
	Rialto Segment

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



(In thousands)	February 29, 2016		November 30, 2015
Assets:
Cash and cash equivalents	$	112,305	150,219
Restricted cash (1)	10,233		15,061
Receivables, net (2)	—		154,948
Loans held-for-sale (3)	243,230		316,275
Loans receivable, net	166,536		164,826
Real estate owned - held-for-sale	177,221		183,052
Real estate owned - held-and-used, net	148,900		153,717
Investments in unconsolidated entities	234,039		224,869
Investments held-to-maturity	49,309		25,625
Other (4)	130,231		116,908
	$	1,272,004	1,505,500
Liabilities:
Notes and other debts payable	$	609,150	771,728
Other (5)	47,153		94,496
	$	656,303	866,224


(1)	Restricted cash primarily consists of upfront deposits and application fees RMF receives before originating loans and is recognized as income once the loan has been originated as well as 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, 2015.


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


(4)	Other assets included credit default swaps carried at fair value of $9.8 million and $6.2 million as of February 29, 2016 and November 30, 2015, respectively, and interest rate swaps and swap futures carried at fair value of $0.3 million as of November 30, 2015.


(5)	Other liabilities included interest rate swaps and swap futures carried at fair value of $6.0 million and $1.0 million as of February 29, 2016 and November 30, 2015, respectively, and credit default swaps carried at fair value of $0.7 million as of November 30, 2015.

For the three months ended February 29, 2016 and February 28, 2015, Rialto costs and expenses included loan impairments of $2.3 million and $1.2 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). In addition, for the three months ended February 29, 2016 and February 28, 2015, Rialto operating earnings included a net loss attributable to noncontrolling interests of $0.3 million and $1.8 million, respectively.

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



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
Realized gains on REO sales, net	$	3,746		3,130
Unrealized losses on transfer of loans receivable to REO and impairments, net	(153		)	(2,556	)
REO and other expenses	(14,835		)	(13,242	)
Rental and other income	10,551			12,396
Rialto other expense, net	$	(691	)	(272	)

Loans Receivable

The following table represents loans receivable, net by type:



(In thousands)	February 29, 2016		November 30, 2015
Nonaccrual loans: FDIC and Bank Portfolios	$	78,447	88,694
Accrual loans	88,089		76,132
Loans receivable, net	$	166,536	164,826

The nonaccrual loan 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 ("LLCs") in partnership with the FDIC (“FDIC Portfolios”). 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 the activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At February 29, 2016, these consolidated LLCs had total combined assets and liabilities of $307.4 million and $11.7 million, respectively. At November 30, 2015, these consolidated LLCs had total combined assets and liabilities of $355.2 million and $11.3 million, respectively.

In addition in 2010, Rialto 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 February 29, 2016 and November 30, 2015, 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, Receivables.

Accrual loans as of February 29, 2016 included loans originated of which $18.1 million relates to a convertible land loan that matures in July 2016 and $70.0 million relates to floating and fixed rate commercial property loans maturing between October 2017 and October 2025.

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

February 29, 2016



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	114,480	51,691	1,153	52,844
Single family homes	35,413		8,306	1,974	10,280
Commercial properties	12,154		1,379	1,072	2,451
Other	66,667		—	12,872	12,872
Loans receivable	$	228,714	61,376	17,071	78,447

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

The average recorded investment in impaired loans was approximately $84 million and $123 million for the three months ended February 29, 2016 and February 28, 2015, 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.

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:



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
Allowance on nonaccrual loans, beginning of the period	$	35,625		58,236
Provision for loan losses, net of recoveries	2,339			1,224
Charge-offs	(7,571		)	(8,441	)
Allowance on nonaccrual loans, end of the period	$	30,393		51,019

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 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 represent the activity in REO:



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
REO - held-for-sale, beginning of period	$	183,052		190,535
Improvements	887			1,704
Sales	(16,510		)	(24,925	)
Impairments and unrealized losses	(3,548		)	(1,418	)
Transfers from held-and-used, net (1)	13,340			19,615
REO - held-for-sale, end of period	$	177,221		185,511



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
REO - held-and-used, net, beginning of period	$	153,717		255,795
Additions	8,667			8,912
Improvements	307			643
Impairments	(89		)	(1,413	)
Depreciation	(362		)	(789	)
Transfers to held-for-sale (1)	(13,340		)	(19,615	)
Other	—			(964	)
REO - held-and-used, net, end of period	$	148,900		242,569


(1)	During both the three months ended February 29, 2016 and February 28, 2015, 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 months ended February 29, 2016, the Company recorded net gains of $2.7 million from acquisitions of REO through foreclosure. These net gains are recorded in Rialto other expense, net.

Rialto Mortgage Finance - loans held-for-sale

During the three months ended February 29, 2016, RMF originated loans with a total principal balance of $315.3 million of which $305.8 million were recorded as loans held-for-sale and $9.5 million as accrual loans within loans receivable, net, and sold $380.2 million of loans into two separate securitizations. During the three months ended February 28, 2015, RMF originated loans with a total principal balance of $565.5 million and sold $318.1 million of loans into two separate securitizations. As of November 30, 2015, $151.8 million of the 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 7.00% Senior Notes to provide additional working capital for RMF, and 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. At February 29, 2016 and November 30, 2015, the carrying amount, net of debt issuances costs, of the 7.00% Senior Notes was $348.1 million and $347.9 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 February 29, 2016.

At February 29, 2016, Rialto warehouse facilities were as follows:



(In thousands)	Maximum Aggregate Commitment
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
364-day warehouse repurchase facility that matures January 2017 (1)	250,000
Warehouse repurchase facility that matures December 2017 (1)	100,000
Warehouse repurchase facility that matures August 2018 (two - one year extensions) (2)	100,000
Total	$	1,100,000


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


(2)	In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this facility will be held as accrual loans within loans receivable, net. Borrowings under this facility were $41.6 million and $36.3 million as of February 29, 2016 and November 30, 2015, respectively.

Borrowings under the facilities that finance RMF's loan originations and securitization activities were $146.3 million and $317.1 million as of February 29, 2016 and November 30, 2015, 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 subsequently extended. The remaining balance is due in December 2016. As of both February 29, 2016 and November 30, 2015, the outstanding amount related to the 5-year senior unsecured note was $30.3 million.

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, the Rialto segment 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 August 15, 2017. As of February 29, 2016 and November 30, 2015, the outstanding amount, net of debt issuance costs, related to the Structured Notes was $31.1 million and $31.3 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:



								February 29, 2016		February 29, 2016		November 30, 2015
(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	$	63,278	68,570
Rialto Real Estate Fund II, LP	2012	1,305,000		1,305,000		100,000		100,000		97,498		99,947
Rialto Mezzanine Partners Fund, LP	2013	300,000		300,000		33,799		33,799		28,296		32,344
Rialto Capital CMBS Funds	2014	102,878		102,878		44,750		44,750		44,097		23,233
Rialto Real Estate Fund III	2015	697,173		—		100,000		—		72		—
Other investments										798		775
										$	234,039	224,869

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



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
Rialto Real Estate Fund, LP	$	1,339		746
Rialto Real Estate Fund II, LP	(722		)	893
Rialto Mezzanine Partners Fund, LP	724			475
Rialto Capital CMBS Funds	372			544
Rialto Real Estate Fund III	(239		)	—
Other investments	23			6
Rialto equity in earnings from unconsolidated entities	$	1,497		2,664

During the three months ended February 29, 2016 and February 28, 2015, the Company received $4.9 million and $6.5 million, respectively, of advance distributions with regard to Rialto's carried interests in its real estate funds in order to cover 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.

During 2015, Rialto adopted a Carried Interest Incentive Plan (the "Plan"), under which participating employees in the aggregate may receive up to 40% of the equity units of a limited liability company (a "Carried Interest Entity"). This Carried Interest Entity is entitled to distributions made by a fund or other investment vehicle (a "Fund") managed by a subsidiary of Rialto. As such, those employees receiving equity units in the Carried Interest Entity may participate in distributions made by a Fund to the extent the Carried Interest Entity makes distributions to its equity holders. The units issued to employees are equity awards and are subject to vesting schedules and forfeiture or repurchase provisions in the case of a termination of employment.

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

Balance Sheets



(In thousands)	February 29, 2016		November 30, 2015
Assets:
Cash and cash equivalents	$	108,500	188,147
Loans receivable	450,787		473,997
Real estate owned	518,466		506,609
Investment securities	1,188,653		1,092,476
Investments in partnerships	422,493		429,979
Other assets	27,495		30,340
	$	2,716,394	2,721,548
Liabilities and equity:
Accounts payable and other liabilities	$	35,947	29,462
Notes payable	450,250		374,498
Equity	2,230,197		2,317,588
	$	2,716,394	2,721,548

Statements of Operations



	Three Months Ended
	February 29,			February 28,
(In thousands)	2016			2015
Revenues	$	44,296		41,738
Costs and expenses	20,899			23,005
Other income (expense), net (1)	(15,162		)	5,874
Net earnings of unconsolidated entities	$	8,235		24,607
Rialto equity in earnings from unconsolidated entities	$	1,497		2,664


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

At February 29, 2016 and November 30, 2015, the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $49.3 million and $25.6 million, respectively. These investments securities have discount rates ranging from 39% to 55% with coupon rates ranging from 3.0% to 4.0%, stated and assumed final distribution dates between November 2020 and February 2026, and stated maturity dates between November 2048 and January 2059. The Rialto segment reviews changes in estimated cash flows periodically to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during the three months ended February 29, 2016 or February 28, 2015. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

In 2014, the Rialto segment invested $18.0 million in a private commercial real estate services company. The investment was carried at cost at both February 29, 2016 and November 30, 2015 and is included in Rialto's other assets.