10-Q 1 len-2013228x10q.htm 10-Q LEN-2013.2.28-10Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2013
Commission File Number: 1-11749
 
Lennar Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4337490
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
(305) 559-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
Common stock outstanding as of March 31, 2013:
Class A 161,082,667
Class B   31,303,195






Part I. Financial Information
Item 1. Financial Statements

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except shares and per share amounts)
(unaudited)
 
February 28,
 
November 30,
 
2013 (1)
 
2012 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
1,112,728

 
1,146,867

Restricted cash
8,085

 
8,096

Receivables, net
58,175

 
53,745

Inventories:
 
 
 
Finished homes and construction in progress
1,945,434

 
1,625,048

Land and land under development
3,341,069

 
3,119,804

Consolidated inventory not owned
325,473

 
326,861

Total inventories
5,611,976

 
5,071,713

Investments in unconsolidated entities
577,342

 
565,360

Other assets
973,565

 
956,070

 
8,341,871

 
7,801,851

Rialto Investments:
 
 
 
Cash and cash equivalents
64,188

 
105,310

Defeasance cash to retire notes payable
4,655

 
223,813

Loans receivable, net
406,207

 
436,535

Real estate owned, held-for-sale
178,678

 
134,161

Real estate owned, held-and-used, net
547,273

 
601,022

Investments in unconsolidated entities
106,609

 
108,140

Other assets
34,623

 
38,379

 
1,342,233

 
1,647,360

Lennar Financial Services
748,165

 
912,995

Total assets
$
10,432,269

 
10,362,206

(1)
Under certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities (“VIEs”) and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.
As of February 28, 2013, total assets include $1,837.4 million related to consolidated VIEs of which $15.9 million is included in Lennar Homebuilding cash and cash equivalents, $6.0 million in Lennar Homebuilding receivables, net, $65.6 million in Lennar Homebuilding finished homes and construction in progress, $485.6 million in Lennar Homebuilding land and land under development, $65.9 million in Lennar Homebuilding consolidated inventory not owned, $44.5 million in Lennar Homebuilding investments in unconsolidated entities, $223.2 million in Lennar Homebuilding other assets, $63.3 million in Rialto Investments cash and cash equivalents, $4.7 million in Rialto Investments defeasance cash to retire notes payable, $318.5 million in Rialto Investments loans receivable, net, $115.3 million in Rialto Investments real estate owned, held-for-sale, $422.8 million in Rialto Investments real estate owned, held-and-used, net $0.6 million in Rialto Investments in unconsolidated entities and $5.5 million in Rialto Investments other assets.
As of November 30, 2012, total assets include $2,128.6 million related to consolidated VIEs of which $13.2 million is included in Lennar Homebuilding cash and cash equivalents, $6.0 million in Lennar Homebuilding receivables, net, $57.4 million in Lennar Homebuilding finished homes and construction in progress, $482.6 million in Lennar Homebuilding land and land under development, $65.2 million in Lennar Homebuilding consolidated inventory not owned, $43.7 million in Lennar Homebuilding investments in unconsolidated entities, $224.1 million in Lennar Homebuilding other assets, $104.8 million in Rialto Investments cash and cash equivalents, $223.8 million in Rialto Investments defeasance cash to retire notes payable, $350.2 million in Rialto Investments loans receivable, net, $94.2 million in Rialto Investments real estate owned, held-for-sale, $454.9 million in Rialto Investments real estate owned, held-and-used, net, $0.7 million in Rialto Investments in unconsolidated entities and $7.8 million in Rialto Investments other assets.

See accompanying notes to condensed consolidated financial statements.
2

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets – (Continued)
(Dollars in thousands, except shares and per share amounts)
(unaudited)

 
February 28,
 
November 30,
 
2013 (2)
 
2012 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
229,880

 
220,690

Liabilities related to consolidated inventory not owned
266,803

 
268,159

Senior notes and other debts payable
4,505,662

 
4,005,051

Other liabilities
600,569

 
635,524

 
5,602,914

 
5,129,424

Rialto Investments:
 
 
 
Notes payable and other liabilities
285,166

 
600,602

Lennar Financial Services
474,549

 
630,972

Total liabilities
6,362,629

 
6,360,998

Stockholders’ equity:
 
 
 
Preferred stock

 

Class A common stock of $0.10 par value; Authorized: February 28, 2013 and November 30, 2012
     - 300,000,000 shares; Issued: February 28, 2013 - 172,726,088 shares and November 30, 2012
     -172,397,149 shares
17,273

 
17,240

Class B common stock of $0.10 par value; Authorized: February 28, 2013 and November 30, 2012
     - 90,000,000 shares; Issued: February 28, 2013 - 32,982,815 shares and November 30, 2012
     - 32,982,815 shares
3,298

 
3,298

Additional paid-in capital
2,436,078

 
2,421,941

Retained earnings
1,654,930

 
1,605,131

Treasury stock, at cost; February 28, 2013 - 11,702,017 Class A common shares and 1,679,620
     Class B common shares; November 30, 2012 - 12,152,816 Class A common shares and
     1,679,620 Class B common shares
(615,698
)
 
(632,846
)
Total stockholders’ equity
3,495,881

 
3,414,764

Noncontrolling interests
573,759

 
586,444

Total equity
4,069,640

 
4,001,208

Total liabilities and equity
$
10,432,269

 
10,362,206

(2)
As of February 28, 2013, total liabilities include $435.3 million related to consolidated VIEs as to which there was no recourse against the Company, of which $10.1 million is included in Lennar Homebuilding accounts payable, $35.8 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $186.7 million in Lennar Homebuilding senior notes and other debts payable, $14.5 million in Lennar Homebuilding other liabilities and $188.2 million in Rialto Investments notes payable and other liabilities.
As of November 30, 2012, total liabilities include $737.2 million related to consolidated VIEs as to which there was no recourse against the Company, of which $10.6 million is included in Lennar Homebuilding accounts payable, $35.9 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $181.6 million in Lennar Homebuilding senior notes and other debts payable, $15.7 million in Lennar Homebuilding other liabilities and $493.4 million in Rialto Investments notes payable and other liabilities.


See accompanying notes to condensed consolidated financial statements.
3

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
(unaudited)


 
Three Months Ended
 
February 28,
 
February 29,
 
2013
 
2012
Revenues:
 
 
 
Lennar Homebuilding
$
868,444

 
624,433

Lennar Financial Services
95,880

 
68,215

Rialto Investments
25,622

 
32,208

Total revenues
989,946

 
724,856

Costs and expenses:
 
 
 
Lennar Homebuilding
778,674

 
584,745

Lennar Financial Services
79,778

 
59,965

Rialto Investments
31,771

 
33,370

Corporate general and administrative
31,270

 
26,842

Total costs and expenses
921,493

 
704,922

Lennar Homebuilding equity in earnings (loss) unconsolidated entities
(867
)
 
1,083

Lennar Homebuilding other income, net
4,266

 
4,067

Other interest expense
(26,031
)
 
(24,849
)
Rialto Investments equity in earnings from unconsolidated entities
6,173

 
18,458

Rialto Investments other income (expense), net
1,327

 
(12,240
)
Earnings before income taxes
53,321

 
6,453

Benefit for income taxes
3,637

 
1,524

Net earnings (including net loss attributable to noncontrolling interests)
$
56,958

 
7,977

Less: Net loss attributable to noncontrolling interests (1)
(534
)
 
(6,991
)
Net earnings attributable to Lennar
$
57,492

 
14,968

Basic earnings per share
$
0.30

 
0.08

Diluted earnings per share
$
0.26

 
0.08

Cash dividends per each Class A and Class B common share
$
0.04

 
0.04

Comprehensive earnings attributable to Lennar
$
57,492

 
14,968

Comprehensive loss attributable to noncontrolling interests
$
(534
)
 
(6,991
)

(1)
Net loss attributable to noncontrolling interests for the three months ended February 28, 2013 and February 29, 2012 includes ($0.3) million and ($4.3) million, respectively, related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC.

See accompanying notes to condensed consolidated financial statements.
4

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)


 
Three Months Ended
 
February 28,
 
February 29,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net earnings (including net loss attributable to noncontrolling interests)
$
56,958

 
7,977

Adjustments to reconcile net earnings (including net loss attributable to noncontrolling
interests) to net cash used in operating activities:
 
 
 
Depreciation and amortization
6,333

 
7,630

Amortization of discount/premium on debt, net
5,540

 
5,371

Lennar Homebuilding equity in (earnings) loss from unconsolidated entities
867

 
(1,083
)
Distributions of earnings from Lennar Homebuilding unconsolidated entities
53

 
126

Rialto Investments equity in earnings from unconsolidated entities
(6,173
)
 
(18,458
)
Distributions of earnings from Rialto Investments unconsolidated entities
107

 
757

Share based compensation expense
6,486

 
8,161

Tax benefit from share-based awards
3,164

 

Excess tax benefits from share-based awards
(3,013
)
 

Deferred income tax benefit
(7,730
)
 

Gains on retirement of Lennar Homebuilding other debts payable
(1,000
)
 
(988
)
Unrealized and realized gains on Rialto Investments real estate owned
(10,136
)
 
(5,831
)
Impairments of Rialto Investments loans receivable and REO
7,885

 
4,748

Valuation adjustments and write-offs of option deposits and pre-acquisition costs
1,713

 
2,326

Changes in assets and liabilities:
 
 
 
Decrease in restricted cash
417

 
773

(Increase) decrease in receivables
(240
)
 
101,672

Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
(514,597
)
 
(172,159
)
(Increase) decrease in other assets
5,559

 
(1,183
)
Decrease in Lennar Financial Services loans-held-for-sale
167,423

 
30,866

Decrease in accounts payable and other liabilities
(41,108
)
 
(103,149
)
Net cash used in operating activities
(321,492
)
 
(132,444
)
Cash flows from investing activities:
 
 
 
Net (additions) disposals of operating properties and equipment
(1,261
)
 
1,140

Investments in and contributions to Lennar Homebuilding unconsolidated entities
(14,708
)
 
(26,810
)
Distributions of capital from Lennar Homebuilding unconsolidated entities
17,456

 
9,897

Investments in and contributions to Rialto Investments unconsolidated entities

 
(7,294
)
Distributions of capital from Rialto Investments unconsolidated entities
7,680

 
81

Decrease in Rialto Investments defeasance cash to retire notes payable
219,158

 
108,163

Receipts of principal payments on Rialto Investments loans receivable
18,434

 
33,549

Proceeds from sales of Rialto Investments real estate owned
34,451

 
37,868

Improvements to Rialto Investments real estate owned
(1,716
)
 
(3,963
)
Purchase of loans receivable
(5,250
)
 

Purchases of Lennar Homebuilding investments available-for-sale
(15,417
)
 
(2,408
)
Proceeds from sales of Lennar Homebuilding investments available-for-sale

 
6,436

Decrease in Lennar Financial Services loans held-for-investment, net
446

 
447

Purchases of Lennar Financial Services investment securities
(13,357
)
 
(1,150
)
Proceeds from maturities of Lennar Financial Services investment securities
14,130

 
750

Net cash provided by investing activities
$
260,046

 
156,706


See accompanying notes to condensed consolidated financial statements.
5

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(unaudited)


 
Three Months Ended
 
February 28,
 
February 29,
 
2013
 
2012
Cash flows from financing activities:
 
 
 
Net repayments under Lennar Financial Services debt
$
(146,061
)
 
(150,684
)
Proceeds from senior notes
450,000

 
50,000

Debt issuance costs of senior notes and convertible senior notes
(4,730
)
 
(1,035
)
Principal repayments on Rialto Investments notes payable
(304,123
)
 
(170,026
)
Proceeds from other borrowings
58,092

 
28,090

Principal payments on other borrowings
(63,926
)
 
(20,267
)
Exercise of land option contracts from an unconsolidated land investment venture
(1,270
)
 
(4,628
)
Receipts related to noncontrolling interests
434

 
391

Payments related to noncontrolling interests
(12,585
)
 

Excess tax benefits from share-based awards
3,013

 

Common stock:
 
 
 
Issuances
21,668

 
10,761

Dividends
(7,693
)
 
(7,562
)
Net cash used in financing activities
(7,181
)
 
(264,960
)
Net decrease in cash and cash equivalents
(68,627
)
 
(240,698
)
Cash and cash equivalents at beginning of period
1,310,743

 
1,163,604

Cash and cash equivalents at end of period
$
1,242,116

 
922,906

Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
1,112,728

 
792,165

Lennar Financial Services
65,200

 
56,555

Rialto Investments
64,188

 
74,186

 
$
1,242,116

 
922,906

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding:
 
 
 
Non-cash contributions to unconsolidated entities
$
16,734

 
1,314

Inventory acquired in satisfaction of other assets including investments available-for-sale
$

 
90,385

Non-cash purchases of investments available-for-sale
$

 
12,520

Purchases of inventories and other assets financed by sellers
$
59,821

 
49,615

Rialto Investments:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
15,321

 
41,588


See accompanying notes to condensed consolidated financial statements.
6



Lennar Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1)
Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2012. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three months ended February 28, 2013 are not necessarily indicative of the results to be expected for the full year.
Rialto Management Fees Revenue
The Rialto Investments segment provides services to a variety of legal entities and investment vehicles such as funds, joint ventures, co-invests, and other private equity structures to manage their respective investments. As a result, Rialto earns and receives management fees, underwriting fees, due diligence fees and liquidation fees on asset resolutions. The management fees and other forms of compensation to Rialto vary on a deal by deal basis and can increase after meeting certain investment hurdles. Management fees related to the Rialto Investments segment are included in Rialto Investments revenue and are recorded when contract terms are met, fees are determinable and collectability is reasonably assured. We believe the way we record Rialto Investments' management fees revenue is a significant accounting policy because it is a significant portion of Rialto Investments segment's revenues and will continue to grow in the future as the segment manages more assets.
Reclassifications
Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2013 presentation. These reclassifications had no impact on the Company’s results of operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.


7



(2)
Operating and Reporting Segments
The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:
(1) Homebuilding East
(2) Homebuilding Central
(3) Homebuilding West
(4) Homebuilding Southeast Florida
(5) Homebuilding Houston
(6) Lennar Financial Services
(7) Rialto Investments
Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, selling, general and administrative expenses and other interest expense of the segment.
The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately have operations located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2) 
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon and Washington
(1)Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment.
(2)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.
Operations of the Lennar Financial Services segment include mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations, as well as in other states.
Operations of the Rialto Investments (“Rialto”) segment include sourcing, underwriting, pricing, managing and ultimately monetizing real estate and real estate related assets, as well as providing similar services to others in markets across the country. Rialto’s operating earnings consists of revenues generated primarily from accretable interest income associated with portfolios of real estate loans acquired in partnership with the FDIC and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the segment's Real Estate Investment Fund, LP (the “Fund I”), fees for sub-advisory services, other income (expense), net, consisting primarily of net gains upon foreclosure of real estate owned (“REO”) and net gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, REO expenses and other general administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s 2012 Annual Report on Form 10-K. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

8



Financial information relating to the Company’s operations was as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
Assets:
 
 
 
Homebuilding East
$
1,640,261

 
1,565,439

Homebuilding Central
820,877

 
729,300

Homebuilding West
2,601,065

 
2,396,515

Homebuilding Southeast Florida
678,094

 
603,360

Homebuilding Houston
312,404

 
273,605

Homebuilding Other (1)
805,786

 
724,461

Rialto Investments (2)
1,342,233

 
1,647,360

Lennar Financial Services
748,165

 
912,995

Corporate and unallocated
1,483,384

 
1,509,171

Total assets
$
10,432,269

 
10,362,206

(1)
Includes assets related to the Company's multifamily business of $63.2 million and $29.1 million, respectively, as of February 28, 2013 and November 30, 2012.
(2)
Consists primarily of assets of consolidated VIEs (see Note 8).
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Revenues:
 
 
 
Homebuilding East
$
288,892

 
244,833

Homebuilding Central
149,032

 
85,713

Homebuilding West
174,075

 
123,085

Homebuilding Southeast Florida
71,851

 
49,789

Homebuilding Houston
108,518

 
84,834

Homebuilding Other
76,076

 
36,179

Lennar Financial Services
95,880

 
68,215

Rialto Investments
25,622

 
32,208

Total revenues (1)
$
989,946

 
724,856

Operating earnings (loss):
 
 
 
Homebuilding East
$
22,875

 
13,947

Homebuilding Central
13,957

 
1,064

Homebuilding West
12,603

 
(7,573
)
Homebuilding Southeast Florida
9,408

 
6,634

Homebuilding Houston
9,506

 
4,516

Homebuilding Other
(1,211
)
 
1,401

Lennar Financial Services
16,102

 
8,250

Rialto Investments
1,351

 
5,056

Total operating earnings
84,591

 
33,295

Corporate general and administrative expenses
31,270

 
26,842

Earnings before income taxes
$
53,321

 
6,453

(1)
Total revenues are net of sales incentives of $74.0 million ($23,300 per home delivered) for the three months ended February 28, 2013, compared to $84.5 million ($34,200 per home delivered) for the three months ended February 29, 2012.

9



Valuation adjustments and write-offs relating to the Company’s homebuilding operations were as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:
 
 
 
East
$
49

 
217

Central
37

 
153

West
98

 
530

Southeast Florida
1,050

 
328

Houston

 
61

Other
21

 
736

Total
1,255

 
2,025

Valuation adjustments to land the Company intends to sell or has sold to third parties:
 
 
 
East
83

 

Central
2

 

West
158

 

Total
243

 

Write-offs of option deposits and pre-acquisition costs:
 
 
 
East
171

 
7

Central
26

 
49

West
18

 
232

Other

 
2

Total
215

 
290

Valuation adjustments to investments of unconsolidated entities:
 
 
 
East

 
11

Total

 
11

Total valuation adjustments and write-offs of option deposits and pre-acquisition costs
$
1,713

 
2,326

During the three months ended February 28, 2013, the Company recorded lower valuation adjustments than during the three months ended February 29, 2012. Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.


10



(3)
Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Revenues
$
81,224

 
82,644

Costs and expenses
81,637

 
83,422

Other income
13,361

 

Net earnings (loss) of unconsolidated entities
$
12,948

 
(778
)
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
$
(867
)
 
1,083

Balance Sheets
(In thousands)
February 28,
2013
 
November 30,
2012
Assets:
 
 
 
Cash and cash equivalents
$
167,418

 
157,340

Inventories
2,802,210

 
2,792,064

Other assets
183,024

 
250,940

 
$
3,152,652

 
3,200,344

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
255,369

 
310,496

Debt
718,154

 
759,803

Equity
2,179,129

 
2,130,045

 
$
3,152,652

 
3,200,344

As of February 28, 2013 and November 30, 2012, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $577.3 million and $565.4 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of February 28, 2013 and November 30, 2012 was $690.6 million, and $681.6 million, respectively, primarily as a result of the Company buying its interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value.
In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the nature of the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of February 28, 2013 and November 30, 2012, the portfolio of land (including land development costs) of $255.8 million and $264.9 million, respectively, is also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.
The Lennar Homebuilding unconsolidated entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.

11



The summary of the Company’s net recourse exposure related to Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
Several recourse debt - repayment
$
40,773

 
48,020

Joint and several recourse debt - repayment
15,000

 
18,695

The Company’s maximum recourse exposure
55,773

 
66,715

Less: joint and several reimbursement agreements with the Company’s partners
(13,500
)
 
(16,826
)
The Company’s net recourse exposure
$
42,273

 
49,889

During the three months ended February 28, 2013, the Company’s maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $10.9 million primarily related to the joint ventures selling assets and other transactions.
The recourse debt exposure in the previous table represents the Company’s maximum recourse exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay the debt or to reimburse the Company for any payments on its guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of Lennar Homebuilding’s unconsolidated entities with recourse debt were as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
Assets
$
1,811,292

 
1,843,163

Liabilities
$
732,346

 
765,295

Equity
$
1,078,946

 
1,077,868

In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Historically, the Company has had repayment guarantees and/or maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes. As of both February 28, 2013 and November 30, 2012, the Company does not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
During the three months ended February 28, 2013, there were no loan paydowns by Lennar relating to recourse debt. During the three months ended February 29, 2012, there were other loan paydowns of $3.4 million. During both the three months ended February 28, 2013 and February 29, 2012, there were no payments under completion guarantees.
As of February 28, 2013, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of February 28, 2013, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).

12



The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
The Company’s net recourse exposure
$
42,273

 
49,889

Reimbursement agreements from partners
13,500

 
16,826

The Company’s maximum recourse exposure
$
55,773

 
66,715

Non-recourse bank debt and other debt (partner’s share of several recourse)
$
93,066

 
114,900

Non-recourse land seller debt or other debt
18,488

 
26,340

Non-recourse debt with completion guarantees
464,044

 
458,418

Non-recourse debt without completion guarantees
86,783

 
93,430

Non-recourse debt to the Company
662,381

 
693,088

Total debt
$
718,154

 
759,803

The Company’s maximum recourse exposure as a % of total JV debt
8
%
 
9
%

(4)
Stockholders' Equity
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the three months ended February 28, 2013 and February 29, 2012:
 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2012
$
4,001,208

 
17,240

 
3,298

 
2,421,941

 
(632,846
)
 
1,605,131

 
586,444

Net earnings (including net loss
   attributable to noncontrolling
   interests)
56,958

 

 

 

 

 
57,492

 
(534
)
Employee stock and directors
   plans
21,668

 
33

 

 
4,487

 
17,148

 

 

Tax benefit from employee stock
   plans and vesting of restricted
   stock
3,164

 

 

 
3,164

 

 

 

Amortization of restricted stock
6,486

 

 

 
6,486

 

 

 

Cash dividends
(7,693
)
 

 

 

 

 
(7,693
)
 

Receipts related to
   noncontrolling interests
434

 

 

 

 

 

 
434

Payments related to
   noncontrolling interests
(12,585
)
 

 

 

 

 

 
(12,585
)
Balance at February 28, 2013
$
4,069,640

 
17,273

 
3,298

 
2,436,078

 
(615,698
)
 
1,654,930

 
573,759

 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2011
$
3,303,525

 
16,910

 
3,298

 
2,341,079

 
(621,220
)
 
956,401

 
607,057

Net earnings (including net
   loss attributable to
   noncontrolling interests)
7,977

 

 

 

 

 
14,968

 
(6,991
)
Employee stock and directors
   plans
11,646

 
46

 

 
6,078

 
5,522

 

 

Amortization of restricted stock
7,276

 

 

 
7,276

 

 

 

Cash dividends
(7,562
)
 

 

 

 

 
(7,562
)
 

Receipts related to
   noncontrolling interests
391

 

 

 

 

 

 
391

Balance at February 29, 2012
$
3,323,253

 
16,956

 
3,298

 
2,354,433

 
(615,698
)
 
963,807

 
600,457

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During the three months ended February 28, 2013 and February 29, 2012, there were no repurchases of

13



common stock under the stock repurchase program. As of February 28, 2013, 6.2 million shares of common stock can be repurchased in the future under the program.
During three months ended February 28, 2013 and February 29, 2012, treasury stock decreased by 0.5 million and 0.3 million, respectively, in Class A common shares due to activity related to the Company's equity compensation plan.
(5)
Income Taxes
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed each reporting period by the Company based on the more-likely-than-not realization threshold criterion. In the assessment of the need for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.
During the year ended November 30, 2012, the Company concluded that it was more likely than not that the majority of its deferred tax assets would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative as detailed in the Company's Form 10-K for the year ended November 30, 2012. Accordingly, the Company reversed a majority of its valuation allowance against its deferred tax assets. As of November 30, 2012, the Company had a valuation allowance of $88.8 million, primarily related to state net operating loss ("NOL") carryforwards.
During the three months ended February 28, 2013, the Company concluded that it was more likely than not that a portion of its state NOL carryforwards related to which a valuation allowance had been established would be utilized. This conclusion was based on additional positive evidence including actual and forecasted profitability. Accordingly, during the three months ended February 28, 2013, the Company reversed $25.1 million of its valuation allowance against its state NOL carryforwards. This reversal was partially offset by a tax provision of $21.5 million primarily related to pre-tax earnings during the three months ended February 28, 2013. Therefore, the Company had a $3.6 million net benefit for income taxes during the three months ended February 28, 2013. During the three months ended February 29, 2012, the Company recorded a tax benefit of $1.5 million, primarily related to a refund claim for certain losses carried back to a prior year. Based on an analysis utilizing objectively verifiable evidence, it was not more likely than not that certain state NOL carryforwards would be utilized due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states. As a result, as of February 28, 2013, the Company had a valuation allowance of $63.7 million against its deferred tax assets, primarily related to state NOL carryforwards. In future periods, some or all of the remaining allowance could be reversed if additional sufficient positive evidence is present indicating that it is more likely than not that a portion or all of the Company's remaining deferred tax assets will be realized.
As of February 28, 2013, the Company's deferred tax assets, net, were $475.3 million, of which $481.2 million were deferred tax assets included in Lennar Homebuilding's other assets on the Company's condensed consolidated balance sheets and $5.9 million were deferred tax liabilities included in Lennar Financial Services segment's liabilities on the Company's condensed consolidated balance sheets.
At February 28, 2013 and November 30, 2012, the Company had federal tax effected NOL carryforwards totaling $279.7 million and $278.8 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2025. As of February 28, 2013, the Company needs to generate $1.0 billion of pre-tax earnings in future periods to realize all of its federal NOL carryforwards and federal deductible temporary tax differences. At February 28, 2013 and November, 30, 2012, the Company had state tax effected NOL carryforwards totaling $173.5 million and $173.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2013 and 2032. As of February 28, 2013, state NOL carryforwards totaling $7.9 million may expire over the next twelve months if sufficient taxable income is not generated to utilize the net operating losses. At February 28, 2013 and November, 30, 2012, the Company had a valuation allowance of $59.5 million and $84.6 million, respectively, against its state NOL carryforwards because the Company believes it is more likely than not that a portion of its state NOL carryforwards will not be realized due to the limited carryforward periods in certain states.
At February 28, 2013 and November 30, 2012, the Company had $8.8 million and $12.3 million of gross unrecognized tax benefits. If the Company were to recognize its gross unrecognized tax benefits as of February 28, 2013, $5.7 million would affect the Company’s effective tax rate. The Company expects the total amount of unrecognized tax benefits to decrease by $1.6 million within twelve months as a result of anticipated settlements with various taxing authorities.
During the three months ended February 28, 2013, the Company’s gross unrecognized tax benefits decreased by $3.5 million primarily as a result of state tax payments resulting from a previously settled IRS examination. The decrease in gross

14



unrecognized tax benefits had no effect on the Company’s effective tax rate, which was (6.75%). As a result of the partial reversal of the valuation allowance against the Company's deferred tax assets, the effective tax rate is not reflective of the Company's historical tax rate.
At February 28, 2013, the Company had $18.1 million accrued for interest and penalties, of which $0.4 million was recorded during the three months ended February 28, 2013. During the three months ended February 28, 2013, the accrual for interest and penalties was reduced by $2.8 million primarily as a result of the payment of interest related to state tax payments resulting from a previously settled IRS examination. At November 30, 2012, the Company had $20.5 million accrued for interest and penalties.
The IRS is currently examining the Company’s federal income tax return for fiscal year 2011 and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal year 2005 and subsequent years. The Company participates in the Compliance Assurance Process, "CAP," an IRS examination program. This program operates as a contemporaneous exam throughout the year in order to keep exam cycles current and achieve a higher level of compliance.

(6)
Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands, except per share amounts)
2013
 
2012
Numerator:
 
 
 
Net earnings attributable to Lennar
$
57,492

 
14,968

Less: distributed earnings allocated to nonvested shares
102

 
115

Less: undistributed earnings allocated to nonvested shares
664

 
113

Numerator for basic earnings per share
56,726

 
14,740

Plus: interest on 2.00% convertible senior notes due 2020 and
    3.25% convertible senior notes due 2021
2,826

 
2,911

Plus: undistributed earnings allocated to convertible shares
662

 
113

Less: undistributed earnings reallocated to convertible shares
588

 
137

Numerator for diluted earnings per share
$
59,626

 
17,627

Denominator:
 
 
 
Denominator for basic earnings per share - weighted average
    common shares outstanding
189,548

 
185,997

Effect of dilutive securities:
 
 
 
Shared based payments
573

 
883

Convertible senior notes
35,896

 
26,933

Denominator for diluted earnings per share - weighted average
    common shares outstanding
226,017

 
213,813

Basic earnings per share
$
0.30

 
0.08

Diluted earnings per share
$
0.26

 
0.08

For the three months ended February 28, 2013, there were no options to purchase shares of Class A stock that were outstanding and anti-dilutive. For three months ended February 29, 2012, options to purchase 0.3 million shares of Class A stock were outstanding and anti-dilutive.

15




(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
Assets:
 
 
 
Cash and cash equivalents
$
65,200

 
58,566

Restricted cash
12,566

 
12,972

Receivables, net (1)
171,580

 
172,230

Loans held-for-sale (2)
334,658

 
502,318

Loans held-for-investment, net
23,593

 
23,982

Investments held-to-maturity
62,746

 
63,924

Goodwill
34,046

 
34,046

Other (3)
43,776

 
44,957

 
$
748,165

 
912,995

Liabilities:
 
 
 
Notes and other debts payable
$
311,933

 
457,994

Other (4)
162,616

 
172,978

 
$
474,549

 
630,972

(1)
Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of February 28, 2013 and November 30, 2012, respectively.
(2)
Loans held-for-sale relate to unsold loans carried at fair value.
(3)
Other assets include mortgage loan commitments carried at fair value of $12.0 million and $12.7 million as of February 28, 2013 and November 30, 2012, respectively.
(4)
Other liabilities include $75.7 million and $76.1 million as of February 28, 2013 and November 30, 2012, respectively, of certain of the Company’s self-insurance reserves related to general liability and workers’ compensation. Other liabilities also include forward contracts carried at fair value of $2.1 million and $2.6 million as of February 28, 2013 and November 30, 2012, respectively.
At February 28, 2013, the Lennar Financial Services segment had a 364-day warehouse repurchase facility with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $100 million that matures in February 2014, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $200 million that matures in July 2013, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $150 million that matures February 2014 (plus a $100 million accordion feature that is usable from 10 days prior to quarter-end through 20 days after quarter-end) and a 364-day warehouse facility with a maximum aggregate commitment of $60 million, that matures November 2013. As of February 28, 2013, the maximum aggregate commitment and uncommitted amount under these facilities totaled $610 million and $100 million, respectively.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $311.9 million and $458.0 million at February 28, 2013 and November 30, 2012, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $405.7 million and $509.1 million at February 28, 2013 and November 30, 2012, respectively. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreement. There has been an increased industry-wide effort by purchasers to defray their losses during the unfavorable economic environment by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet

16



received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Loan origination liabilities, beginning of period
$
7,250

 
6,050

Provision for losses during the period
413

 
93

Adjustments to pre-existing provisions for losses from changes in estimates
96

 
8

Payments/settlements
(153
)
 
(190
)
Loan origination liabilities, end of period
$
7,606

 
5,961

For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans as of February 28, 2013 and November 30, 2012 was $7.8 million and $7.3 million, respectively. At February 28, 2013, the recorded investment in the impaired loans with a valuation allowance was $3.4 million, net of an allowance of $4.4 million. At November 30, 2012, the recorded investment in the impaired loans with a valuation allowance was $2.9 million, net of an allowance of $4.4 million. The average recorded investment in impaired loans totaled $3.2 million and $3.6 million for the three months ended February 28, 2013 and February 29, 2012.


17



(8)
Rialto Investments Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
February 28,
2013
 
November 30,
2012
Assets:
 
 
 
Cash and cash equivalents
$
64,188

 
105,310

Defeasance cash to retire notes payable
4,655

 
223,813

Loans receivable, net
406,207

 
436,535

Real estate owned - held-for-sale
178,678

 
134,161

Real estate owned - held-and-used, net
547,273

 
601,022

Investments in unconsolidated entities
106,609

 
108,140

Investments held-to-maturity
15,262

 
15,012

Other
19,361

 
23,367

 
$
1,342,233

 
1,647,360

Liabilities:
 
 
 
Notes payable
$
270,357

 
574,480

Other
14,809

 
26,122

 
$
285,166

 
600,602

Rialto’s operating earnings were as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Revenues
$
25,622

 
32,208

Costs and expenses
31,771

 
33,370

Rialto Investments equity in earnings from unconsolidated entities
6,173

 
18,458

Rialto Investments other income (expense), net
1,327

 
(12,240
)
Operating earnings (1)
$
1,351

 
5,056

(1)
Operating earnings for the three months ended February 28, 2013 and February 29, 2012 include net loss attributable to noncontrolling interests of ($0.3) million and ($4.3) million, respectively.
The following is a detail of Rialto Investments other income (expense), net for the periods indicated:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Realized gains on REO sales, net
$
8,671

 
42

Unrealized gains on transfer of loans receivable to REO, net
670

 
1,952

REO expenses
(12,556
)
 
(18,074
)
Rental income
4,542

 
3,840

Rialto Investments other income (expense), net
$
1,327

 
(12,240
)
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 February 28, 2013 and November 30, 2012, the notes payable balance was $167.2 million and $470.0 million, respectively; however, as of February 28, 2013 and November 30, 2012, $4.7 million and $223.8 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 three months ended February 28, 2013, the LLCs retired $302.8 million principal

18



amount of the notes payable under the agreement with the FDIC through the defeasance account. In February 2013, the Rialto segment and the FDIC entered into a forbearance agreement whereby the FDIC temporarily waived its right to reissue a new purchase money note for the remaining $11.2 million balance of the portion of the notes payable that was due on February 25, 2013 until July 25, 2013. This forbearance does not meet the definition of an extension in the financing agreement and thus, no triggering event is deemed to have occurred. The Company agreed to disburse all available funds in the defeasance account on a monthly basis to the FDIC until the remaining $11.2 million balance of the portion of the notes payable that was due on February 25, 2013 was paid in full, but no later than July 25, 2013. In March 2013, the Company paid the remaining balance of the notes payable that was due on February 25, 2013 with cash disbursed from 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 February 28, 2013, these consolidated LLCs had total combined assets and liabilities of $930.7 million and $188.2 million, respectively. At November 30, 2012, these consolidated LLCs had total combined assets and liabilities of $1,236.4 million and $493.4 million, 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 of which $33.0 million of principal amount was retired in 2012.
The following table displays the loans receivable by aggregate collateral type:
(In thousands)
February 28,
2013
 
November 30,
2012
Land
$
202,094

 
216,095

Single family homes
82,999

 
93,207

Commercial properties
89,512

 
96,226

Multi-family homes
17,200

 
12,776

Other
14,402

 
18,231

Loans receivable
$
406,207

 
436,535


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)
February 28,
2013
 
November 30,
2012
Outstanding principal balance
$
766,840

 
812,187

Carrying value
$
372,105

 
396,200


19



The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the three months ended February 28, 2013 and February 29, 2012 were as follows:
(In thousands)
February 28,
2013
 
February 29,
2012
Accretable yield, beginning of period
$
112,899

 
209,480

Additions
18,949

 
1,838

Deletions
(19,915
)
 
(10,635
)
Accretions
(13,845
)
 
(21,403
)
Accretable yield, end of period
$
98,088

 
179,280

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent loan impairments and 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.
The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
February 28, 2013
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
8,659

 
2,429

 
1,321

 
3,750

Single family homes
17,748

 
6,730

 
2,316

 
9,046

Commercial properties
32,638

 
692

 
20,614

 
21,306

Loans receivable
$
59,045

 
9,851

 
24,251

 
34,102

November 30, 2012
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
23,163

 
4,983

 
2,844

 
7,827

Single family homes
18,966

 
8,311

 
2,244

 
10,555

Commercial properties
35,996

 
1,006

 
20,947

 
21,953

Loans receivable
$
78,125

 
14,300

 
26,035

 
40,335

The average recorded investment in impaired loans totaled approximately $37 million and $69 million for the three months ended February 28, 2013 and February 29, 2012, respectively.
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

20



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. As of February 28, 2013, the Company had an allowance on these loans of $16.9 million. During the three months ended February 28, 2013, the Company recorded $6.1 million of provision for loan losses offset by charge-offs of $1.4 million upon resolution of the loans. As of November 30, 2012, the Company had an allowance on these loans of $12.2 million. During the three months ended February 29, 2012, the Company did not record any provision for loan losses or charge-offs on these loans.
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 February 28, 2013 and November 30, 2012, the Company had an allowance on these loans of $1.7 million and $3.7 million, respectively. During the three months ended February 28, 2013 and February 29, 2012, the Company recorded $1.0 million and $0.9 million, respectively, of provision for loan losses offset by charge-offs of $3.0 million and $1.6 million, respectively, upon foreclosure of the loans.
Accrual and nonaccrual loans receivable by risk categories were as follows:
February 28, 2013
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
198,344

 
3,750

 
202,094

Single family homes
73,953

 
9,046

 
82,999

Commercial properties
68,206

 
21,306

 
89,512

Multi-family homes
17,200

 

 
17,200

Other
14,402

 

 
14,402

Loans receivable
$
372,105

 
34,102

 
406,207

November 30, 2012
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
208,268

 
7,827

 
216,095

Single family homes
82,652

 
10,555

 
93,207

Commercial properties
74,273

 
21,953

 
96,226

Multi-family homes
12,776

 

 
12,776

Other
18,231

 

 
18,231

Loans receivable
$
396,200

 
40,335

 
436,535

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.

21



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
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
REO - held-for-sale, beginning of period
$
134,161

 
143,677

Additions
594

 
1,134

Improvements
1,016

 
3,963

Sales
(25,780
)
 
(36,844
)
Impairments
(699
)
 
(1,240
)
Transfers to/from held-and-used, net (1)
69,386

 
(9,111
)
REO - held-for-sale, end of period
$
178,678

 
101,579

 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
REO - held-and-used, net, beginning of period
$
601,022

 
582,111

Additions
16,192

 
46,241

Improvements
700

 

Sales

 
(981
)
Impairments
(96
)
 
(2,597
)
Depreciation
(1,159
)
 
(3,315
)
Transfers to/from held-for-sale (1)
(69,386
)
 
9,111

REO - held-and-used, net, end of period
$
547,273

 
630,570

(1)
During the three months ended February 28, 2013 and February 29, 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 the three months ended February 28, 2013, the Company recorded $8.7 million of net gains from sales of REO. For the three months ended February 28, 2013 and February 29, 2012, the Company recorded net gains of $1.5 million and $5.8 million, respectively, from acquisitions of REO through foreclosure. These net gains 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 months ended February 28, 2013 and February 29, 2012.The carrying value of the investment securities at February 28, 2013 and November 30, 2012, was $15.3 million and $15.0 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 2010, 2011 and 2012, the Rialto segment obtained investors in Fund I who made equity commitments of $700 million (including $75 million committed by the Company). All capital commitments have been called and funded, and Fund I is closed to additional commitments. Fund I 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, Fund I’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in the statement of operations of Fund I, the

22



Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.
During the three months ended February 28, 2013, the Company received distributions of $7.7 million as a return of capital. During the three months ended February 29, 2012, the Company contributed $7.3 million to Fund I. As of February 28, 2013 and November 30, 2012, the carrying value of the Company’s investment in Fund I was $97.6 million and $98.9 million, respectively. For the three months ended February 28, 2013 and February 29, 2012, the Company’s share of earnings from Fund I was $6.4 million and $7.6 million, respectively.
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 both February 28, 2013 and November 30, 2012, the carrying value of the Company’s investment in the Servicer Provider was $8.4 million.
In December 2012, the Rialto segment completed the first closing of and Real Estate Fund II, LP ("Fund II") with initial equity commitments of approximately $260 million, including $100 million committed by the Company. No cash was funded at the time of the closing. Fund II's objective during its three-year investment period is to invest in distressed real estate assets and other related investments that fit Fund II's investment parameters. In March 2013, $75 million of the $260 million in equity commitments was called, of which, the Company contributed its portion of approximately $29 million.
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)
February 28,
2013
 
November 30,
2012
Assets:
 
 
 
Cash and cash equivalents
$
82,820

 
299,172

Loans receivable
388,033

 
361,286

Real estate owned
187,413

 
161,964

Investment securities
234,505

 
182,399

Investments in real estate partnerships
127,931

 
72,903

Other assets
182,528

 
199,839

 
$
1,203,230

 
1,277,563

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
145,115

 
155,928

Notes payable
80,213

 
120,431

Partner loans
163,516

 
163,516

Equity
814,386

 
837,688

 
$
1,203,230

 
1,277,563

Statements of Operations
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Revenues
$
53,343

 
122,405

Costs and expenses
59,114

 
51,185

Other income, net (1)
56,001

 
266,440

Net earnings of unconsolidated entities
$
50,230

 
337,660

Rialto Investments equity in earnings from unconsolidated entities
$
6,173

 
18,458

(1)
Other income, net, for the three months ended February 29, 2012 includes the AB PPIP Fund's mark-to-market unrealized gains and unrealized losses, all of which the Company’s portion is a small percentage.


23



(9)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of February 28, 2013 and November 30, 2012 included $134.1 million and $193.0 million, respectively, of cash held in escrow for approximately three days.

(10)
Lennar Homebuilding Restricted Cash
Restricted cash consists of customer deposits on home sales held in restricted accounts until title transfers to the homebuyer, as required by the state and local governments in which the homes were sold.

(11)
Lennar Homebuilding Senior Notes and Other Debts Payable

(Dollars in thousands)
February 28,
2013
 
November 30,
2012
5.95% senior notes due 2013
$
62,932

 
62,932

5.50% senior notes due 2014
249,294

 
249,294

5.60% senior notes due 2015
500,651

 
500,769

6.50% senior notes due 2016
249,868

 
249,851

4.75% senior notes due 2017
400,000

 
400,000

12.25% senior notes due 2017
394,871

 
394,457

4.125% senior notes due 2018
274,995

 

6.95% senior notes due 2018
248,017

 
247,873

2.00% convertible senior notes due 2020
276,500

 
276,500

2.75% convertible senior notes due 2020
405,331

 
401,787

3.25% convertible senior notes due 2021
400,000

 
400,000

4.750% senior notes due 2022
521,628

 
350,000

Mortgages notes on land and other debt
521,575

 
471,588

 
$
4,505,662

 
4,005,051


At February 28, 2013, the Company had a $150 million Letter of Credit and Reimbursement Agreement ("LC Agreement") with certain financial institutions, which may be increased to $200 million, but for which there are currently no commitments for the additional $50 million. In addition, at February 28, 2013, the Company also had a $50 million Letter of Credit and Reimbursement Agreement with certain financial institutions that had a $50 million accordion feature for which there are currently no commitments, and a $200 million Letter of Credit Facility with a financial institution. Additionally, in May 2012, the Company entered into a 3-year unsecured revolving credit facility (the "Credit Facility") with certain financial institutions that expires in May 2015. As of February 28, 2013, the maximum aggregate commitment under the Credit Facility was $525 million, of which $500 million was committed and $25 million was available through an accordion feature, subject to additional commitments. As of February 28, 2013, the Company had no outstanding borrowings under the Credit Facility. The Company believes it was in compliance with its debt covenants at February 28, 2013.
The Company’s performance letters of credit outstanding were $115.8 million and $107.5 million, respectively, at February 28, 2013 and November 30, 2012. The Company’s financial letters of credit outstanding were $209.0 million and $204.7 million, respectively, at February 28, 2013 and November 30, 2012. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at February 28, 2013, the Company had outstanding performance and surety bonds related to site improvements at various projects (including certain projects in the Company’s joint ventures) of $614.7 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of February 28, 2013, there were approximately $360.6 million, or 59%, of anticipated future costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds or letters of credit, but if any such draws occur, the Company does not believe they would have a material effect on its financial position, results of operations or cash flows.
During the three months ended February 28, 2013, the Company issued $275 million aggregate principal amount of 4.125% senior notes due 2018 (the "4.125% Senior Notes") at a price of 99.998% in a private placement and an additional $175

24



million aggregate principal amount of its 4.750% senior notes due 2022 ("4.750% Senior Notes") at a price of 98.073% in a private placement. Proceeds from the offerings, after payment of expenses, were $272.0 million and $172.2 million, respectively. The Company will use the net proceeds of the sale of the 4.125% Senior Notes and the 4.750% Senior Notes for working capital and general corporate purposes, which may include repayment or repurchase of its other outstanding senior notes. Interest on the 4.125% Senior Notes is due semi-annually beginning September 15, 2013. The 4.125% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries. Interest on the 4.750% Senior Notes is due semi-annually beginning May 15, 2013. The 4.750% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries. At February 28, 2013, the carrying amount of the 4.125% Senior Notes was $275.0 million. At February 28, 2013 and November 30, 2012, the carrying amount of the 4.750% Senior Notes was $521.6 million and $350.0 million, respectively.
In November 2011, the Company issued $350 million aggregate principal amount of 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”). During the three months ended February 29, 2012, the initial purchasers of the 3.25% Convertible Senior Notes purchased an additional $50 million aggregate principal amount to cover over-allotments. At both February 28, 2013 and November 30, 2012, the carrying and principal amount of the 3.25% Convertible Senior Notes was $400.0 million. The 3.25% Convertible Senior Notes are convertible into shares of Class A common stock at any time prior to maturity or redemption at the initial conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of the 3.25% Convertible Senior Notes or 17,022,200 Class A common shares if all the 3.25% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $23.50 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. Holders of the 3.25% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest on November 15, 2016. The Company has the right to redeem the 3.25% Convertible Senior Notes at any time on or after November 20, 2016 for 100% of their principal amount, plus accrued but unpaid interest. The 3.25% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
The 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”) are convertible into cash, shares of Class A common stock or a combination of both, at the Company’s election. However, it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash. Prior to the second quarter of 2012, the shares were not historically included in the calculation of diluted earnings per share primarily because it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash and the Company's volume weighted average stock price did not exceed the conversion price. However, the Company’s volume weighted average stock price for the three months ended February 28, 2013 was $39.54, which exceeded the conversion price, thus 8.9 million shares were included in the calculation of diluted earnings per share. Holders may convert the 2.75% Convertible Senior Notes at the initial conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount or 20,150,012 Class A common shares if all the 2.75% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $22.13 per share of Class A common stock. Holders of the 2.75% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on December 15, 2015. The Company has the right to redeem the 2.75% Convertible Senior Notes at any time on or after December 20, 2015 for 100% of their principal amount, plus accrued but unpaid interest. The 2.75% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
Certain provisions under ASC 470, Debt, require the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company has applied these provisions to its 2.75% Convertible Senior Notes. At both February 28, 2013 and November 30, 2012, the principal amount of the 2.75% Convertible Senior Notes was $446.0 million. At February 28, 2013 and November 30, 2012, the carrying amount of the equity component included in stockholders’ equity was $40.7 million and $44.2 million, respectively, and the net carrying amount of the 2.75% Convertible Senior Notes included in Lennar Homebuilding senior notes and other debts payable was $405.3 million and $401.8 million, respectively.
The 2.00% convertible senior notes due 2020 (the “2.00% Convertible Senior Notes”) are convertible into shares of Class A common stock at the initial conversion rate of 36.1827 shares of Class A common stock per $1,000 principal amount of the 2.00% Convertible Senior Notes or 10,004,517 Class A common shares if all the 2.00% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $27.64 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. At both February 28, 2013 and November 30, 2012, the carrying and principal amount of the 2.00% Convertible Senior Notes was $276.5 million. Holders of the 2.00% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on each of December 1, 2013 and December 1, 2015. The Company has the right to redeem the 2.00% Convertible Senior Notes at any time on or after December 1, 2013 for

25



100% of their principal amount, plus accrued but unpaid interest. The 2.00% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
Although the guarantees by substantially all of the Company's 100% owned homebuilding subsidiaries are full, unconditional and joint and several while they are in effect, (i) a subsidiary will cease to be a guarantor at any time when it is not directly or indirectly guaranteeing at least $75 million of debt of Lennar Corporation (the parent company), and (ii) a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.

(12)
Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in other liabilities in the accompanying condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Warranty reserve, beginning of period
$
84,188

 
88,120

Warranties issued during the period
8,759

 
6,855

Adjustments to pre-existing warranties from changes in estimates
2,949

 
1,367

Payments
(10,688
)
 
(10,625
)
Warranty reserve, end of period
$
85,208

 
85,717

As of February 28, 2013, the Company has identified approximately 1,010 homes delivered in Florida primarily during its 2006 and 2007 fiscal years that are confirmed to have had defective Chinese drywall and resulting damage. This represents a small percentage of homes the Company delivered nationally (1.2%) during those fiscal years. Defective Chinese drywall is an industry-wide issue as other homebuilders have publicly disclosed that they have experienced similar issues with defective Chinese drywall. Based on its efforts to date, the Company has not identified defective Chinese drywall in homes delivered by the Company outside of Florida. The Company has offered to replace defective Chinese drywall when it has been found in homes the Company has built, and has done so in substantially all affected homes. Drywall claims for approximately 40 of the 1,010 homes will be resolved through settlement of the drywall multi-district class action litigation in the United States District Court for the Eastern District of Louisiana.
Through February 28, 2013, the Company has accrued $82.2 million of warranty reserves related to defective Chinese drywall. There were no additional amounts accrued during the three months ended February 28, 2013. As of February 28, 2013 and November 30, 2012, the warranty reserve related to Chinese drywall, net of payments, was $2.5 million and $2.9 million, respectively. The Company has received, and continues to seek, reimbursement from its subcontractors, insurers and others for costs the Company has incurred or expects to incur to investigate and repair defective Chinese drywall and resulting damage.


26



(13)
Share-Based Payment
During the three months ended February 28, 2013, the Company did not grant any stock options or nonvested shares. During the three months ended February 29, 2012, the Company did not grant any stock options and granted an immaterial number of nonvested shares. Compensation expense related to the Company’s share-based payment awards was as follows:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Stock options
$

 
885

Nonvested shares
6,486

 
7,276

Total compensation expense for share-based awards
$
6,486

 
8,161


(14)
Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at February 28, 2013 and November 30, 2012, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, defeasance cash to retire notes payable, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities of these instruments.
 
 
 
February 28, 2013
 
November 30, 2012
 
Fair Value
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Hierarchy
 
Amount
 
Value
 
Amount
 
Value
ASSETS
 
 
 
 
 
 
 
 
 
Rialto Investments:
 
 
 
 
 
 
 
 
 
Loans receivable, net
Level 3
 
$
406,207

 
426,366

 
436,535

 
450,281

Investments held-to-maturity
Level 3
 
$
15,262

 
15,159

 
15,012

 
14,904

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Loans held-for-investment, net
Level 3
 
$
23,593

 
25,274

 
23,982

 
24,949

Investments held-to-maturity
Level 2
 
$
62,746

 
62,796

 
63,924

 
63,877

LIABILITIES
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Senior notes and other debts payable
Level 2
 
$
4,505,662

 
5,545,976

 
4,005,051

 
5,035,670

Rialto Investments:
 
 
 
 
 
 
 
 
 
Notes payable
Level 2
 
$
270,357

 
264,484

 
574,480

 
568,702

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Notes and other debts payable
Level 2
 
$
311,933

 
311,933

 
457,994

 
457,994

The following methods and assumptions are used by the Company in estimating fair values:
Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates.
Rialto Investments—The fair values for loans receivable is based on discounted cash flows, or the fair value of the collateral less estimated cost to sell. The fair value for investments held-to-maturity is based on discounted cash flows. For notes payable, the fair value of the zero percent interest notes guaranteed by the FDIC was calculated based on a 2-year treasury yield, and the fair value of other notes payable was calculated based on discounted cash flows using the Company’s weighted average borrowing rate.
Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information.

27



Fair Value Measurements:
GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
Financial Instruments
Fair Value
Hierarchy
 
Fair Value at
February 28,
2013
 
Fair Value at
November 30,
2012
(In thousands)
 
 
 
 
 
Lennar Financial Services:
 
 
 
 
 
Loans held-for-sale (1)
Level 2
 
$
334,658

 
502,318

Mortgage loan commitments
Level 2
 
$
12,008

 
12,713

Forward contracts
Level 2
 
$
(2,128
)
 
(2,570
)
Lennar Homebuilding:
 
 
 
 
 
Investments available-for-sale
Level 3
 
$
31,818

 
19,591

(1)
The aggregate fair value of loans held-for-sale of $334.7 million at February 28, 2013 exceeds their aggregate principal balance of $322.3 million by $12.4 million. The aggregate fair value of loans held-for-sale of $502.3 million at November 30, 2012 exceeds their aggregate principal balance of $479.1 million by $23.2 million.
The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values:
Loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of February 28, 2013 and November 30, 2012. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.
Mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments.
Forward contracts— Fair value is based on quoted market prices for similar financial instruments.
Investments available-for-sale— The fair value of these investments are based on third party valuations.

28



Gains and losses of Lennar Financial Services financial instruments measured at fair value from initial measurement and subsequent changes in fair value are recognized in the Lennar Financial Services segment’s operating earnings. There were no gains or losses recognized for the Lennar Homebuilding investments available-for-sale during the three months ended February 28, 2013 and February 29, 2012. The changes in fair values that are included in operating earnings are shown, by financial instrument and financial statement line item below:
 
Three Months Ended
 
February 28,
 
February 29,
(In thousands)
2013
 
2012
Changes in fair value included in Lennar Financial Services revenues:
 
 
 
Loans held-for-sale
$
(10,780
)
 
(1,307
)
Mortgage loan commitments
$
(705
)
 
1,442

Forward contracts
$
442

 
735

Interest income on loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded in interest income in the Lennar Financial Services’ statement of operations.
The following table represents a reconciliation of the beginning and ending balance for the Company’s Level 3 recurring fair value measurements (investments available-for-sale) included in the Lennar Homebuilding segment’s other assets:
 
Three Months Ended
(In thousands)
February 28, 2013
 
February 29, 2012
Investments available-for-sale, beginning of period
$
19,591

 
42,892

Purchases and other (1)
12,227

 
14,928

Sales

 
(6,436
)
Settlements (2)

 
(33,148
)
Investments available-for-sale, end of period
$
31,818

 
18,236

(1)
Represents investments in community development district bonds that mature at various dates between 2022 and 2042.
(2)
The investments available-for-sale that were settled during the three months ended February 29, 2012 related to investments in community development district bonds, which were in default by the borrower and regarding which the Company foreclosed on the underlying real estate collateral. Therefore, these investments were reclassified from other assets to land and land under development.
The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs and Rialto Investments real estate owned assets. The fair value included in the tables below represent only those assets whose carrying value were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:
Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Three Months Ended
February 28,
2013
 
Total Gains (Losses) (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
2,941

 
(1,255
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (3)
Level 3
 
$
8,447

 
(271
)
REO - held-and-used, net (4)
Level 3
 
$
18,211

 
941

(1)
Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended February 28, 2013.
(2)
Finished homes and construction in progress with an aggregate carrying value of $4.2 million were written down to their fair value of $2.9 million, resulting in valuation adjustments of $1.3 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended February 28, 2013.
(3)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $0.2 million and a fair value of $0.6 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or

29



management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $0.4 million. As part of management’s periodic valuations of its REO, held-for-sale, during the three months ended February 28, 2013, REO, held-for-sale, with an aggregate value of $8.5 million were written down to their fair value of $7.8 million, resulting in impairments of $0.7 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended February 28, 2013.
(4)
REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $15.2 million and a fair value of $16.2 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $1.0 million. As part of management’s periodic valuations of its REO, held-and-used, net, during the three months ended February 28, 2013, REO, held-and-used, net, with an aggregate value of $2.1 million were written down to their fair value of $2.0 million, resulting in impairments of $0.1 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended February 28, 2013.
Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Three Months Ended
February 29,
2012
 
Total Gains (Losses) (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
1,548

 
(2,025
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (3)
Level 3
 
$
11,423

 
(462
)
REO - held-and-used, net (4)
Level 3
 
$
54,289

 
2,414

(1)
Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended February 29, 2012.
(2)
Finished homes and construction in progress with an aggregate carrying value of $3.5 million were written down to their fair value of $1.5 million, resulting in valuation adjustments of $2.0 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended February 29, 2012.
(3)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $0.3 million and a fair value of $1.1 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $0.8 million. As part of management's periodic valuations of its REO, held-for-sale, during the three months ended February 29, 2012, REO, held-for-sale, with an aggregate value of $11.5 million were written down to their fair value of $10.3 million, resulting in impairments of $1.2 million. These gains and impairments are included within Rialto Investments other income (expense), net in the Company's statement of operations for the three months ended February 29, 2012.