Rialto Segment

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



	November 30,
(In thousands)	2015		2014
Assets:
Cash and cash equivalents	$	150,219	303,889
Restricted cash	15,061		46,975
Receivables, net (1)	154,948		153,773
Loans held-for-sale (2)	316,275		113,596
Loans receivable, net	164,826		137,124
Real estate owned - held-for-sale	183,052		190,535
Real estate owned - held-and-used, net	153,717		255,795
Investments in unconsolidated entities	224,869		175,700
Investments held-to-maturity	25,625		17,290
Other (3)	116,908		57,306
	$	1,505,500	1,451,983
Liabilities:
Notes and other debts payable	$	771,728	617,077
Other (4)	94,496		123,798
	$	866,224	740,875


(1)	Receivables, net primarily related to loans sold but not settled as of November 30, 2015 and 2014.


(2)	Loans held-for-sale related to unsold loans originated by RMF carried at fair value.


(3)	Other assets included credit default swaps carried at fair value of $6.2 million and $1.7 million as of November 30, 2015 and 2014, respectively, and interest rate swaps and swap futures carried at fair value of $0.3 million as of November 30, 2015.


(4)	Other liabilities included interest rate swaps and swap future carried at fair value of $1.0 million and $1.4 million as of November 30, 2015 and 2014, respectively, and credit default swaps carried at fair value of $0.7 million and $0.8 million as of November 30, 2015 and 2014, respectively.

In the years ended November 30, 2015, 2014 and 2013, Rialto costs and expenses included loan impairments of $10.4 million, $57.1 million and $16.1 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). In addition, for the years ended November 30, 2015, 2014 and 2013, Rialto operating earnings included net earnings (loss) attributable to noncontrolling interests of $4.8 million, ($22.5) million and $6.2 million, respectively.

The following is a detail of Rialto other income, net:



	Years Ended November 30,
(In thousands)	2015			2014		2013
Realized gains on REO sales, net	$	35,242		43,671		48,785
Unrealized losses on transfer of loans receivable to REO and impairments, net	(13,678		)	(26,107	)	(16,517	)
REO and other expenses	(57,740		)	(58,067	)	(44,282	)
Rental and other income	48,430			43,898		20,269
Gain on bargain purchase acquisition	—			—		8,532
Rialto other income, net	$	12,254		3,395		16,787

Loans Receivable

The loans receivable portfolios consist primarily of loans acquired at a discount. In 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies in partnership with the FDIC (“FDIC Portfolios”) and acquired 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions.

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. As of November 30, 2015 and 2014 management classified all loans receivable within the FDIC Portfolios and Bank Portfolios as nonaccrual loans as forecasted principal and interest cannot be reasonably estimated and accounted for these assets in accordance with ASC 310-10.

The following table represents loans receivable, net by type:



	November 30,
(In thousands)	2015		2014
Nonaccrual loans: FDIC and Bank Portfolios	$	88,694	130,105
Accrual loans (1)	76,132		7,019
Loans receivable, net	$	164,826	137,124


(1)	As of November 30, 2015 accrual loans included loans originated of which $17.1 million relates to a convertible land loan maturing in July 2016 and $59.1 million relates to floating rate commercial property loans maturing between May 2016 and July 2018.

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

November 30, 2015



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	145,417	59,740	1,165	60,905
Single family homes	39,659		8,344	3,459	11,803
Commercial properties	13,458		1,368	1,085	2,453
Other	78,279		—	13,533	13,533
Loans receivable	$	276,813	69,452	19,242	88,694

November 30, 2014



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	228,245	85,912	3,691	89,603
Single family homes	66,183		18,096	2,306	20,402
Commercial properties	34,048		3,368	3,918	7,286
Other	64,284		5	12,809	12,814
Loans receivable	$	392,760	107,381	22,724	130,105

The average recorded investment in impaired loans totaled approximately $109 million and $69 million for the years ended November 30, 2015 and 2014, respectively.

In order to assess the risk associated with each risk category, management 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.

With regard to accrual loans that were accounted under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"), prior to the fourth quarter of 2014, Rialto estimated the cash flows, at acquisition, it expected to collect on the FDIC Portfolios and Bank Portfolios and the difference between the contractually required payments and the cash flows expected to be collected at acquisition was referred to as the nonaccretable difference. This difference was neither accreted into income nor recorded on the Company’s consolidated balance sheets. The excess of cash flows expected to be collected over the cost of the loans acquired was referred to as the accretable yield and was recognized in interest income over the remaining life of the loans using the effective yield method. During the fourth quarter of 2014, in an effort to better reflect the performance of the FDIC Portfolios and Bank Portfolios, Rialto changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as the timing and amount of expected cash flows on the remaining loan portfolios could no longer be reasonably estimated.

For the year ended November 30, 2015, there was no activity in the accretable yield for the FDIC Portfolios and Bank Portfolios as all the remaining accreting loans were classified as nonaccrual loans during the fourth quarter of 2014, as explained above. For the year ended November 30, 2014, the activity in the accretable yield was as follows:



(In thousands)	November 30, 2014
Accretable yield, beginning of year	$	73,144
Additions	8,988
Deletions	(54,482		)
Accretions	(27,650		)
Accretable yield, end of year	$	—

Additions primarily represented reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represented loan impairments, net of recoveries, and disposal of loans, which included foreclosure of underlying collateral and resulted in the removal of the loans from the accretable yield portfolios.

Allowance for Loan Losses

The allowance for loan losses is a valuation reserve established through provisions for loan losses charged against Rialto’s operating earnings.

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated. 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 its fair value. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:



	November 30,
(In thousands)	2015			2014
Allowance on nonaccrual loans, beginning of year	$	58,326		1,213
Provision for loan losses	10,363			12,536
Reclassification from accrual (1)	—			53,265
Charge-offs	(33,064		)	(8,688	)
Allowance on nonaccrual loans, end of year	$	35,625		58,326


(1)	During the fourth quarter of 2014, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as the timing and amount of expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. As of November 30, 2014, these loans were classified as nonaccrual loans.

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/or 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 (under ASC 310-30) and the recognition of an impairment through an allowance for loan losses but can be reversed if conditions improve. For the year ended November 30, 2015, there was no activity in the Company's allowance related to accrual loans. For the year ended November 30, 2014, the activity in the Company's allowance rollforward related to accrual loans accounted for under ASC 310-30 was as follows:



(In thousands)	November 30, 2014
Allowance on accrual loans, beginning of year	$	18,952
Provision for loan losses, net of recoveries	44,577
Reclassification to nonaccrual (1)	(53,265		)
Charge-offs	(10,264		)
Allowance on accrual loans, end of year	$	—


(1)	During the fourth quarter of 2014, the Company changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as the timing and amount of expected cash flows on the remaining loan portfolios could no longer be reasonably estimated. As of November 30, 2014, these loans were classified as nonaccrual loans.

Real Estate Owned

The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the 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 is 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 present the activity in REO:



	November 30,
(In thousands)	2015			2014
REO - held-for-sale, beginning of year	$	190,535		197,851
Improvements	5,535			8,176
Sales	(120,053		)	(226,027	)
Impairments and unrealized losses	(12,192		)	(9,441	)
Transfers to/from held-and-used, net (1)	119,227			219,976
REO - held-for-sale, end of year	$	183,052		190,535



	November 30,
(In thousands)	2015			2014
REO - held-and-used, net, beginning of year	$	255,795		428,989
Additions	20,134			55,407
Improvements	2,942			6,102
Impairments	(2,624		)	(11,501	)
Depreciation	(2,339		)	(3,226	)
Transfers to held-for-sale (1)	(119,227		)	(219,976	)
Other	(964		)	—
REO - held-and-used, net, end of year	$	153,717		255,795


(1)	During the years ended November 30, 2015 and 2014, the Rialto segment transferred certain properties to/from REO held-and-used, net to REO held-for-sale as a result of changes made in the disposition strategy of the real estate assets.

For the years ended November 30, 2015, 2014 and 2013, the Company recorded net losses of $1.3 million, $6.8 million and $0.4 million, respectively, from acquisitions of REO through foreclosure. These net losses are recorded in Rialto other income, net.

Rialto Mortgage Finance - loans held-for-sale

During the year ended November 30, 2015, RMF originated loans with a total principal balance of $2.6 billion and sold $2.4 billion of loans into twelve separate securitizations. During the year ended November 30, 2014, RMF originated loans with a principal balance of $1.6 billion and sold $1.3 billion of loans into eight separate securitizations. As of November 30, 2015 and 2014, $151.8 million and $147.2 million, respectively, of these originated loans were sold into a securitization trust but not settled and thus were included as receivables, net.

Notes and Other Debts Payable

In November 2013, the Rialto segment originally 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. 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 placement. Proceeds from the offerings, after payment of expenses, were approximately $347 million. Rialto used the net proceeds of the sale of the 7.00% Senior Notes to provide additional working capital for RMF, to make investments in the funds that Rialto manages, as well as for general corporate purposes. In addition, Rialto used $100 million of the net proceeds to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. Interest on the 7.00% Senior Notes is due semi-annually. As of November 30, 2015 and 2014, the carrying amount, net of debt issuance costs, of the 7.00% Senior Notes was $347.9 million and $347.1 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 Rialto was in compliance with its debt covenants at November 30, 2015.

At November 30, 2015, RMF warehouse facilities were as follows:



(In thousands)	Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures March 2016 (1)	$	250,000
364-day warehouse repurchase facility that matures August 2016 (1)	250,000
364-day warehouse repurchase facility that matures October 2016 (one year extension) (1)	400,000
Warehouse repurchase facility that matures August 2018 (two - one year extensions) (2)	100,000
Totals	$	1,000,000


(1)	RMF uses these facilities to finance its loan origination and securitization business.


(2)	In August 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this new facility will be held as accrual loans within loans receivable, net. Borrowings under this facility were $36.3 million as of November 30, 2015.

In December 2015, RMF entered into an additional warehouse repurchase facility with commitments totaling $100 million that matures in December 2017.

Borrowings under the facilities that finance RMF's loan originations and securitization activities were $317.1 million and $141.3 million as of November 30, 2015 and 2014, respectively and were secured by a 75% interest in the originated commercial loans financed. The facilities require immediate repayment of the 75% interest in the secured commercial loans when the loans are sold in a securitization and the proceeds are collected. These warehouse repurchase facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature.

In 2010, Rialto paid $310 million for the Bank Portfolios and for over 300 REO properties, of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions for which the maturity was extended subsequently. The remaining balance is due in December 2016. As of November 30, 2015 and 2014, the outstanding amount related to the 5-year senior unsecured note was $30.3 million and $60.6 million, respectively.

In May 2014, the Rialto segment 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. In November 2014, Rialto issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is April 15, 2017. As of November 30, 2015 and 2014, the outstanding amount, net of debt issuance costs, related to the Structured Notes was $31.3 million and $56.6 million, respectively.

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 the funds in which Rialto has investments in 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 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:



								November 30, 2015		November 30, 2015		November 30, 2014
(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	$	68,570	71,831
Rialto Real Estate Fund II, LP	2012	1,305,000		1,305,000		100,000		100,000		99,947		67,652
Rialto Mezzanine Partners Fund, LP	2013	300,000		300,000		33,799		33,799		32,344		20,226
Rialto Capital CMBS Fund, LP	2014	70,660		70,660		23,735		23,735		23,233		15,266
Rialto Real Estate Fund III (1)	2015	510,233		—		100,000		—		—		—
Other investments										775		725
										$	224,869	175,700


(1)	In November 2015, Rialto completed the first closing of commitments from the entities that comprise Rialto Real Estate Fund III ("Fund III"). Fund III's objective is to invest in commercial real estate related debt and preferred equity opportunities of all types, as well as value add real estate acquisitions and real estate property requiring repositioning.

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



	Years Ended November 30,
(In thousands)	2015			2014	2013
Rialto Real Estate Fund, LP	$	9,676		30,612	19,391
Rialto Real Estate Fund II, LP	7,440			15,929	2,523
Rialto Mezzanine Partners Fund, LP	2,194			1,913	354
Rialto Capital CMBS Fund, LP	3,013			10,823	—
Rialto Real Estate Fund III (1)	(78		)	—	—
Other investments	48			—	85
Rialto equity in earnings from unconsolidated entities	$	22,293		59,277	22,353


(1)	Equity in loss from Fund III for the year ended November 30, 2015 relates to formation costs incurred in November 2015.

During the years ended November 30, 2015 and 2014, the Company received $20.0 million and $34.7 million, respectively, of advance distributions with regard to Rialto's carried interests in the Rialto real estate funds in order to cover the income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds. These advance distributions are not subject to clawbacks and are included in Rialto's revenues.

In June 2015, Rialto adopted a Carried Interest Plan (the "Plan"), which provides participants in the Plan the opportunity to participate in distributions made by a fund or other investment vehicle (a "Fund") managed by a subsidiary of Rialto. Under the Plan, Rialto may distribute to some employees who are involved in the management of the Fund, units of the limited liability company (the "Carried Interest Entity") that entitle its holders to specified percentages of distributions made from the Fund to the Carried Interest Entity. Rialto may distribute to some of its employees units entitling them up to 40% of the distributions received by the Carried Interest Entity. The units issued to employees will be subject to vesting schedules and forfeiture or repurchase provisions in the case of a termination of employment. The Carried Interest Entity will make advanced tax distributions to participants to enable them to pay taxes to the extent that the taxes they are required to pay are more than the total distributions they have received.

A total of 70% of the Plan awards vest in annual increments after the date of the first closing of the related Fund, with 10% vesting during the first year and 15% during each of the next four years. The final 30% vests as the remaining distributions are received by the Carried Interest Entity. During the year ended November 30, 2015, Rialto recorded $3.0 million related to the amortization of compensation expense over the vesting period.

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

Balance Sheets

	November 30,
(In thousands)	2015		2014
Assets:
Cash and cash equivalents	$	188,147	141,609
Loans receivable	473,997		512,034
Real estate owned	506,609		378,702
Investment securities	1,092,476		795,306
Investments in partnerships	429,979		311,037
Other assets	30,340		45,451
	$	2,721,548	2,184,139
Liabilities and equity:
Accounts payable and other liabilities	$	29,462	20,573
Notes payable	374,498		395,654
Equity	2,317,588		1,767,912
	$	2,721,548	2,184,139

Statements of Operations

	Years Ended November 30,
(In thousands)	2015		2014	2013
Revenues	$	170,921	150,452	251,533
Costs and expenses	97,162		95,629	252,563
Other income, net (1)	144,941		479,929	187,446
Net earnings of unconsolidated entities	$	218,700	534,752	186,416
Rialto equity in earnings from unconsolidated entities	$	22,293	59,277	22,353


(1)	Other income, net included realized and unrealized gains (losses) on investments.

In 2010, the Rialto segment invested in non-investment grade CMBS at a 55% discount to par value with a coupon rate of 4%, a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. In September 2015, the Rialto segment made a net investment of $7.1 million in another CMBS bond at a 39% discount to par value with a coupon rate of 3.4%, a stated and assumed final distribution date of September 2025 and a stated maturity date of September 2058. The aggregate carrying value of these investment securities at November 30, 2015 and 2014 was $25.6 million and $17.3 million, respectively. The Rialto segment reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during the years ended November 30, 2015, 2014 and 2013. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

In December 2014, the Rialto segment invested $18 million in a private commercial real estate services company. The investment is carried at cost at November 30, 2015 and is included in Rialto's other assets.