10-Q 1 len-2014531x10q2.htm 10-Q LEN-2014.5.31-10Q2



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 May 31, 2014
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 May 31, 2014:
Class A 173,130,581
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)
 
May 31,
 
November 30,
 
2014 (1)
 
2013 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
627,615

 
695,424

Restricted cash
39,088

 
36,150

Receivables, net
83,180

 
51,935

Inventories:
 
 
 
Finished homes and construction in progress
2,879,956

 
2,269,116

Land and land under development
4,453,089

 
3,871,773

Consolidated inventory not owned
62,068

 
460,159

Total inventories
7,395,113

 
6,601,048

Investments in unconsolidated entities
690,035

 
716,949

Other assets
653,678

 
748,629

 
9,488,709

 
8,850,135

Rialto Investments:
 
 
 
Cash and cash equivalents
244,675

 
201,496

Restricted cash
34,890

 
2,593

Receivables, net
125,746

 
111,833

Loans receivable, net
203,190

 
278,392

Loans held-for-sale
45,065

 
44,228

Real estate owned, held-for-sale
192,829

 
197,851

Real estate owned, held-and-used, net
379,069

 
428,989

Investments in unconsolidated entities
157,693

 
154,573

Other assets
90,259

 
59,358

 
1,473,416

 
1,479,313

Lennar Financial Services
865,908

 
796,710

Lennar Multifamily
166,593

 
147,089

Total assets
$
11,994,626

 
11,273,247

(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 May 31, 2014, total assets include $1,038.0 million related to consolidated VIEs of which $12.7 million is included in Lennar Homebuilding cash and cash equivalents, $18.0 million in Lennar Homebuilding restricted cash, $0.2 million in Lennar Homebuilding receivables, net, $0.2 million in Lennar Homebuilding finished homes and construction in progress, $238.1 million in Lennar Homebuilding land and land under development, $62.1 million in Lennar Homebuilding consolidated inventory not owned, $13.0 million in Lennar Homebuilding investments in unconsolidated entities, $86.3 million in Lennar Homebuilding other assets, $36.6 million in Rialto Investments ("Rialto") cash and cash equivalents, $173.1 million in Rialto loans receivable, net, $120.3 million in Rialto real estate owned, held-for-sale, $270.0 million in Rialto real estate owned, held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities and $6.7 million in Rialto other assets.
As of November 30, 2013, total assets include $1,195.3 million related to consolidated VIEs of which $8.3 million is included in Lennar Homebuilding cash and cash equivalents, $17.7 million in Lennar Homebuilding restricted cash, $2.4 million in Lennar Homebuilding receivables, net, $94.8 million in Lennar Homebuilding land and land under development, $243.6 million in Lennar Homebuilding consolidated inventory not owned, $14.7 million in Lennar Homebuilding investments in unconsolidated entities, $86.8 million in Lennar Homebuilding other assets, $44.8 million in Rialto cash and cash equivalents, $244.0 million in Rialto loans receivable, net, $122.0 million in Rialto real estate owned, held-for-sale, $313.8 million in Rialto real estate owned, held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities and $1.8 million in Rialto 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)

 
May 31,
 
November 30,
 
2014 (2)
 
2013 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
316,257

 
271,365

Liabilities related to consolidated inventory not owned
53,015

 
384,876

Senior notes and other debts payable
4,683,438

 
4,194,432

Other liabilities
722,702

 
712,931

 
5,775,412

 
5,563,604

Rialto Investments
658,784

 
497,008

Lennar Financial Services
638,688

 
543,639

Lennar Multifamily
30,435

 
41,526

Total liabilities
7,103,319

 
6,645,777

Stockholders’ equity:
 
 
 
Preferred stock

 

Class A common stock of $0.10 par value; Authorized: May 31, 2014 and November 30, 2013
- 300,000,000 shares; Issued: May 31, 2014 - 173,138,745 shares and November 30, 2013
- 184,833,120 shares
17,314

 
18,483

Class B common stock of $0.10 par value; Authorized: May 31, 2014 and November 30, 2013
- 90,000,000 shares; Issued: May 31, 2014 - 32,982,815 shares and November 30, 2013
- 32,982,815 shares
3,298

 
3,298

Additional paid-in capital
2,199,138

 
2,721,246

Retained earnings
2,253,374

 
2,053,893

Treasury stock, at cost; May 31, 2014 - 8,164 Class A common stock and 1,679,620
Class B common stock; November 30, 2013 - 12,063,466 Class A common stock and
1,679,620 Class B common stock
(73,780
)
 
(628,019
)
Total stockholders’ equity
4,399,344

 
4,168,901

Noncontrolling interests
491,963

 
458,569

Total equity
4,891,307

 
4,627,470

Total liabilities and equity
$
11,994,626

 
11,273,247

(2)
As of May 31, 2014, total liabilities include $145.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $2.2 million is included in Lennar Homebuilding accounts payable, $53.0 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $61.7 million in Lennar Homebuilding senior notes and other debts payable, $4.4 million in Lennar Homebuilding other liabilities and $24.5 million in Rialto Investments notes payable and other liabilities.
As of November 30, 2013, total liabilities include $294.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $3.0 million is included in Lennar Homebuilding accounts payable, $191.6 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $75.1 million in Lennar Homebuilding senior notes and other debts payable, $4.9 million in Lennar Homebuilding other liabilities and $20.2 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
 
Six Months Ended
 
May 31,
 
May 31,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Lennar Homebuilding
$
1,634,785

 
1,269,844

 
2,866,170

 
2,138,288

Lennar Financial Services
111,016

 
119,096

 
187,968

 
214,976

Rialto Investments
54,393

 
25,684

 
101,348

 
51,306

Lennar Multifamily
18,551

 
12,257

 
26,354

 
12,554

Total revenues
1,818,745

 
1,426,881

 
3,181,840

 
2,417,124

Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding
1,392,643

 
1,100,507

 
2,456,998

 
1,879,181

Lennar Financial Services
92,723

 
89,924

 
165,210

 
169,702

Rialto Investments
79,604

 
28,305

 
127,180

 
60,076

Lennar Multifamily
25,549

 
13,581

 
39,476

 
17,409

Corporate general and administrative
38,317

 
33,853

 
76,429

 
65,123

Total costs and expenses
1,628,836

 
1,266,170

 
2,865,293

 
2,191,491

Lennar Homebuilding equity in earnings unconsolidated entities
394

 
13,491

 
5,384

 
12,627

Lennar Homebuilding other income, net
2,262

 
2,075

 
5,151

 
9,872

Other interest expense
(10,287
)
 
(25,109
)
 
(22,978
)
 
(51,140
)
Rialto Investments equity in earnings from unconsolidated entities
17,939

 
4,505

 
23,293

 
10,678

Rialto Investments other income, net
3,595

 
6,646

 
2,366

 
7,973

Lennar Multifamily equity in loss from unconsolidated entities
(182
)
 
(30
)
 
(257
)
 
(33
)
Earnings before income taxes
203,630

 
162,289

 
329,506

 
215,610

Provision for income taxes
(81,013
)
 
(19,491
)
 
(126,924
)
 
(15,854
)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
122,617

 
142,798

 
202,582

 
199,756

Less: Net earnings (loss) attributable to noncontrolling interests
(15,102
)
 
5,362

 
(13,254
)
 
4,828

Net earnings attributable to Lennar
$
137,719

 
137,436

 
215,836

 
194,928

Basic earnings per share
$
0.67

 
0.71

 
1.06

 
1.01

Diluted earnings per share
$
0.61

 
0.61

 
0.95

 
0.88

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

 
0.04

 
0.08

 
0.08

Comprehensive earnings attributable to Lennar
$
137,719

 
137,436

 
215,836

 
194,928

Comprehensive earnings (loss) attributable to noncontrolling interests
$
(15,102
)
 
5,362

 
(13,254
)
 
4,828



See accompanying notes to condensed consolidated financial statements.
4

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


 
Six Months Ended
 
May 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
202,582

 
199,756

Adjustments to reconcile net earnings to net cash used in operating activities:
 
 
 
Depreciation and amortization
16,645

 
13,739

Amortization of discount/premium on debt, net
10,577

 
11,268

Lennar Homebuilding equity in earnings from unconsolidated entities
(5,384
)
 
(12,627
)
Distributions of earnings from Lennar Homebuilding unconsolidated entities
4,051

 
220

Rialto Investments equity in earnings from unconsolidated entities
(23,293
)
 
(10,678
)
Distributions of earnings from Rialto Investments unconsolidated entities

 
197

Lennar Multifamily equity in loss from unconsolidated entities
257

 
33

Share based compensation expense
17,291

 
13,194

Tax benefit from share-based awards
282

 
8,435

Excess tax benefits from share-based awards
(282
)
 
(8,240
)
Deferred income tax expense
99,683

 
6,174

Gains on retirement of Lennar Homebuilding debt

 
(1,000
)
Gain on retirement of Rialto Investments notes payable
(2,627
)
 

Unrealized and realized gains on Rialto Investments real estate owned
(16,635
)
 
(25,483
)
Impairments of Rialto Investments loans receivable and REO
44,126

 
15,197

Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets
2,357

 
5,118

Changes in assets and liabilities:
 
 
 
Increase in restricted cash
(13,193
)
 
(798
)
Decrease (increase) in receivables
(63,071
)
 
22,346

Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
(981,096
)
 
(952,662
)
Increase in other assets
(24,262
)
 
(31,872
)
Increase in Rialto Investments loans held-for-sale
(368
)
 

Decrease (increase) in Lennar Financial Services loans held-for-sale
(55,069
)
 
120,922

Increase in accounts payable and other liabilities
65,733

 
16,852

Net cash used in operating activities
(721,696
)
 
(609,909
)
Cash flows from investing activities:
 
 
 
Increase in restricted cash related to LOCs
(478
)
 

Net additions of operating properties and equipment
(8,212
)
 
(2,979
)
Investments in and contributions to Lennar Homebuilding unconsolidated entities
(56,571
)
 
(26,046
)
Distributions of capital from Lennar Homebuilding unconsolidated entities
74,766

 
113,646

Investments in and contributions to Rialto Investments unconsolidated entities
(18,206
)
 
(33,636
)
Distributions of capital from Rialto Investments unconsolidated entities
30,086

 
37,106

Investments in and contributions to Lennar Multifamily unconsolidated entities
(14,110
)
 
(7,022
)
Distributions of capital from Lennar Multifamily unconsolidated entities
42,377

 
9,243

Decrease in Rialto Investments defeasance cash to retire notes payable

 
185,910

Receipts of principal payments on Rialto Investments loans receivable
8,357

 
34,288

Proceeds from sales of Rialto Investments real estate owned
112,409

 
104,482

Proceeds from sale of commercial mortgage-backed securities bond
9,171

 

Purchases of commercial mortgage-backed securities bond
(8,705
)
 

Improvements to Rialto Investments real estate owned
(6,194
)
 
(5,396
)
Purchases of loans receivables

 
(5,450
)
Purchases of Lennar Homebuilding investments available-for-sale
(21,274
)
 
(15,417
)
Proceeds from sales of Lennar Homebuilding investments available-for-sale
44,579

 

Acquisition, net of cash acquired
(4,808
)
 

Decrease (increase) in Lennar Financial Services loans held-for-investment, net
889

 
(248
)
Purchases of Lennar Financial Services investment securities
(5,374
)
 
(13,460
)
Proceeds from maturities of Lennar Financial Services investment securities
9,204

 
26,991

Net cash provided by investing activities
$
187,906

 
402,012


See accompanying notes to condensed consolidated financial statements.
5

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


 
Six Months Ended
 
May 31,
 
2014
 
2013
Cash flows from financing activities:
 
 
 
Net borrowings (repayments) under Lennar Financial Services debt
$
85,782

 
(123,253
)
Net repayments under Rialto Investments warehouse repurchase facilities
(31,593
)
 

Proceeds from Lennar Homebuilding senior notes
500,500

 
500,000

Proceeds from Rialto Investments senior notes
104,525

 

Proceeds from Rialto Investments structured notes
73,830

 

Redemption of senior notes

 
(63,001
)
Debt issuance costs
(7,725
)
 
(5,117
)
Principal repayments on Rialto Investments notes payable
(5,870
)
 
(314,597
)
Proceeds from other borrowings
26,933

 
65,500

Principal payments on other borrowings
(157,177
)
 
(105,630
)
Exercise of land option contracts from an unconsolidated land investment venture
(1,540
)
 
(19,857
)
Receipts related to noncontrolling interests
11,933

 
575

Payments related to noncontrolling interests
(72,737
)
 
(168,176
)
Excess tax benefits from share-based awards
282

 
8,240

Common stock:
 
 
 
Issuances
13,302

 
29,620

Repurchases
(566
)
 
(83
)
Dividends
(16,355
)
 
(15,390
)
Net cash provided by (used in) financing activities
523,524

 
(211,169
)
Net decrease in cash and cash equivalents
(10,266
)
 
(419,066
)
Cash and cash equivalents at beginning of period
970,505

 
1,310,743

Cash and cash equivalents at end of period
$
960,239

 
891,677

Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
627,615

 
727,207

Lennar Financial Services
86,164

 
72,541

Rialto Investments
244,675

 
91,631

Lennar Multifamily
1,785

 
298

 
$
960,239

 
891,677

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding and Lennar Multifamily:
 
 
 
Non-cash contributions to Lennar Homebuilding unconsolidated entities
$
354

 
227,851

Inventory acquired in satisfaction of other assets including investments available-for-sale
$
4,774

 

Purchases of inventories and other assets financed by sellers
$
96,430

 
73,355

Non-cash reduction of equity due to purchase of noncontrolling interest
$

 
99,066

Non-cash purchase of noncontrolling interests
$

 
63,500

Non-cash contributions to Lennar Multifamily unconsolidated entities
$
59,107

 
14,070

Rialto Investments:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
37,270

 
27,784

Non-cash acquisition of Servicer Provider
$
8,317

 

Lennar Financial Services:
 
 
 
Purchase of mortgage servicing rights financed by seller
$
5,927

 

Consolidation/deconsolidation of unconsolidated/consolidated entities, net:



 
 
 
Inventories
$
155,021

 

Investments in unconsolidated entities
$
(30,647
)
 

Operating properties and equipment and other assets
$
(18,468
)
 

Noncontrolling interests
$
(105,906
)
 


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 16) 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, 2013. 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 and six months ended May 31, 2014 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2014 presentation. These reclassifications had no impact on the Company's results of operations. As a result of the Company's change in reportable segments in the Company's Form 10-K for the year ended November 30, 2013 to include Lennar Multifamily, the Company revised the presentation of certain prior year amounts in the condensed consolidated financial statements to conform with the 2014 presentation.
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.
(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
(8) Lennar Multifamily
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.

7



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, Tennessee 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 primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. The Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold 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 raising, investing and managing third party capital, originating and securitizing commercial mortgage loans, as well as investing its own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities, as well as providing strategic real estate capital. Rialto’s operating earnings consist of revenues generated primarily from 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, gains from securitization transactions and interest income from the new Rialto Mortgage Finance ("RMF") business, asset management, due diligence and underwriting fees derived from the segment's investments in the real estate investment funds managed by the Rialto segment, fees for sub-advisory services, other income (expense), net, consisting primarily of gains upon foreclosure of real estate owned (“REO”) and gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF, REO expenses and other general and administrative expenses.
Operations of the Lennar Multifamily segment include revenues generated from the sales of land, revenue from construction activities and management fees generated from joint ventures less the cost of sales of land, expenses related to construction activities, equity in loss from unconsolidated entities and general and 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 Form 10-K for the year ended November 30, 2013. 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)
May 31,
2014
 
November 30,
2013
Assets:
 
 
 
Homebuilding East
$
2,125,930

 
1,890,138

Homebuilding Central
1,146,071

 
963,815

Homebuilding West
3,348,046

 
3,108,395

Homebuilding Southeast Florida
776,051

 
757,125

Homebuilding Houston
391,911

 
307,864

Homebuilding Other
884,892

 
808,496

Rialto Investments
1,473,416

 
1,479,313

Lennar Financial Services
865,908

 
796,710

Lennar Multifamily
166,593

 
147,089

Corporate and unallocated
815,808

 
1,014,302

Total assets
$
11,994,626

 
11,273,247

 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
536,748

 
421,829

 
927,256

 
710,721

Homebuilding Central
235,208

 
181,774

 
397,702

 
330,806

Homebuilding West
423,354

 
269,565

 
738,369

 
443,640

Homebuilding Southeast Florida
129,492

 
123,883

 
231,656

 
195,734

Homebuilding Houston
178,663

 
145,394

 
309,286

 
253,912

Homebuilding Other
131,320

 
127,399

 
261,901

 
203,475

Lennar Financial Services
111,016

 
119,096

 
187,968

 
214,976

Rialto Investments
54,393

 
25,684

 
101,348

 
51,306

Lennar Multifamily
18,551

 
12,257

 
26,354

 
12,554

Total revenues (1)
$
1,818,745

 
1,426,881

 
3,181,840

 
2,417,124

Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
85,252

 
49,373

 
135,904

 
72,248

Homebuilding Central
24,074

 
12,836

 
34,734

 
26,793

Homebuilding West (2)
64,643

 
45,698

 
118,436

 
58,301

Homebuilding Southeast Florida (3)
26,748

 
28,764

 
47,306

 
38,172

Homebuilding Houston
24,685

 
15,026

 
46,356

 
24,532

Homebuilding Other (4)
9,109

 
8,097

 
13,993

 
10,420

Lennar Financial Services
18,293

 
29,172

 
22,758

 
45,274

Rialto Investments
(3,677
)
 
8,530

 
(173
)
 
9,881

Lennar Multifamily
(7,180
)
 
(1,354
)
 
(13,379
)
 
(4,888
)
Total operating earnings
241,947

 
196,142

 
405,935

 
280,733

Corporate general and administrative expenses
38,317

 
33,853

 
76,429

 
65,123

Earnings before income taxes
$
203,630

 
162,289

 
329,506

 
215,610

(1)
Total revenues are net of sales incentives of $100.9 million ($20,300 per home delivered) and $177.4 million ($20,700 per home delivered) for the three and six months ended May 31, 2014, respectively, compared to $89.9 million ($20,200 per home delivered) and $163.9 million ($21,500 per home delivered) for the three and six months ended May 31, 2013, respectively.
(2)
For the six months ended May 31, 2014, operating earnings includes $0.9 million of valuation adjustments to land the Company intends to sell or has sold to third parties.
(3)
For the three and six months ended May 31, 2013, operating earnings include $2.7 million and $3.8 million, respectively, of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes.
(4)For the six months ended May 31, 2014, operating earnings includes $1.1 million write-offs of option deposits and pre-acquisition costs.

9



 
 
 
 

(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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues
$
32,111

 
179,790

 
175,805

 
261,014

Costs and expenses
65,098

 
127,737

 
210,737

 
209,359

Other income

 

 

 
13,361

Net earnings (loss) of unconsolidated entities
$
(32,987
)
 
52,053

 
(34,932
)
 
65,016

Lennar Homebuilding equity in earnings from unconsolidated entities (1)
$
394

 
13,491

 
5,384

 
12,627

(1)
For the six months ended May 31, 2014, Lennar Homebuilding equity in earnings from unconsolidated entities included $4.7 million of equity in earnings primarily as a result of third party land sales by one unconsolidated entity. For both the three and six months ended May 31, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $13.0 million of equity in earnings primarily as a result of sales of homesites to third parties by another unconsolidated entity.
Balance Sheets
(In thousands)
May 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
205,140

 
184,521

Inventories
2,739,466

 
2,904,795

Other assets
154,541

 
147,410

 
$
3,099,147

 
3,236,726

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
255,286

 
272,940

Debt
513,547

 
450,457

Equity
2,330,314

 
2,513,329

 
$
3,099,147

 
3,236,726

As of May 31, 2014 and November 30, 2013, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $690.0 million and $716.9 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2014 and November 30, 2013 was $768.2 million and $829.5 million, respectively. The basis difference is primarily as a result of the Company buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than 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. ("MSR"), 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 remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of November 30, 2013, the portfolio of land (including land development costs) of $241.8 million was also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities above. During the three months ended May 31, 2014, the Company entered into a new agreement with the joint venture which required $155.0 million of inventory assets to remain consolidated due to the existence of option contracts on substantially all of the homesites and were reclassified into land and land under development. The remaining $70.3 million of inventory assets no longer under option by the Company were deconsolidated.
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.

10



The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments, including Lennar's maximum recourse exposure, were as follows:
(In thousands)
May 31,
2014
 
November 30,
2013
The Company’s net recourse exposure
$
25,101

 
27,496

Reimbursement agreements from partners
4,151

 
13,500

The Company’s maximum recourse exposure
$
29,252

 
40,996

Non-recourse bank debt and other debt (partner’s share of several recourse)
$
57,309

 
61,008

Non-recourse land seller debt or other debt
4,035

 
20,454

Non-recourse debt with completion guarantees
303,292

 
245,821

Non-recourse debt without completion guarantees
119,659

 
82,178

Non-recourse debt to the Company
484,295

 
409,461

Total debt
$
513,547

 
450,457

The Company’s maximum recourse exposure as a % of total JV debt
6
%
 
9
%
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. As of both May 31, 2014 and November 30, 2013, the Company did not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities. 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 repayment or maintenance guarantee, 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.
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.
As of May 31, 2014, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2014, 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 12).


11



(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 six months ended May 31, 2014 and 2013:
 
 
 
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, 2013
$
4,627,470

 
18,483

 
3,298

 
2,721,246

 
(628,019
)
 
2,053,893

 
458,569

Net earnings (including net loss attributable to noncontrolling interests)
202,582

 

 

 

 

 
215,836

 
(13,254
)
Employee stock and directors plans
13,429

 
4

 

 
1,378

 
12,047

 

 

Retirement of treasury stock

 
(1,173
)
 

 
(541,019
)
 
542,192

 

 

Tax benefit from employee stock plans and vesting of restricted stock
282

 

 

 
282

 

 

 

Amortization of restricted stock
17,251

 

 

 
17,251

 

 

 

Cash dividends
(16,355
)
 

 

 

 

 
(16,355
)
 

Receipts related to noncontrolling interests
11,933

 

 

 

 

 

 
11,933

Payments related to noncontrolling interests
(72,737
)
 

 

 

 

 

 
(72,737
)
Non-cash consolidations, net
107,022

 

 

 

 

 

 
107,022

Non-cash activity related to noncontrolling interests
430

 

 

 

 

 

 
430

Balance at May 31, 2014
$
4,891,307

 
17,314

 
3,298

 
2,199,138

 
(73,780
)
 
2,253,374

 
491,963

 
 
 
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)
199,756

 

 

 

 

 
194,928

 
4,828

Employee stock and directors plans
30,134

 
102

 

 
12,967

 
17,065

 

 

Tax benefit from employee stock plans and vesting of restricted stock
8,435

 

 

 
8,435

 

 

 

Amortization of restricted stock
13,161

 

 

 
13,161

 

 

 

Cash dividends
(15,390
)
 

 

 

 

 
(15,390
)
 

Equity adjustments related to purchase of noncontrolling interests
38,636

 

 

 
(60,430
)
 

 

 
99,066

Receipts related to noncontrolling interests
575

 

 

 

 

 

 
575

Payments related to noncontrolling interests
(168,176
)
 

 

 

 

 

 
(168,176
)
Non-cash purchase of noncontrolling interests
(63,500
)
 

 

 

 

 

 
(63,500
)
Balance at May 31, 2013
$
4,044,839

 
17,342

 
3,298

 
2,396,074

 
(615,781
)
 
1,784,669

 
459,237

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both the three and six months ended May 31, 2014 and 2013, there were no repurchases of common stock under the stock repurchase program. As of May 31, 2014, 6.2 million shares of common stock could be repurchased in the future under the program.

12



During the three and six months ended May 31, 2014, treasury stock decreased by 11.7 million and 12.1 million, respectively, shares of Class A common stock primarily due to the retirement of 11.7 million shares of Class A common stock authorized by the Company's Board of Directors during the three months ended May 31, 2014. The retirement of Class A common stock resulted in a reclass between treasury stock and additional paid-in capital within stockholders' equity. During the three months ended May 31, 2013, treasury stock increased by an immaterial amount of Class A common stock. During the six months ended May 31, 2013, treasury stock decreased by approximately 0.5 million in shares of Class A common stock due to activity related to the Company's equity compensation plan.
(5)
Income Taxes
During the three and six months ended May 31, 2014, the Company recorded a tax provision of $81.0 million and $126.9 million, respectively, primarily related to pre-tax earnings. During the three and six months ended May 31, 2013, the Company recorded a tax provision of $19.5 million and $15.9 million, respectively, which included a tax provision of $60.8 million and $82.3 million, respectively, primarily related to pre-tax earnings, partially offset by a reversal of the Company's valuation allowance of $41.3 million and $66.4 million, respectively. The effective tax rate for the three months ended May 31, 2014 and 2013 was 37.04% and 12.42%, respectively. The effective tax rate for the six months ended May 31, 2014 and 2013 was 37.03% and 7.52%, respectively. The difference in tax rate between the two periods is primarily the result of a valuation allowance reversal during the three and six months ended May 31, 2013.
In accordance with ASC 740, the Company evaluates its deferred tax assets quarterly to determine if adjustments to its valuation allowance are required. ASC 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available positive and negative evidence using a “more likely than not” standard with respect to whether deferred tax assets will be realized. 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.
As of May 31, 2014 and November 30, 2013, the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $280.0 million and $376.8 million, respectively. The net deferred tax assets included a valuation allowance of $12.7 million as of both May 31, 2014 and November 30, 2013, primarily related to state net operating loss ("NOL") carryforwards that may expire due to short carryforward periods.
At May 31, 2014 and November 30, 2013, the Company had federal tax effected NOL carryforwards totaling $2.4 million and $88.1 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2025. At May 31, 2014 and November 30, 2013, the Company had state tax effected NOL carryforwards totaling $129.6 million and $143.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2014 and 2033. At both May 31, 2014 and November 30, 2013, the Company had a valuation allowance of $10.6 million 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 both May 31, 2014 and November 30, 2013, the Company had $10.5 million of gross unrecognized tax benefits. At May 31, 2014, the Company had $27.3 million accrued for interest and penalties, of which $8.5 million was recorded during the six months ended May 31, 2014. During both the three and six months ended May 31, 2014, the accrual for interest and penalties was reduced by $0.3 million, primarily as a result of interest payments. At November 30, 2013, the Company had $19.1 million accrued for interest and penalties.

13



(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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
137,719

 
137,436

 
215,836

 
194,928

Less: distributed earnings allocated to nonvested shares
97

 
102

 
195

 
204

Less: undistributed earnings allocated to nonvested shares
1,541

 
1,747

 
2,388

 
2,405

Numerator for basic earnings per share
136,081

 
135,587

 
213,253

 
192,319

Plus: interest on 3.25% convertible senior notes due 2021 and
    2.00% convertible senior notes due 2020 (1)
1,982

 
2,826

 
3,964

 
5,651

Plus: undistributed earnings allocated to convertible shares
1,541

 
1,747

 
2,388

 
2,405

Less: undistributed earnings reallocated to convertible shares
1,388

 
1,500

 
2,162

 
2,085

Numerator for diluted earnings per share
$
138,216

 
138,660

 
217,443

 
198,290

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average
    common shares outstanding
202,000

 
190,010

 
201,977

 
189,779

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
9

 
339

 
9

 
456

Convertible senior notes
26,001

 
36,306

 
25,835

 
36,101

Denominator for diluted earnings per share - weighted average
    common shares outstanding
228,010

 
226,655

 
227,821

 
226,336

Basic earnings per share
$
0.67

 
0.71

 
1.06

 
1.01

Diluted earnings per share
$
0.61

 
0.61

 
0.95

 
0.88

(1)
Interest on the 2.00% convertible senior notes due 2020 is included in the three and six months ended May 31, 2013 because the holders of the 2.00% convertible senior notes due 2020 converted the notes into shares of Class A common stock in November 30, 2013.
For both the three and six months ended May 31, 2014 and 2013, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive.

14



(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
May 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
86,164

 
73,066

Restricted cash
5,693

 
10,283

Receivables, net (1)
120,888

 
127,223

Loans held-for-sale (2)
467,786

 
414,231

Loans held-for-investment, net
26,787

 
26,356

Investments held-to-maturity
56,806

 
62,344

Goodwill
38,854

 
34,046

Other (3)
62,930

 
49,161

 
$
865,908

 
796,710

Liabilities:
 
 
 
Notes and other debts payable
$
465,875

 
374,166

Other (4)
172,813

 
169,473

 
$
638,688

 
543,639

(1)
Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of May 31, 2014 and November 30, 2013, 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 $15.0 million and $7.3 million as of May 31, 2014 and November 30, 2013, respectively. Other assets also includes forward contracts carried at fair value of $1.4 million as of November 30, 2013. In addition, other assets include mortgage servicing rights carried at fair value of $18.2 million and $11.5 million as of May 31, 2014 and November 30, 2013, respectively.
(4)
Other liabilities include $73.2 million and $74.5 million as of May 31, 2014 and November 30, 2013, 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 $6.3 million as of May 31, 2014.
At May 31, 2014, the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures November 2014
$
325,000

364-day warehouse repurchase facility that matures February 2015 (1)
300,000

364-day warehouse repurchase facility that matures February 2015
150,000

Totals
$
775,000

(1)
Maximum aggregate commitment includes a $100 million accordion feature that is usable 10 days prior to quarter-end through 20 days after quarter end.
In June 2014, the Lennar Financial Services segment entered into a new 364-day warehouse repurchase facility with a maximum aggregate commitment of $150.0 million (including a $50.0 million accordion feature that is usable 10 days prior to quarter-end through 20 days after quarter end) that matures in June 2015.
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 and their prior year predecessors were $465.9 million and $374.2 million at May 31, 2014 and November 30, 2013, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $486.6 million and $452.5 million at May 31, 2014 and November 30, 2013, 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.
The Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold 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. During recent years there has been an increased industry-wide effort by purchasers to defray their losses in an unfavorable economic environment by purporting to have found inaccuracies related

15



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 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 Company's condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Loan origination liabilities, beginning of period
$
9,585

 
7,606

 
9,311

 
7,250

Provision for losses during the period
449

 
360

 
742

 
773

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

 
428

 

 
524

Payments/settlements
(260
)
 
(137
)
 
(279
)
 
(290
)
Loan origination liabilities, end of period
$
9,774

 
8,257

 
9,774

 
8,257

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 was as follows:
(In thousands)
May 31,
2014
 
November 30,
2013
Impaired loans unpaid principal balance
$
7,635

 
7,897

Valuation allowance
(3,756
)
 
(3,891
)
Investment in impaired loans
$
3,879

 
4,006

The average recorded investment in impaired loans totaled $3.8 million and $3.9 million for the three and six months ended May 31, 2014, respectively. The average recorded investment in impaired loans totaled $3.6 million and $3.3 million for the three and six months ended May 31, 2013, respectively.
In April 2014, the Lennar Financial Services segment acquired a Colorado-based mortgage company. At acquisition date the provisional fair value of the assets acquired were $1.4 million and the provisional goodwill recorded was $4.8 million.


16


(8)
Rialto Investments Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
May 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
244,675

 
201,496

Restricted cash (1)
34,890

 
2,593

Receivables, net (2)
125,746

 
111,833

Loans receivable, net
203,190

 
278,392

Loans held-for-sale (3)
45,065

 
44,228

Real estate owned - held-for-sale
192,829

 
197,851

Real estate owned - held-and-used, net
379,069

 
428,989

Investments in unconsolidated entities
157,693

 
154,573

Investments held-to-maturity
16,658

 
16,070

Other (4)
73,601

 
43,288

 
$
1,473,416

 
1,479,313

Liabilities:
 
 
 
Notes and other debts payable (5)
$
577,916

 
441,883

Other (6)
80,868

 
55,125

 
$
658,784

 
497,008

(1)
Restricted cash primarily consists of cash held in escrow by the Company's loan servicer provider on behalf of customers and lenders and is disbursed in accordance with agreements between the transacting parties.
(2)
Receivables, net primarily relate to loans sold but not settled as of May 31, 2014 and November 30, 2013, respectively.
(3)
Loans held-for-sale relate to unsold loans originated by RMF carried at fair value.
(4)
Other assets include credit default swaps carried at fair value of $1.2 million and $0.8 million as of May 31, 2014 and November 30, 2013, respectively.
(5)
Notes and other debts payable include $352.1 million and $250.0 million related to the 7.00% Senior Notes due 2018 ("7.00% Senior Notes") as of May 31, 2014 and November 30, 2013, respectively, and also include $44.4 million and $76.0 million as of May 31, 2014 and November 30, 2013, respectively, related to the RMF warehouse repurchase financing agreements. As of May 31, 2014, notes and other debts payable also include $73.8 million related to notes issued through a structured note offering.
(6)
Other liabilities include interest rate swaps and swap futures carried at fair value of $0.4 million as of May 31, 2014 and credit default swaps carried at fair value of $0.6 million and $0.3 million as of May 31, 2014 and November 30, 2013, respectively.
Rialto’s operating earnings were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues
$
54,393

 
25,684

 
101,348

 
51,306

Costs and expenses (1)
79,604

 
28,305

 
127,180

 
60,076

Rialto Investments equity in earnings from unconsolidated entities
17,939

 
4,505

 
23,293

 
10,678

Rialto Investments other income, net
3,595

 
6,646

 
2,366

 
7,973

Operating earnings (loss) (2)
$
(3,677
)
 
8,530

 
(173
)
 
9,881

(1)
Costs and expenses for the three and six months ended May 31, 2014 include loan impairments of $33.9 million and $40.6 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). For the three and six months ended May 31, 2013 costs and expenses include loan impairments of $3.5 million and $10.6 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating loss for the three and six months ended May 31, 2014 include net loss attributable to noncontrolling interests of $17.1 million and $16.1 million, respectively. Operating earnings for the three and six months ended May 31, 2013 include net earnings attributable to noncontrolling interests of $5.7 million and $5.4 million, respectively.

17


The following is a detail of Rialto Investments other income, net for the periods indicated:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Realized gains on REO sales, net
$
14,234

 
18,535

 
23,743

 
27,206

Unrealized losses on transfer of loans receivable to REO and impairments, net
(8,274
)
 
(6,980
)
 
(10,651
)
 
(6,310
)
REO and other expenses (1)
(12,411
)
 
(10,348
)
 
(30,950
)
 
(22,904
)
Rental and other income (1)
10,046

 
5,439

 
20,224

 
9,981

Rialto Investments other income, net
$
3,595

 
6,646

 
2,366

 
7,973

(1)
For the six months ended May 31, 2014, a $12.6 million allowance was reclassified from REO and other expenses to rental and other income, which did not impact Rialto Investments other income, net.
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 ("FDIC Portfolios"), which retained 60% equity interests in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, the Company’s equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions will continue being shared 60%/40% with the FDIC. During the six months ended May 31, 2014, $98.2 million was distributed by the LLCs, of which $59.6 million was paid to the FDIC and $38.6 million was paid to Rialto, the parent company.
The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The Company was determined to be the primary beneficiary because it has the power to direct activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2014, these consolidated LLCs had total combined assets and liabilities of $607.5 million and $24.5 million, respectively. At November 30, 2013, these consolidated LLCs had total combined assets and liabilities of $727.1 million and $20.2 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. As of both May 31, 2014 and November 30, 2013, there was $90.9 million outstanding related to the 5-year senior unsecured note.
In May 2014, Rialto issued $73.8 million principal amount of notes through a structured note offering (the "Structured Notes") collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserved, were $69.1 million. The estimated final payment date of the Structured Notes is December 15, 2015.
The following table displays the loans receivable by aggregate collateral type:
(In thousands)
May 31,
2014
 
November 30,
2013
Land
$
105,202

 
166,950

Single family homes
49,808

 
59,647

Commercial properties
32,501

 
38,060

Other
15,679

 
13,735

Loans receivable, net
$
203,190

 
278,392

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

18


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 but can be reversed if conditions improve.
The outstanding balance and carrying value of loans accounted for under ASC 310-30 were as follows:
(In thousands)
May 31,
2014
 
November 30,
2013
Outstanding principal balance
$
496,641

 
586,901

Carrying value
$
197,992

 
270,075

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the six months ended May 31, 2014 and 2013 was as follows:
 
May 31,
(In thousands)
2014
 
2013
Accretable yield, beginning of period
$
73,144

 
112,899

Additions
6,431

 
40,879

Deletions
(22,078
)
 
(22,463
)
Accretions
(18,927
)
 
(26,596
)
Accretable yield, end of period
$
38,570

 
104,719

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent loan impairments, net of recoveries, 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:
May 31, 2014
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
5,218

 

 
2,106

 
2,106

Single family homes
9,166

 
502

 
1,983

 
2,485

Commercial properties
1,500

 

 
607

 
607

Loans receivable
$
15,884

 
502

 
4,696

 
5,198

November 30, 2013
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
6,791

 
249

 
2,304

 
2,553

Single family homes
15,125

 
519

 
4,119

 
4,638

Commercial properties
3,400

 
498

 
628

 
1,126

Loans receivable
$
25,316

 
1,266

 
7,051

 
8,317


19


The average recorded investment in impaired loans totaled approximately $7 million and $37 million for the six months ended May 31, 2014 and 2013, 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 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 but can be reversed if conditions improve. The activity in the Company's allowance rollforward related to accrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Allowance on accrual loans, beginning of period
$
24,922

 
16,851

 
$
18,952

 
$
12,178

Provision for loan losses, net of recoveries
33,851

 
3,453

 
40,488

 
9,530

Charge-offs
(3,115
)
 
(1,588
)
 
(3,782
)
 
(2,992
)
Allowance on accrual loans, end of period
$
55,658

 
18,716

 
55,658

 
18,716

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. 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. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Allowance on nonaccrual loans, beginning of period
$
424

 
1,710

 
$
1,213

 
$
3,722

Provision for loan losses
15

 
67

 
94

 
1,080

Charge-offs
(153
)
 
(5
)
 
(1,021
)
 
(3,030
)
Allowance on nonaccrual loans, end of period
$
286

 
1,772

 
286

 
1,772

Accrual and nonaccrual loans receivable by risk categories were as follows:
May 31, 2014
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
103,096

 
2,106

 
105,202

Single family homes
47,323

 
2,485

 
49,808

Commercial properties
31,894

 
607

 
32,501

Other
15,679

 

 
15,679

Loans receivable
$
197,992

 
5,198

 
203,190

November 30, 2013
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
164,397

 
2,553

 
166,950

Single family homes
55,009

 
4,638

 
59,647

Commercial properties
36,934

 
1,126

 
38,060

Other
13,735

 

 
13,735

Loans receivable
$
270,075

 
8,317

 
278,392

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 suggests a decline in the collateral’s fair value.

20


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.
The following tables represent the activity in REO:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
REO - held-for-sale, beginning of period
$
186,234

 
178,678

 
197,851

 
134,161

Additions

 
739

 

 
1,333

Improvements
1,130

 
1,501

 
2,723

 
2,517

Sales
(47,433
)
 
(51,496
)
 
(88,666
)
 
(77,276
)
Impairments and unrealized losses
(1,032
)
 
(3,485
)
 
(2,823
)
 
(4,184
)
Transfers from held-and-used, net (1)
53,930

 
78,448

 
83,744

 
147,834

REO - held-for-sale, end of period
$
192,829

 
204,385

 
192,829

 
204,385

 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2014
 
2013
 
2014
 
2013
REO - held-and-used, net, beginning of period
$
405,675

 
547,273

 
428,989

 
601,022

Additions
26,093

 
8,536

 
34,127

 
24,728

Improvements
2,708

 
2,179

 
3,471

 
2,879

Impairments
(599
)
 
(307
)
 
(1,503
)
 
(403
)
Depreciation
(878
)
 
(919
)
 
(2,271
)
 
(2,078
)
Transfers to held-for-sale (1)
(53,930
)
 
(78,448
)
 
(83,744
)
 
(147,834
)
REO - held-and-used, net, end of period
$
379,069

 
478,314

 
379,069

 
478,314

(1)
During the three and six months ended May 31, 2014 and 2013, the Rialto segment transferred certain properties from REO held-and-used, net to REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.
For the three and six months ended May 31, 2014, the Company recorded net losses of $7.0 million and $7.1 million, respectively, from acquisitions of REO through foreclosure. For the three and six months ended May 31, 2013, the Company recorded net losses of $3.2 million and $1.7 million, respectively, from acquisitions of REO through foreclosure. These net losses are recorded in Rialto Investments other income, net.
Rialto Mortgage Finance
In July 2013, RMF was formed to originate and sell into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. During the six months ended May 31, 2014, RMF originated loans with a total principal balance of $692.2 million and sold $691.5 million of loans into three separate securitizations. An additional $125.7 million of these originated loans were sold but not settled into a securitization trust as of May 31, 2014, and thus were included in receivables, net. As of May 31, 2014 and November 30, 2013, RMF had two warehouse repurchase financing agreements that mature in fiscal year 2015 totaling $500 million to help finance the loans it makes. Borrowings under these facilities were $44.4 million and $76.0 million as of May 31, 2014 and November 30, 2013, respectively.
In November 2013, the Rialto segment issued $250 million aggregate principal amount of the 7.00% senior notes due 2018 ("7.00% Senior Notes"), at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were approximately $245 million. Rialto used a majority of the net proceeds of the sale of the 7.00% Senior Notes as working capital for RMF and used $100 million to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes, at a price of 102.25% of their face value in a private offering with no registration rights. Proceeds from the offering, after payment of expenses, were approximately $102 million. Rialto used the net proceeds of the offering to

21


provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. Interest on the 7.00% Senior Notes is due semi-annually beginning June 1, 2014. At May 31, 2014 and November 30, 2013, the carrying amount of the 7.00% Senior Notes was $352.1 million and $250.0 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to, or enter into transactions with, Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. The Company believes it was in compliance with its debt covenants at May 31, 2014.
Investments
All of Rialto's investments in funds have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, as amended by ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the Company's investments' assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations, the Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,
2014
 
May 31,
2014
 
November 30,
2013
(Dollars in thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to fund by the Company
 
Funds contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006

 
$
700,006

 
$
75,000

 
$
75,000

 
$
73,188

 
75,729

Rialto Real Estate Fund II, LP
2012
 
1,305,000

 
660,058

 
100,000

 
50,579

 
52,020

 
53,103

Rialto Mezzanine Partners Fund
2013
 
125,000

 
81,701

 
27,299

 
17,843

 
17,719

 
16,724

Other Investments
 
 
 
 
 
 
 
 
 
 
14,766

 
9,017