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Financial Services Segment

3 Months Ended

Feb. 28, 2019

The Company's homebuilding operations construct and sell homes primarily for first-time, move-up and active adult homebuyers primarily under the Lennar brand name. In addition, the Company's homebuilding operations purchase, develop and sell land to third parties. In connection with the CalAtlantic acquisition, the Company experienced significant growth in its operations. As a result in 2018, the Company's chief operating decision makers ("CODM") reassessed how they evaluate the business and allocate resources. The CODM manage and assess the Company’s performance at a regional level. Therefore, in 2018 the Company performed an assessment of its operating segments in accordance with ASC 280, Segment Reporting, (“ASC 280”) and determined that each of its four homebuilding regions, financial services operations, multifamily operations and Rialto operations are its operating segments. Prior to this change, in accordance with the aggregation criteria defined in ASC 280, the Company’s operating segments were aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. In addition, in the first quarter of 2019, as a result of the reclassification of RMF and certain other Rialto assets from the Rialto segment to the Financial Services segment effective December 1, 2018, the Company has renamed the Rialto segment as "Lennar Other" and included in this segment certain strategic technology investments, which were reclassified from Homebuilding to Lennar Other. Prior periods have been reclassified to conform with the 2019 presentation. The Company’s reportable segments consist of:

(1) Homebuilding East

(2) Homebuilding Central

(3) Homebuilding Texas

(4) Homebuilding West

(5) Financial Services

(6) Multifamily

(7) Lennar Other

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, other revenues from management fees and forfeited deposits, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, and selling, general and administrative expenses incurred by the segment.

The Company’s reportable Homebuilding segments and all other homebuilding operations not required to be reported separately have homebuilding divisions located in:

East: Florida, New Jersey, North and South Carolina

Central: Georgia, Illinois, Indiana, Maryland, Minnesota and Virginia

Texas: Texas

West: Arizona, California, Colorado, Nevada, Oregon, Utah and Washington

Other: Urban divisions and other homebuilding related investments, including FivePoint

Operations of the Financial Services segment include primarily mortgage financing, title and closing services primarily for buyers of the Company’s homes as well as property and casualty insurance. It also includes originating and selling into securitizations commercial mortgage loans through its RMF business. The Financial Services segment sells substantially all of the loans it originates within a short period of time 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. Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title and closing services, and property and casualty insurance, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Financial Services segment operates generally in the same states as the Company’s homebuilding operations as well as in other states.

Operations of the Multifamily segment include revenues generated from the sales of land, revenue from construction activities, and management and promote fees generated from joint ventures and equity in earnings (loss) from unconsolidated entities and other gains (which includes sales of buildings), less the cost of sales of land sold, expenses related to construction activities and general and administrative expenses.

Operations of the Lennar Other segment include operating earnings (loss) consisting of revenues generated primarily from the Company's share of carried interests in the Rialto fund investments retained after the sale of Rialto's asset and investment management platform, along with equity in earnings (loss) from the Rialto fund investments and strategic technology investments, and other income (expense), net from the remaining assets related to the Company's former Rialto segment.

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, 2018. The Company's 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.

Financial information relating to the Company’s operations was as follows:



(In thousands)	February 28, 2019		November 30, 2018
Assets:
Homebuilding East	$	6,821,359	7,183,758
Homebuilding Central	2,662,731		2,522,799
Homebuilding Texas	2,476,923		2,311,760
Homebuilding West	10,803,039		10,291,385
Homebuilding Other	968,106		1,013,367
Financial Services	2,243,611		2,778,910
Multifamily	1,003,872		874,219
Lennar Other	574,863		588,959
Corporate and unallocated	1,195,422		1,001,024
Total assets	$	28,749,926	28,566,181
Homebuilding goodwill	$	3,442,359	3,442,359
Financial Services goodwill (1)	$	215,516	237,688


(1)	Decrease in goodwill relates to the Financial Services' segment sale of substantially all of its retail mortgage and its real estate brokerage business.



	Three Months Ended
	February 28,
(In thousands)	2019			2018
Revenues:
Homebuilding East	$	1,226,814		912,963
Homebuilding Central	435,067			254,568
Homebuilding Texas	418,517			356,098
Homebuilding West	1,540,896			1,127,957
Homebuilding Other	2,427			10,507
Financial Services (1)	143,311			196,087
Multifamily	97,394			93,256
Lennar Other	3,656			29,355
Total revenues (2)	$	3,868,082		$	2,980,791
Operating earnings (loss) (3):
Homebuilding East	$	135,383		101,329
Homebuilding Central	30,926			9,036
Homebuilding Texas	32,278			14,013
Homebuilding West	190,661			139,429
Homebuilding Other (4)	(19,653		)	150,120
Total Homebuilding operating earnings	369,595			413,927
Financial Services	18,972			25,862
Multifamily	6,797			(1,201		)
Lennar Other	3,103			2,845
Corporate and unallocated (5)	(79,343		)	(172,005		)
Earnings before income taxes	$	319,124		269,428


(1)	Financial Services revenues are significantly lower period over period primarily due to the loss of revenues as a result of the sales of substantially all of the segment's retail mortgage business and the segment's real estate brokerage business, as well as a decrease in revenue related to RMF due to lower securitization volume and margin.


(2)	Total revenues were net of sales incentives of $222.3 million ($25,300 per home delivered) for the three months ended February 28, 2019, compared to $149.9 million ($22,300 per home delivered) for the three months ended February 28, 2018.


(3)	All Homebuilding segments were impacted by purchase accounting adjustments that totaled $55.0 million for the three months ended February 28, 2018.


(4)	Homebuilding Other operating earnings for the three months ended February 28, 2018 included $164.9 million related to a gain on the sale of an 80% interest in one of Homebuilding's strategic joint ventures, Treasure Island Holdings.

(5)

Corporate and unallocated includes corporate, general and administrative expenses, and for the three months ended February 28, 2018, $104.2 million of acquisition and integration costs related to the CalAtlantic acquisition.

Financial Services Segment

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



(In thousands)	February 28, 2019		November 30, 2018
Assets:
Cash and cash equivalents	$	155,914	188,485
Restricted cash	10,837		17,944
Receivables, net (1)	354,216		731,169
Loans held-for-sale (2)	1,056,984		1,213,889
Loans held-for-investment, net	81,004		70,216
Investments held-to-maturity	210,806		189,472
Investments available-for-sale (3)	5,188		4,161
Goodwill	215,516		237,688
Other assets (4)	153,146		125,886
	$	2,243,611	2,778,910
Liabilities:
Notes and other debts payable	$	1,070,547	1,558,702
Other liabilities (5)	229,458		309,500
	$	1,300,005	1,868,202


(1)	Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of February 28, 2019 and November 30, 2018, respectively.


(2)	Loans held-for-sale related to unsold residential and commercial loans carried at fair value.


(3)	Investments available-for-sale are carried at fair value with changes in fair value recorded as a component of accumulated other comprehensive income (loss) on the condensed consolidated balance sheet.


(4)	As of February 28, 2019 and November 30, 2018, other assets included mortgage loan commitments carried at fair value of $16.1 million and $16.4 million, respectively, and mortgage servicing rights carried at fair value of $35.4 million and $37.2 million, respectively.

(5)

As of February 28, 2019 and November 30, 2018, other liabilities included $58.5 million and $60.3 million, respectively, of certain of the Company’s self-insurance reserves related to construction defects, general liability and workers’ compensation. In addition, as of February 28, 2019 and November 30, 2018, other liabilities also included forward contracts carried at fair value of $1.5 million and $10.4 million, respectively.

Consistent with the Company's reversion to a pure-play homebuilder, during the three months ended February 28, 2019, the Company sold the majority of its retail title agency business and title insurance underwriter, substantially all of its retail mortgage business and its real estate brokerage business. These transactions resulted in a net gain of $1.7 million.

In connection with the sale of the majority of its retail title agency business and title insurance underwriter, the Company provided seller financing and received a substantial minority equity ownership stake in the buyer. The combination of both the equity and debt components of this transaction caused the transaction not to meet the accounting requirements for sale treatment and, therefore, the Company is required to consolidate the buyer’s results at this time.

At February 28, 2019, the Financial Services warehouse facilities used to fund residential mortgages were as follows:



(In thousands)	Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures March 2019 (1)	$	300,000
364-day warehouse repurchase facility that matures May 2019 (2)	300,000
364-day warehouse repurchase facility that matures June 2019	500,000
364-day warehouse repurchase facility that matures October 2019 (3)	500,000
Total	$	1,600,000


(1)	Subsequent to February 28, 2019, the warehouse repurchase facility was extended to December 2019. Maximum aggregate commitment includes an uncommitted amount of $300 million.


(2)	Maximum aggregate commitment includes an uncommitted amount of $300 million.


(3)	Maximum aggregate commitment includes an uncommitted amount of $400 million.

The Financial Services segment uses these facilities to finance its residential lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors

were $771.5 million and $1.3 billion at February 28, 2019 and November 30, 2018, respectively, and were collateralized by residential mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $801.1 million and $1.3 billion at February 28, 2019 and November 30, 2018, 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 receivables on loans sold but not yet paid for. Without the facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

Substantially all of the residential loans the Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Over the last several years there has been an industry-wide effort by purchasers to defray their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. Mortgage investors could seek to have the Company buy back mortgage loans or compensate them for losses incurred on mortgage loans that the Company has sold based on claims that the Company breached its limited representations or warranties. The Company’s mortgage operations have established accruals for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes accruals 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 residential 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 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
	February 28,
(In thousands)	2019			2018
Loan origination liabilities, beginning of period	$	48,584		22,543
Provision for losses	673			647
Origination liabilities assumed related to CalAtlantic acquisition	—			3,959
Payments/settlements	(42,560		)	(39	)
Loan origination liabilities, end of period	$	6,697		27,110

Rialto Mortgage Finance - loans held-for-sale

During the three months ended February 28, 2019, RMF originated commercial loans with a total principal balance of $270.1 million, all of which were recorded as loans held-for-sale, and sold $200.5 million of commercial loans into two separate securitizations. As of February 28, 2019 and November 30, 2018, there were no unsettled transactions.

During the three months ended February 28, 2018, RMF originated commercial loans with a total principal balance of $238.0 million, all of which were recorded as loans held-for-sale, and sold $347.7 million of commercial loans into three separate securitizations.

At February 28, 2019, the RMF warehouse facilities were as follows:



(In thousands)	Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures November 2019	$	200,000
364-day warehouse repurchase facility that matures December 2019	250,000
364-day warehouse repurchase facility that matures December 2019	200,000
364-day warehouse repurchase facility that matures December 2019	200,000
Total - Loans origination and securitization business	$	850,000
Warehouse repurchase facility that matures December 2019 (two - one year extensions) (1)	50,000
Total	$	900,000


(1)	RMF uses this warehouse repurchase facility to finance the origination of floating rate accrual loans, which are reported as accrual loans within loans receivable, net. There were no borrowings under this facility as of both February 28, 2019 and November 30, 2018.

Borrowings under the facilities that finance RMF's commercial loan originations and securitization activities were $122.6 million and $178.8 million as of February 28, 2019 and November 30, 2018, 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. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the loans held-for-sale to investors. Without the facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

Investments held-to-maturity

At February 28, 2019 and November 30, 2018, the carrying value of Financial Services' commercial mortgage-backed securities ("CMBS") was $167.4 million and $137.0 million, respectively. These securities were purchased at discounts ranging from 6% to 84% with coupon rates ranging from 1.3% to 5.3%, stated and assumed final distribution dates between November 2020 and December 2028, and stated maturity dates between November 2043 and March 2059. The Financial Services segment reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its CMBS. Based on the segment’s assessment, no impairment charges were recorded during either the three months ended February 28, 2019 or 2018. The Financial Services segment classifies these securities as held-to-maturity based on its intent and ability to hold the securities until maturity. The Company has financing agreements to finance CMBS that have been purchased as investments by the Financial Services segment. At February 28, 2019 and November 30, 2018, the carrying amount, net of debt issuance costs, of outstanding debt in these agreements was $155.9 million and $123.7 million, respectively, and the interest is incurred at a fixed rate of 3.2% to 4.1%.Multifamily Segment

The Company is actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. The Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.

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



(In thousands)	February 28, 2019		November 30, 2018
Assets:
Cash and cash equivalents	$	13,594	7,832
Receivables (1)	74,508		73,829
Land under development	332,642		277,894
Investments in unconsolidated entities	485,140		481,129
Other assets	97,988		33,535
	$	1,003,872	874,219
Liabilities:
Accounts payable and other liabilities	$	170,349	170,616
Notes payable (2)	39,616		—
	$	209,965	170,616


(1)	Receivables primarily related to general contractor services, net of deferrals and management fee income receivables due from unconsolidated entities.


(2)	Notes payable are net of debt issuance costs.

The unconsolidated entities in which the Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Multifamily unconsolidated entities, the Company (or entities related to them) has been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. Additionally, the Company guarantees the construction costs of the project as construction cost over-runs would be paid by the Company. Generally, these payments would increase the Company's investment in the entities and would increase its share of funds the entities distribute after the achievement of certain thresholds. As of both February 28, 2019 and November 30, 2018, the fair value of the completion guarantees was immaterial. Additionally, as of February 28, 2019 and November 30, 2018, the Multifamily segment had $1.9 million and $4.6 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities and deposits on land purchase contracts. These letters of credit are included in the disclosure in Note 12 related to the Company's

performance and financial letters of credit. As of February 28, 2019 and November 30, 2018, Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $926.3 million and $1.0 billion, respectively.

In many instances, the Multifamily segment is appointed as the construction, development and property manager for certain of its Multifamily unconsolidated entities and receives fees for performing this function. During the three months ended February 28, 2019 and 2018, the Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $13.1 million and $11.5 million, respectively.

The Multifamily segment also provides general contractor services for construction of some of the rental properties owned by unconsolidated entities in which the Company has an investment. During the three months ended February 28, 2019 and 2018, the Multifamily segment provided general contractor services, net of deferrals, totaling $82.4 million and $81.7 million, respectively, which were partially offset by costs related to those services of $79.4 million and $78.6 million, respectively.

The Multifamily Venture Fund I (the "Venture Fund") is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with $2.2 billion in equity commitments, including a $504 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. During the three months ended February 28, 2019, $64.8 million in equity commitments were called, of which the Company contributed its portion of $16.2 million. During the three months ended February 28, 2019, the Company received $4.9 million of distributions as a return of capital from the Venture Fund. As of February 28, 2019, $1.8 billion of the $2.2 billion in equity commitments had been called, of which the Company had contributed $457.0 million, representing its pro-rata portion of the called equity, resulting in a remaining equity commitment for the Company of $47.0 million. As of February 28, 2019 and November 30, 2018, the carrying value of the Company's investment in the Venture Fund was $390.7 million and $383.4 million, respectively.

In March 2018, the Multifamily segment completed the first closing of a second Multifamily Venture, Multifamily Venture II LP ("Venture Fund II"), for the development, construction and property management of class-A multifamily assets. As of February 28, 2019, Venture Fund II had approximately $787 million of equity commitments, including a $255 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. During the three months ended February 28, 2019, $26.8 million in equity commitments were called, of which the Company contributed its portion of $8.7 million. During the three months ended February 28, 2019, the Company received $6.3 million of distributions as a return of capital from the Venture Fund II. As of February 28, 2019, $262.2 million of the $787 million in equity commitments had been called, of which the Company had contributed $83.8 million, representing its pro-rata portion of the called equity, resulting in a remaining equity commitment for the Company of $171.2 million. As of February 28, 2019 and November 30, 2018, the carrying value of the Company's investment in Venture Fund II was $65.2 million and $63.0 million, respectively. The difference between the Company's net contributions and the carrying value of the Company's investments was related to a basis difference. Venture Fund II was seeded initially with eight undeveloped multifamily assets that were previously purchased by the Multifamily segment totaling approximately 3,000 apartments with projected project costs of approximately $1.3 billion.

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

Balance Sheets



(In thousands)	February 28, 2019		November 30, 2018
Assets:
Cash and cash equivalents	$	37,533	61,571
Operating properties and equipment	3,798,753		3,708,613
Other assets	43,746		40,899
	$	3,880,032	3,811,083
Liabilities and equity:
Accounts payable and other liabilities	$	186,555	199,119
Notes payable (1)	1,449,294		1,381,656
Equity	2,244,183		2,230,308
	$	3,880,032	3,811,083
Multifamily investments in unconsolidated entities	$	485,140	481,129


(1)	Notes payable are net of debt issuance costs of $18.2 million and $15.7 million, as of February 28, 2019 and November 30, 2018, respectively.

Statements of Operations



	Three Months Ended
	February 28,
(In thousands)	2019		2018
Revenues	$	35,371	23,952
Costs and expenses	56,128		31,795
Other income, net	21,400		7,307
Net earnings (loss) of unconsolidated entities	$	643	(536	)
Multifamily equity in earnings (loss) from unconsolidated entities and other gain (1)	$	10,581	2,742

(1)

During the three months ended February 28, 2019, the Multifamily segment sold, through its unconsolidated entities, one operating property and an investment in an operating property resulting in the segment's $15.5 million share of gains. The gain of $11.9 million recognized on the sale of the investment in an operating property and recognition of the Company's share of deferred development fees that were capitalized at the joint venture level are included in Multifamily equity in earnings (loss) from unconsolidated entities and other gain, and are not included in net earnings (loss) of unconsolidated entities. During the three months ended February 28, 2018, the Multifamily segment sold one operating property through an unconsolidated entity resulting in the segment's $4.1 million share of gains.Lennar Other

Lennar Other primarily includes fund investments the Company retained when it sold the Rialto asset and investment management platform, as well as strategic investments in technology companies.

The assets and liabilities related to Lennar Other were as follows:



(In thousands)	February 28, 2019		November 30, 2018
Assets:
Cash and cash equivalents	$	15,843	24,334
Restricted cash	975		7,175
Real estate owned, net	23,874		25,632
Investments in unconsolidated entities	428,385		424,104
Investments held-to-maturity	60,204		59,974
Other assets	45,582		47,740
	$	574,863	588,959
Liabilities:
Notes and other debts payable	$	15,046	14,488
Other liabilities	18,182		53,020
	$	33,228	67,508

Investments held-to-maturity

At February 28, 2019 and November 30, 2018, the carrying value of the Lennar Other's CMBS was $60.2 million and $60.0 million, respectively. These securities were purchased at discounts ranging from 6.5% to 86.1% with coupon rates ranging from 1.3% to 4.0%, stated and assumed final distribution dates between November 2020 and October 2026, and stated maturity dates between November 2049 and March 2059. The Company reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its CMBS. Based on the Company’s assessment, no impairment charges were recorded during either the three months ended February 28, 2019 or 2018. The Company classifies these securities as held-to-maturity based on its intent and ability to hold the securities until maturity. The Company has financing agreements to finance CMBS that have been purchased as investments by the segment. At February 28, 2019 and November 30, 2018, the carrying amount, net of debt issuance costs, of outstanding debt in these agreements was $13.1 million and $12.6 million, respectively, and the interest is incurred at a rate of 4.6% to 5.0%.