Rialto Investments Segment

The assets and liabilities related to the Rialto segment were as follows:



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	92,959	83,938
Defeasance cash to retire notes payable	138,665		219,386
Loans receivable, net	578,375		713,354
Real estate owned - held-for-sale	113,115		143,677
Real estate owned - held-and-used, net	634,401		582,111
Investments in unconsolidated entities	150,733		124,712
Investments held-to-maturity	14,538		14,096
Other	26,041		15,874
	$	1,748,827	1,897,148
Liabilities:
Notes payable	$	594,915	765,541
Other	17,683		30,579
	$	612,598	796,120

Rialto’s operating earnings were as follows:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
Revenues	$	33,472		42,595		65,680		76,218
Costs and expenses	30,198			32,273		63,568		60,622
Rialto Investments equity in earnings (loss) from unconsolidated entities	5,569			(2,973	)	24,027		1,552
Rialto Investments other income (expense), net	(1,372		)	15,329		(13,612	)	28,532
Operating earnings (1)	$	7,471		22,678		12,527		45,680


(1)	Operating earnings for the three and six months ended May 31, 2012 include net earnings (loss) attributable to noncontrolling interests of $3.2 million and ($1.2) million, respectively. Operating earnings for the three and six months ended May 31, 2011 include net earnings (loss) attributable to noncontrolling interests of $12.9 million and $24.8 million, respectively.

Loans Receivable

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of May 31, 2012 and November 30, 2011, the notes payable balance was $470.0 million and $626.9 million, respectively; however, $138.7 million and $219.4 million, respectively, of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account are being and will be used to retire the notes payable upon their maturity. During the six months ended May 31, 2012, the LLCs retired $156.9 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.

The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. At May 31, 2012, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.5 billion, respectively. At November 30, 2011, these consolidated LLCs had total combined assets and liabilities of $1.4 billion and $0.7 billion, respectively.

In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. The Company paid $310 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions. During the six months ended May 31, 2012, the Company retired $13 million principal amount of the 5-year senior unsecured note.

The following table displays the loans receivable by aggregate collateral type:



(In thousands)	May 31, 2012		November 30, 2011
Land	$	304,239	348,234
Single family homes	126,656		152,265
Commercial properties	114,218		172,799
Multi-family homes	24,395		28,108
Other	8,867		11,948
Loans receivable	$	578,375	713,354

With regard to loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”), the Rialto segment estimated the cash flows, at acquisition, it expected to collect on the FDIC Portfolios and Bank Portfolios. In accordance with ASC 310-30, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Company’s condensed consolidated balance sheets. The excess of cash flows expected to be collected over the cost of the loans acquired is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the effective yield method.

The Rialto segment periodically evaluates its estimate of cash flows expected to be collected on its FDIC Portfolios and Bank Portfolios. These evaluations require the continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value of the loans to allocate purchase price. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized as a provision for loan losses, resulting in an increase to the allowance for loan losses.

The outstanding balance and carrying value of loans accounted for under ASC 310-30 was as follows:



(In thousands)	May 31, 2012		November 30, 2011
Outstanding principal balance	$	1,040,569	1,331,094
Carrying value	$	517,967	639,642

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the six months ended May 31, 2012 and 2011were as follows:



(In thousands)	May 31, 2012			May 31, 2011
Accretable yield, beginning of period	$	209,480		396,311
Additions	8,423			16,173
Deletions	(23,256		)	(37,869	)
Accretions	(40,890		)	(61,114	)
Accretable yield, end of period	$	153,757		313,501

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent disposal of loans, which includes foreclosure of underlying collateral and result in the removal of the loans from the accretable yield portfolios.

When forecasted principal and interest cannot be reasonably estimated at the loan acquisition date, management classifies the loan as nonaccrual and accounts for these assets in accordance with ASC 310-10, Receivables (“ASC 310-10”). When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Although these loans met the definition of ASC 310-10, these loans were not considered impaired relative to the Company’s recorded investment at the time of acquisition since they were acquired at a substantial discount to their unpaid principal balance. A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell. As of May 31, 2012 and November 30, 2011, the Company had an allowance for loan losses against the nonaccrual loans of $0.2 million and $0.8 million, respectively.

The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:

May 31, 2012



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	40,590	—	16,694	16,694
Single family homes	28,458		1,156	14,410	15,566
Commercial properties	35,996		—	22,818	22,818
Multi-family homes	10,928		—	5,145	5,145
Other	295		—	185	185
Loans receivable	$	116,267	1,156	59,252	60,408

November 30, 2011



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	75,557	—	24,692	24,692
Single family homes	55,377		1,956	13,235	15,191
Commercial properties	48,293		2,660	24,434	27,094
Multi-family homes	16,750		—	6,735	6,735
Other	405		—	—	—
Loans receivable	$	196,382	4,616	69,096	73,712

The average recorded investment in impaired loans totaled approximately $67 million and $197 million, respectively, for the six months ended May 31, 2012 and 2011.

The loans receivable portfolios consist of loans acquired at a discount. Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. The following are the risk categories for the loans receivable portfolios:

Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses.

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. Although the Company believes the recorded investment balance will ultimately be realized, the risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. As of May 31, 2012 and November 30, 2011, the Company had an allowance on these loans of $0.2 million and $0.8 million, respectively. During the three months ended May 31, 2012, the Company recorded $1.4 million of provision for loan losses offset by charge-offs of $1.3 million upon foreclosure of the loans. During the six months ended May 31, 2012, the Company recorded $2.3 million of provision for loan losses offset by charge-offs of $2.9 million upon foreclosure of the loans.

Accrual and nonaccrual loans receivable by risk categories were as follows:

May 31, 2012



(In thousands)	Accrual		Nonaccrual	Total
Land	$	287,545	16,694	304,239
Single family homes	111,090		15,566	126,656
Commercial properties	91,400		22,818	114,218
Multi-family homes	19,250		5,145	24,395
Other	8,682		185	8,867
Loans receivable	$	517,967	60,408	578,375

November 30, 2011



(In thousands)	Accrual		Nonaccrual	Total
Land	$	323,542	24,692	348,234
Single family homes	137,074		15,191	152,265
Commercial properties	145,705		27,094	172,799
Multi-family homes	21,373		6,735	28,108
Other	11,948		—	11,948
Loans receivable	$	639,642	73,712	713,354

In order to assess the risk associated with each risk category, the Rialto segment evaluates the forecasted cash flows and the value of the underlying collateral securing loans receivable on a quarterly basis or when an event occurs that suggest a decline in the collateral’s fair value.

Real Estate Owned

The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the condensed consolidated balance sheets as REO held-and-used, net and REO held-for-sale. When a property is determined to be held-and-used, net, the asset is recorded at fair value and depreciated over its useful life using the straight line method. When certain criteria set forth in ASC 360, Property, Plant and Equipment, are met; the property is classified as held-for-sale. When a real estate asset is classified as held-for-sale, the property is recorded at the lower of its cost basis or fair value less estimated costs to sell. The fair value of REO held-for-sale are determined in part by placing reliance on third party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity.

Upon the acquisition of REO through loan foreclosure, gains and losses are recorded in Rialto Investments other income (expense), net. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain upon foreclosure. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is generally recorded as a provision for loan losses.

At times, the Company may foreclose on a loan from an accrual loan pool in which the removal of the loan does not cause an overall decrease in the expected cash flows of the loan pool, and as such, no provision for loan losses is required to be recorded. However, the amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is recorded as an unrealized loss upon foreclosure.

The following tables present the activity in REO:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
REO - held-for-sale, beginning of period	$	101,579		431,119		143,677		250,286
Additions	221			94,568		1,355		280,209
Improvements	2,036			5,516		5,999		8,234
Sales	(45,210		)	(13,028	)	(82,054	)	(20,554	)
Impairments	(382		)	—		(1,622	)	—
Transfers to Lennar Homebuilding	(3,904		)	(3,926	)	(3,904	)	(3,926	)
Transfers to/from held-and-used, net (1)	58,775			—		49,664		—
REO - held-for-sale, end of period	$	113,115		514,249		113,115		514,249



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
REO - held-and-used, net, beginning of period	$	630,570		15,126		582,111		7,818
Additions	63,434			1,391		109,675		8,734
Improvements	780			—		780		—
Sales	—			—		(981	)	—
Impairments	(676		)	—		(3,273	)	—
Depreciation	(932		)	(50	)	(4,247	)	(85	)
Transfers to/from held-for-sale (1)	(58,775		)	—		(49,664	)	—
REO - held-and-used, net, end of period	$	634,401		16,467		634,401		16,467


(1)	During the three and six months ended May 31, 2012, the Rialto segment transferred certain properties to/from REO held-and-used, net to/from REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.

For both the three and six months ended May 31, 2012, the Company recorded $8.4 million of gains from sales of REO. For the three months ended May 31, 2011, there were no gains from sales of REO and for six months ended May 31, 2011 the Company recorded $0.3 million of gains from sales of REO. For the three and six months ended May 31, 2012, the Company recorded gains (losses) of ($2.1) million and $3.7 million, respectively, from acquisitions of REO through foreclosure. For the three and six months ended May 31, 2011, the Company recorded $17.9 million and $35.0 million, respectively, of gains from acquisitions of REO through foreclosure. These gains (losses) are recorded in Rialto Investments other income (expense), net.

Investments

In 2010, the Rialto segment invested in approximately $43 million of non-investment grade commercial mortgage-backed securities (“CMBS”) for $19.4 million, representing a 55% discount to par value. The CMBS have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically, to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during both the three and six months ended May 31, 2012 and 2011. During the six months ended May 31, 2011, the Rialto segment sold a portion of its CMBS for $11.1 million, resulting in a gain on sale of CMBS of $4.7 million. The carrying value of the investment securities at May 31, 2012 and November 30, 2011, was $14.5 million and $14.1 million, respectively. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

In addition to the acquisition and management of the FDIC Portfolios and Bank Portfolios, an affiliate in the Rialto segment is a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor receives management fees for sub-advisory services. The Company committed to invest $75 million, of which the remaining outstanding commitment as of May 31, 2012 was $5.6 million, of the total equity commitments of approximately $1.2 billion made by private investors in this fund, and the U.S. Treasury has committed to a matching amount of approximately $1.2 billion of equity in the fund, as well as agreed to extend up to approximately $2.3 billion of debt financing. During both the three and six months ended May 31, 2012, the Company contributed $1.9 million. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the AB PPIP fund was $76.7 million and $65.2 million, respectively.

In 2010, the Rialto segment completed its first closing of a real estate investment fund (the “Fund”) with initial equity commitments of approximately $300 million (including $75 million committed by the Company, of which the remaining outstanding commitment as of May 31, 2012 was $23.7 million). The Fund was determined to have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the Fund’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in the statement of operations of the Fund, the Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.

As of May 31, 2012, the equity commitments of the Fund were $700 million (including the $75 million committed by the Company). During the three and six months ended May 31, 2012, the Company contributed $10.7 million and $18.0 million, respectively, to the Fund. Of these amounts contributed, $13.9 million was distributed back to the Company during the three months ended May 31, 2012 as a return of capital contributions due to a securitization within the Fund. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Fund was $64.8 million and $50.1 million, respectively. For the three and six months ended May 31, 2012, the Company’s share of earnings from the Fund was $3.0 million and $10.6 million, respectively. For both the three and six months ended May 31, 2011, the Company's share of losses from the Fund was ($0.4) million.

Additionally, another subsidiary in the Rialto segment has approximately a 5% investment in a service and infrastructure provider to the residential home loan market (the “Servicer Provider”), which provides services to the consolidated LLCs, among others. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Servicer Provider was $8.6 million and $8.8 million, respectively.

Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:

Balance Sheets



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	137,104	60,936
Loans receivable	400,467		274,213
Real estate owned	107,363		47,204
Investment securities	4,081,846		4,336,418
Other assets	223,861		171,196
	$	4,950,641	4,889,967
Liabilities and equity:
Accounts payable and other liabilities	$	166,557	320,353
Notes payable	230,561		40,877
Partner loans	163,516		137,820
Debt due to the U.S. Treasury	1,492,950		2,044,950
Equity	2,897,057		2,345,967
	$	4,950,641	4,889,967

Statements of Operations



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2012		2011		2012	2011
Revenues	$	119,123	116,044		241,528	232,932
Costs and expenses	51,996		35,045		103,181	86,516
Other income (expense), net (1)	37,335		(165,918	)	303,775	(79,130	)
Net earnings (loss) of unconsolidated entities	$	104,462	(84,919	)	442,122	67,286
Rialto Investments equity in earnings (loss) from unconsolidated entities	$	5,569	(2,973	)	24,027	1,552


(1)	Other income (expense), net for the three and six months ended May 31, 2012 and 2011 includes the AB PPIP Fund’s mark-to-market unrealized gains and unrealized losses, of which the Company’s portion is a small percentage.