10-Q 1 len-2014831x10qq3.htm 10-Q LEN-2014.8.31-10Q Q3



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 August 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 August 31, 2014:
Class A 173,941,743
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)
 
August 31,
 
November 30,
 
2014 (1)
 
2013 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
542,241

 
695,424

Restricted cash
11,769

 
36,150

Receivables, net
83,420

 
51,935

Inventories:
 
 
 
Finished homes and construction in progress
3,159,148

 
2,269,116

Land and land under development
4,509,515

 
3,871,773

Consolidated inventory not owned
55,771

 
460,159

Total inventories
7,724,434

 
6,601,048

Investments in unconsolidated entities
697,623

 
716,949

Other assets
695,325

 
748,629

 
9,754,812

 
8,850,135

Rialto Investments:
 
 
 
Cash and cash equivalents
211,030

 
201,496

Restricted cash
31,636

 
2,593

Receivables, net

 
111,833

Loans receivable, net
174,286

 
278,392

Loans held-for-sale
164,923

 
44,228

Real estate owned, held-for-sale
194,339

 
197,851

Real estate owned, held-and-used, net
335,472

 
428,989

Investments in unconsolidated entities
176,132

 
154,573

Other assets
95,925

 
59,358

 
1,383,743

 
1,479,313

Lennar Financial Services
946,537

 
796,710

Lennar Multifamily
204,985

 
147,089

Total assets
$
12,290,077

 
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 August 31, 2014, total assets include $979.8 million related to consolidated VIEs of which $13.2 million is included in Lennar Homebuilding cash and cash equivalents, $0.3 million in Lennar Homebuilding restricted cash, $0.2 million in Lennar Homebuilding receivables, net, $224.4 million in Lennar Homebuilding land and land under development, $55.8 million in Lennar Homebuilding consolidated inventory not owned, $13.2 million in Lennar Homebuilding investments in unconsolidated entities, $103.7 million in Lennar Homebuilding other assets, $37.6 million in Rialto Investments ("Rialto") cash and cash equivalents, $154.8 million in Rialto loans receivable, net, $119.3 million in Rialto real estate owned, held-for-sale, $236.3 million in Rialto real estate owned, held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities, $2.5 million in Rialto other assets and $17.8 million in Lennar Multifamily 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)

 
August 31,
 
November 30,
 
2014 (2)
 
2013 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
349,382

 
271,365

Liabilities related to consolidated inventory not owned
47,507

 
384,876

Senior notes and other debts payable
4,692,880

 
4,194,432

Other liabilities
770,499

 
712,931

 
5,860,268

 
5,563,604

Rialto Investments
659,648

 
497,008

Lennar Financial Services
697,799

 
543,639

Lennar Multifamily
34,221

 
41,526

Total liabilities
7,251,936

 
6,645,777

Stockholders’ equity:
 
 
 
Preferred stock

 

Class A common stock of $0.10 par value; Authorized: August 31, 2014 and November 30, 2013
- 300,000,000 shares; Issued: August 31, 2014 - 174,238,332 shares and November 30, 2013
- 184,833,120 shares
17,424

 
18,483

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

 
3,298

Additional paid-in capital
2,223,001

 
2,721,246

Retained earnings
2,422,921

 
2,053,893

Treasury stock, at cost; August 31, 2014 - 296,589 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
(85,165
)
 
(628,019
)
Total stockholders’ equity
4,581,479

 
4,168,901

Noncontrolling interests
456,662

 
458,569

Total equity
5,038,141

 
4,627,470

Total liabilities and equity
$
12,290,077

 
11,273,247

(2)
As of August 31, 2014, total liabilities include $142.7 million related to consolidated VIEs as to which there was no recourse against the Company, of which $5.5 million is included in Lennar Homebuilding accounts payable, $47.5 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $61.6 million in Lennar Homebuilding senior notes and other debts payable, $4.5 million in Lennar Homebuilding other liabilities and $23.6 million in Rialto Investments 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 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
 
Nine Months Ended
 
August 31,
 
August 31,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Lennar Homebuilding
$
1,830,771

 
1,461,626

 
4,696,941

 
3,599,914

Lennar Financial Services
128,379

 
112,638

 
316,347

 
327,614

Rialto Investments
40,848

 
27,808

 
142,196

 
79,114

Lennar Multifamily
14,036

 
695

 
40,390

 
13,249

Total revenues
2,014,034

 
1,602,767

 
5,195,874

 
4,019,891

Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding
1,558,319

 
1,245,638

 
4,015,317

 
3,124,819

Lennar Financial Services
101,235

 
89,146

 
266,445

 
258,848

Rialto Investments
47,644

 
34,167

 
174,824

 
94,243

Lennar Multifamily
20,482

 
6,138

 
59,958

 
23,547

Corporate general and administrative
43,072

 
37,619

 
119,501

 
102,742

Total costs and expenses
1,770,752

 
1,412,708

 
4,636,045

 
3,604,199

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
(2,080
)
 
10,458

 
3,304

 
23,085

Lennar Homebuilding other income (expense), net
(63
)
 
4,149

 
5,088

 
14,021

Other interest expense
(8,381
)
 
(22,230
)
 
(31,359
)
 
(73,370
)
Rialto Investments equity in earnings from unconsolidated entities
19,973

 
5,199

 
43,266

 
15,877

Rialto Investments other income (expense), net
(5,342
)
 
1,837

 
(2,976
)
 
9,810

Lennar Multifamily equity in earnings (loss) from unconsolidated entities
14,946

 
(113
)
 
14,689

 
(146
)
Earnings before income taxes
262,335

 
189,359

 
591,841

 
404,969

Provision for income taxes
(88,895
)
 
(67,205
)
 
(215,819
)
 
(83,059
)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
173,440

 
122,154

 
376,022

 
321,910

Less: Net earnings (loss) attributable to noncontrolling interests
(4,317
)
 
1,492

 
(17,571
)
 
6,320

Net earnings attributable to Lennar
$
177,757

 
120,662

 
393,593

 
315,590

Basic earnings per share
$
0.87

 
0.62

 
1.92

 
1.64

Diluted earnings per share
$
0.78

 
0.54

 
1.73

 
1.42

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

 
0.04

 
0.12

 
0.12

Comprehensive earnings attributable to Lennar
$
177,757

 
120,662

 
393,593

 
315,590

Comprehensive earnings (loss) attributable to noncontrolling interests
$
(4,317
)
 
1,492

 
(17,571
)
 
6,320



See accompanying notes to condensed consolidated financial statements.
4

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


 
Nine Months Ended
 
August 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
376,022

 
321,910

Adjustments to reconcile net earnings to net cash used in operating activities:
 
 
 
Depreciation and amortization
27,161

 
21,683

Amortization of discount/premium on debt, net
16,140

 
17,641

Lennar Homebuilding equity in earnings from unconsolidated entities
(3,304
)
 
(23,085
)
Distributions of earnings from Lennar Homebuilding unconsolidated entities
4,456

 
718

Rialto Investments equity in earnings from unconsolidated entities
(43,266
)
 
(15,877
)
Distributions of earnings from Rialto Investments unconsolidated entities
354

 
648

Lennar Multifamily equity in (earnings) loss from unconsolidated entities
(14,689
)
 
146

Distributions of earnings from Lennar Multifamily unconsolidated entities
14,469

 

Share based compensation expense
28,590

 
23,527

Excess tax benefits from share-based awards
(3,007
)
 
(10,148
)
Deferred income tax expense
76,351

 
67,938

Gains on retirement of Lennar Homebuilding debt

 
(1,000
)
Gain on retirement of Rialto Investments notes payable
(4,135
)
 

Unrealized and realized gains on Rialto Investments real estate owned
(20,568
)
 
(38,056
)
Impairments of Rialto Investments loans receivable and REO
55,275

 
23,970

Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets
8,049

 
6,086

Changes in assets and liabilities:
 
 
 
Increase in restricted cash
(5,078
)
 
(7,476
)
Decrease in receivables
58,522

 
31,815

Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
(1,334,703
)
 
(1,469,381
)
Increase in other assets
(38,649
)
 
(17,616
)
Increase in Rialto Investments loans held-for-sale
(120,754
)
 
(244,137
)
Decrease (increase) in Lennar Financial Services loans held-for-sale
(127,685
)
 
156,799

Increase in accounts payable and other liabilities
151,948

 
136,156

Net cash used in operating activities
(898,501
)
 
(1,017,739
)
Cash flows from investing activities:
 
 
 
Decrease in restricted cash related to LOCs
19,012

 

Net additions of operating properties and equipment
(12,415
)
 
(4,931
)
Investments in and contributions to Lennar Homebuilding unconsolidated entities
(74,292
)
 
(45,947
)
Distributions of capital from Lennar Homebuilding unconsolidated entities
83,690

 
140,532

Investments in and contributions to Rialto Investments unconsolidated entities
(28,175
)
 
(41,483
)
Distributions of capital from Rialto Investments unconsolidated entities
41,235

 
39,837

Investments in and contributions to Lennar Multifamily unconsolidated entities
(25,072
)
 
(14,406
)
Distributions of capital from Lennar Multifamily unconsolidated entities
51,565

 
14,479

Decrease in Rialto Investments defeasance cash to retire notes payable

 
145,781

Receipts of principal payments on Rialto Investments loans receivable
20,827

 
49,560

Proceeds from sales of Rialto Investments real estate owned
168,946

 
182,220

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
(9,924
)
 
(7,862
)
Purchases of loans receivables

 
(5,450
)
Purchases of Lennar Homebuilding investments available-for-sale
(21,274
)
 
(28,708
)
Proceeds from sales of Lennar Homebuilding investments available-for-sale
46,234

 
2,486

Acquisition, net of cash acquired
(5,489
)
 

Increase in Rialto Investments loans held-for-investment
(7,000
)
 

Decrease (increase) in Lennar Financial Services loans held-for-investment, net
1,242

 
(706
)
Purchases of Lennar Financial Services investment securities
(19,025
)
 
(21,504
)
Proceeds from maturities of Lennar Financial Services investment securities
11,904

 
30,146


See accompanying notes to condensed consolidated financial statements.
5

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


Net cash provided by investing activities
$
242,455

 
434,044

 
Nine Months Ended
 
August 31,
 
2014
 
2013
Cash flows from financing activities:
 
 
 
Net borrowings under unsecured revolving credit facility
$
70,000

 
100,000

Net borrowings (repayments) under Lennar Financial Services debt
141,954

 
(167,710
)
Net borrowings (repayments) under Rialto Investments warehouse repurchase facilities
(4,596
)
 
133,103

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

 

Principal payments on Rialto Investments structured notes
(18,836
)
 

Redemption of senior notes

 
(63,001
)
Debt issuance costs
(7,725
)
 
(5,189
)
Principal payments on Rialto Investments notes payable
(7,676
)
 
(360,956
)
Proceeds from other borrowings
33,103

 
76,966

Principal payments on other borrowings
(241,339
)
 
(187,648
)
Exercise of land option contracts from an unconsolidated land investment venture
(1,540
)
 
(27,329
)
Receipts related to noncontrolling interests
11,963

 
579

Payments related to noncontrolling interests
(115,001
)
 
(174,853
)
Excess tax benefits from share-based awards
3,007

 
10,148

Common stock:
 
 
 
Issuances
13,603

 
33,945

Repurchases
(12,153
)
 
(191
)
Dividends
(24,565
)
 
(23,142
)
Net cash provided by (used in) financing activities
519,054

 
(155,278
)
Net decrease in cash and cash equivalents
(136,992
)
 
(738,973
)
Cash and cash equivalents at beginning of period
970,505

 
1,310,743

Cash and cash equivalents at end of period
$
833,513

 
571,770

Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
542,241

 
433,548

Lennar Financial Services
78,361

 
65,803

Rialto Investments
211,030

 
72,024

Lennar Multifamily
1,881

 
395

 
$
833,513

 
571,770

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding and Lennar Multifamily:
 
 
 
Non-cash contributions to Lennar Homebuilding unconsolidated entities
$
647

 
240,247

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

 

Purchases of inventories and other assets financed by sellers
$
109,560

 
126,148

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

 
103,391

Non-cash purchase of noncontrolling interests
$

 
63,500

Non-cash contributions to Lennar Multifamily unconsolidated entities
$
72,552

 
14,070

Rialto Investments:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
51,545

 
53,849

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
$
(7,218
)
 

Noncontrolling interests
$
(117,156
)
 


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 nine months ended August 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 reflect Lennar Multifamily as a separate reportable segment, 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 gains from securitization transactions and interest income from the Rialto Mortgage Finance ("RMF") business, 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 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 and equity in earnings (loss) from unconsolidated entities, less the cost of sales of land, expenses related to construction activities 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)
August 31,
2014
 
November 30,
2013
Assets:
 
 
 
Homebuilding East
$
2,257,064

 
1,890,138

Homebuilding Central
1,207,902

 
963,815

Homebuilding West
3,433,419

 
3,108,395

Homebuilding Southeast Florida
814,133

 
757,125

Homebuilding Houston
404,030

 
307,864

Homebuilding Other
884,778

 
808,496

Rialto Investments
1,383,743

 
1,479,313

Lennar Financial Services
946,537

 
796,710

Lennar Multifamily
204,985

 
147,089

Corporate and unallocated
753,486

 
1,014,302

Total assets
$
12,290,077

 
11,273,247

 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
570,698

 
510,788

 
1,497,954

 
1,221,509

Homebuilding Central
266,284

 
205,523

 
663,986

 
536,329

Homebuilding West
448,068

 
303,952

 
1,186,437

 
747,592

Homebuilding Southeast Florida
167,077

 
119,849

 
398,733

 
315,583

Homebuilding Houston
189,657

 
192,962

 
498,943

 
446,874

Homebuilding Other
188,987

 
128,552

 
450,888

 
332,027

Lennar Financial Services
128,379

 
112,638

 
316,347

 
327,614

Rialto Investments
40,848

 
27,808

 
142,196

 
79,114

Lennar Multifamily
14,036

 
695

 
40,390

 
13,249

Total revenues (1)
$
2,014,034

 
1,602,767

 
5,195,874

 
4,019,891

Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
83,403

 
78,523

 
219,307

 
150,771

Homebuilding Central (2)
21,531

 
11,102

 
56,265

 
37,895

Homebuilding West (3)
67,887

 
58,253

 
186,323

 
116,554

Homebuilding Southeast Florida (4)
40,579

 
25,367

 
87,885

 
63,539

Homebuilding Houston
27,740

 
27,893

 
74,096

 
52,425

Homebuilding Other (5)
20,788

 
7,227

 
34,781

 
17,647

Lennar Financial Services
27,144

 
23,492

 
49,902

 
68,766

Rialto Investments
7,835

 
677

 
7,662

 
10,558

Lennar Multifamily
8,500

 
(5,556
)
 
(4,879
)
 
(10,444
)
Total operating earnings
305,407

 
226,978

 
711,342

 
507,711

Corporate general and administrative expenses
43,072

 
37,619

 
119,501

 
102,742

Earnings before income taxes
$
262,335

 
189,359

 
591,841

 
404,969

(1)
Total revenues were net of sales incentives of $111.0 million ($20,400 per home delivered) and $288.4 million ($20,600 per home delivered) for the three and nine months ended August 31, 2014, respectively, compared to $92.8 million ($18,700 per home delivered) and $256.7 million ($20,400 per home delivered) for the three and nine months ended August 31, 2013, respectively.
(2)
For both the three and nine months ended August 31, 2014, operating earnings included $2.0 million in write-offs of other receivables. For both the three and nine months ended August 31, 2013, operating earnings included $0.9 million of valuation adjustments to investments of unconsolidated entities.

9



(3)
For both the three and nine months ended August 31, 2014, operating earnings included $2.0 million in write-offs of option deposits and pre-acquisition costs. For the nine months ended August 31, 2014, operating earnings included $0.9 million of valuation adjustments to land the Company intends to sell or has sold to third parties.
(4)
For both the three and nine months ended August 31, 2014, operating earnings included $1.0 million of valuation adjustments to other assets. For the nine months ended August 31, 2013, operating earnings included $3.8 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes.
(5)
For the nine months ended August 31, 2014, operating earnings included $1.5 million in write-offs of option deposits and pre-acquisition costs.
 
 
 
 
 
 
 
 

(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
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues
$
39,021

 
240,642

 
214,826

 
501,656

Costs and expenses
35,401

 
162,664

 
246,138

 
372,023

Other income

 
1,241

 

 
14,602

Net earnings (loss) of unconsolidated entities
$
3,620

 
79,219

 
(31,312
)
 
144,235

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)
$
(2,080
)
 
10,458

 
3,304

 
23,085

(1)
For the nine months ended August 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 the three and nine months ended August 31, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $8.6 million and $21.6 million, respectively, of equity in earnings primarily as a result of sales of homesites to third parties by another unconsolidated entity and previously deferred profit related to those homesites that was earned during the three months ended August 31, 2013.
Balance Sheets
(In thousands)
August 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
259,393

 
184,521

Inventories
2,795,009

 
2,904,795

Other assets
142,753

 
147,410

 
$
3,197,155

 
3,236,726

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
253,264

 
272,940

Debt
604,134

 
450,457

Equity
2,339,757

 
2,513,329

 
$
3,197,155

 
3,236,726

As of August 31, 2014 and November 30, 2013, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $697.6 million and $716.9 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 31, 2014 and November 30, 2013 was $768.7 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

10



related to Lennar Homebuilding’s unconsolidated entities above. In the second quarter of 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.
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)
August 31,
2014
 
November 30,
2013
The Company’s net recourse exposure
$
24,588

 
27,496

Reimbursement agreements from partners

 
13,500

The Company’s maximum recourse exposure
$
24,588

 
40,996

Non-recourse bank debt and other debt (partner’s share of several recourse)
$
56,970

 
61,008

Non-recourse land seller debt or other debt
4,033

 
20,454

Non-recourse debt with completion guarantees
344,933

 
245,821

Non-recourse debt without completion guarantees
173,610

 
82,178

Non-recourse debt to the Company
579,546

 
409,461

Total debt
$
604,134

 
450,457

The Company’s maximum recourse exposure as a % of total JV debt
4
%
 
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 August 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.
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.
If the Company is required to make a payment under any 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.
As of August 31, 2014, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of August 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 nine months ended August 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)
376,022

 

 

 

 

 
393,593

 
(17,571
)
Employee stock and directors plans
2,176

 
114

 

 
1,400

 
662

 

 

Retirement of treasury stock

 
(1,173
)
 

 
(541,019
)
 
542,192

 

 

Tax benefit from employee stock plans, vesting of restricted stock and prior year conversion of 2.00% convertible senior notes due 2020
12,892

 

 

 
12,892

 

 

 

Amortization of restricted stock
28,482

 

 

 
28,482

 

 

 

Cash dividends
(24,565
)
 

 

 

 

 
(24,565
)
 

Receipts related to noncontrolling interests
11,963

 

 

 

 

 

 
11,963

Payments related to noncontrolling interests
(115,001
)
 

 

 

 

 

 
(115,001
)
Non-cash consolidations, net
118,272

 

 

 

 

 

 
118,272

Non-cash activity related to noncontrolling interests
430

 

 

 

 

 

 
430

Balance at August 31, 2014
$
5,038,141

 
17,424

 
3,298

 
2,223,001

 
(85,165
)
 
2,422,921

 
456,662

 
 
 
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)
321,910

 

 

 

 

 
315,590

 
6,320

Employee stock and directors plans
34,396

 
243

 

 
17,196

 
16,957

 

 

Tax benefit from employee stock plans and vesting of restricted stock
11,053

 

 

 
11,053

 

 

 

Amortization of restricted stock
23,430

 

 

 
23,430

 

 

 

Cash dividends
(23,142
)
 

 

 

 

 
(23,142
)
 

Equity adjustments related to purchase of noncontrolling interests
39,605

 

 

 
(61,945
)
 

 

 
101,550

Receipts related to noncontrolling interests
579

 

 

 

 

 

 
579

Payments related to noncontrolling interests
(174,853
)
 

 

 

 

 

 
(174,853
)
Non-cash purchase of noncontrolling interests
(63,500
)
 

 

 

 

 

 
(63,500
)
Balance at August 31, 2013
$
4,170,686

 
17,483

 
3,298

 
2,411,675

 
(615,889
)
 
1,897,579

 
456,540

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 nine months ended August 31, 2014 and 2013, there were no repurchases of common stock under the stock repurchase program. As of August 31, 2014, 6.2 million shares of common stock could be repurchased in the future under the program.

12



During the three months ended August 31, 2014, treasury stock increased by 0.3 million shares of Class A common stock due to activity related to the Company's equity compensation plan. During the nine months ended August 31, 2014, treasury stock decreased by 11.8 million 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, partially offset by activity related to the Company's equity compensation plan. 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 August 31, 2013, treasury stock increased by an immaterial amount of Class A common stock. During the nine months ended August 31, 2013, treasury stock decreased by 0.4 million shares of Class A common stock due to activity related to the Company's equity compensation plan.
(5)
Income Taxes
During the three and nine months ended August 31, 2014, the Company recorded a tax provision of $88.9 million and $215.8 million, respectively, primarily related to pre-tax earnings. During the three and nine months ended August 31, 2013, the Company recorded a tax provision of $67.2 million and $83.1 million, respectively, which included a tax provision of $67.9 million and $150.2 million, respectively, primarily related to pre-tax earnings, partially offset by a reversal of the Company's valuation allowance of $0.7 million and $67.1 million, respectively. The effective tax rates for the three months ended August 31, 2014 and 2013 were 33.34% and 35.77%, respectively. The effective tax rates for the nine months ended August 31, 2014 and 2013 were 35.41% and 20.84%, respectively. The difference in tax rate between the two periods is primarily the result of a valuation allowance reversal during the nine months ended August 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 August 31, 2014 and November 30, 2013, the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $313.2 million and $376.8 million, respectively. The net deferred tax assets included a valuation allowance of $10.6 million and $12.7 million as of August 31, 2014 and November 30, 2013, respectively, primarily related to state net operating loss ("NOL") carryforwards that may expire due to short carryforward periods.
At August 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 August 31, 2014 and November 30, 2013, the Company had state tax effected NOL carryforwards totaling $121.0 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 August 31, 2014 and November 30, 2013, the Company had $8.9 million and $10.5 million of gross unrecognized tax benefits, respectively. At August 31, 2014, the Company had $31.0 million accrued for interest and penalties, of which $13.5 million was recorded during the nine months ended August 31, 2014. During the nine months ended August 31, 2014, the accrual for interest and penalties was reduced by $1.6 million, primarily as a result of settlement with state tax authorities. 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
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands, except per share amounts)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
177,757

 
120,662

 
393,593

 
315,590

Less: distributed earnings allocated to nonvested shares
109

 
122

 
305

 
326

Less: undistributed earnings allocated to nonvested shares
2,124

 
1,712

 
4,486

 
4,090

Numerator for basic earnings per share
175,524

 
118,828

 
388,802

 
311,174

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

 
2,826

 
5,946

 
8,477

Plus: undistributed earnings allocated to convertible shares
2,124

 
1,712

 
4,486

 
4,090

Less: undistributed earnings reallocated to convertible shares
1,908

 
1,489

 
4,047

 
3,549

Numerator for diluted earnings per share
$
177,722

 
121,877

 
395,187

 
320,192

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average
    common shares outstanding
202,354

 
190,799

 
202,103

 
190,119

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
5

 
90

 
8

 
334

Convertible senior notes
25,869

 
34,446

 
25,846

 
35,549

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

 
225,335

 
227,957

 
226,002

Basic earnings per share
$
0.87

 
0.62

 
1.92

 
1.64

Diluted earnings per share
$
0.78

 
0.54

 
1.73

 
1.42

(1)
Interest on the 2.00% convertible senior notes due 2020 is included in the three and nine months ended August 31, 2013 because the holders of the 2.00% convertible senior notes due 2020 converted the notes into shares of Class A common stock on November 30, 2013.
For both the three and nine months ended August 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)
August 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
78,361

 
73,066

Restricted cash
8,661

 
10,283

Receivables, net (1)
121,185

 
127,223

Loans held-for-sale (2)
539,988

 
414,231

Loans held-for-investment, net
26,821

 
26,356

Investments held-to-maturity
57,023

 
62,344

Goodwill
38,854

 
34,046

Other (3)
75,644

 
49,161

 
$
946,537

 
796,710

Liabilities:
 
 
 
Notes and other debts payable
$
522,047

 
374,166

Other (4)
175,752

 
169,473

 
$
697,799

 
543,639

(1)
Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 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 $14.3 million and $7.3 million as of August 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 $19.4 million and $11.5 million as of August 31, 2014 and November 30, 2013, respectively.
(4)
Other liabilities include $72.7 million and $74.5 million as of August 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 $4.1 million as of August 31, 2014.
At August 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 January 2015 (1)
300,000

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

364-day warehouse repurchase facility that matures June 2015 (2)
150,000

Totals
$
925,000

(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.
(2)
Maximum aggregate commitment includes a $50 million accordion feature that is usable 10 days prior to quarter-end through 20 days after quarter end.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $516.1 million and $374.2 million at August 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 $540.9 million and $452.5 million at August 31, 2014 and November 30, 2013, respectively. If the facilities are not renewed or replaced, 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

15



by purchasers to defray their losses in an 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 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
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Loan origination liabilities, beginning of period
$
9,774

 
8,257

 
9,311

 
7,250

Provision for losses during the period
918

 
569

 
1,660

 
1,342

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

 
(176
)
 

 
348

Payments/settlements
(83
)
 
(16
)
 
(362
)
 
(306
)
Loan origination liabilities, end of period
$
10,609

 
8,634

 
10,609

 
8,634

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)
August 31,
2014
 
November 30,
2013
Impaired loans unpaid principal balance
$
7,510

 
7,897

Valuation allowance
(3,768
)
 
(3,891
)
Investment in impaired loans
$
3,742

 
4,006

The average recorded investment in impaired loans totaled $3.8 million and $3.9 million for the three and nine months ended August 31, 2014, respectively. The average recorded investment in impaired loans totaled $3.9 million and $3.5 million for the three and nine months ended August 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 was $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)
August 31,
2014
 
November 30,
2013
Assets:
 
 
 
Cash and cash equivalents
$
211,030

 
201,496

Restricted cash (1)
31,636

 
2,593

Receivables, net (2)

 
111,833

Loans receivable, net
174,286

 
278,392

Loans held-for-sale (3)
164,923

 
44,228

Real estate owned - held-for-sale
194,339

 
197,851

Real estate owned - held-and-used, net
335,472

 
428,989

Investments in unconsolidated entities
176,132

 
154,573

Investments held-to-maturity
16,968

 
16,070

Other (4)
78,957

 
43,288

 
$
1,383,743

 
1,479,313

Liabilities:
 
 
 
Notes and other debts payable (5)
$
582,659

 
441,883

Other (6)
76,989

 
55,125

 
$
659,648

 
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 November 30, 2013.
(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 $1.3 million and $0.8 million as of August 31, 2014 and November 30, 2013, respectively.
(5)
Notes and other debts payable include $352.0 million and $250.0 million related to the 7.00% Senior Notes due 2018 ("7.00% Senior Notes") as of August 31, 2014 and November 30, 2013, respectively, and also include $71.4 million and $76.0 million as of August 31, 2014 and November 30, 2013, respectively, related to the RMF warehouse repurchase financing agreements. As of August 31, 2014, notes and other debts payable also include $55.0 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 $1.4 million as of August 31, 2014 and credit default swaps carried at fair value of $1.6 million and $0.3 million as of August 31, 2014 and November 30, 2013, respectively.
Rialto’s operating earnings were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Revenues
$
40,848

 
27,808

 
142,196

 
79,114

Costs and expenses (1)
47,644

 
34,167

 
174,824

 
94,243

Rialto Investments equity in earnings from unconsolidated entities
19,973

 
5,199

 
43,266

 
15,877

Rialto Investments other income (expense), net
(5,342
)
 
1,837

 
(2,976
)
 
9,810

Operating earnings (2)
$
7,835

 
677

 
7,662

 
10,558

(1)
Costs and expenses for the three and nine months ended August 31, 2014 included loan impairments of $4.2 million and $44.7 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). For the three and nine months ended August 31, 2013, costs and expenses included loan impairments of $3.5 million and $14.1 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating earnings for the three and nine months ended August 31, 2014 included net loss attributable to noncontrolling interests of $4.5 million and $20.7 million, respectively. Operating earnings for the three and nine months ended August 31, 2013 included net earnings (loss) attributable to noncontrolling interests of ($0.8) million and $4.6 million, respectively.

17


The following is a detail of Rialto Investments other income (expense), net for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Realized gains on REO sales, net
$
4,106

 
9,651

 
27,849

 
36,857

Unrealized gains (losses) on transfer of loans receivable to REO and impairments, net
(7,165
)
 
(2,373
)
 
(17,816
)
 
(8,683
)
REO and other expenses
(13,027
)
 
(10,267
)
 
(43,977
)
 
(33,171
)
Rental and other income
10,744

 
4,826

 
30,968

 
14,807

Rialto Investments other income (expense), net
$
(5,342
)
 
1,837

 
(2,976
)
 
9,810

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 nine months ended August 31, 2014, $146.7 million was distributed by the LLCs. The FDIC was distributed $88.0 million and Rialto, the parent company, was distributed $57.6 million.
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 August 31, 2014, these consolidated LLCs had total combined assets and liabilities of $551.2 million and $23.6 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 August 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 reserve, were $69.1 million. The estimated final payment date of the Structured Notes is December 15, 2015. As of August 31, 2014, there was $55.0 million outstanding related to the Structured Notes.
The following table displays the loans receivable by aggregate collateral type:
(In thousands)
August 31,
2014
 
November 30,
2013
Land
$
101,047

 
166,950

Single family homes
28,698

 
59,647

Commercial properties
29,536

 
38,060

Other
15,005

 
13,735

Loans receivable, net
$
174,286

 
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)
August 31,
2014
 
November 30,
2013
Outstanding principal balance
$
438,046

 
586,901

Carrying value
$
169,636

 
270,075

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

 
112,899

Additions
8,785

 
53,652

Deletions
(25,621
)
 
(38,263
)
Accretions
(25,693
)
 
(38,455
)
Accretable yield, end of period
$
30,615

 
89,833

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:
August 31, 2014
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
4,607

 

 
1,813

 
1,813

Single family homes
8,739

 
502

 
1,732

 
2,234

Commercial properties
1,500

 

 
603

 
603

Loans receivable
$
14,846

 
502

 
4,148

 
4,650


19


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

The average recorded investment in impaired loans totaled approximately $6 million and $29 million for the nine months ended August 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
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
Allowance on accrual loans, beginning of period
$
55,658

 
18,716

 
18,952

 
12,178

Provision for loan losses, net of recoveries
4,089

 
3,318

 
44,577

 
12,849

Charge-offs
(6,482
)
 
(1,940
)
 
(10,264
)
 
(4,933
)
Allowance on accrual loans, end of period
$
53,265

 
20,094

 
53,265

 
20,094

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. As of August 31, 2014 and November 30, 2013, the Company had an allowance on these loans of $0.3 million and $1.2 million, respectively.
Accrual and nonaccrual loans receivable by risk categories were as follows:
August 31, 2014
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
99,234

 
1,813

 
101,047

Single family homes
26,464

 
2,234

 
28,698

Commercial properties
28,933

 
603

 
29,536

Other
15,005

 

 
15,005

Loans receivable
$
169,636

 
4,650

 
174,286


20


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.
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
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014

 
2013
 
2014

 
2013
REO - held-for-sale, beginning of period
$
192,829

 
204,385

 
197,851

 
134,161

Additions

 
14,833

 

 
16,166

Improvements
1,994

 
1,949

 
4,717

 
4,466

Sales
(52,431
)
 
(68,087
)
 
(141,097
)
 
(145,363
)
Impairments and unrealized losses
(6,087
)
 
(169
)
 
(8,910
)
 
(4,353
)
Transfers to Lennar Homebuilding

 
(430
)
 

 
(430
)
Transfers from held-and-used, net (1)
58,034

 
46,128

 
141,778

 
193,962

REO - held-for-sale, end of period
$
194,339

 
198,609

 
194,339

 
198,609

 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2014
 
2013
 
2014
 
2013
REO - held-and-used, net, beginning of period
$
379,069

 
478,314

 
428,989

 
601,022

Additions
14,530

 
14,154

 
48,657

 
38,882

Improvements
1,736

 
517

 
5,207

 
3,396

Impairments
(1,333
)
 
(5,126
)
 
(2,836
)
 
(5,529
)
Depreciation
(496
)
 
(1,075
)
 
(2,767
)
 
(3,153
)
Transfers to held-for-sale (1)
(58,034
)
 
(46,128
)
 
(141,778
)
 
(193,962
)
REO - held-and-used, net, end of period
$
335,472

 
440,656

 
335,472

 
440,656

(1)
During the three and nine months ended August 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 nine months ended August 31, 2014, the Company recorded net losses of $0.2 million and $7.3 million, respectively, from acquisitions of REO through foreclosure. For the three and nine months ended August 31, 2013, the Company recorded net gains of $2.9 million and $1.2 million, respectively, from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto Investments other income (expense), 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

21


properties. During the nine months ended August 31, 2014, RMF originated loans with a total principal balance of $1.1 billion and sold $983.6 million of loans into five separate securitizations. As of August 31, 2014 and November 30, 2013, RMF had two warehouse repurchase financing agreements that mature in fiscal year 2015 with commitments totaling $650 million to help finance the loans it makes. Borrowings under these facilities were $71.4 million and $76.0 million as of August 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 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 with the first interest payment made on June 1, 2014. At August 31, 2014 and November 30, 2013, the carrying amount of the 7.00% Senior Notes was $352.0 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 August 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 assets and liabilities of Rialto's investments are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations and the Company’s share is recorded in Rialto Investments equity in earnings from unconsolidated entities in the Company's statement of operations.
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
August 31,
2014
 
August 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

 
$
80,741

 
75,729

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

 
660,058

 
100,000

 
50,579

 
57,528

 
53,103

Rialto Mezzanine Partners Fund
2013
 
168,600

 
145,267

 
27,299

 
23,521

 
23,397

 
16,724

Other investments
 
 
 
 
 
 
 
 
 
 
14,466

 
9,017

 
 
 
 
 
 
 
 
 
 
 
$
176,132

 
154,573

Rialto's share of earnings from unconsolidated entities was as follows: