Annual Statements Open main menu

LENNAR CORP /NEW/ - Quarter Report: 2012 August (Form 10-Q)




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, 2012
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 September 30, 2012:
Class A 159,580,731
Class B   31,303,195






Part I. Financial Information
Item 1. Financial Statements

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except shares and per share amounts)
(unaudited)
 
August 31,
 
November 30,
 
2012 (1)
 
2011 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
692,004

 
1,024,212

Restricted cash
6,601

 
8,590

Receivables, net
46,281

 
53,977

Inventories:
 
 
 
Finished homes and construction in progress
1,693,221

 
1,334,703

Land and land under development
3,015,444

 
2,636,510

Consolidated inventory not owned
326,985

 
389,322

Total inventories
5,035,650

 
4,360,535

Investments in unconsolidated entities
570,666

 
545,760

Other assets
913,469

 
524,694

 
7,264,671

 
6,517,768

Rialto Investments:
 
 
 
Cash and cash equivalents
72,679

 
83,938

Defeasance cash to retire notes payable
185,975

 
219,386

Loans receivable, net
496,802

 
713,354

Real estate owned, held-for-sale
115,718

 
143,677

Real estate owned, held-and-used, net
647,227

 
582,111

Investments in unconsolidated entities
101,668

 
124,712

Other assets
54,323

 
29,970

 
1,674,392

 
1,897,148

Lennar Financial Services
779,437

 
739,755

Total assets
$
9,718,500

 
9,154,671

(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, 2012, total assets include $2,110.1 million related to consolidated VIEs of which $13.2 million is included in Lennar Homebuilding cash and cash equivalents, $6.2 million in Lennar Homebuilding receivables, net, $52.2 million in Lennar Homebuilding finished homes and construction in progress, $477.9 million in Lennar Homebuilding land and land under development, $62.4 million in Lennar Homebuilding consolidated inventory not owned, $44.1 million in Lennar Homebuilding investments in unconsolidated entities, $221.3 million in Lennar Homebuilding other assets, $72.1 million in Rialto Investments cash and cash equivalents, $186.0 million in Rialto Investments defeasance cash to retire notes payable, $400.3 million in Rialto Investments loans receivable, net, $83.0 million in Rialto Investments real estate owned, held-for-sale, $483.2 million in Rialto Investments real estate owned, held-and-used, net, $0.7 million in Rialto Investments in unconsolidated entities and $7.5 million in Rialto Investments other assets.
As of November 30, 2011, total assets include $2,317.4 million related to consolidated VIEs of which $19.6 million is included in Lennar Homebuilding cash and cash equivalents, $5.3 million in Lennar Homebuilding receivables, net, $0.1 million in Lennar Homebuilding finished homes and construction in progress, $538.2 million in Lennar Homebuilding land and land under development, $71.6 million in Lennar Homebuilding consolidated inventory not owned, $43.4 million in Lennar Homebuilding investments in unconsolidated entities, $219.6 million in Lennar Homebuilding other assets, $80.0 million in Rialto Investments cash and cash equivalents, $219.4 million in Rialto Investments defeasance cash to retire notes payable, $565.6 million in Rialto Investments loans receivable, net, $115.4 million in Rialto Investments real estate owned, held-for-sale, $428.0 million in Rialto Investments real estate owned, held-and-used, net, $0.6 million in Rialto Investments in unconsolidated entities and $10.6 million in Rialto Investments other assets.

See accompanying notes to condensed consolidated financial statements.
2

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets – (Continued)
(In thousands, except shares and per share amounts)
(unaudited)

 
August 31,
 
November 30,
 
2012 (2)
 
2011 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
169,863

 
201,101

Liabilities related to consolidated inventory not owned
268,207

 
326,200

Senior notes and other debts payable
3,671,595

 
3,362,759

Other liabilities
611,763

 
602,231

 
4,721,428

 
4,492,291

Rialto Investments:
 
 
 
Notes payable and other liabilities
614,390

 
796,120

Lennar Financial Services
524,305

 
562,735

Total liabilities
5,860,123

 
5,851,146

Stockholders’ equity:
 
 
 
Preferred stock

 

Class A common stock of $0.10 par value; Authorized: August 31, 2012 and November 30, 2011
     - 300,000,000 shares; Issued: August 31, 2012 - 171,216,366 shares and November 30, 2011
     -169,099,760 shares
17,122

 
16,910

Class B common stock of $0.10 par value; Authorized: August 31, 2012 and November 30, 2011
     - 90,000,000 shares; Issued: August 31, 2012 - 32,982,815 shares and November 30, 2011
     - 32,982,815 shares
3,298

 
3,298

Additional paid-in capital
2,378,574

 
2,341,079

Retained earnings
1,488,426

 
956,401

Treasury stock, at cost; August 31, 2012 - 11,702,017 Class A common shares and 1,679,620
     Class B common shares; November 30, 2011 - 12,000,017 Class A common shares and
     1,679,620 Class B common shares
(615,698
)
 
(621,220
)
Total stockholders’ equity
3,271,722

 
2,696,468

Noncontrolling interests
586,655

 
607,057

Total equity
3,858,377

 
3,303,525

Total liabilities and equity
$
9,718,500

 
9,154,671

(2)
As of August 31, 2012, total liabilities include $719.0 million related to consolidated VIEs as to which neither Lennar Corporation, nor any of its subsidiaries, has any obligations, of which $7.8 million is included in Lennar Homebuilding accounts payable, $33.8 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $171.4 million in Lennar Homebuilding senior notes and other debts payable, $15.0 million in Lennar Homebuilding other liabilities and $491.0 million in Rialto Investments notes payable and other liabilities.
As of November 30, 2011, total liabilities include $902.3 million related to consolidated VIEs as to which neither Lennar Corporation, nor any of its subsidiaries, has any obligations of which $12.7 million is included in Lennar Homebuilding accounts payable, $43.6 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $175.3 million in Lennar Homebuilding senior notes and other debts payable, $16.7 million in Lennar Homebuilding other liabilities and $654.0 million in Rialto Investments notes payable and other liabilities.


See accompanying notes to condensed consolidated financial statements.
3

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)


 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Lennar Homebuilding
$
955,800

 
711,754

 
2,388,321

 
1,840,939

Lennar Financial Services
106,764

 
66,374

 
263,574

 
183,509

Rialto Investments
37,194

 
42,065

 
102,874

 
118,283

Total revenues
1,099,758

 
820,193

 
2,754,769

 
2,142,731

Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding (1)
850,432

 
662,909

 
2,167,019

 
1,741,383

Lennar Financial Services
81,441

 
58,386

 
212,021

 
171,843

Rialto Investments
46,396

 
33,562

 
109,964

 
94,184

Corporate general and administrative
32,286

 
22,776

 
88,296

 
66,726

Total costs and expenses
1,010,555

 
777,633

 
2,577,300

 
2,074,136

Lennar Homebuilding equity in earnings (loss) unconsolidated entities
(5,991
)
 
(4,552
)
 
(14,289
)
 
6,526

Lennar Homebuilding other income (expense), net (2)
(5,406
)
 
6,940

 
11,419

 
46,411

Other interest expense
(22,659
)
 
(24,107
)
 
(71,311
)
 
(68,654
)
Rialto Investments equity in earnings (loss) from unconsolidated entities
13,551

 
(6,505
)
 
37,578

 
(4,953
)
Rialto Investments other income (expense), net
(10,063
)
 
9,743

 
(23,675
)
 
38,275

Earnings before income taxes
58,635

 
24,079

 
117,191

 
86,200

Benefit (provision) for income taxes
12,776

 
(579
)
 
416,621

 
873

Net earnings (including net earnings (loss) attributable to
     noncontrolling interests)
$
71,411

 
23,500

 
533,812

 
87,073

Less: Net earnings (loss) attributable to noncontrolling interests (3)
(15,698
)
 
2,770

 
(20,968
)
 
25,152

Net earnings attributable to Lennar
$
87,109

 
20,730

 
554,780

 
61,921

Basic earnings per share
$
0.46

 
0.11

 
2.93

 
0.33

Diluted earnings per share
$
0.40

 
0.11

 
2.56

 
0.33

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

 
0.04

 
0.12

 
0.12

(1)
Lennar Homebuilding costs and expenses include $6.1 million and $11.7 million, respectively, of valuation adjustments and write-offs of option deposits and pre-acquisition costs for the three and nine months ended August 31, 2012; and $10.7 million and $19.6 million, respectively, of valuation adjustments and write-offs of option deposits and pre-acquisition costs for the three and nine months ended August 31, 2011.
(2)
Lennar Homebuilding other income (expense), net, includes $2.1 million and $15.3 million of valuation adjustments to the Company’s investments in Lennar Homebuilding’s unconsolidated entities and write-offs of other assets for the nine months ended August 31, 2011.
(3)
Net earnings (loss) attributable to noncontrolling interests for the three and nine months ended August 31, 2012 includes ($13.4) million and ($14.6) million, respectively, of losses related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC. Net earnings (loss) attributable to noncontrolling interests for the three and nine months ended August 31, 2011 includes $6.1 million and $30.9 million, respectively, of earnings related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC.

See accompanying notes to condensed consolidated financial statements.
4

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


 
Nine Months Ended
 
August 31,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
533,812

 
87,073

Adjustments to reconcile net earnings (including net earnings (loss) attributable to noncontrolling
     interests) to net cash used in operating activities:
 
 
 
Depreciation and amortization
20,368

 
12,321

Amortization of discount/premium on debt, net
16,107

 
12,618

Lennar Homebuilding equity in (earnings) loss from unconsolidated entities
14,289

 
(6,526
)
Distributions of earnings from Lennar Homebuilding unconsolidated entities
1,005

 
11,410

Rialto Investments equity in (earnings) loss from unconsolidated entities
(37,578
)
 
4,953

Distributions of earnings from Rialto Investments unconsolidated entities
6,324

 
4,084

Share based compensation expense
24,181

 
16,220

Tax benefit from share-based awards
2,479

 

Excess tax benefits from share-based awards
(1,572
)
 
(283
)
Deferred income tax benefit
(422,418
)
 

Loss on partial redemption of Lennar Homebuilding senior notes
6,510

 

Gains on retirement of Lennar Homebuilding other debts payable
(988
)
 

Unrealized and realized gains on Rialto Investments real estate owned
(12,519
)
 
(56,909
)
Gains on sale of Rialto Investments commercial mortgage-backed securities

 
(4,743
)
Impairments of Rialto Investments loans receivable and REO
30,156

 
12,085

Valuation adjustments and write-offs of option deposits and pre-acquisition costs, other
       receivables and other assets
12,671

 
34,892

Changes in assets and liabilities:
 
 
 
Decrease in restricted cash
5,626

 
404

Decrease in receivables
48,949

 
10,633

Increase in inventories, excluding valuation adjustments and write-offs of option deposits
    and pre-acquisition costs
(554,873
)
 
(118,132
)
Increase in other assets
(25,422
)
 
(104,863
)
(Increase) decrease in Lennar Financial Services loans-held-for-sale
(119,929
)
 
43,044

Decrease in accounts payable and other liabilities
(37,685
)
 
(73,864
)
Net cash used in operating activities
(490,507
)
 
(115,583
)
Cash flows from investing activities:
 
 
 
Net additions of operating properties and equipment
(3,201
)
 
(3,307
)
Investments in and contributions to Lennar Homebuilding unconsolidated entities
(55,687
)
 
(89,465
)
Distributions of capital from Lennar Homebuilding unconsolidated entities
26,538

 
25,280

Investments in and contributions to Rialto Investments unconsolidated entities
(28,722
)
 
(64,360
)
Distributions of capital from Rialto Investments unconsolidated entities
83,368

 

Decrease (increase) in Rialto Investments defeasance cash to retire notes payable
33,411

 
(88,358
)
Receipts of principal payments on Rialto Investments loans receivable
52,913

 
52,849

Proceeds from sales of Rialto Investments real estate owned
121,848

 
55,283

Improvements to Rialto Investments real estate owned
(10,288
)
 
(15,484
)
Purchases of Lennar Homebuilding investments available-for-sale
(7,224
)
 

Proceeds from sales of Lennar Homebuilding investments available-for-sale
10,853

 

Decrease (increase) in Lennar Financial Services loans held-for-investment, net
3,114

 
(192
)
Purchases of Lennar Financial Services investment securities
(5,205
)
 
(51,940
)
Proceeds from sale of investments in commercial mortgage-backed securities

 
11,127

Proceeds from maturities of Lennar Financial Services investment securities
19,232

 
6,938

Net cash provided by (used in) investing activities
$
240,950

 
(161,629
)

See accompanying notes to condensed consolidated financial statements.
5

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


 
Nine Months Ended
 
August 31,
 
2012
 
2011
Cash flows from financing activities:
 
 
 
Net repayments under Lennar Financial Services debt
$
(52,420
)
 
(56,313
)
Proceeds from senior notes
400,000

 

Proceeds from convertible senior notes
50,000

 

Debt issuance costs of senior notes and convertible senior notes
(4,814
)
 

Partial redemption of senior notes
(210,862
)
 

Principal repayments on Rialto Investments notes payable
(170,889
)
 

Proceeds from other borrowings
31,561

 
2,957

Principal payments on other borrowings
(58,929
)
 
(84,463
)
Exercise of land option contracts from an unconsolidated land investment venture
(48,242
)
 
(33,827
)
Receipts related to noncontrolling interests
1,046

 
5,765

Payments related to noncontrolling interests
(480
)
 
(7,087
)
Excess tax benefits from share-based awards
1,572

 
283

Common stock:
 
 
 
Issuances
16,323

 
5,547

Repurchases

 
(29
)
Dividends
(22,755
)
 
(22,425
)
Net cash used in financing activities
(68,889
)
 
(189,592
)
Net decrease in cash and cash equivalents
(318,446
)
 
(466,804
)
Cash and cash equivalents at beginning of period
1,163,604

 
1,394,135

Cash and cash equivalents at end of period
$
845,158

 
927,331

Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
692,004

 
800,332

Lennar Financial Services
80,475

 
57,423

Rialto Investments
72,679

 
69,576

 
$
845,158

 
927,331

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding:
 
 
 
Non-cash contributions to unconsolidated entities
$
7,612

 
17,047

Non-cash distributions from unconsolidated entities
$

 
12,043

Inventory acquired in satisfaction of other assets including investments available-for-sale
$
91,554

 

Non-cash reclass from inventories to operating properties and equipment
$

 
126,525

Non-cash purchases of investments available-for-sale
$
12,520

 

Purchases of inventories and other assets financed by sellers
$
53,159

 
55,733

Rialto Investments:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
160,754

 
396,190

Consolidations of newly formed or previously unconsolidated entities, net:
 
 
 
Receivables
$

 
2

Inventories
$

 
52,850

Investments in Lennar Homebuilding unconsolidated entities
$

 
(28,574
)
Other assets
$

 
380

Debts payable
$

 
(14,703
)
Other liabilities
$

 
(9,423
)
Noncontrolling interests
$

 
(532
)

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 15) 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, 2011. 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, 2012 are not necessarily indicative of the results to be expected for the full year.
Reclassification
Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2012 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
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,

7



selling, general and administrative expenses and other interest expense of the segment. 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 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 mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar 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. 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 sourcing, underwriting, pricing, managing and ultimately monetizing real estate and real estate related assets, as well as providing similar services to others in markets across the country. Rialto’s operating earnings consists of revenues generated primarily from accretable 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 Real Estate Investment Fund (the “Fund”), 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, REO expenses and other general 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 2011 Annual Report on Form 10-K. 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)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Homebuilding East
$
1,522,331

 
1,312,750

Homebuilding Central
731,466

 
681,859

Homebuilding West
2,332,904

 
2,169,503

Homebuilding Southeast Florida
628,599

 
604,415

Homebuilding Houston
295,094

 
230,076

Homebuilding Other
688,856

 
595,615

Rialto Investments (1)
1,674,392

 
1,897,148

Lennar Financial Services
779,437

 
739,755

Corporate and unallocated
1,065,421

 
923,550

Total assets
$
9,718,500

 
9,154,671

(1)
Consists primarily of assets of consolidated VIEs (see Note 8).

8



 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
328,983

 
256,780

 
883,965

 
704,525

Homebuilding Central
138,728

 
101,151

 
339,005

 
260,312

Homebuilding West
179,114

 
144,898

 
459,909

 
362,177

Homebuilding Southeast Florida
106,876

 
66,763

 
227,543

 
153,784

Homebuilding Houston
136,075

 
96,065

 
323,364

 
230,904

Homebuilding Other
66,024

 
46,097

 
154,535

 
129,237

Lennar Financial Services
106,764

 
66,374

 
263,574

 
183,509

Rialto Investments
37,194

 
42,065

 
102,874

 
118,283

Total revenues (1)
$
1,099,758

 
820,193

 
2,754,769

 
2,142,731

 
 
 
 
 
 
 
 
Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
26,230

 
19,504

 
66,468

 
50,299

Homebuilding Central (2)
10,012

 
(6,404
)
 
15,394

 
(24,878
)
Homebuilding West (3)
(266
)
 
(4,457
)
 
(17,244
)
 
36,033

Homebuilding Southeast Florida (4)
14,882

 
10,900

 
45,692

 
20,871

Homebuilding Houston
15,746

 
7,205

 
30,524

 
10,130

Homebuilding Other
4,708

 
378

 
6,287

 
(8,616
)
Lennar Financial Services
25,323

 
7,988

 
51,553

 
11,666

Rialto Investments
(5,714
)
 
11,741

 
6,813

 
57,421

Total operating earnings
90,921

 
46,855

 
205,487

 
152,926

Corporate general and administrative expenses
32,286

 
22,776

 
88,296

 
66,726

Earnings before income taxes
$
58,635

 
24,079

 
117,191

 
86,200

(1)
Total revenues are net of sales incentives of $94.3 million ($26,100 per home delivered) and $274.0 million ($29,500 per home delivered), respectively, for the three and nine months ended August 31, 2012, compared to $95.1 million ($33,600 per home delivered) and $247.9 million ($33,600 per home delivered), respectively, for the three and nine months ended August 31, 2011.
(2)
For the three and nine months ended August 31, 2011, operating loss includes $0.5 million and $8.1 million, respectively, of expenses associated with remedying pre-existing liabilities of a previously acquired company.
(3)
For the nine months ended August 31, 2011, operating earnings include $37.5 million related to the receipt of a litigation settlement, as well as $15.4 million related to the Company’s share of a gain on debt extinguishment and the recognition of $10.0 million of deferred management fees related to management services previously performed by the Company for one of its Lennar Homebuilding unconsolidated entities.
(4)
For the nine months ended August 31, 2012, operating earnings include a $15.0 million gain on the sale of an operating property.

9



Valuation adjustments and write-offs relating to the Company’s homebuilding operations were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Valuation adjustments to finished homes, CIP and land on which
 
 
 
 
 
 
 
the Company intends to build homes:
 
 
 
 
 
 
 
East
$
79

 
412

 
864

 
1,588

Central
6

 
4,741

 
214

 
8,818

West
2,346

 
2,357

 
4,317

 
3,939

Southeast Florida
2,139

 
777

 
2,775

 
1,540

Houston
41

 
113

 
130

 
330

Other
40

 
1,262

 
780

 
1,587

Total
4,651

 
9,662

 
9,080

 
17,802

Valuation adjustments to land the Company intends to sell or has sold
 
 
 
 
 
 
 
to third parties:
 
 
 
 
 
 
 
East
107

 

 
122

 
92

Central
15

 
1

 
15

 
180

West

 

 
1

 

Southeast Florida
22

 

 
354

 

Houston

 
11

 

 
21

Other

 
153

 

 
153

Total
144

 
165

 
492

 
446

Write-offs of option deposits and pre-acquisition costs:
 
 
 
 
 
 
 
East
1,303

 
380

 
1,632

 
726

Central
7

 
344

 
61

 
370

West

 
172

 
232

 
172

Houston

 

 

 
81

Other

 

 
156

 

Total
1,310

 
896

 
2,081

 
1,349

Company’s share of valuation adjustments related to assets of
 
 
 
 
 
 
 
of unconsolidated entities:
 
 
 
 
 
 
 
East
61

 
3

 
61

 
3

Central

 

 

 
371

West
27

 
683

 
5,464

 
2,343

Other

 

 

 
2,495

Total
88

 
686

 
5,525

 
5,212

Valuation adjustments to investments of unconsolidated entities:
 
 
 
 
 
 
 
East (1)

 

 
18

 
8,412

West

 
2,077

 

 
2,077

Total

 
2,077

 
18

 
10,489

Write-offs of other receivables and other assets:
 
 
 
 
 
 
 
East

 

 
1,000

 

Other

 

 

 
4,806

Total

 

 
1,000

 
4,806

Total valuation adjustments and write-offs of option deposits and
 
 
 
 
 
 
 
pre-acquisition costs, other receivables and other assets
$
6,193

 
13,486

 
18,196

 
40,104

(1)
For the nine months ended August 31, 2011, the Company recorded a $0.1 million valuation adjustment related to a $29.8 million investment of a Lennar Homebuilding unconsolidated entity, which was the result of a linked transaction. The linked transaction resulted in a pre-tax gain of $38.6 million related to a debt extinguishment due to the Company's

10



purchase of the Lennar Homebuilding entity debt's at a discount and a $38.7 million valuation adjustment of the Lennar Homebuilding unconsolidated entity's inventory upon acquisition. The net pre-tax loss of $0.1 million was included in Lennar Homebuilding other income (expense), net.
During the nine months ended August 31, 2012, the Company recorded lower valuation adjustments than during the nine months ended August 31, 2011. Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.

(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)
2012
 
2011
 
2012
 
2011
Revenues
$
110,823

 
104,690

 
264,336

 
255,004

Costs and expenses
126,007

 
108,599

 
303,717

 
261,073

Other income
10,515

 

 
10,515

 
123,007

Net earnings (loss) of unconsolidated entities
$
(4,669
)
 
(3,909
)
 
(28,866
)
 
116,938

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)
$
(5,991
)
 
(4,552
)
 
(14,289
)
 
6,526

(1)
For the nine months ended August 31, 2012, Lennar Homebuilding equity in earnings (loss) includes $5.5 million, of valuation adjustments related to strategic asset sales at Lennar Homebuilding's unconsolidated entities. For the nine months ended August 31, 2011, Lennar Homebuilding equity in earnings (loss) included a $15.4 million gain related to the Company’s share of a $123.0 million gain on debt extinguishment at a Lennar Homebuilding unconsolidated entity, partially offset by $5.2 million of valuation adjustments related to assets of Lennar Homebuilding’s unconsolidated entities.
Balance Sheets
(In thousands)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Cash and cash equivalents
$
108,024

 
90,584

Inventories
2,840,523

 
2,895,241

Other assets
233,199

 
277,152

 
$
3,181,746

 
3,262,977

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
284,939

 
246,384

Debt
783,844

 
960,627

Equity
2,112,963

 
2,055,966

 
$
3,181,746

 
3,262,977

As of August 31, 2012 and November 30, 2011, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $570.7 million and $545.8 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 31, 2012 and November 30, 2011 was $675.0 million, and $628.1 million, respectively, primarily as a result of the Company buying at a discount a partner's equity in a Lennar Homebuilding unconsolidated entity.
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., Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of August 31, 2012 and November 30, 2011, the portfolio of land (including land development costs) of $294.9 million and $372.0 million, respectively, is also reflected as inventory in the summarized

11



condensed financial information related to Lennar Homebuilding’s unconsolidated entities.
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 summary of the Company’s net recourse exposure related to Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Several recourse debt - repayment
$
44,795

 
62,408

Joint and several recourse debt - repayment
22,043

 
46,292

The Company’s maximum recourse exposure
66,838

 
108,700

Less: joint and several reimbursement agreements with the Company’s partners
(18,673
)
 
(33,795
)
The Company’s net recourse exposure
$
48,165

 
74,905

During the nine months ended August 31, 2012, the Company’s maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $41.9 million, as a result of $13.7 million paid by the Company primarily through capital contributions to unconsolidated entities and $28.2 million primarily related to the joint ventures selling assets and other transactions.
As of August 31, 2012 and November 30, 2011, the Company had no obligation guarantees accrued. The obligation guarantees, if any, are estimated based on current facts and circumstances and any unexpected changes may lead the Company to incur obligation guarantees in the future.
The recourse debt exposure in the previous table represents the Company’s maximum recourse exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay the debt or to reimburse the Company for any payments on its guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of Lennar Homebuilding’s unconsolidated entities with recourse debt were as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Assets
$
1,807,541

 
1,865,144

Liabilities
$
766,222

 
815,815

Equity
$
1,041,319

 
1,049,329

In addition, 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. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, 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, 2012, the Company does not have maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.
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.
During the three months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $1.3 million. During the three months ended August 31, 2011, there were: (1) no payments under the Company’s maintenance

12



guarantees and (2) other loan paydowns of $3.1 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the three months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
During the nine months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $5.2 million. During the nine months ended August 31, 2011, there were: (1) payments of $1.7 million under the Company’s maintenance guarantees and (2) other loan paydowns of $16.1 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the nine months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
As of August 31, 2012, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of August 31, 2012, 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 11).
The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
The Company’s net recourse exposure
$
48,165

 
74,905

Reimbursement agreements from partners
18,673

 
33,795

The Company’s maximum recourse exposure
$
66,838

 
108,700

Non-recourse bank debt and other debt (partner’s share of several recourse)
$
104,874

 
149,937

Non-recourse land seller debt or other debt
26,341

 
26,391

Non-recourse debt with completion guarantees
476,650

 
441,770

Non-recourse debt without completion guarantees
109,141

 
233,829

Non-recourse debt to the Company
717,006

 
851,927

Total debt
$
783,844

 
960,627

The Company’s maximum recourse exposure as a % of total JV debt
9
%
 
11
%


13



(4)
Equity and Comprehensive Earnings (Loss)
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, 2012 and 2011:
 
 
 
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, 2011
$
3,303,525

 
16,910

 
3,298

 
2,341,079

 
(621,220
)
 
956,401

 
607,057

Net earnings (including net loss
   attributable to noncontrolling
   interests)
533,812

 

 

 

 

 
554,780

 
(20,968
)
Employee stock and directors
   plans
18,949

 
212

 

 
13,215

 
5,522

 

 

Tax benefit from employee stock
   plans and vesting of restricted
   stock
2,479

 

 

 
2,479

 

 

 

Amortization of restricted stock
21,801

 

 

 
21,801

 

 

 

Cash dividends
(22,755
)
 

 

 

 

 
(22,755
)
 

Receipts related to
   noncontrolling interests
1,046

 

 

 

 

 

 
1,046

Payments related to
   noncontrolling interests
(480
)
 

 

 

 

 

 
(480
)
Balance at August 31, 2012
$
3,858,377

 
17,122

 
3,298

 
2,378,574

 
(615,698
)
 
1,488,426

 
586,655

 
 
 
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, 2010
$
3,194,383

 
16,701

 
3,297

 
2,310,339

 
(615,496
)
 
894,108

 
585,434

Net earnings (including net
   earnings attributable to
   noncontrolling interests)
87,073

 

 

 

 

 
61,921

 
25,152

Employee stock and directors
   plans
9,045

 
39

 
1

 
9,034

 
(29
)
 

 

Amortization of restricted stock
13,001

 

 

 
13,001

 

 

 

Cash dividends
(22,425
)
 

 

 

 

 
(22,425
)
 

Receipts related to
   noncontrolling interests
5,765

 

 

 

 

 

 
5,765

Payments related to
   noncontrolling interests
(7,087
)
 

 

 

 

 

 
(7,087
)
Lennar Homebuilding non-cash
   consolidations
532

 

 

 

 

 

 
532

Balance at August 31, 2011
$
3,280,287

 
16,740

 
3,298

 
2,332,374

 
(615,525
)
 
933,604

 
609,796

Comprehensive earnings attributable to Lennar for both the three and nine months ended August 31, 2012 and 2011 was the same as net earnings attributable to Lennar. Comprehensive earnings (loss) attributable to noncontrolling interests for both the three and nine months ended August 31, 2012 and 2011 was the same as net earnings (loss) attributable to noncontrolling interests.
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, 2012 and 2011, there were no repurchases of common stock under the stock repurchase program. As of August 31, 2012, 6.2 million shares of common stock can be repurchased in the future under the program.
During three months ended August 31, 2012, treasury stock had no change in Class A common shares. During the nine months ended August 31, 2012, treasury stock decreased by 0.3 million Class A common shares due to activity related to the Company's equity compensation plan.

14



(5)
Income Taxes
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future earnings, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.
During the nine months ended August 31, 2012, the Company concluded that it was more likely than not that the majority of its deferred tax assets would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative, including such factors as ten consecutive quarters of earnings, the expectation of continued earnings and signs of recovery in the housing markets the Company operates in. Accordingly, the Company reversed $447.0 million of its valuation allowance against its deferred tax assets. After the reversal, the Company had a valuation allowance of $133.3 million against its deferred tax assets as of August 31, 2012. The Company's deferred tax assets, net, were $422.4 million at August 31, 2012 of which $428.8 million were deferred tax assets included in Lennar Homebuilding's other assets on the Company's condensed consolidated balance sheets and $6.4 million were deferred tax liabilities included in Lennar Financial Services segment's liabilities on the Company's condensed consolidated balance sheets. The valuation allowance against the Company’s deferred tax assets was $576.9 million at November 30, 2011. In accordance with GAAP, when a change in a valuation allowance is recognized as a result of a change in judgment in an interim period, a portion of the valuation allowance to be reversed needs to be spread over remaining interim periods. Additionally, a valuation allowance remains on some of the Company's state net operating loss carryforwards that are not more likely than not to be utilized at this time due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states. In future periods, the remaining allowance could be reversed if additional sufficient positive evidence is present indicating that it is more likely than not that a portion or all of the Company's remaining deferred tax assets will be realized.
During the three months ended August 31, 2012, the Company concluded that it was more likely than not that a portion of its state deferred tax assets would be utilized. This conclusion was based on additional positive evidence including actual and forecasted earnings. Accordingly, during the three months ended August 31, 2012, the Company reversed $35.4 million of its valuation allowance against its state deferred tax assets and $8.6 million of its valuation allowance that was previously maintained to be utilized in the remaining interim periods of 2012. This reversal was partially offset by a tax provision of $31.2 million primarily related to pre-tax earnings during the three months ended August 31, 2012. Therefore, the Company had a $12.8 million net benefit for income taxes during the three months ended August 31, 2012. During the nine months ended August 31, 2012, the Company recorded a tax benefit of $416.6 million, primarily related to the reversal of the Company's valuation allowance. During the three months ended August 31, 2011, the Company recorded a provision for income taxes of $0.6 million, primarily related to interest accrued for income taxes. During the nine months ended August 31, 2011, the Company recorded a tax benefit of $0.9 million, primarily related to the resolution of issues with certain taxing authorities.
At August 31, 2012 and November 30, 2011, the Company had $12.3 million and $36.7 million of gross unrecognized tax benefits. If the Company were to recognize its gross unrecognized tax benefits as of August 31, 2012, $5.5 million would affect the Company’s effective tax rate. The Company expects the total amount of unrecognized tax benefits to decrease by $3.8 million within twelve months as a result of settlements with various taxing authorities.
During the nine months ended August 31, 2012, the Company’s gross unrecognized tax benefits decreased by $24.4 million primarily as a result of the resolution of an IRS examination, which included a settlement for certain losses carried back to prior years and the settlement of certain tax accounting method items. The decrease in gross unrecognized tax benefits reduced the Company’s effective tax rate from (300.83%) to (301.55%). As a result of the partial reversal of the valuation allowance against the Company's deferred tax assets, the effective tax rate is not reflective of the Company's historical tax rate.
At August 31, 2012, the Company had $23.9 million accrued for interest and penalties, of which $3.3 million and $5.3 million, respectively, was recorded during the three and nine months ended August 31, 2012. During the three and nine months ended August 31, 2012, the accrual for interest and penalties was reduced by $0.1 million and $1.4 million as a result of the payment of interest due to the settlement of an IRS examination and various state issues. At November 30, 2011, the Company had $20.0 million accrued for interest and penalties.
The IRS is currently examining the Company’s federal income tax returns for fiscal years 2009 through 2011, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal year 2005 and subsequent years. The Company participates in an IRS examination program, Compliance Assurance Process, "CAP." This program operates as a contemporaneous exam throughout the year in order to keep exam cycles current and achieve a higher level of compliance.

15



(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)
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
87,109

 
20,730

 
554,780

 
61,921

Less: distributed earnings allocated to nonvested shares
151

 
94

 
378

 
288

Less: undistributed earnings allocated to nonvested shares
1,378

 
164

 
8,411

 
504

Numerator for basic earnings per share
85,580

 
20,472

 
545,991

 
61,129

Plus: interest on 2.00% convertible senior notes due 2020 and
    3.25% convertible senior notes due 2021
2,710

 
871

 
8,504

 
2,614

Plus: undistributed earnings allocated to convertible shares
1,378

 
164

 
8,411

 
503

Less: undistributed earnings reallocated to convertible shares
1,215

 
166

 
7,352

 
508

Numerator for diluted earnings per share
$
88,453

 
21,341

 
555,554

 
63,738

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average
    common shares outstanding
186,761

 
184,665

 
186,397

 
184,480

Effect of dilutive securities:
 
 
 
 
 
 
 
Shared based payments
1,087

 
482

 
1,015

 
620

Convertible senior notes
31,732

 
10,005

 
29,723

 
10,005

Denominator for diluted earnings per share - weighted average
    common shares outstanding
219,580

 
195,152

 
217,135

 
195,105

Basic earnings per share
$
0.46

 
0.11

 
2.93

 
0.33

Diluted earnings per share
$
0.40

 
0.11

 
2.56

 
0.33

For the three months ended August 31, 2012, there were no options to purchase shares of Class A stock that were outstanding and anti-dilutive. For three months ended August 31, 2011, options to purchase 0.7 million shares of Class A stock were outstanding and anti-dilutive. Options to purchase 0.3 million and 1.2 million shares, respectively, in total of Class A and Class B common stock were outstanding and anti-dilutive for the nine months ended August 31, 2012 and 2011.


16



(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Cash and cash equivalents
$
80,475

 
55,454

Restricted cash
12,682

 
16,319

Receivables, net (1)
131,293

 
220,546

Loans held-for-sale (2)
421,840

 
303,780

Loans held-for-investment, net
21,672

 
24,262

Investments held-to-maturity
33,366

 
48,860

Goodwill
34,046

 
34,046

Other (3)
44,063

 
36,488

 
$
779,437

 
739,755

Liabilities:
 
 
 
Notes and other debts payable
$
357,713

 
410,134

Other (4)
166,592

 
152,601

 
$
524,305

 
562,735

(1)
Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 31, 2012 and November 30, 2011, 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 $11.7 million and $4.2 million, respectively, as of August 31, 2012 and November 30, 2011.
(4)
Other liabilities include $79.1 million and $75.4 million, respectively, as of August 31, 2012 and November 30, 2011, 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 $4.0 million and $1.4 million, respectively, as of August 31, 2012 and November 30, 2011.
At August 31, 2012, the Lennar Financial Services segment had a 364-day warehouse repurchase facility with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $50 million that matures in February 2013, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $150 million that matures in June 2013, and another 364-day warehouse repurchase facility with a maximum aggregate commitment of $200 million that matures in July 2013. As of August 31, 2012, the maximum aggregate commitment and uncommitted amount under these facilities totaled $450 million and $50 million, respectively.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $357.7 million and $410.1 million, respectively, at August 31, 2012 and November 30, 2011, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $383.2 million and $431.6 million, respectively, at August 31, 2012 and November 30, 2011. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Substantially all of the loans the Lennar 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 agreement. There has been an increased industry-wide effort by purchasers to defray their losses in an unfavorable economic environment by purporting to have found inaccuracies related 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

17



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 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)
2012
 
2011
 
2012
 
2011
Loan origination liabilities, beginning of period
$
6,198

 
9,951

 
6,050

 
9,872

Provision for losses during the period
165

 
118

 
380

 
247

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

 

 
253

 
(50
)
Payments/settlements (1)
(209
)
 
(3,174
)
 
(529
)
 
(3,174
)
Loan origination liabilities, end of period
$
6,154

 
6,895

 
6,154

 
6,895

(1)
Payments/settlements during the three months ended August 31, 2011 include a settlement the Company paid to one of its largest investors, which settled all outstanding and potential future repurchase demands related to originations sold to them prior to 2009.
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 as of August 31, 2012 and November 30, 2011 was $7.4 million and $8.8 million, respectively. At August 31, 2012, the recorded investment in the impaired loans with a valuation allowance was $2.7 million, net of an allowance of $4.7 million. At November 30, 2011, the recorded investment in the impaired loans with a valuation allowance was $3.7 million, net of an allowance of $5.1 million. The average recorded investment in impaired loans totaled $3.0 million and $3.2 million, respectively, for the three and nine months ended August 31, 2012. The average recorded investment in impaired loans totaled $3.8 million and $4.0 million, respectively, for the three and nine months ended August 31, 2011.

(8)
Rialto Investments Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Cash and cash equivalents
$
72,679

 
83,938

Defeasance cash to retire notes payable
185,975

 
219,386

Loans receivable, net
496,802

 
713,354

Real estate owned - held-for-sale
115,718

 
143,677

Real estate owned - held-and-used, net
647,227

 
582,111

Investments in unconsolidated entities
101,668

 
124,712

Investments held-to-maturity
14,771

 
14,096

Other
39,552

 
15,874

 
$
1,674,392

 
1,897,148

Liabilities:
 
 
 
Notes payable
$
594,813

 
765,541

Other
19,577

 
30,579

 
$
614,390

 
796,120


18



Rialto’s operating earnings (loss) were as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
37,194

 
42,065

 
102,874

 
118,283

Costs and expenses
46,396

 
33,562

 
109,964

 
94,184

Rialto Investments equity in earnings (loss) from unconsolidated entities
13,551

 
(6,505
)
 
37,578

 
(4,953
)
Rialto Investments other income (expense), net
(10,063
)
 
9,743

 
(23,675
)
 
38,275

Operating earnings (loss) (1)
$
(5,714
)
 
11,741

 
6,813

 
57,421

(1)
Operating earnings (loss) for the three and nine months ended August 31, 2012 include net loss attributable to noncontrolling interests of $13.4 million and $14.6 million, respectively. Operating earnings (loss) for the three and nine months ended August 31, 2011 include net earnings attributable to noncontrolling interests of $6.1 million and $30.9 million, respectively.
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. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of August 31, 2012 and November 30, 2011, the notes payable balance was $470.0 million and $626.9 million, respectively; however, as of August 31, 2012 and November 30, 2011, $186.0 million and $219.4 million, respectively, of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account are being and will be used to retire the notes payable upon their maturity. During the nine months ended August 31, 2012, the LLCs retired $156.9 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.
The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. At August 31, 2012, these consolidated LLCs had total combined assets and liabilities of $1.2 billion and $0.5 billion, respectively. At November 30, 2011, these consolidated LLCs had total combined assets and liabilities of $1.4 billion and $0.7 billion, 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. During the nine months ended August 31, 2012, the Company retired $13 million principal amount of the 5-year senior unsecured note.
The following table displays the loans receivable by aggregate collateral type:
(In thousands)
August 31,
2012
 
November 30,
2011
Land
$
249,065

 
348,234

Single family homes
105,273

 
152,265

Commercial properties
96,959

 
172,799

Multi-family homes
23,186

 
28,108

Other
22,319

 
11,948

Loans receivable
$
496,802

 
713,354


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.

19



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 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.
The outstanding balance and carrying value of loans accounted for under ASC 310-30 was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Outstanding principal balance
$
903,402

 
1,331,094

Carrying value
$
446,216

 
639,642

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the nine months ended August 31, 2012 and 2011were as follows:
(In thousands)
August 31,
2012
 
August 31,
2011
Accretable yield, beginning of period
$
209,480

 
396,311

Additions
43,306

 
16,173

Deletions
(71,830
)
 
(72,864
)
Accretions
(58,108
)
 
(87,549
)
Accretable yield, end of period
$
122,848

 
252,071

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent loan impairments 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, 2012
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
28,682

 
4,203

 
5,365

 
9,568

Single family homes
24,357

 
2,217

 
11,744

 
13,961

Commercial properties
35,996

 
919

 
20,992

 
21,911

Multi-family homes
10,928

 

 
5,146

 
5,146

Loans receivable
$
99,963

 
7,339

 
43,247

 
50,586


20



November 30, 2011
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
75,557

 

 
24,692

 
24,692

Single family homes
55,377

 
1,956

 
13,235

 
15,191

Commercial properties
48,293

 
2,660

 
24,434

 
27,094

Multi-family homes
16,750

 

 
6,735

 
6,735

Other
405

 

 

 

Loans receivable
$
196,382

 
4,616

 
69,096

 
73,712

The average recorded investment in impaired loans totaled approximately $62 million and $183 million, respectively, for the nine months ended August 31, 2012 and 2011.
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. As of August 31, 2012, the Company had an allowance on these loans of $14.1 million. During both the three and nine months ended August 31, 2012, the Company recorded $17.1 million of provision for loan losses offset by charge-offs of $3.0 million upon foreclosure of the loans. As of November 30, 2011, the Company did not have an allowance for losses against accrual loans.
Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. Although the Company believes the recorded investment balance will ultimately be realized, 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, 2012 and November 30, 2011, the Company had an allowance on these loans of $3.0 million and $0.8 million, respectively. During the three months ended August 31, 2012 and 2011, the Company recorded $3.2 million and $5.2 million, respectively, of provision for loan losses offset by charge-offs of $0.4 million and $5.2 million, respectively, upon foreclosure of the loans. During the nine months ended August 31, 2012 and 2011, the Company recorded $5.5 million and $12.1 million, respectively, of provision for loan losses offset by charge-offs of $3.3 million and $12.1 million, respectively, upon foreclosure of the loans.
Accrual and nonaccrual loans receivable by risk categories were as follows:
August 31, 2012
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
239,497

 
9,568

 
249,065

Single family homes
91,312

 
13,961

 
105,273

Commercial properties
75,048

 
21,911

 
96,959

Multi-family homes
18,040

 
5,146

 
23,186

Other
22,319

 

 
22,319

Loans receivable
$
446,216

 
50,586

 
496,802


21



November 30, 2011
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
323,542

 
24,692

 
348,234

Single family homes
137,074

 
15,191

 
152,265

Commercial properties
145,705

 
27,094

 
172,799

Multi-family homes
21,373

 
6,735

 
28,108

Other
11,948

 

 
11,948

Loans receivable
$
639,642

 
73,712

 
713,354

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 suggest 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.
Upon the acquisition of REO through loan foreclosure, gains and losses are recorded in Rialto Investments other income (expense), net. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain upon foreclosure. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is generally recorded as a provision for loan losses.
At times, the Company may foreclose on a loan from an accrual loan pool in which the removal of the loan does not cause an overall decrease in the expected cash flows of the loan pool, and as such, no provision for loan losses is required to be recorded. However, the amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is recorded as an unrealized loss upon foreclosure.
The following tables present the activity in REO
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
REO - held-for-sale, beginning of period
$
113,115

 
514,249

 
143,677

 
250,286

Additions
6,428

 
125,881

 
7,783

 
406,090

Improvements
1,439

 
7,250

 
7,438

 
15,484

Sales
(27,956
)
 
(31,700
)
 
(110,010
)
 
(52,254
)
Impairments
(810
)
 

 
(2,432
)
 

Transfers to Lennar Homebuilding
(7,431
)
 

 
(11,335
)
 
(3,926
)
Transfers to/from held-and-used, net (1)
30,933

 

 
80,597

 

REO - held-for-sale, end of period
$
115,718

 
615,680

 
115,718

 
615,680


22



 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
REO - held-and-used, net, beginning of period
$
634,401

 
16,467

 
582,111

 
7,818

Additions
44,958

 
35,246

 
154,633

 
43,980

Improvements
2,070

 

 
2,850

 

Sales

 

 
(981
)
 

Impairments
(1,880
)
 

 
(5,153
)
 

Depreciation
(1,389
)
 
(61
)
 
(5,636
)
 
(146
)
Transfers to/from held-for-sale (1)
(30,933
)
 

 
(80,597
)
 

REO - held-and-used, net, end of period
$
647,227

 
51,652

 
647,227

 
51,652

(1)
During the three and nine months ended August 31, 2012, the Rialto segment transferred certain properties to/from REO held-and-used, net to/from 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, 2012, the Company recorded $2.5 million and $10.9 million, respectively, of gains from sales of REO. For the three and nine months ended August 31, 2011, the Company recorded $2.7 million and $3.0 million, respectively, of gains from sales of REO. For the three and nine months ended August 31, 2012, the Company recorded gains (losses) of ($2.0) million and $1.7 million, respectively, from acquisitions of REO through foreclosure. For the three and nine months ended August 31, 2011, the Company recorded $18.9 million and $53.9 million, respectively, of gains from acquisitions of REO through foreclosure. These gains (losses) are recorded in Rialto Investments other income (expense), net.
Investments
In 2010, the Rialto segment invested in approximately $43 million of non-investment grade commercial mortgage-backed securities (“CMBS”) for $19.4 million, representing a 55% discount to par value. The CMBS have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. 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 both the three and nine months ended August 31, 2012 and 2011. During the nine months ended August 31, 2011, the Rialto segment sold a portion of its CMBS for $11.1 million, resulting in a gain on sale of CMBS of $4.7 million. The carrying value of the investment securities at August 31, 2012 and November 30, 2011, was $14.8 million and $14.1 million, respectively. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In addition to the acquisition and management of the FDIC Portfolios and Bank Portfolios, an affiliate in the Rialto segment is a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor receives management fees for sub-advisory services. The Company committed to invest $75 million, of the total equity commitments of approximately $1.2 billion made by private investors in this fund and the U.S. Treasury committed to a matching amount of approximately $1.2 billion of equity in the fund, as well as agreed to extend up to approximately $2.3 billion of debt financing. During the nine months ended August 31, 2012, the Company contributed $1.9 million. and received distributions of $75.6 million. During the three months ended August 31, 2012, the AB PPIP fund started unwinding its operations and as a result the Company received $71.5 million in distributions. The Company also earned $8.1 million in fees from the segment's role as a sub-advisor to the AB PPIP fund, which were included in the Rialto Investments revenue. As of August 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the AB PPIP fund was $12.5 million and $65.2 million, respectively. Monetization of the remaining securities in the AB PPIP fund is being finalized and liquidating distributions are expected during the fourth quarter of 2012.
In 2010, the Rialto segment completed its first closing of a real estate investment fund (the “Fund”) with initial equity commitments of approximately $300 million (including $75 million committed by the Company, of which the remaining outstanding commitment as of August 31, 2012 was $14.8 million). The Fund was determined to have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, 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 Fund’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in the statement of operations of the Fund, the Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.
As of August 31, 2012, the equity commitments of the Fund were $700 million (including the $75 million committed by the Company). During the three and nine months ended August 31, 2012, the Company contributed $8.8 million and $26.8

23



million, respectively, to the Fund. Of the total contributions during the nine months ended August 31, 2012, $13.9 million was distributed back to the Company as a return of capital contributions due to a securitization within the Fund. As of August 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Fund was $79.8 million and $50.1 million, respectively. For the three and nine months ended August 31, 2012, the Company’s share of earnings from the Fund was $6.2 million and $16.8 million, respectively. For the three and nine months ended August 31, 2011, the Company's share of earnings from the Fund was $1.3 million and $0.9 million, respectively.
Additionally, another subsidiary in the Rialto segment has approximately a 5% investment in a service and infrastructure provider to the residential home loan market (the “Servicer Provider”), which provides services to the consolidated LLCs, among others. As of August 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Servicer Provider was $8.7 million and $8.8 million, respectively.
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)
August 31,
2012
 
November 30,
2011
Assets (1):
 
 
 
Cash and cash equivalents
$
192,212

 
60,936

Loans receivable
392,251

 
274,213

Real estate owned
147,306

 
47,204

Investment securities
712,636

 
4,336,418

Other assets
200,760

 
171,196

 
$
1,645,165

 
4,889,967

Liabilities and equity (1):
 
 
 
Accounts payable and other liabilities
$
116,946

 
320,353

Notes payable
160,310

 
40,877

Partner loans
163,516

 
137,820

Debt due to the U.S. Treasury

 
2,044,950

Equity
1,204,393

 
2,345,967

 
$
1,645,165

 
4,889,967

(1)
During the three months ended August 31, 2012, the AB PPIP fund started unwinding its operations by selling its investments. Therefore, the assets of the Rialto Investments unconsolidated entities decreased significantly from November 30, 2011 to August 31, 2012. Monetization of the remaining securities in the AB PPIP fund is being finalized and liquidating distributions are expected during the fourth quarter of 2012.
Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
115,800

 
122,153

 
357,328

 
355,085

Costs and expenses
75,233

 
53,183

 
178,414

 
139,699

Other income (expense), net (1)
366,696

 
(303,141
)
 
670,471

 
(382,271
)
Net earnings (loss) of unconsolidated entities
$
407,263

 
(234,171
)
 
849,385

 
(166,885
)
Rialto Investments equity in earnings (loss) from unconsolidated entities
$
13,551

 
(6,505
)
 
37,578

 
(4,953
)
(1)
Other income (expense), net, for the three and nine months ended August 31, 2012 includes the AB PPIP Fund's mark-to-market unrealized gains and unrealized losses, as well as realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, all of which the Company’s portion is a small percentage. Other income (expense), net, for the three and nine months ended August 31, 2011 includes the AB PPIP Fund’s mark-to-market unrealized gains and unrealized losses, of which the Company’s portion is a small percentage.

24



(9)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of August 31, 2012 and November 30, 2011 included $121.6 million and $26.1 million, respectively, of cash held in escrow for approximately three days.

(10)
Lennar Homebuilding Restricted Cash
Restricted cash consists of customer deposits on home sales held in restricted accounts until title transfers to the homebuyer, as required by the state and local governments in which the homes were sold.

(11)
Lennar Homebuilding Senior Notes and Other Debts Payable

(Dollars in thousands)
August 31,
2012
 
November 30,
2011
5.95% senior notes due 2013
$
62,920

 
266,855

5.50% senior notes due 2014
249,128

 
248,967

5.60% senior notes due 2015
500,769

 
500,999

6.50% senior notes due 2016
249,851

 
249,819

4.75% senior notes due 2017
400,000

 

12.25% senior notes due 2017
394,457

 
393,700

6.95% senior notes due 2018
247,873

 
247,598

2.00% convertible senior notes due 2020
276,500

 
276,500

2.75% convertible senior notes due 2020
398,390

 
388,417

3.25% convertible senior notes due 2021
400,000

 
350,000

Mortgages notes on land and other debt
491,707

 
439,904

 
$
3,671,595

 
3,362,759


At August 31, 2012, the Company had a $150 million Letter of Credit and Reimbursement Agreement ("LC Agreement") with certain financial institutions, which may be increased to $200 million, but for which there are currently no commitments for the additional $50 million. At August 31, 2012, the Company also had a $50 million Letter of Credit and Reimbursement Agreement with certain financial institutions that had a $50 million accordion feature for which there are currently no commitments, and a $200 million Letter of Credit Facility with a financial institution. Additionally, in May 2012, the Company entered into a 3-year unsecured revolving credit facility (the "Credit Facility") with certain financial institutions that expires in May 2015. As of August 31, 2012, the maximum aggregate commitment under the Credit Facility was $525 million, of which $440 million is committed and $85 million is available through an accordion feature, subject to additional commitments. Subsequent to August 31, 2012, the committed amount under the Credit Facility was increased to $500 million. As of August 31, 2012, the Company had no outstanding borrowings under the Credit Facility. The Company believes it was in compliance with its debt covenants at August 31, 2012.
The Company’s performance letters of credit outstanding were $100.3 million and $68.0 million, respectively, at August 31, 2012 and November 30, 2011. The Company’s financial letters of credit outstanding were $201.2 million and $199.3 million, respectively, at August 31, 2012 and November 30, 2011. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at August 31, 2012, the Company had outstanding performance and surety bonds related to site improvements at various projects (including certain projects in the Company’s joint ventures) of $591.2 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of August 31, 2012, there were approximately $319.9 million, or 54%, of anticipated future costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds, but if any such draws occur, the Company does not believe they would have a material effect on its financial position, results of operations or cash flows.
In the three months ended August 31, 2012, the Company issued $400 million aggregate principal amount of 4.75% senior notes due 2017 (the "4.75% Senior Notes") at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were $396.2 million. The Company used a portion of the net proceeds of the sale of the 4.75% Senior Notes to fund purchases pursuant to its tender offer for its 5.95% senior notes due 2013 ("5.95% Senior Notes"). The Company

25



will use the remaining net proceeds of the sale of the 4.75% Senior Notes for working capital and general corporate purposes. Interest on the 4.75% Senior Notes is due semi-annually beginning October 15, 2012. The 4.75% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's wholly owned homebuilding subsidiaries. At August 31, 2012, the carrying amount of the 4.75% Senior Notes was $400.0 million.
During the three months ended August 31, 2012, the Company repurchased $204.7 million aggregate principal amount of its 5.95% Senior Notes through a tender offer that ran from July 17, 2012 through August 14, 2012, resulting in a pre-tax loss of $6.5 million, included in Lennar Homebuilding other income (expense), net.
In November 2011, the Company issued $350.0 million aggregate principal amount of 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”). During the three months ended February 29, 2012, the initial purchasers of the 3.25% Convertible Senior Notes purchased an additional $50 million aggregate principal amount to cover over-allotments. At August 31, 2012 and November 30, 2011, the carrying and principal amount of the 3.25% Convertible Senior Notes was $400.0 million and $350.0 million, respectively. The 3.25% Convertible Senior Notes are convertible into shares of Class A common stock at any time prior to maturity or redemption at the initial conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of the 3.25% Convertible Senior Notes or 17,022,200 Class A common shares if all the 3.25% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $23.50 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. Holders of the 3.25% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest on November 15, 2016. The Company has the right to redeem the 3.25% Convertible Senior Notes at any time on or after November 20, 2016 for 100% of their principal amount, plus accrued but unpaid interest.
The 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”) are convertible into cash, shares of Class A common stock or a combination of both, at the Company’s election. However, it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash. Prior to the second quarter of 2012, the shares were not historically included in the calculation of diluted earnings per share primarily because it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash and the Company's volume weighted average stock price did not exceed the conversion price. However, the Company’s volume weighted average stock price for the three months ended August 31, 2012 was $28.88, which exceeded the conversion price, thus 4.7 million shares were included in the calculation of diluted earnings per share. For the nine months ended August 31, 2012, 2.7 million shares were included in the calculation of diluted earnings per share. Holders may convert the 2.75% Convertible Senior Notes at the initial conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount or 20,150,012 Class A common shares if all the 2.75% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $22.13 per share of Class A common stock. Holders of the 2.75% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on December 15, 2015. The Company has the right to redeem the 2.75% Convertible Senior Notes at any time on or after December 20, 2015 for 100% of their principal amount, plus accrued but unpaid interest.
Certain provisions under ASC 470, Debt, require the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The Company has applied these provisions to its 2.75% Convertible Senior Notes. At both August 31, 2012 and November 30, 2011, the principal amount of the 2.75% Convertible Senior Notes was $446.0 million. At August 31, 2012 and November 30, 2011, the carrying amount of the equity component included in stockholders’ equity was $47.6 million and $57.6 million, respectively, and the net carrying amount of the 2.75% Convertible Senior Notes included in Lennar Homebuilding senior notes and other debts payable was $398.4 million and $388.4 million, respectively.
The 2.00% convertible senior notes due 2020 (the “2.00% Convertible Senior Notes”) are convertible into shares of Class A common stock at the initial conversion rate of 36.1827 shares of Class A common stock per $1,000 principal amount of the 2.00% Convertible Senior Notes or 10,004,517 Class A common shares if all the 2.00% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $27.64 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. At both August 31, 2012 and November 30, 2011, the carrying and principal amount of the 2.00% Convertible Senior Notes was $276.5 million. Holders of the 2.00% Convertible Senior Notes have the right to require the Company to repurchase them for cash equal to 100% of their principal amount , plus accrued but unpaid interest, on each of December 1, 2013 and December 1, 2015. The Company has the right to redeem the 2.00% Convertible Senior Notes at any time on or after December 1, 2013 for 100% of their principal amount, plus accrued but unpaid interest.


26



(12)
Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in other liabilities in the accompanying condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Warranty reserve, beginning of period
$
84,488

 
91,177

 
88,120

 
109,179

Warranties issued during the period
9,469

 
7,070

 
24,430

 
18,408

Adjustments to pre-existing warranties from changes in estimates
766

 
4,894

 
5,813

 
4,856

Payments
(9,942
)
 
(11,234
)
 
(33,582
)
 
(40,536
)
Warranty reserve, end of period
$
84,781

 
91,907

 
84,781

 
91,907

As of August 31, 2012, the Company has identified approximately 1,000 homes delivered in Florida primarily during its 2006 and 2007 fiscal years that are confirmed to have had defective Chinese drywall and resulting damage. This represents a small percentage of homes the Company delivered nationally (1.2%) during those fiscal years. Defective Chinese drywall is an industry-wide issue as other homebuilders have publicly disclosed that they have experienced similar issues with defective Chinese drywall. Based on its efforts to date, the Company has not identified defective Chinese drywall in homes delivered by the Company outside of Florida. The Company has replaced defective Chinese drywall when it has been found in homes the Company has built.
Through August 31, 2012, the Company has accrued $82.2 million of warranty reserves related to homes confirmed as having defective Chinese drywall, as well as an estimate for homes not yet inspected that may contain Chinese drywall. There were no additional amounts accrued during either the three or nine months ended August 31, 2012. As of August 31, 2012 and November 30, 2011, the warranty reserve related to Chinese drywall, net of payments, was $3.9 million and $9.1 million, respectively. The Company has received, and continues to seek, reimbursement from its subcontractors, insurers and others for costs the Company has incurred or expects to incur to investigate and repair defective Chinese drywall and resulting damage. During the three and nine months ended August 31, 2012, the Company received payments of $0.6 million and $0.9 million, respectively, through third party recoveries relative to the costs it has incurred and expects to incur remedying the homes confirmed and estimated to have defective Chinese drywall and resulting damage. During the three and nine months ended August 31, 2011, the Company received payments of $0.9 million and $3.3 million, respectively, through third party recoveries relative to the costs it has incurred and expects to incur remedying the homes confirmed and estimated to have defective Chinese drywall and resulting damage.

(13)
Share-Based Payment
During the three months ended August 31, 2012, the Company did not grant any stock options and issued 1.2 million nonvested shares. During the nine months ended August 31, 2012, the Company granted an immaterial number of stock options and issued 1.3 million nonvested shares. During both the three and nine months ended August 31, 2011, the Company granted an immaterial number of stock options and nonvested shares. Compensation expense related to the Company’s share-based payment awards was as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Stock options
$
580

 
925

 
2,380

 
3,219

Nonvested shares
7,669

 
3,789

 
21,801

 
13,001

Total compensation expense for share-based awards
$
8,249

 
4,714

 
24,181

 
16,220



27



(14)
Financial Instruments
GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at August 31, 2012 and November 30, 2011, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, defeasance cash to retire notes payable, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities of these instruments.
 
 
 
August 31, 2012
 
November 30, 2011
 
Fair Value
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Hierarchy
 
Amount
 
Value
 
Amount
 
Value
ASSETS
 
 
 
 
 
 
 
 
 
Rialto Investments:
 
 
 
 
 
 
 
 
 
Loans receivable, net
Level 3
 
$
496,802

 
513,160

 
713,354

 
749,382

Investments held-to-maturity
Level 3
 
$
14,771

 
14,662

 
14,096

 
13,996

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Loans held-for-investment, net
Level 3
 
$
21,672

 
19,513

 
24,262

 
22,736

Investments held-to-maturity
Level 2
 
$
33,366

 
33,376

 
48,860

 
47,651

LIABILITIES
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Senior notes and other debts payable
Level 2
 
$
3,671,595

 
4,454,509

 
3,362,759

 
3,491,212

Rialto Investments:
 
 
 
 
 
 
 
 
 
Notes payable
Level 2
 
$
594,813

 
576,151

 
765,541

 
729,943

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Notes and other debts payable
Level 2
 
$
357,713

 
357,713

 
410,134

 
410,134

The following methods and assumptions are used by the Company in estimating fair values:
Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates.
Rialto Investments—The fair values for loans receivable is based on discounted cash flows, or the fair value of the collateral less estimated cost to sell. The fair value for investments held-to-maturity is based on discounted cash flows. For notes payable, the fair value of the zero percent interest notes guaranteed by the FDIC was calculated based on a 3-year treasury yield, and the fair value of other notes payable was calculated based on discounted cash flows using the Company’s weighted average borrowing rate.
Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information.

28



The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
Financial Instruments
Fair Value
Hierarchy
 
Fair Value at
August 31,
2012
 
Fair Value at
November 30,
2011
(In thousands)
 
 
 
 
 
Lennar Financial Services:
 
 
 
 
 
Loans held-for-sale (1)
Level 2
 
$
421,840

 
303,780

Mortgage loan commitments
Level 2
 
$
11,658

 
4,192

Forward contracts
Level 2
 
$
(3,956
)
 
(1,404
)
Lennar Homebuilding:
 
 
 
 
 
Investments available-for-sale
Level 3
 
$
19,045

 
42,892

(1)
The aggregate fair value of loans held-for-sale of $421.8 million at August 31, 2012 exceeds their aggregate principal balance of $402.6 million by $19.2 million. The aggregate fair value of loans held-for-sale of $303.8 million at November 30, 2011 exceeds their aggregate principal balance of $292.2 million by $11.6 million.
The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values:
Loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of August 31, 2012 and November 30, 2011. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.
Mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments.
Forward contracts— Fair value is based on quoted market prices for similar financial instruments.
Investments available-for-sale— The fair value of these investments are based on third party valuations.
Gains and losses of Lennar Financial Services financial instruments measured at fair value from initial measurement and subsequent changes in fair value are recognized in the Lennar Financial Services segment’s operating earnings. There were no gains or losses recognized for the Lennar Homebuilding investments available-for-sale during both the three and nine months ended August 31, 2012. The changes in fair values that are included in operating earnings are shown, by financial instrument and financial statement line item below:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Changes in fair value included in Lennar Financial Services revenues:
 
 
 
 
 
 
 
Loans held-for-sale
$
5,403

 
1,896

 
7,694

 
4,590

Mortgage loan commitments
$
281

 
2,239

 
7,466

 
5,903

Forward contracts
$
1,478

 
265

 
(2,552
)
 
(6,106
)
Interest income on loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded in interest income in the Lennar Financial Services’ statement of operations.

29



The following table represents a reconciliation of the beginning and ending balance for the Company’s Level 3 recurring fair value measurements (investments available-for-sale) included in the Lennar Homebuilding segment’s other assets:
 
Three Months Ended
 
Nine Months Ended
(In thousands)
August 31, 2012
Investments available-for-sale, beginning of period
$
24,306

 
42,892

Purchases and other (1)

 
20,998

Sales
(4,092
)
 
(10,528
)
Settlements (2)
(1,169
)
 
(34,317
)
Investments available-for-sale, end of period
$
19,045

 
19,045

(1)
Represents investments in community development district bonds that mature at various dates between 2022 and 2042.
(2)
The investments available-for-sale that were settled during both the three and nine months ended August 31, 2012 related to investments in community development district bonds, which were in default by the borrower and regarding which the Company foreclosed on the underlying real estate collateral. Therefore, these investments were reclassified from other assets to land and land under development.
The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs and Rialto Investments real estate owned assets. The fair value included in the tables below represent only those assets whose carrying value were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:
Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Three Months Ended
August 31,
2012
 
Total Losses (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
8,049

 
(4,651
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (3)
Level 3
 
$
10,101

 
(2,682
)
REO - held-and-used, net (4)
Level 3
 
$
53,292

 
(2,006
)
(1)
Represents total losses due to valuation adjustments and total losses from acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended August 31, 2012.
(2)
Finished homes and construction in progress with an aggregate carrying value of $12.7 million were written down to their fair value of $8.0 million, resulting in valuation adjustments of $4.7 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended August 31, 2012.
(3)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $8.3 million and a fair value of $6.4 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO, held-for-sale, were $1.9 million. As part of management’s periodic valuations of its REO, held-for-sale, during the three months ended August 31, 2012, REO, held-for-sale, with an aggregate value of $4.5 million were written down to their fair value of $3.7 million, resulting in impairments of $0.8 million. These losses and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2012.
(4)
REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $45.1 million and a fair value of $45.0 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO, held-and-used, net, were $0.1 million. As part of management’s periodic valuations of its REO, held-and-used, net, during the three months ended August 31, 2012, REO, held-and-used, net, with an aggregate value of $10.2 million were written down to their fair value of $8.3 million, resulting in impairments of $1.9 million. These losses and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2012.

30



Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Three Months Ended
August 31,
2011
 
Total Losses (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
18,711

 
(9,662
)
Investments in unconsolidated entities (3)
Level 3
 
$
12,644

 
(2,077
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (4)
Level 3
 
$
125,881

 
18,375

REO - held-and-used, net (5)
Level 3
 
$
35,246

 
465

(1)
Represents total losses due to valuation adjustments and total gains from acquisitions of real estate through foreclosure recorded during the three months ended August 31, 2011.
(2)
Finished homes and construction in progress with an aggregate carrying value of $28.4 million were written down to their fair value of $18.7 million, resulting in valuation adjustments of $9.7 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended August 31, 2011.
(3)
Lennar Homebuilding investments in unconsolidated entities with an aggregate carrying value of $14.7 million were written down to their fair value of $12.6 million, resulting in valuation adjustments of $2.1 million, which were included in Lennar Homebuilding other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2011.
(4)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $107.5 million and a fair value of $125.9 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $18.4 million and are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2011.
(5)
REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $34.7 million and a fair value of $35.2 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $0.5 million and are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2011.
Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Nine Months Ended
August 31,
2012
 
Total Losses (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
10,810

 
(9,080
)
Land and land under development (3)
Level 3
 
$
13,318

 
(332
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (4)
Level 3
 
$
23,967

 
(4,870
)
REO - held-and-used, net (5)
Level 3
 
$
173,665

 
(1,051
)
(1)
Represents total losses due to valuation adjustments and net losses on REO which includes REO impairments partially offset by gains from acquisition of real estate through foreclosure recorded during the nine months ended August 31, 2012.
(2)
Finished homes and construction in progress with an aggregate carrying value of $19.9 million were written down to their fair value of $10.8 million, resulting in valuation adjustments of $9.1 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the nine months ended August 31, 2012.
(3)
Land and land under development with an aggregate carrying value of $13.6 million were written down to their fair value of $13.3 million, resulting in valuation adjustments of $0.3 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the nine months ended August 31, 2012.
(4)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $10.2 million and a fair value of $7.8 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO, held-for-sale, were 2.4 million. As part of management’s

31



periodic valuations of its REO, held-for-sale, during the nine months ended August 31, 2012, REO, held-for-sale, with an aggregate value of $18.6 million were written down to their fair value of $16.2 million, resulting in impairments of $2.4 million. These losses and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2012.
(5)
REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $150.6 million and a fair value of $154.7 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $4.1 million. As part of management’s periodic valuations of its REO, held-and-used, net, during the nine months ended August 31, 2012, REO, held-and-used, net, with an aggregate value of $24.2 million were written down to their fair value of $19.0 million, resulting in impairments of $5.2 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2012.
Non-financial assets
Fair Value
Hierarchy
 
Fair Value
Nine Months Ended
August 31,
2011
 
Total Losses (1)
(In thousands)
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
25,761

 
(17,802
)
Investments in unconsolidated entities (3)
Level 3
 
$
42,855

 
(10,489
)
Rialto Investments:
 
 
 
 
 
REO - held-for-sale (4)
Level 3
 
$
406,090

 
52,865

REO - held-and-used, net (5)
Level 3
 
$
43,980

 
1,015

(1)
Represents total losses due to valuation adjustments and total gains from acquisitions of real estate through foreclosure recorded during the nine months ended August 31, 2011.
(2)
Finished homes and construction in progress with an aggregate carrying value of $43.6 million were written down to their fair value of $25.8 million, resulting in valuation adjustments of $17.8 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended August 31, 2011.
(3)
Lennar Homebuilding investments in unconsolidated entities with an aggregate carrying value of $53.4 million were written down to their fair value of $42.9 million, resulting in valuation adjustments of $10.5 million, which were included in Lennar Homebuilding other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2011.
(4)
REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $353.2 million and a fair value of $406.1 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $52.9 million and are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2011.
(5)
REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $43.0 million and a fair value of $44.0 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $1.0 million and are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2011.
Finished homes and construction in progress are included within inventories. Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes, deposits on land purchase contracts and interest related to development and construction. Construction overhead and selling expenses are expensed as incurred. Homes held-for-sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated to homes within the respective areas. The Company reviews its inventory for indicators of impairment by evaluating each community during each reporting period. The inventory within each community is categorized as finished homes and construction in progress or land under development based on the development state of the community. There were 442 and 426 active communities, excluding unconsolidated entities, as of August 31, 2012 and 2011, respectively. If the undiscounted cash flows expected to be generated by a community are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such community to its estimated fair value.

32



In conducting its review for indicators of impairment on a community level, the Company evaluates, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales and the estimated fair value of the land itself. The Company pays particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales price and/or margins are trending downward and are anticipated to continue to trend downward. From this review, the Company identifies communities whose carrying values exceed their undiscounted cash flows.
The Company estimates the fair value of its communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above. For example, since the start of the downturn in the housing market, the Company has found ways to reduce its construction costs in many communities, and this reduction in construction costs in addition to change in product type in many communities has impacted future estimated cash flows.
Each of the homebuilding markets in which the Company operates is unique, as homebuilding has historically been a local business driven by local market conditions and demographics. Each of the Company’s homebuilding markets has specific supply and demand relationships reflective of local economic conditions. The Company’s projected cash flows are impacted by many assumptions. Some of the most critical assumptions in the Company’s cash flow model are projected absorption pace for home sales, sales prices and costs to build and deliver homes on a community by community basis.
In order to arrive at the assumed absorption pace for home sales included in the Company’s cash flow model, the Company analyzes its historical absorption pace in the community as well as other comparable communities in the geographical area. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics, unemployment rates and availability of competing product in the geographic area where the community is located. When analyzing the Company’s historical absorption pace for home sales and corresponding internal and external market studies, the Company places greater emphasis on more current metrics and trends such as the absorption pace realized in its most recent quarters as well as forecasted population demographics, unemployment rates and availability of competing product. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a trend and adjusts its historical information accordingly in order to develop assumptions on the projected absorption pace in the cash flow model for a community.
In order to determine the assumed sales prices included in its cash flow models, the Company analyzes the historical sales prices realized on homes it delivered in the community and other comparable communities in the geographical area as well as the sales prices included in its current backlog for such communities. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on sales prices in neighboring communities and sales prices on similar products in non-neighboring communities in the geographic area where the community is located. When analyzing its historical sales prices and corresponding market studies, the Company also places greater emphasis on more current metrics and trends such as future forecasted sales prices in neighboring communities as well as future forecasted sales prices for similar products in non-neighboring communities. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a trend and adjusts its historical information accordingly in order to develop assumptions on the projected sales prices in the cash flow model for a community.
In order to arrive at the Company’s assumed costs to build and deliver homes, the Company generally assumes a cost structure reflecting contracts currently in place with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. Costs assumed in the cash flow model for the Company’s communities are generally based on the rates the Company is currently obligated to pay under existing contracts with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure.
Since the estimates and assumptions included in the Company’s cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead the Company to incur additional impairment charges in the future.
Using all available information, the Company calculates its best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair

33



value also requires discounting the estimated cash flows at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset’s fair value depends on the community’s projected life and development stage. The Company generally uses a discount rate of approximately 20%, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory.
The Company estimates the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or assumptions change. For example, further market deterioration or changes in assumptions may lead to the Company incurring additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired but for which indicators of impairment may arise if further market deterioration occurs.
In the nine months ended August 31, 2012, the Company reviewed each of its homebuilding communities for potential indicators and performed detailed impairment calculations on 14 communities. The table below summarizes the most significant unobservable inputs used in the Company's discounted cash flow model to determine the fair value of its communities for which the Company recorded valuation adjustments during the nine months ended August 31, 2012:
Unobservable inputs
Range
Average selling price

$83,000

-
$310,000
Absorption rate per quarter (homes)
1

-
20
Discount rate
20%
The Company evaluates its investments in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in value of the Company’s investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value.
The evaluation of the Company’s investment in unconsolidated entities includes certain critical assumptions made by management: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors.
The Company’s assumptions on the projected future distributions from the unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The unconsolidated entities generally use a discount rate of approximately 20% in their reviews for impairment, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Company’s proportionate share is reflected in the Company’s homebuilding equity in earnings (loss) from unconsolidated entities with a corresponding decrease to its investment in unconsolidated entities. In certain instances, the Company may be required to record additional losses relating to its investment in unconsolidated entities, if the Company’s investment in the unconsolidated entity, or a portion thereof, is deemed to be other than temporarily impaired. These losses are included in Lennar Homebuilding other income, net.
Additionally, the Company considers various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, intent and ability for the Company to recover its investment in the entity, financial condition and long-term prospects of the entity, short-term liquidity needs of the unconsolidated entity, trends in the general economic environment of the land, entitlement status of the land held by the unconsolidated entity, overall projected returns on investment, defaults under contracts with third parties (including bank debt), recoverability of the investment through future cash flows and relationships with the other partners and banks. If the Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded.
REO represents real estate that the Rialto segment has taken control or has effective control of in partial or full satisfaction of loans receivable. At the time of acquisition of a property through foreclosure of a loan, REO is recorded at fair value less estimated costs to sell if classified as held-for-sale or at fair value if classified as held-and-used, which becomes the property’s new basis. The fair values of these assets 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 third party appraisals and internally developed analyses are significantly impacted by the local market economy, market supply and demand, competitive conditions and prices on comparable properties, adjusted for date of sale, location, property size, and other factors. Each REO is unique and is analyzed in the context of the particular market where the property is located. In order to establish the significant assumptions for a particular REO, the Company analyzes historical trends, including trends achieved by our local homebuilding operations, if applicable, and current trends in the market and economy impacting the REO. Using

34



available trend information, the Company then calculates its best estimate of fair value, which can include projected cash flows discounted at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. These methods use unobservable inputs to develop fair value for the Company’s REO. Due to the volume and variance of unobservable inputs, resulting from the uniqueness of each of the Company's REO, the Company does not use a standard range of unobservable inputs with respect to its evaluation of REO. However, for operating properties within REO, the Company may also use estimated cash flows multiplied by a capitalization rate to determine the fair value of the property. For the three and nine months ended August 31, 2012, the capitalization rates used to estimate fair value ranged from 5% to 13% and varied based on the location of the asset, asset type and occupancy rates for the operating properties.
Changes in economic factors, consumer demand and market conditions, among other things, could materially impact estimates used in the third party appraisals and/or internally prepared analyses of recent offers or prices on comparable properties. Thus, estimates can differ significantly from the amounts ultimately realized by the Rialto segment from disposition of these assets. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain on foreclosure in the Company’s statement of operations. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is initially recorded as an impairment in the Company’s statement of operations.

(15)
Consolidation of Variable Interest Entities
GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company’s variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management and development agreements between the Company and a VIE, (4) loans provided by the Company to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality, if any, between the Company and the other partner(s) and contracts to purchase assets from VIEs.
Generally, all major decision making in the Company’s joint ventures is shared between all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by the Company are nominal and believed to be at market and there is no significant economic disproportionality between the Company and other partners. Generally, the Company purchases less than a majority of the joint venture’s assets and the purchase prices under the Company’s option contracts are believed to be at market.
Generally, Lennar Homebuilding unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, the Company continues to fund operations and debt paydowns through partner loans or substituted capital contributions.
The Company evaluated the joint venture agreements of its joint ventures that were formed or that had reconsideration events during the nine months ended August 31, 2012. Based on the Company’s evaluation, it consolidated an entity within its Lennar Homebuilding segment that at August 31, 2012 had total assets of $7.3 million and an immaterial amount of liabilities. In addition, during the nine months ended August 31, 2012, there were no VIEs that were deconsolidated.
At August 31, 2012 and November 30, 2011, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $570.7 million and $545.8 million, respectively, and the Rialto segment’s investments in unconsolidated entities as of August 31, 2012 and November 30, 2011 were $101.7 million and $124.7 million, respectively.
Consolidated VIEs
As of August 31, 2012, the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $2.1 billion and $0.7 billion, respectively. Those assets are owned by, and those liabilities are obligations of, the VIEs, not the Company.
A VIE’s assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company’s senior notes or other debts payable. In addition, the assets held by a VIE usually are collateral for that VIE’s debt. The Company and

35



other partners do not generally have an obligation to make capital contributions to a VIE unless the Company and/or the other partner(s) have entered into debt guarantees with a VIE’s banks. Other than debt guarantee agreements with a VIE’s banks, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to a VIE. While the Company has option contracts to purchase land from certain of its VIEs, the Company is not required to purchase the assets and could walk away from the contracts.
Unconsolidated VIEs
The Company’s recorded investment in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:
As of August 31, 2012
(In thousands)
Investments in
Unconsolidated
VIEs
 
Lennar’s
Maximum
Exposure
to Loss
Lennar Homebuilding (1)
$
98,127

 
121,368

Rialto Investments (2)
35,972

 
35,972

 
$
134,099

 
157,340

As of November 30, 2011
(In thousands)
Investments in
Unconsolidated
VIEs
 
Lennar’s
Maximum
Exposure
to Loss
Lennar Homebuilding (1)
$
94,517

 
123,038

Rialto Investments (2)
88,076

 
95,576

 
$
182,593

 
218,614

(1)
At August 31, 2012, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investment in the unconsolidated VIEs, except with regard to $20.7 million of recourse debt of one of the unconsolidated VIEs, which is included in the Company’s maximum recourse related to Lennar Homebuilding unconsolidated entities, and a $2.2 million letter of credit outstanding for one of the unconsolidated VIEs that in the event of default under its debt agreement the letter of credit will be drawn upon. At November 30, 2011, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investment in the unconsolidated VIEs, except with regard to $28.3 million, respectively, of recourse debt of one of the unconsolidated VIEs, which is included in the Company’s maximum recourse related to Lennar Homebuilding unconsolidated entities.
(2)
At August 31, 2012, the maximum recourse exposure to loss of Rialto’s investment in unconsolidated VIEs was limited to its investments in the unconsolidated entities. During the three months ended August 31, 2012, the AB PPIP fund finalized its operations and started liquidating distributions; therefore, the Company does not have any outstanding commitment to the AB PPIP fund at August 31, 2012. As of November 30, 2011, the Company had contributed $67.5 million of the $75.0 million commitment to fund capital in the AB PPIP fund, and it could not walk away from its remaining commitment to fund capital. Therefore, as of November 30, 2011, the maximum exposure to loss for Rialto’s unconsolidated VIEs was higher than the carrying amount of its investments. In addition, at August 31, 2012 and November 30, 2011, investments in unconsolidated VIEs and Lennar’s maximum exposure to loss include $14.8 million and $14.1 million, respectively, related to Rialto’s investments held-to-maturity.
While these entities are VIEs, the Company has determined that the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance is generally shared. While the Company generally manages the day-to-day operations of the VIEs, each of these VIEs has an executive committee made up of representatives from each partner. The members of the executive committee have equal votes and major decisions require unanimous consent and approval from all members. The Company does not have the unilateral ability to exercise participating voting rights without partner consent. Furthermore, the Company’s economic interest is not significantly disproportionate to the point where it would indicate that the Company has the power to direct these activities.
The Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for $20.7 million of recourse debt of one of the Lennar Homebuilding unconsolidated VIEs and $2.2 million letter of credit outstanding for one of the Lennar Homebuilding unconsolidated VIEs that in the event of default under its debt agreement the letter of credit will be drawn upon. Except for the Lennar Homebuilding unconsolidated VIEs discussed above, the Company

36



and the other partners did not guarantee any debt of the other unconsolidated VIEs. There are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the VIEs. While the Company has option contracts to purchase land from certain of its unconsolidated VIEs, the Company is not required to purchase the assets and could walk away from the contracts.
Option Contracts
The Company has access to land through option contracts, which generally enables it to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company has determined whether to exercise the option.
A majority of the Company’s option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. The Company’s option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on the fair value at the time of takedown.
The Company’s investments in option contracts are recorded at cost unless those investments are determined to be impaired, in which case the Company’s investments are written down to fair value. The Company reviews option contracts for indicators of impairment during each reporting period. The most significant indicator of impairment is a decline in the fair value of the optioned property such that the purchase and development of the optioned property would no longer meet the Company’s targeted return on investment with appropriate consideration given to the length of time available to exercise the option. Such declines could be caused by a variety of factors including increased competition, decreases in demand or changes in local regulations that adversely impact the cost of development. Changes in any of these factors would cause the Company to re-evaluate the likelihood of exercising its land options.
Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, the Company is not required to purchase land in accordance with those take-down schedules. In substantially all instances, the Company has the right and ability to not exercise its option and forfeit its deposit without further penalty, other than termination of the option and loss of any unapplied portion of its deposit and pre-acquisition costs. Therefore, in substantially all instances, the Company does not consider the take-down price to be a firm contractual obligation.
When the Company does not intend to exercise an option, it writes off any unapplied deposit and pre-acquisition costs associated with the option contract.
The Company evaluates all option contracts for land to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, if the Company is deemed to be the primary beneficiary, it is required to consolidate the land under option at the purchase price of the optioned land. During the nine months ended August 31, 2012, the effect of consolidation of these option contracts was a net increase of $5.9 million to consolidated inventory not owned with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 31, 2012. To reflect the purchase price of the inventory consolidated, the Company reclassified the related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 31, 2012. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and the Company’s cash deposits. The increase to consolidated inventory not owned was offset by the Company exercising its options to acquire land under certain contracts previously consolidated resulting in a net decrease in consolidated inventory not owned of $62.3 million for the nine months ended August 31, 2012.
The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits and pre-acquisition costs totaling $169.8 million and $156.8 million, respectively, at August 31, 2012 and November 30, 2011. Additionally, the Company had posted $43.3 million and $44.1 million, respectively, of letters of credit in lieu of cash deposits under certain option contracts as of August 31, 2012 and November 30, 2011.


37



(16)
New Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements, (“ASU 2010-06”), which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements. The Company adopted ASU 2010-06 for its second quarter ended May 31, 2010, except for the Level 3 activity disclosures which were effective for the Company’s fiscal year beginning December 1, 2011. The adoption of this ASU did not have a material effect on the Company’s condensed consolidated financial statements, but did require additional disclosures.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, (“ASU 2011-04”). ASU 2011-04 amends ASC 820, Fair Value Measurements, (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. The company adopted ASU 2011-04 for its second quarter ended May 31, 2012. The adoption of ASU 2011-04 did not have a material effect on the Company’s condensed consolidated financial statements, but did require additional disclosures.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for the Company’s quarter ending February 28, 2013. The adoption of ASU 2011-05 is not expected to have a material effect on the Company’s condensed consolidated financial statements, but will require a change in the presentation of the Company’s comprehensive income from the notes of the consolidated financial statements, where it is currently disclosed, to the face of the condensed consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”), which amends the guidance in ASC 350-20, Intangibles – Goodwill and Other – Goodwill. Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for the Company’s fiscal year beginning December 1, 2012, with early adoption permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s condensed consolidated financial statements.


38



(17)
Supplemental Financial Information
The indentures governing the principal amounts of the Company’s 5.95% senior notes due 2013, 5.50% senior notes due 2014, 5.60% senior notes due 2015, 6.50% senior notes due 2016, 4.75% senior notes due 2017, 12.25% senior notes due 2017, 6.95% senior notes due 2018, 2.00% convertible senior notes due 2020, 2.75% convertible senior notes due 2020 and 3.25% convertible senior notes due 2021 require that, if any of the Company’s wholly owned subsidiaries, other than its finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least $75 million principal amount of debt of Lennar Corporation, those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as “guarantors” in the following tables are subsidiaries that were guaranteeing the senior notes because they were guaranteeing the $150 million LC Agreement, the $200 million Letter of Credit Facility and the Credit Facility at August 31, 2012. The guarantees are full and unconditional and the guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. The guarantees are joint and several, subject to limitations as to each guarantor designed to eliminate fraudulent conveyance concerns. Supplemental information for the guarantors is as follows:

Condensed Consolidating Balance Sheet
August 31, 2012
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and
     receivables, net
$
574,032

 
150,667

 
20,187

 

 
744,886

Inventories

 
4,506,482

 
529,168

 

 
5,035,650

Investments in unconsolidated entities

 
526,519

 
44,147

 

 
570,666

Other assets
46,542

 
646,380

 
220,547

 

 
913,469

Investments in subsidiaries
3,416,526

 
724,539

 

 
(4,141,065
)
 

 
4,037,100

 
6,554,587

 
814,049

 
(4,141,065
)
 
7,264,671

Rialto Investments

 

 
1,674,392

 

 
1,674,392

Lennar Financial Services

 
74,819

 
704,618

 

 
779,437

Total assets
$
4,037,100

 
6,629,406

 
3,193,059

 
(4,141,065
)
 
9,718,500

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
234,976

 
514,332

 
32,318

 

 
781,626

Liabilities related to consolidated inventory not owned

 
268,207

 

 

 
268,207

Senior notes and other debts payable
3,179,887

 
269,178

 
222,530

 

 
3,671,595

Intercompany
(2,649,485
)
 
2,132,830

 
516,655

 

 

 
765,378

 
3,184,547

 
771,503

 

 
4,721,428

Rialto Investments

 

 
614,390

 

 
614,390

Lennar Financial Services

 
28,333

 
495,972

 

 
524,305

Total liabilities
765,378

 
3,212,880

 
1,881,865

 

 
5,860,123

Stockholders’ equity
3,271,722

 
3,416,526

 
724,539

 
(4,141,065
)
 
3,271,722

Noncontrolling interests

 

 
586,655

 

 
586,655

Total equity
3,271,722

 
3,416,526

 
1,311,194

 
(4,141,065
)
 
3,858,377

Total liabilities and equity
$
4,037,100

 
6,629,406

 
3,193,059

 
(4,141,065
)
 
9,718,500



39

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Balance Sheet
November 30, 2011
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and
     receivables, net
$
871,376

 
190,483

 
24,920

 

 
1,086,779

Inventories

 
3,822,009

 
538,526

 

 
4,360,535

Investments in unconsolidated entities

 
502,363

 
43,397

 

 
545,760

Other assets
35,722

 
269,392

 
219,580

 

 
524,694

Investments in subsidiaries
3,368,336

 
611,311

 

 
(3,979,647
)
 

 
4,275,434

 
5,395,558

 
826,423

 
(3,979,647
)
 
6,517,768

Rialto Investments

 

 
1,897,148

 

 
1,897,148

Lennar Financial Services

 
149,842

 
589,913

 

 
739,755

Total assets
$
4,275,434

 
5,545,400

 
3,313,484

 
(3,979,647
)
 
9,154,671

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
290,337

 
483,590

 
29,405

 

 
803,332

Liabilities related to consolidated inventory not owned

 
326,200

 

 

 
326,200

Senior notes and other debts payable
2,922,855

 
215,840

 
224,064

 

 
3,362,759

Intercompany
(1,634,226
)
 
1,105,872

 
528,354

 

 

 
1,578,966

 
2,131,502

 
781,823

 

 
4,492,291

Rialto Investments

 

 
796,120

 

 
796,120

Lennar Financial Services

 
45,562

 
517,173

 

 
562,735

Total liabilities
1,578,966

 
2,177,064

 
2,095,116

 

 
5,851,146

Stockholders’ equity
2,696,468

 
3,368,336

 
611,311

 
(3,979,647
)
 
2,696,468

Noncontrolling interests

 

 
607,057

 

 
607,057

Total equity
2,696,468

 
3,368,336

 
1,218,368

 
(3,979,647
)
 
3,303,525

Total liabilities and equity
$
4,275,434

 
5,545,400

 
3,313,484

 
(3,979,647
)
 
9,154,671



40

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Three Months Ended August 31, 2012
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
955,800

 

 

 
955,800

Lennar Financial Services

 
43,163

 
68,091

 
(4,490
)
 
106,764

Rialto Investments

 

 
37,194

 

 
37,194

Total revenues

 
998,963

 
105,285

 
(4,490
)
 
1,099,758

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
845,316

 
4,403

 
713

 
850,432

Lennar Financial Services

 
40,266

 
46,233

 
(5,058
)
 
81,441

Rialto Investments

 

 
46,396

 

 
46,396

Corporate general and administrative
31,021

 

 

 
1,265

 
32,286

Total costs and expenses
31,021

 
885,582

 
97,032

 
(3,080
)
 
1,010,555

Lennar Homebuilding equity in loss from
    unconsolidated entities

 
(5,835
)
 
(156
)
 

 
(5,991
)
Lennar Homebuilding other income (expense), net
72

 
(5,435
)
 

 
(43
)
 
(5,406
)
Other interest expense
(1,453
)
 
(22,659
)
 

 
1,453

 
(22,659
)
Rialto Investments equity in earnings from
    unconsolidated entities

 

 
13,551

 

 
13,551

Rialto Investments other expense, net

 

 
(10,063
)
 

 
(10,063
)
Earnings (loss) before income taxes
(32,402
)
 
79,452

 
11,585

 

 
58,635

Benefit (provision) for income taxes
(8,090
)
 
44,373

 
(23,507
)
 

 
12,776

Equity in earnings from subsidiaries
127,601

 
3,776

 

 
(131,377
)
 

Net earnings (loss) (including net loss attributable to
    noncontrolling interests)
87,109

 
127,601

 
(11,922
)
 
(131,377
)
 
71,411

Less: Net loss attributable to noncontrolling interests

 

 
(15,698
)
 

 
(15,698
)
Net earnings attributable to Lennar
$
87,109

 
127,601

 
3,776

 
(131,377
)
 
87,109



41

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Three Months Ended August 31, 2011
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
706,256

 
5,498

 

 
711,754

Lennar Financial Services

 
35,133

 
35,532

 
(4,291
)
 
66,374

Rialto Investments

 

 
42,065

 

 
42,065

Total revenues

 
741,389

 
83,095

 
(4,291
)
 
820,193

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
654,924

 
10,190

 
(2,205
)
 
662,909

Lennar Financial Services

 
33,719

 
26,080

 
(1,413
)
 
58,386

Rialto Investments

 

 
33,562

 

 
33,562

Corporate general and administrative
21,571

 

 

 
1,205

 
22,776

Total costs and expenses
21,571

 
688,643

 
69,832

 
(2,413
)
 
777,633

Lennar Homebuilding equity in loss from
    unconsolidated entities

 
(4,440
)
 
(112
)
 

 
(4,552
)
Lennar Homebuilding other income (expense), net
(417
)
 
6,931

 

 
426

 
6,940

Other interest expense
(1,452
)
 
(24,107
)
 

 
1,452

 
(24,107
)
Rialto Investments equity in loss from
    unconsolidated entities

 

 
(6,505
)
 

 
(6,505
)
Rialto Investments other income, net

 

 
9,743

 

 
9,743

Earnings (loss) before income taxes
(23,440
)
 
31,130

 
16,389

 

 
24,079

Benefit (provision) for income taxes
8,463

 
(6,488
)
 
(2,554
)
 

 
(579
)
Equity in earnings from subsidiaries
35,707

 
11,065

 

 
(46,772
)
 

Net earnings (including net earnings attributable to
    noncontrolling interests)
20,730

 
35,707

 
13,835

 
(46,772
)
 
23,500

Less: Net earnings attributable to noncontrolling interests

 

 
2,770

 

 
2,770

Net earnings attributable to Lennar
$
20,730

 
35,707

 
11,065

 
(46,772
)
 
20,730



42

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Nine Months Ended August 31, 2012
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
2,387,916

 
405

 

 
2,388,321

Lennar Financial Services

 
113,678

 
163,153

 
(13,257
)
 
263,574

Rialto Investments

 

 
102,874

 

 
102,874

Total revenues

 
2,501,594

 
266,432

 
(13,257
)
 
2,754,769

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
2,151,982

 
12,257

 
2,780

 
2,167,019

Lennar Financial Services

 
110,711

 
116,562

 
(15,252
)
 
212,021

Rialto Investments

 

 
109,964

 

 
109,964

Corporate general and administrative
84,500

 

 

 
3,796

 
88,296

Total costs and expenses
84,500

 
2,262,693

 
238,783

 
(8,676
)
 
2,577,300

Lennar Homebuilding equity in loss from
    unconsolidated entities

 
(13,880
)
 
(409
)
 

 
(14,289
)
Lennar Homebuilding other income (expense), net
(210
)
 
11,390

 

 
239

 
11,419

Other interest expense
(4,342
)
 
(71,311
)
 

 
4,342

 
(71,311
)
Rialto Investments equity in earnings from
    unconsolidated entities

 

 
37,578

 

 
37,578

Rialto Investments other expense, net

 

 
(23,675
)
 

 
(23,675
)
Earnings (loss) before income taxes
(89,052
)
 
165,100

 
41,143

 

 
117,191

Benefit (provision) for income taxes
2,671

 
449,440

 
(35,490
)
 

 
416,621

Equity in earnings from subsidiaries
641,161

 
26,621

 

 
(667,782
)
 

Net earnings (including net loss attributable to
    noncontrolling interests)
554,780

 
641,161

 
5,653

 
(667,782
)
 
533,812

Less: Net loss attributable to noncontrolling interests

 

 
(20,968
)
 

 
(20,968
)
Net earnings attributable to Lennar
$
554,780

 
641,161

 
26,621

 
(667,782
)
 
554,780



43

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Nine Months Ended August 31, 2011
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
1,813,528

 
27,411

 

 
1,840,939

Lennar Financial Services

 
101,828

 
105,088

 
(23,407
)
 
183,509

Rialto Investments

 

 
118,283

 

 
118,283

Total revenues

 
1,915,356

 
250,782

 
(23,407
)
 
2,142,731

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
1,703,368

 
43,709

 
(5,694
)
 
1,741,383

Lennar Financial Services

 
104,498

 
82,837

 
(15,492
)
 
171,843

Rialto Investments

 

 
94,184

 

 
94,184

Corporate general and administrative
62,986

 

 

 
3,740

 
66,726

Total costs and expenses
62,986

 
1,807,866

 
220,730

 
(17,446
)
 
2,074,136

Lennar Homebuilding equity in earnings (loss) from
    unconsolidated entities

 
6,872

 
(346
)
 

 
6,526

Lennar Homebuilding other income, net
8,737

 
46,383

 

 
(8,709
)
 
46,411

Other interest expense
(14,670
)
 
(68,654
)
 

 
14,670

 
(68,654
)
Rialto Investments equity in loss from
    unconsolidated entities

 

 
(4,953
)
 

 
(4,953
)
Rialto Investments other income, net

 

 
38,275

 

 
38,275

Earnings (loss) before income taxes
(68,919
)
 
92,091

 
63,028

 

 
86,200

Benefit (provision) for income taxes
32,170

 
(23,048
)
 
(8,249
)
 

 
873

Equity in earnings from subsidiaries
98,670

 
29,627

 

 
(128,297
)
 

Net earnings (including net earnings attributable to
    noncontrolling interests)
61,921

 
98,670

 
54,779

 
(128,297
)
 
87,073

Less: Net earnings attributable to noncontrolling interests

 

 
25,152

 

 
25,152

Net earnings attributable to Lennar
$
61,921

 
98,670

 
29,627

 
(128,297
)
 
61,921



44

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended August 31, 2012
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net loss attributable to
      noncontrolling interests)
$
554,780

 
641,161

 
5,653

 
(667,782
)
 
533,812

Adjustments to reconcile net earnings (including net
     loss attributable to noncontrolling interests) to net
     cash provided by (used in) operating activities
(1,996
)
 
(1,578,847
)
 
(111,258
)
 
667,782

 
(1,024,319
)
Net cash provided by (used in) operating activities
552,784

 
(937,686
)
 
(105,605
)
 

 
(490,507
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Investments in and contributions to Lennar
     Homebuilding unconsolidated entities, net

 
(28,007
)
 
(1,142
)
 

 
(29,149
)
Distributions of capital from Rialto Investments
     unconsolidated entities, net

 

 
54,646

 

 
54,646

Decrease in Rialto Investments defeasance cash to
     retire notes payable

 

 
33,411

 

 
33,411

Receipts of principal payments on Rialto Investments
     loans receivable

 

 
52,913

 

 
52,913

Proceeds from sales of Rialto Investments real
     estate owned

 

 
121,848

 

 
121,848

Other
(218
)
 
3,807

 
3,692

 

 
7,281

Net cash provided by (used in) investing activities
(218
)
 
(24,200
)
 
265,368

 

 
240,950

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net repayments under Lennar Financial Services debt

 
(77
)
 
(52,343
)
 

 
(52,420
)
Net proceeds from convertible senior notes and
     senior notes
445,186

 

 

 

 
445,186

Partial redemption of senior notes
(210,862
)
 

 

 

 
(210,862
)
Principal repayments on Rialto Investments
     notes payable

 

 
(170,889
)
 

 
(170,889
)
Net repayments on other borrowings

 
(22,895
)
 
(4,473
)
 

 
(27,368
)
Exercise of land option contracts from an
     unconsolidated land investment venture

 
(48,242
)
 

 

 
(48,242
)
Net receipts related to noncontrolling interests

 

 
566

 

 
566

Excess tax benefits from share-based awards
1,572

 

 

 

 
1,572

Common stock:
 
 
 
 
 
 
 
 
 
Issuances
16,323

 

 

 

 
16,323

Dividends
(22,755
)
 

 

 

 
(22,755
)
Intercompany
(1,077,007
)
 
981,589

 
95,418

 

 

Net cash provided by (used in) financing activities
(847,543
)
 
910,375

 
(131,721
)
 

 
(68,889
)
Net increase (decrease) in cash and cash equivalents
(294,977
)
 
(51,511
)
 
28,042

 

 
(318,446
)
Cash and cash equivalents at beginning of period
864,237

 
172,018

 
127,349

 

 
1,163,604

Cash and cash equivalents at end of period
$
569,260

 
120,507

 
155,391

 

 
845,158



45

(17) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended August 31, 2011
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net earnings attributable to
      noncontrolling interests)
$
61,921

 
98,670

 
54,779

 
(128,297
)
 
87,073

Adjustments to reconcile net earnings (including net
     earnings attributable to noncontrolling interests) to
     net cash provided by (used in) operating activities
34,414

 
(362,442
)
 
(2,925
)
 
128,297

 
(202,656
)
Net cash provided by (used in) operating activities
96,335

 
(263,772
)
 
51,854

 

 
(115,583
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Investments in and contributions to Lennar
     Homebuilding unconsolidated entities, net

 
(60,027
)
 
(4,158
)
 

 
(64,185
)
Investments in and contributions to Rialto Investments
     unconsolidated entities, net

 

 
(64,360
)
 

 
(64,360
)
Increase in Rialto Investments defeasance cash to
     retire notes payable

 

 
(88,358
)
 

 
(88,358
)
Receipts of principal payments on Rialto Investments
     loans receivable

 

 
52,849

 

 
52,849

Proceeds from sales of Rialto Investments real
      estate owned

 

 
55,283

 

 
55,283

Other
(8
)
 
(44,063
)
 
(8,787
)
 

 
(52,858
)
Net cash used in investing activities
(8
)
 
(104,090
)
 
(57,531
)
 

 
(161,629
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net repayments under Lennar Financial Services debt

 
(15
)
 
(56,298
)
 

 
(56,313
)
Net repayments on other borrowings

 
(43,450
)
 
(38,056
)
 

 
(81,506
)
Exercise of land option contracts from an
     unconsolidated land investment venture

 
(33,827
)
 

 

 
(33,827
)
Net payments related to noncontrolling interests

 

 
(1,322
)
 

 
(1,322
)
Excess tax benefits from share-based awards
283

 

 

 

 
283

Common stock:
 
 
 
 
 
 
 
 
 
Issuances
5,547

 

 

 

 
5,547

Repurchases
(29
)
 

 

 

 
(29
)
Dividends
(22,425
)
 

 

 

 
(22,425
)
Intercompany
(488,655
)
 
408,663

 
79,992

 

 

Net cash provided by (used in) financing activities
(505,279
)
 
331,371

 
(15,684
)
 

 
(189,592
)
Net decrease in cash and cash equivalents
(408,952
)
 
(36,491
)
 
(21,361
)
 

 
(466,804
)
Cash and cash equivalents at beginning of period
1,071,542

 
179,215

 
143,378

 

 
1,394,135

Cash and cash equivalents at end of period
$
662,590

 
142,724

 
122,017

 

 
927,331



46



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended November 30, 2011.
Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for our fiscal year ended November 30, 2011. We do not undertake any obligation to update forward-looking statements, except as required by Federal securities laws.
Outlook
Our diluted earnings per share of $0.40 during the third quarter of 2012, marks our tenth consecutive quarter of earnings. It appears that the housing market has stabilized and the recovery is underway. Low mortgage rates, affordable home prices, increased buyer confidence and an extremely affordable rent-to-own comparison are driving growth in each of our markets. Additionally, reduced foreclosures and declining distressed home inventory are further contributing to the improvement in the housing market.
Our continued effort to manage our homebuilding business carefully with tight controls over our costs and an intense focus on improving our gross margins, along with the ability to increase sales per community, raise prices and lower incentives, has resulted in our highest operating margins since our second quarter of 2006 and improving operating leverage. Although conservative lending practices and challenging appraisals continue to exist in the marketplace, our company is experiencing net positive price and volume trends in most of our markets. This was evidenced during our third quarter of 2012, as deliveries increased 28%, new orders increased 44%, backlog increased 79% and our operating margins increased over 100% to 11.2% compared to last year. While materials and labor costs are increasing, we expect sales price increases and incentive reductions to offset the impact of increasing costs.
As we look forward, the combination of low home prices and low interest rates continues to make the decision to purchase a new home more attractive for consumers than the heated rental market. As a company, we will continue to focus our strategy on making carefully underwritten strategic asset acquisitions in well-positioned markets in order to maximize our operating leverage as demand for new homes grows. In addition, we expect our financial services segment to continue to leverage our core homebuilding business and participate in the robust refinancing market, and our Rialto Investment segment to be a contributor of cash and source of valuable homebuilding land deals for our company.
Our strong balance sheet and liquidity puts us in an excellent position to capitalize on opportunities as we believe that the strategic investments we have made in all of our segments position us well for a third consecutive profitable year in 2012.


47



(1) Results of Operations
Overview
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and nine months ended August 31, 2012 are not necessarily indicative of the results to be expected for the full year.
Our net earnings attributable to Lennar were $87.1 million, or $0.46 per basic and $0.40 per diluted share, in the third quarter of 2012, which included a benefit for income taxes of $12.8 million, or $0.06 per diluted share. The benefit for income taxes included a reversal of our deferred tax asset valuation allowance of $44.0 million, partially offset by a tax provision of $31.2 million primarily related to third quarter 2012 pre-tax earnings. This compared to net earnings attributable to Lennar of $20.7 million, or $0.11 per basic and diluted share, in the third quarter of 2011. Our net earnings attributable to Lennar were $554.8 million, or $2.93 per basic and $2.56 per diluted share, in the nine months ended August 31, 2012, which included a partial reversal of our deferred tax asset valuation allowance of $447.0 million, or $2.06 per diluted share, compared to net earnings attributable to Lennar of $61.9 million, or $0.33 per basic and diluted share, in the nine months ended August 31, 2011, which included $37.5 million, or $0.19 per diluted share, related to the receipt of a non-recurring litigation settlement. During both the three and nine months ended August 31, 2012, there was an increase in operating earnings primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in our homebuilding operations. In addition, there was an increase in the operating earnings of our Lennar Financial Services segment primarily due to increased volume, partially offset by a decrease in the operating earnings of our Rialto segment.
Financial information relating to our operations was as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Lennar Homebuilding revenues:
 
 
 
 
 
 
 
Sales of homes
$
932,838

 
700,611

 
2,339,983

 
1,808,262

Sales of land
22,962

 
11,143

 
48,338

 
32,677

Total Lennar Homebuilding revenues
955,800

 
711,754

 
2,388,321

 
1,840,939

Lennar Homebuilding costs and expenses:
 
 
 
 
 
 
 
Costs of homes sold
716,627

 
553,027

 
1,816,944

 
1,443,262

Cost of land sold
21,626

 
9,603

 
41,421

 
25,785

Selling, general and administrative
112,179

 
100,279

 
308,654

 
272,336

Total Lennar Homebuilding costs and expenses
850,432

 
662,909

 
2,167,019

 
1,741,383

Lennar Homebuilding operating margins
105,368

 
48,845

 
221,302

 
99,556

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
(5,991
)
 
(4,552
)
 
(14,289
)
 
6,526

Lennar Homebuilding other income (expense), net
(5,406
)
 
6,940

 
11,419

 
46,411

Other interest expense
(22,659
)
 
(24,107
)
 
(71,311
)
 
(68,654
)
Lennar Homebuilding operating earnings
$
71,312

 
27,126

 
147,121

 
83,839

Lennar Financial Services revenues
$
106,764

 
66,374

 
263,574

 
183,509

Lennar Financial Services costs and expenses
81,441

 
58,386

 
212,021

 
171,843

Lennar Financial Services operating earnings
$
25,323

 
7,988

 
51,553

 
11,666

Rialto Investments revenues
$
37,194

 
42,065

 
102,874

 
118,283

Rialto Investments costs and expenses
46,396

 
33,562

 
109,964

 
94,184

Rialto Investments equity in earnings (loss) from unconsolidated entities
13,551

 
(6,505
)
 
37,578

 
(4,953
)
Rialto Investments other income (expense), net
(10,063
)
 
9,743

 
(23,675
)
 
38,275

Rialto Investments operating earnings (loss)
$
(5,714
)
 
11,741

 
6,813

 
57,421

Total operating earnings
$
90,921

 
46,855

 
205,487

 
152,926

Corporate general administrative expenses
(32,286
)
 
(22,776
)
 
(88,296
)
 
(66,726
)
Earnings before income taxes
$
58,635

 
24,079

 
117,191

 
86,200


48



Three Months Ended August 31, 2012 versus Three Months Ended August 31, 2011
Revenues from home sales increased 33% in the third quarter of 2012 to $932.8 million from $700.6 million in 2011. Revenues were higher primarily due to a 28% increase in the number of home deliveries, excluding unconsolidated entities, and a 4% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 3,617 homes in the third quarter of 2012 from 2,832 homes last year. There was an increase in home deliveries in all our Homebuilding segments and Homebuilding Other. The average sales price of homes delivered increased to $258,000 in the third quarter of 2012 from $247,000 in the same period last year. Sales incentives offered to homebuyers were $26,100 per home delivered in the third quarter of 2012, or 9.2% as a percentage of home sales revenue, compared to $33,600 per home delivered in the same period last year, or 12.0% as a percentage of home sales revenue, and $29,800 per home delivered in the second quarter of 2012, or 10.7% as a percentage of home sales revenue.
Gross margins on home sales were $216.2 million, or 23.2%, in the third quarter of 2012, compared to $147.6 million, or 21.1%, in the third quarter of 2011, which included a 120 basis point benefit related to changes in our cost-to-complete estimates for homebuilding communities in the close-out phase. This benefit primarily impacted our Homebuilding West segment and was offset by valuation adjustments that impacted the gross margin percentage by 130 basis points in the third quarter of 2011. Gross margin percentage on home sales improved compared to last year, primarily due to a greater percentage of deliveries from our new higher margin communities, a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales, an increase in the average sales price of homes delivered and lower valuation adjustments. Gross profits on land sales totaled $1.3 million in the third quarter of 2012, compared to $1.5 million in the third quarter of 2011.
Selling, general and administrative expenses were $112.2 million in the third quarter of 2012, compared to $100.3 million in the third quarter of 2011. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 12.0% in the third quarter of 2012, from 14.3% in the third quarter of 2011, due to improved operating leverage.
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($6.0) million in the third quarter of 2012, primarily related to our share of operating losses of Lennar Homebuilding unconsolidated entities, compared to Lennar Homebuilding equity in earnings (loss) of ($4.6) million in the third quarter of 2011.
Lennar Homebuilding other income (expense), net, totaled ($5.4) million in the third quarter of 2012, which included a pre-tax loss of $6.5 million related to the repurchase of $204.7 million aggregate principal amount of 5.95% senior notes due 2013, (the "5.95% Senior Notes"), through a tender offer, compared to Lennar Homebuilding other income (expense), net, of $6.9 million in the third quarter of 2011, net of $2.1 million of valuation adjustments to our investments in unconsolidated entities.
Lennar Homebuilding interest expense was $45.0 million in the third quarter of 2012 ($21.9 million was included in cost of homes sold, $0.4 million in cost of land sold and $22.7 million in other interest expense), compared to $42.4 million in the third quarter of 2011 ($17.8 million was included in cost of homes sold, $0.5 million in cost of land sold and $24.1 million in other interest expense). Interest expense increased due to an increase in our outstanding debt compared to the same period last year.
Operating earnings for the Lennar Financial Services segment were $25.3 million in the third quarter of 2012, compared to $8.0 million in the third quarter of 2011. The increase in profitability was primarily due to increased volume and margins in the segment's mortgage operations and increased volume in the segment's title operations, as a result of an increase in refinance transactions and homebuilding deliveries.
In the third quarter of 2012, operating earnings (loss) for the Rialto Investments segment were $7.7 million (which is comprised of a $5.7 million operating loss and an add back of $13.4 million of net loss attributable to noncontrolling interests), compared to operating earnings (loss) of $5.7 million (which included $11.7 million of operating earnings offset by $6.1 million of net earnings attributable to noncontrolling interests) in the same period last year. In the third quarter of 2012, revenues in this segment were $37.2 million, which consisted primarily of accretable interest income associated with the segment’s portfolio of real estate loans and fees for managing and servicing assets, including $8.1 million in fees earned from Rialto's role as sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”), compared to revenues of $42.1 million in the same period last year. In the third quarter of 2012, Rialto Investments other income (expense), net, was ($10.1) million, which consisted primarily of expenses related to owning and maintaining real estate owned ("REO") and impairments on REO, partially offset by gains from sales of REO and rental income. In the third quarter of 2011, Rialto Investments other income (expense), net, was $9.7 million, which consisted primarily of gains from acquisition of REO through foreclosure, as well as gains from sales of REO, partially offset by expenses related to owning and maintaining REO.

49



The segment also had equity in earnings (loss) from unconsolidated entities of $13.6 million during the third quarter of 2012, which included $8.1 million of net gains primarily related to realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, $1.2 million of interest income earned by the AB PPIP fund and $6.2 million of equity in earnings related to our share of earnings from the Rialto Real Estate Fund (the “Fund”). This compared to equity in earnings (loss) from unconsolidated entities of ($6.5) million in the third quarter of 2011, which included $10.2 million of net losses primarily related to unrealized losses for our share of the mark-to-market adjustments of the investment portfolio underlying the AB PPIP fund, partially offset by $2.8 million of interest income earned by the AB PPIP fund. In the third quarter of 2012, expenses in this segment were $46.4 million, which consisted primarily of costs related to its portfolio operations, loan impairments of $20.3 million primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests) and other general and administrative expenses, compared to expenses of $33.6 million in the same period last year.
Corporate general and administrative expenses were $32.3 million, or 2.9% as a percentage of total revenues, in the third quarter of 2012, compared to $22.8 million, or 2.8% as a percentage of total revenues, in the third quarter of 2011. The increase in corporate general and administrative expenses was primarily due to an increase in personnel related expenses as a result of an increase in share-based and variable compensation expense.
Net earnings (loss) attributable to noncontrolling interests were ($15.7) million and $2.8 million, respectively, in the third quarter of 2012 and 2011. Net loss attributable to noncontrolling interests during the third quarter of 2012 was primarily related to the FDIC’s interest in the portfolio of real estate loans that we acquired in partnership with the FDIC. Net earnings attributable to noncontrolling interests during the third quarter of 2011 were related to the FDIC’s interest in the portfolio of real estate loans that we acquired in partnership with the FDIC, partially offset by a net loss attributable to noncontrolling interests in our homebuilding operations.
A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required if, based on available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with loss carryforwards not expiring unused and tax planning alternatives.
During the third quarter of 2012, we concluded that it was more likely than not that a portion of our state deferred tax assets would be utilized. This conclusion was based on additional positive evidence including actual and forecasted earnings. Accordingly, during the third quarter of 2012, we reversed $35.4 million of the valuation allowance against the state deferred tax assets and $8.6 million of the valuation allowance that was previously maintained to be utilized in remaining interim periods of 2012. The total reversal for the third quarter of 2012 was $44.0 million. This reversal was offset by a tax provision of $31.2 million primarily related to third quarter 2012 pre-tax earnings. Therefore, we had a $12.8 million net benefit for income taxes for the third quarter of 2012.
Our overall effective income tax rates were (17.19%) and 2.72%, respectively, for the three months ended August 31, 2012 and 2011. The change in the effective tax rate, compared with the same period during 2011, primarily related to the reversal of our valuation allowance.
Nine Months Ended August 31, 2012 versus Nine Months Ended August 31, 2011
Revenues from home sales increased 29% in the nine months ended August 31, 2012 to $2.3 billion from $1.8 billion in 2011. Revenues were higher primarily due to a 26% increase in the number of home deliveries, excluding unconsolidated entities, and a 3% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 9,281 homes in the nine months ended August 31, 2012 from 7,387 homes last year. There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other. The average sales price of homes delivered increased to $252,000 in the nine months ended August 31, 2012 from $245,000 in the same period last year. Sales incentives offered to homebuyers were $29,500 per home delivered in the nine months ended August 31, 2012, or 10.5% as a percentage of home sales revenue, compared to $33,600 per home delivered in the same period last year, or 12.1% as a percentage of home sales revenue.
Gross margins on home sales were $523.0 million, or 22.4%, in the nine months ended August 31, 2012, compared to $365.0 million, or 20.2%, in the nine months ended August 31, 2011. Gross margin percentage on home sales improved compared to last year, primarily due to a greater percentage of deliveries from our new higher margin communities, a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales, an increase in the average sales price of homes delivered and lower valuation adjustments. Gross profits on land sales totaled $6.9 million for both the nine months ended August 31, 2012 and 2011.

50



Selling, general and administrative expenses were $308.7 million in the nine months ended August 31, 2012, compared to $272.3 million in the same period last year. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 13.2% in the nine months ended August 31, 2012, from 15.1% in nine months ended August 31, 2011, due to improved operating leverage.
In the nine months ended August 31, 2012, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($14.3) million, primarily related to our share of operating losses of Lennar Homebuilding unconsolidated entities, which included $5.5 million of valuation adjustments related to asset sales at Lennar Homebuilding's unconsolidated entities, compared to Lennar Homebuilding equity in earnings (loss) of $6.5 million in the nine months ended August 31, 2011, which included our share of a gain on debt extinguishment at one of Lennar Homebuilding's unconsolidated entities totaling $15.4 million, partially offset by our share of operating losses of Lennar Homebuilding unconsolidated entities, which included $5.2 million of valuation adjustments related to assets of Lennar Homebuilding's unconsolidated entities.
Lennar Homebuilding other income (expense), net, totaled $11.4 million in the nine months ended August 31, 2012, primarily due to a $15.0 million gain on the sale of an operating property, partially offset by a pre-tax loss of $6.5 million related to the repurchase of $204.7 million aggregate principal amount of our 5.95% Senior Notes through a tender offer. This compared to Lennar Homebuilding other income (expense), net, of $46.4 million in the nine months ended August 31, 2011, which included $29.5 million related to the receipt of a litigation settlement, $5.1 million related to the favorable resolution of a joint venture and the recognition of $10.0 million of deferred management fees related to management services previously performed for one of Lennar Homebuilding's unconsolidated entities. These amounts were partially offset by $15.3 million of valuation adjustments to our investments in Lennar Homebuilding's unconsolidated entities and write-offs of other assets in the nine months ended August 31, 2011.
Lennar Homebuilding interest expense was $131.1 million in the nine months ended August 31, 2012 ($58.4 million was included in cost of homes sold, $1.4 million in cost of land sold and $71.3 million in other interest expense), compared to $119.7 million in the nine months ended August 31, 2011 ($49.8 million was included in cost of homes sold, $1.2 million in cost of land sold and $68.7 million in other interest expense). Interest expense increased due to an increase in our outstanding debt compared to the same period last year.
Operating earnings for the Lennar Financial Services segment were $51.6 million in the nine months ended August 31, 2012, compared to $11.7 million in the same period last year. The increase in profitability was primarily due to increased volume and margins in the segment's mortgage operations and increased volume in the segment's title operations, as a result of an increase in refinance transactions and homebuilding deliveries.
In the nine months ended August 31, 2012, operating earnings (loss) for the Rialto Investments segment were $21.4 million (which is comprised of $6.8 million of operating earnings and an add back of $14.6 million of net loss attributable to noncontrolling interests), compared to operating earnings (loss) of $26.5 million (which included $57.4 million of operating earnings offset by $30.9 million of net earnings attributable to noncontrolling interests) in the same period last year. In the nine months ended August 31, 2012, revenues in this segment were $102.9 million, which consisted primarily of accretable interest income associated with the segment’s portfolio of real estate loans and fees for managing and servicing assets, compared to revenues of $118.3 million in the same period last year. In the nine months ended August 31, 2012, Rialto Investments other income (expense), net, was ($23.7) million, which consisted primarily of expenses related to owning and maintaining REO and impairments on REO, partially offset by gains from sales of REO and rental income. In the nine months ended August 31, 2011, Rialto Investments other income (expense), net, was $38.3 million, which consisted primarily of gains from acquisition of REO through foreclosure, as well as gains from sales of REO, partially offset by expenses related to owning and maintaining REO, and a $4.7 million gain on the sale of investment securities.
The segment also had equity in earnings (loss) from unconsolidated entities of $37.6 million during the nine months ended August 31, 2012, which included $17.0 million of net gains primarily related to realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, $6.3 million of interest income earned by the AB PPIP fund and $16.8 million of equity in earnings related to our share of earnings from the Fund. This compared to equity in earnings (loss) from unconsolidated entities of ($5.0) million in the nine months ended August 31, 2011, which included $13.0 million of net losses primarily related to unrealized losses for the Company's share of the mark-to-market adjustments of the investment portfolio underlying the AB PPIP fund, partially offset by $8.2 million of interest income earned by the AB PPIP fund. In the nine months ended August 31, 2012, expenses in this segment were $110.0 million, which consisted primarily of costs related to its portfolio operations, loan impairments of $22.6 million primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests) and other general and administrative expenses, compared to expenses of $94.2 million in the same period last year.

51



Corporate general and administrative expenses were $88.3 million, or 3.2% as a percentage of total revenues, in the nine months ended August 31, 2012, compared to $66.7 million, or 3.1% as a percentage of total revenues, in the nine months ended August 31, 2011. The increase in corporate general and administrative expenses was primarily due to an increase in personnel related expenses as a result of an increase in share-based and variable compensation expense.
Net earnings (loss) attributable to noncontrolling interests were ($21.0) million and $25.2 million, respectively, in the nine months ended August 31, 2012 and 2011. Net loss attributable to noncontrolling interests during the nine months ended August 31, 2012 was attributable to noncontrolling interests related to our homebuilding and Rialto Investments operations. Net earnings attributable to noncontrolling interests during the nine months ended August 31, 2011 were primarily related to the FDIC’s interest in the portfolio of real estate loans that we acquired in partnership with the FDIC, partially offset by a net loss attributable to noncontrolling interests in our homebuilding operations.
During the nine months ended August 31, 2012, we concluded that it was more likely than not that the majority of our deferred tax assets would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative, including such factors as ten consecutive quarters of earnings, the expectation of continued earnings and signs of recovery in the housing markets we operate in. Accordingly, we reversed $447.0 million of the valuation allowance against our deferred tax assets. As of August 31, 2012, the remaining valuation allowance against our deferred tax assets was $133.3 million, of which a portion related to federal deferred tax assets will be reversed in the fourth quarter of 2012 and the remainder of the valuation allowance could be reversed in future periods if additional sufficient positive evidence is present indicating that it is more likely than not that such assets would be realized. The valuation allowance against our deferred tax assets was $576.9 million at November 30, 2011.
Our overall effective income tax rates were (301.55%) and (1.43%), respectively, for the nine months ended August 31, 2012 and 2011. The change in the effective tax rate, compared with the same period during 2011, primarily related to the reversal of our valuation allowance.

52



Homebuilding Segments
We have grouped our homebuilding activities into five reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida and Homebuilding Houston, based primarily upon similar economic characteristics, geography and product type. Information about homebuilding activities in states that do not have economic characteristics that are similar to those in other states in the same geographic area is grouped under “Homebuilding Other,” which is not a reportable segment. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.
At August 31, 2012, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions 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 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.
The following tables set forth selected financial and operational information related to our homebuilding operations for the periods indicated:
Selected Financial and Operational Data
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
East:
 
 
 
 
 
 
 
Sales of homes
$
327,681

 
254,766

 
870,750

 
696,044

Sales of land
1,302

 
2,014

 
13,215

 
8,481

Total East
328,983

 
256,780

 
883,965

 
704,525

Central:
 
 
 
 
 
 
 
Sales of homes
137,352

 
99,635

 
334,739

 
255,254

Sales of land
1,376

 
1,516

 
4,266

 
5,058

Total Central
138,728

 
101,151

 
339,005

 
260,312

West:
 
 
 
 
 
 
 
Sales of homes
179,114

 
143,168

 
459,386

 
359,093

Sales of land

 
1,730

 
523

 
3,084

Total West
179,114

 
144,898

 
459,909

 
362,177

Southeast Florida:
 
 
 
 
 
 
 
Sales of homes
93,076

 
66,763

 
213,743

 
153,784

Sales of land
13,800

 

 
13,800

 

Total Southeast Florida
106,876

 
66,763

 
227,543

 
153,784

Houston:
 
 
 
 
 
 
 
Sales of homes
129,773

 
90,310

 
307,167

 
215,539

Sales of land
6,302

 
5,755

 
16,197

 
15,365

Total Houston
136,075

 
96,065

 
323,364

 
230,904

Other:
 
 
 
 
 
 
 
Sales of homes
65,842

 
45,969

 
154,198

 
128,548

Sales of land
182

 
128

 
337

 
689

Total Other
66,024

 
46,097

 
154,535

 
129,237

Total homebuilding revenues
$
955,800

 
711,754

 
2,388,321

 
1,840,939


53



 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Operating earnings (loss):
 
 
 
 
 
 
 
East:
 
 
 
 
 
 
 
Sales of homes
$
35,167

 
23,449

 
84,109

 
63,325

Sales of land
(747
)
 
413

 
1,695

 
1,604

Equity in earnings (loss) from unconsolidated entities
(125
)
 
(158
)
 
834

 
(423
)
Other income (expense), net (1)
(1,848
)
 
2,629

 
(403
)
 
2,853

Other interest expense
(6,217
)
 
(6,829
)
 
(19,767
)
 
(17,060
)
Total East
26,230

 
19,504

 
66,468

 
50,299

Central:
 
 
 
 
 
 
 
Sales of homes (2)
14,074

 
(1,934
)
 
26,815

 
(13,814
)
Sales of land
144

 
(61
)
 
852

 
1,639

Equity in loss from unconsolidated entities
(117
)
 
(172
)
 
(281
)
 
(709
)
Other expense, net
(887
)
 
(407
)
 
(1,656
)
 
(267
)
Other interest expense
(3,202
)
 
(3,830
)
 
(10,336
)
 
(11,727
)
Total Central
10,012

 
(6,404
)
 
15,394

 
(24,878
)
West:
 
 
 
 
 
 
 
Sales of homes (2)
12,138

 
4,782

 
19,143

 
1,423

Sales of land
102

 
56

 
184

 
276

Equity in earnings (loss) from unconsolidated entities (3)
(5,464
)
 
(3,853
)
 
(13,846
)
 
11,358

Other income, net (4)
317

 
2,783

 
905

 
47,478

Other interest expense
(7,359
)
 
(8,225
)
 
(23,630
)
 
(24,502
)
Total West
(266
)
 
(4,457
)
 
(17,244
)
 
36,033

Southeast Florida:
 
 
 
 
 
 
 
Sales of homes
17,741

 
11,040

 
38,141

 
25,018

Sales of land
(22
)
 

 
(354
)
 

Equity in loss from unconsolidated entities
(167
)
 
(262
)
 
(742
)
 
(932
)
Other income (expense), net (5)
(400
)
 
1,971

 
15,526

 
2,083

Other interest expense
(2,270
)
 
(1,849
)
 
(6,879
)
 
(5,298
)
Total Southeast Florida
14,882

 
10,900

 
45,692

 
20,871

Houston:
 
 
 
 
 
 
 
Sales of homes
15,170

 
6,767

 
28,292

 
9,162

Sales of land
1,789

 
1,284

 
4,579

 
3,367

Equity in earnings (loss) from unconsolidated entities
(7
)
 

 
(26
)
 
65

Other income (expense), net
(62
)
 
317

 
1,099

 
914

Other interest expense
(1,144
)
 
(1,163
)
 
(3,420
)
 
(3,378
)
Total Houston
15,746

 
7,205

 
30,524

 
10,130

Other:
 
 
 
 
 
 
 
Sales of homes
9,742

 
3,201

 
17,885

 
7,550

Sales of land
70

 
(152
)
 
(39
)
 
6

Equity in loss from unconsolidated entities
(111
)
 
(107
)
 
(228
)
 
(2,833
)
Other expense, net
(2,526
)
 
(353
)
 
(4,052
)
 
(6,650
)
Other interest expense
(2,467
)
 
(2,211
)
 
(7,279
)
 
(6,689
)
Total Other
4,708

 
378

 
6,287

 
(8,616
)
Total homebuilding operating earnings
$
71,312

 
27,126

 
147,121

 
83,839

(1)
Other income (expense), net, for both the three and nine months ended August 31, 2011 includes $5.1 million of income related to the favorable resolution of a joint venture.

54



(2)
Operating loss on the sales of homes in Homebuilding Central for both the three and nine months ended August 31, 2011 was impacted by $0.5 million and $8.1 million, respectively, of expenses associated with remedying pre-existing liabilities of a previously acquired company. Operating earnings on the sales of homes in Homebuilding West for both the three and nine months ended August 31, 2011 included an $8.1 million benefit related to changes in our cost-to-complete estimates for homebuilding communities in the close-out phase. In addition, sales of homes in our Homebuilding West segment for the nine months ended August 31, 2011 included $8.0 million related to the receipt of a non-recurring litigation settlement.
(3)
Equity in earnings from unconsolidated entities for the nine months ended August 31, 2011 included our $15.4 million share of a gain on debt extinguishment at one of our Lennar Homebuilding unconsolidated entities.
(4)
Other income, net, for the nine months ended August 31, 2011 included $29.5 million related to the receipt of a litigation settlement discussed previously in the Overview section and the recognition of $10.0 million of previously deferred management fee income related to one of Lennar Homebuilding’s unconsolidated entities.
(5)
Other income (expense), net, for the nine months ended August 31, 2012, includes a $15.0 million gain on the sale of an operating property.
Summary of Homebuilding Data
Deliveries:
 
Three Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
1,339

 
1,154

 
$
328,598

 
254,765

 
$
245,000

 
221,000

Central
612

 
446

 
137,352

 
99,635

 
224,000

 
223,000

West
635

 
506

 
202,150

 
164,856

 
318,000

 
326,000

Southeast Florida
335

 
242

 
93,077

 
66,763

 
278,000

 
276,000

Houston
550

 
395

 
129,773

 
90,310

 
236,000

 
229,000

Other
184

 
122

 
65,842

 
45,969

 
358,000

 
377,000

Total
3,655

 
2,865

 
$
956,792

 
722,298


$
262,000

 
252,000

Of the total homes delivered listed above, 38 homes with a dollar value of $24.0 million and an average sales price of $630,000 represent home deliveries from unconsolidated entities for the three months ended August 31, 2012, compared to 33 home deliveries with a dollar value of $21.7 million and an average sales price of $657,000 for the three months ended August 31, 2011.
 
Nine Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
3,751

 
3,163

 
$
877,858

 
696,044

 
$
234,000

 
220,000

Central
1,492

 
1,187

 
334,739

 
255,254

 
224,000

 
215,000

West
1,561

 
1,266

 
492,528

 
416,020

 
316,000

 
329,000

Southeast Florida
784

 
573

 
213,744

 
153,784

 
273,000

 
268,000

Houston
1,324

 
945

 
307,167

 
215,539

 
232,000

 
228,000

Other
447

 
336

 
154,198

 
128,547

 
345,000

 
383,000

Total
9,359

 
7,470

 
$
2,380,234

 
1,865,188

 
$
254,000

 
250,000

Of the total homes delivered listed above, 78 homes with a dollar value of $40.3 million and an average sales price of $516,000 represent home deliveries from unconsolidated entities for the nine months ended August 31, 2012, compared to 83 home deliveries with a dollar value of $56.9 million and an average sales price of $686,000 for the nine months ended August 31, 2011.

55



Sales Incentives (1):
 
Three Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
$
40,824

 
36,607

 
$
30,600

 
31,700

 
11.1
%
 
12.6
%
Central
11,355

 
14,197

 
18,600

 
31,800

 
7.6
%
 
12.5
%
West
11,435

 
15,751

 
19,100

 
33,300

 
6.0
%
 
9.9
%
Southeast Florida
9,586

 
9,008

 
28,600

 
37,200

 
9.3
%
 
11.9
%
Houston
17,000

 
14,701

 
30,900

 
37,200

 
11.6
%
 
14.0
%
Other
4,104

 
4,824

 
22,300

 
39,500

 
5.9
%
 
9.5
%
Total
$
94,304

 
95,088

 
$
26,100

 
33,600


9.2
%
 
12.0
%
 
Nine Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
$
117,999

 
100,460

 
$
31,600

 
31,800

 
11.9
%
 
12.6
%
Central
37,232

 
37,042

 
25,000

 
31,200

 
10.0
%
 
12.7
%
West
36,748

 
37,389

 
24,400

 
31,600

 
7.4
%
 
9.4
%
Southeast Florida
25,617

 
21,238

 
32,700

 
37,100

 
10.8
%
 
12.1
%
Houston
43,268

 
36,925

 
32,700

 
39,100

 
12.3
%
 
14.6
%
Other
13,158

 
14,836

 
29,400

 
44,200

 
7.9
%
 
10.3
%
Total
$
274,022

 
247,890

 
$
29,500

 
33,600

 
10.5
%
 
12.1
%
(1)
Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.
New Orders (2):
 
Three Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
1,491

 
1,178

 
$
376,954

 
267,070

 
$
253,000

 
227,000

Central
644

 
460

 
158,071

 
100,972

 
245,000

 
220,000

West
800

 
521

 
250,776

 
170,096

 
313,000

 
326,000

Southeast Florida
472

 
221

 
134,875

 
55,787

 
286,000

 
252,000

Houston
535

 
418

 
131,644

 
94,669

 
246,000

 
226,000

Other
256

 
116

 
94,576

 
42,759

 
369,000

 
369,000

Total
4,198

 
2,914

 
$
1,146,896

 
731,353

 
$
273,000

 
251,000

Of the total new orders listed above, 35 homes with a dollar value of $23.6 million and an average sales price of $676,000 represent new orders from unconsolidated entities for the three months ended August 31, 2012, compared to 30 new orders with a dollar value of $19.8 million and an average sales price of $661,000 for the three months ended August 31, 2011.

56



 
Nine Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
4,342

 
3,511

 
$
1,061,269

 
776,245

 
$
244,000

 
221,000

Central
1,923

 
1,314

 
446,965

 
282,846

 
232,000

 
215,000

West
2,082

 
1,439

 
633,473

 
476,253

 
304,000

 
331,000

Southeast Florida
1,143

 
644

 
310,339

 
174,871

 
272,000

 
272,000

Houston
1,585

 
1,103

 
384,682

 
248,371

 
243,000

 
225,000

Other
626

 
374

 
232,474

 
141,158

 
371,000

 
377,000

Total
11,701

 
8,385

 
$
3,069,202

 
2,099,744

 
$
262,000

 
250,000

Of the total new orders listed above, 84 homes with a dollar value of $43.8 million and an average sales price of $522,000 represent new orders from unconsolidated entities for the nine months ended August 31, 2012, compared to 86 new orders with a dollar value of $58.3 million and an average sales price of $678,000 for the nine months ended August 31, 2011.
(2)
New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during both the three and nine months ended August 31, 2012 and 2011.
Backlog:
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
1,539

 
1,103

 
$
405,551

 
258,451

 
$
264,000

 
234,000

Central
740

 
381

 
176,781

 
80,736

 
239,000

 
212,000

West
819

 
352

 
237,839

 
117,453

 
290,000

 
334,000

Southeast Florida
525

 
194

 
150,032

 
60,121

 
286,000

 
310,000

Houston
616

 
403

 
157,118

 
91,615

 
255,000

 
227,000

Other
274

 
86

 
123,498

 
34,462

 
451,000

 
401,000

Total
4,513

 
2,519

 
$
1,250,819

 
642,838

 
$
277,000

 
255,000

Of the total homes in backlog listed above, 8 homes with a backlog dollar value of $4.6 million and an average sales price of $572,000 represent the backlog from unconsolidated entities at August 31, 2012, compared with backlog from unconsolidated entities of 6 homes with a backlog dollar value of $3.6 million and an average sales price of $592,000 at August 31, 2011.
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. The cancellation rates for both the three and nine months ended August 31, 2012 was within a range that is consistent with our historical cancellation rates. We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31, 2012
 
August 31, 2011
 
August 31, 2012
 
August 31, 2011
East
16
%
 
19
%
 
17
%
 
18
%
Central
19
%
 
24
%
 
17
%
 
21
%
West
16
%
 
22
%
 
17
%
 
19
%
Southeast Florida
11
%
 
16
%
 
10
%
 
15
%
Houston
24
%
 
19
%
 
21
%
 
20
%
Other
8
%
 
13
%
 
7
%
 
7
%
Total
17
%
 
20
%
 
17
%

18
%

57



Three Months Ended August 31, 2012 versus Three Months Ended August 31, 2011
Homebuilding East: Homebuilding revenues increased for the three months ended August 31, 2012, compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment, and an increase in the average sales price of homes delivered in all of the states in the segment, except Maryland and Virginia, in which the average sales price of homes delivered decreased for the three months ended August 31, 2012, compared to the same period last year. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market continues to stabilize and begins to recover in certain areas. Gross margins on home sales were $80.5 million, or 24.6%, for the three months ended August 31, 2012, compared to gross margins on home sales of $59.4 million, or 23.3%, for the three months ended August 31, 2011. Gross margin percentage on homes increased compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (11.1% in 2012, compared to 12.6% in 2011).
Homebuilding Central: Homebuilding revenues increased for the three months ended August 31, 2012 compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment and an increase in the average sales price of homes delivered in all states in the segment, except Colorado. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market continues to stabilize and begins to recover in certain areas. Gross margins on home sales were $28.6 million, or 20.8%, for the three months ended August 31, 2012, compared to gross margins on home sales of $11.5 million, or 11.6%, for the three months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (7.6% in 2012, compared to 12.5% in 2011) and lower valuation adjustments.
Homebuilding West: Homebuilding revenues increased for the three months ended August 31, 2012, compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $36.7 million, or 20.5%, for the three months ended August 31, 2012, compared to gross margins on home sales of $33.9 million, or 23.7%, for the three months ended August 31, 2011. Gross margin percentage on homes sales decreased compared to last year primarily due to an $8.1 million benefit recorded in the three months ended August 31, 2011 related to changes in our cost-to-complete estimates for homebuilding communities in the cost-out phase. This decrease in gross margin percentage was partially offset by a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (6.0% in 2012, compared to 9.9% in 2011).
Homebuilding Southeast Florida: Homebuilding revenues increased for the three months ended August 31, 2012, compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in this segment driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community and an increase in active community count. Gross margins on home sales were $24.7 million, or 26.5%, for the three months ended August 31, 2012, compared to gross margins on home sales of $17.1 million, or 25.6%, for the three months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (9.3% in 2012, compared to 11.9% 2011).
Homebuilding Houston: Homebuilding revenues increased for the three months ended August 31, 2012, compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in this segment driven by an increase in demand, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $28.7 million, or 22.1%, for the three months ended August 31, 2012, compared to gross margins on home sales of $17.9 million, or 19.9%, for the three months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (11.6% in 2012, compared to 14.0% in 2011).
Homebuilding Other: Homebuilding revenues increased for the three months ended August 31, 2012, compared to the three months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states of Homebuilding Other except for Illinois. The increase in deliveries was primarily driven by an increase in demand, compared to the same period last year, resulting in an increase in our home sales per community and increased deliveries in Oregon and

58



Washington, which are new operations. Gross margins on home sales were $17.1 million, or 25.9%, for the three months ended August 31, 2012, compared to gross margins on home sales of $7.7 million, or 16.9%, for the three months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (5.9% in 2012, compared to 9.5% in 2011) and lower valuation adjustments.
Nine Months Ended August 31, 2012 versus Nine Months Ended August 31, 2011
Homebuilding East: Homebuilding revenues increased for the nine months ended August 31, 2012, compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment, except Maryland and Virginia, and an increase in the average sales price of homes delivered in all of the states in the segment. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market continues to stabilize and begins to recover in certain areas. Gross margins on home sales were $202.9 million, or 23.3%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $157.4 million, or 22.6%, for the nine months ended August 31, 2011. Gross margin percentage on homes increased compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (11.9% in 2012, compared to 12.6% in 2011).
Homebuilding Central: Homebuilding revenues increased for the nine months ended August 31, 2012 compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment and an increase in the average sales price of homes delivered in all states in the segment, except Colorado. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales price of homes delivered and/or reduce sales incentives in certain of our communities as the market continues to stabilize and begins to recover in certain areas. Gross margins on home sales were $65.8 million, or 19.6%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $30.3 million, or 11.9%, for the nine months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in valuation adjustments and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (10.0% in 2012, compared to 12.7% in 2011).
Homebuilding West: Homebuilding revenues increased for the nine months ended August 31, 2012 compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all of the states in the segment, compared to the same period last year. The increase in the number of deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $93.9 million, or 20.4%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $75.0 million, or 20.9%, for the nine months ended August 31, 2011. Gross margin percentage on homes sales decreased slightly compared to last year primarily due to an $8.1 million benefit recorded in the nine months ended August 31, 2011 related to changes in our cost-to-complete estimates for homebuilding communities in the cost-out phase, partially offset by a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (7.4% in 2012, compared to 9.4% in 2011).
Homebuilding Southeast Florida: Homebuilding revenues increased for the nine months ended August 31, 2012, compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries in this segment driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $58.1 million, or 27.2%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $40.1 million, or 26.1%, for the nine months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (10.8% in 2012, compared to 12.1% in 2011).
Homebuilding Houston: Homebuilding revenues increased for the nine months ended August 31, 2012, compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $64.2 million, or 20.9%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $39.5 million, or 18.3%, for the nine months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (12.3% in 2012, compared to 14.6% in 2011).

59



Homebuilding Other: Homebuilding revenues increased for the nine months ended August 31, 2012, compared to the nine months ended August 31, 2011, primarily due to an increase in the number of home deliveries in all the states of Homebuilding Other. The increase in deliveries was primarily driven by an increase in demand as evidenced by higher traffic volume in some of our communities, compared to the same period last year, resulting in an increase in our home sales per community. Gross margins on home sales were $38.2 million, or 24.7%, for the nine months ended August 31, 2012, compared to gross margins on home sales of $22.7 million, or 17.7%, for the nine months ended August 31, 2011. Gross margin percentage on homes sales improved compared to last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales (7.9% in 2012, compared to 10.3% in 2011) and lower valuation adjustments.
At August 31, 2012 and 2011, we owned 105,685 homesites and 91,386 homesites, respectively, and had access to an additional 18,147 homesites and 15,988 homesites, respectively, through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At November 30, 2011, we owned 94,684 homesites and had access to an additional 16,702 homesites through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At August 31, 2012, 3.8% of the homesites we owned were subject to home purchase contracts. At August 31, 2012 and 2011, our backlog of sales contracts was 4,513 homes ($1.3 billion) and 2,519 homes ($0.6 billion), respectively. The increase in backlog was primarily attributable to an increase in new orders in the nine months ended August 31, 2012, compared to the nine months ended August 31, 2011.
Lennar Financial Services Segment
Our Lennar Financial Services reportable segment provides mortgage financing, title insurance and closing services for both buyers of our homes and others. Substantially all of the loans the Lennar 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, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements. The following table sets forth selected financial and operation information related to our Lennar Financial Services segment:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
106,764

 
66,374

 
263,574

 
183,509

Costs and expenses
81,441

 
58,386

 
212,021

 
171,843

Operating earnings
$
25,323

 
7,988

 
51,553

 
11,666

Dollar value of mortgages originated
$
1,288,000

 
749,000

 
3,007,000

 
1,958,000

Number of mortgages originated
5,600

 
3,500

 
13,600

 
9,400

Mortgage capture rate of Lennar homebuyers
75
%
 
77
%
 
76
%
 
78
%
Number of title and closing service transactions
29,600

 
20,800

 
79,200

 
63,000

Number of title policies issued
39,300

 
28,000

 
100,900

 
91,400

Rialto Investments Segment
Rialto’s objective is to generate superior, risk-adjusted returns by focusing on commercial and residential real estate opportunities arising from dislocations in the United States real estate markets and the eventual restructure and recapitalization of those markets. Rialto believes it will be able to deliver these returns through its abilities to source, underwrite, price, manage and ultimately monetize real estate assets, as well as providing similar services to others in markets across the country.

60



The following table presents the results of operations of our Rialto segment for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
37,194

 
42,065

 
102,874

 
118,283

Costs and expenses
46,396

 
33,562

 
109,964

 
94,184

Rialto Investments equity in earnings (loss) from unconsolidated entities
13,551

 
(6,505
)
 
37,578

 
(4,953
)
Rialto Investments other income (expense), net
(10,063
)
 
9,743

 
(23,675
)
 
38,275

Operating earnings (loss) (1)
$
(5,714
)
 
11,741

 
6,813

 
57,421

(1)
Operating earnings (loss) for the three and nine months ended August 31, 2012 include net loss attributable to noncontrolling interests of $13.4 million and $14.6 million, respectively. Operating earnings (loss) for the three and nine months ended August 31, 2011 include net earnings attributable to noncontrolling interests of $6.1 million and $30.9 million, respectively.
Distressed Asset Portfolios
In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans. The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to us and the LLCs. As of August 31, 2012, and November 30, 2011, the notes payable balance was $470.0 million and $626.9 million, respectively; however, as of August 31, 2012 and November 30, 2011, $186.0 million and $219.4 million, respectively, of cash collections on loans in excess of expenses had been deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account will be used to retire the notes payable upon their maturity. During the nine months ended August 31, 2012, the LLCs retired $156.9 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.
The LLCs met the accounting definition of variable interest entities (“VIEs”) and since we were determined to be the primary beneficiary, we consolidated the LLCs. At August 31, 2012, these consolidated LLCs had total combined assets and liabilities of $1.2 billion and $0.5 billion, respectively. At November 30, 2011, these consolidated LLCs had total combined assets and liabilities of $1.4 billion and $0.7 billion, respectively.
In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans and over 300 REO properties from three financial institutions. We 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. During the nine months ended August 31, 2012, we retired $13 million principal amount of the 5-year senior unsecured note, thus as of August 31, 2012, there was $111 million outstanding.
Investments
An affiliate in the Rialto segment is a sub-advisor to the AB PPIP fund and receives management fees for sub-advisory services. We also made a commitment of $75 million to purchase an interest in the AB PPIP fund. During the nine months ended August 31, 2012, the Company contributed $1.9 million to the AB PPIP fund and received distributions of $75.6 million. During the three months ended August 31, 2012, the AB PPIP fund started unwinding its operations and as a result we received $71.5 million in distributions. We also earned $8.1 million in fees from the segment's role as a sub-advisor to the AB PPIP fund, which were included in the Rialto Investments revenues. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the AB PPIP fund was $12.5 million and $65.2 million, respectively. Monetization of the remaining securities in the AB PPIP fund is being finalized and liquidating distributions are expected during the fourth quarter of 2012.
In 2010, the Rialto segment completed the first closing of its Fund with initial equity commitments of approximately $300 million (including $75 million committed by us, of which our remaining outstanding commitment as of August 31, 2012 was $14.8 million). As of August 31, 2012, the equity commitments of the Fund were $700 million (including the $75 million committed by us). The Fund’s objective during its three-year investment period is to invest in distressed real estate assets and other related investments that are consistent within the Fund’s investment parameters. During the three and nine months ended August 31, 2012, we contributed $8.8 million and $26.8 million, respectively, to the Fund. Of the total contributions during the year, $13.9 million was distributed back to us as a return of capital contributions due to a securitization within the Fund. Total

61



investor contributions to the Fund for the three and nine months ended August 31, 2012 were $196 million and $356 million, respectively. Of the total investor contributions during the nine months ended August 31, 2012, $130.0 million was distributed back to investors as a return of excess capital contributions due to a securitization within the Fund. Total investor contributions to the Fund since inception, including allocated income and net of the $130.0 million distribution were $868 million. Since inception, the Fund has acquired distressed real estate asset portfolios and has invested in commercial mortgage backed securities (“CMBS”) at a discount to par value. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the Fund was $79.8 million and $50.1 million, respectively. For the three and nine months ended August 31, 2012, our share of earnings from the Fund was $6.2 million and $16.8 million, respectively. For the three and nine months ended August 31, 2011, our share of earnings from the Fund was $1.3 million and $0.9 million, respectively.
In addition, in 2010, the Rialto segment also invested in approximately $43 million of non-investment grade CMBS for $19.4 million, representing a 55% discount to par value. As of August 31, 2012 and November 30, 2011, the carrying value of the investment securities was $14.8 million and $14.1 million, respectively.
Additionally, another subsidiary in the Rialto segment has approximately a 5% investment in a service and infrastructure provider to the residential home loan market (the “Servicer Provider”), which provides services to the consolidated LLCs, among others. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the Servicer Provider was $8.7 million and $8.8 million, respectively.

(2) Financial Condition and Capital Resources
At August 31, 2012, we had cash and cash equivalents related to our homebuilding, financial services and Rialto operations of $845.2 million, compared to $927.3 million at August 31, 2011.
We finance our land acquisition and development activities, construction activities, financial services activities, Rialto activities and general operating needs primarily with cash generated from our operations, debt issuances and equity offerings, as well as cash borrowed under our warehouse lines of credit and our credit facility.
Operating Cash Flow Activities
During the nine months ended August 31, 2012 and August 31, 2011, cash used in operating activities totaled $490.5 million and $115.6 million, respectively. During the nine months ended August 31, 2012, cash used in operating activities were impacted by our net earnings (net of our deferred income tax benefit) and a decrease in receivables, offset by a decrease in accounts payable and other liabilities, an increase in Lennar Financial Services loans held-for-sale and an increase in inventories due to strategic land purchases.
During the nine months ended August 31, 2011, cash used in operating activities were impacted by a decrease in accounts payable and other liabilities, an increase in inventories due to strategic land purchases and an increase in other assets due to purchases of loans receivable, partially offset by our net earnings, a decrease in Lennar Financial Services loans held-for-sale and a decrease in receivables.
Investing Cash Flow Activities
During the nine months ended August 31, 2012 and 2011, cash provided by (used in) investing activities totaled $241.0 million and ($161.6) million, respectively. During the nine months ended August 31, 2012, we received $52.9 million of principal payments on Rialto Investments loans receivable and $121.8 million of proceeds from the sales of REO. In addition, cash increased due to a $33.4 million decrease in Rialto Investments defeasance cash, $26.5 million of distributions of capital from Lennar Homebuilding unconsolidated entities and $83.4 million of distributions of capital from the Rialto Investments' unconsolidated entities, primarily related to the unwinding of the AB PPIP fund. This was partially offset by $55.7 million of cash contributions to Lennar Homebuilding unconsolidated entities primarily for working capital and debt reduction and $28.7 million of cash contributions to the Rialto Investments' unconsolidated entities.
During the nine months ended August 31, 2011, we received $52.8 million of principal payments on Rialto Investments loans receivable, $55.3 million of proceeds from the sale of REO and $25.3 million of distributions of capital from Lennar Homebuilding unconsolidated entities. This was offset by $89.5 million of cash contributions to Lennar Homebuilding unconsolidated entities primarily for working capital and debt reduction, $64.4 million of cash contributions to the Rialto Investments' unconsolidated entities, $88.4 million increase in Rialto Investments defeasance cash and $51.9 million to purchase investment securities held-to-maturity by Lennar Financial Services.
We are always evaluating the possibility of acquiring homebuilders and other companies. However, at August 31, 2012, we had no agreements or understandings regarding any significant transactions.

62



Financing Cash Flow Activities
During the nine months ended August 31, 2012, our cash used in financing activities of $68.9 million was primarily attributed to the partial redemption of our 5.95% Senior Notes, principal repayments on Rialto Investments notes payable, net repayments under our Lennar Financial Services’ 364-day warehouse repurchase facilities and principal payments on other borrowings, partially offset by the receipt of proceeds of the $400 million 4.75% senior notes due 2017 (the "4.75% Senior Notes") and the sale of an additional $50 million aggregate principal amount of our 3.25% convertible senior notes due 2021 that the initial purchasers acquired to cover over-allotments. During the nine months ended August 31, 2011, our cash used in financing activities of $189.6 million was primarily attributed to principal payments on other borrowings and net repayments under our Lennar Financial Services’ warehouse repurchase facilities.
Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Lennar Homebuilding operations. Management believes providing this measure of leverage of our Lennar Homebuilding operations enables management and readers of our financial statements to better understand our financial position and performance. Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital are calculated as follows:
(Dollars in thousands)
August 31,
2012
 
November 30,
2011
 
August 31,
2011
Lennar Homebuilding debt
$
3,671,595

 
3,362,759

 
3,127,649

Stockholders’ equity
3,271,722

 
2,696,468

 
2,670,491

Total capital
$
6,943,317

 
6,059,227

 
5,798,140

Lennar Homebuilding debt to total capital
52.9
%

55.5
%
 
53.9
%
Lennar Homebuilding debt
$
3,671,595

 
3,362,759

 
3,127,649

Less: Lennar Homebuilding cash and cash equivalents
692,004

 
1,024,212

 
800,332

Net Lennar Homebuilding debt
$
2,979,591

 
2,338,547

 
2,327,317

Net Lennar Homebuilding debt to total capital (1)
47.7
%
 
46.4
%
 
46.6
%
(1)
Net Lennar Homebuilding debt to total capital consists of net Lennar Homebuilding debt (Lennar Homebuilding debt less Lennar Homebuilding cash and cash equivalents) divided by total capital (net Lennar Homebuilding debt plus stockholders’ equity).
At August 31, 2012, Lennar Homebuilding debt to total capital was lower compared to August 31, 2011, due to an increase in stockholder’s equity primarily related to our net earnings, which included the partial reversal of our deferred tax asset valuation allowance of $447.0 million, partially offset by the increase in Lennar Homebuilding debt primarily as a result of an increase in senior notes.
Our Lennar Homebuilding average debt outstanding was $3.5 billion for the nine months ended August 31, 2012, compared to $3.1 billion for the nine months ended August 31, 2011. The average rate for interest incurred was 5.5% for the nine months ended August 31, 2012 compared to 5.8% for the nine months ended August 31, 2011. Interest incurred related to homebuilding debt for the nine months ended August 31, 2012 was $163.7 million, compared to $151.0 million in the same period last year. The majority of our short-term financing needs, including financings for land acquisition and development activities and general operating needs, are met with cash generated from operations and proceeds from debt issuances.
At August 31, 2012, we had a $150 million Letter of Credit and Reimbursement Agreement with certain financial institutions, which may be increased to $200 million, but for which there are currently no commitments for the additional $50 million. At August 31, 2012, we also had a $50 million Letter of Credit and Reimbursement Agreement with certain financial institutions that had a $50 million accordion feature for which there are currently no commitments, and a $200 million Letter of Credit Facility with a financial institution. Additionally, in May 2012, we entered into a 3-year unsecured revolving credit facility (the "Credit Facility") with certain financial institutions that expires in May 2015. As of August 31, 2012, the maximum aggregate commitment under the Credit Facility is $525 million, of which $440 million is committed and $85 million is available through an accordion feature, subject to additional commitments. Subsequent to August 31, 2012, the committed amount under the Credit Facility was increased to $500 million. As of August 31, 2012, we had no outstanding borrowings under the Credit Facility. We believe we were in compliance with our debt covenants at August 31, 2012.
Our performance letters of credit outstanding were $100.3 million and $68.0 million, respectively, at August 31, 2012 and November 30, 2011. Our financial letters of credit outstanding were $201.2 million and $199.3 million, respectively, at August 31, 2012 and November 30, 2011. Performance letters of credit are generally posted with regulatory bodies to guarantee our performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral.

63



In the three months ended August 31, 2012, we issued $400 million aggregate principal amount of 4.75% Senior Notes at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were $396.2 million. We used a portion of the net proceeds of the sale of the 4.75% Senior Notes to fund purchases pursuant to our tender offer for our 5.95% Senior Notes. We will use the remaining net proceeds of the sale of the 4.75% Senior Notes for working capital and general corporate purposes. Interest on the 4.75% Senior Notes is due semi-annually beginning October 15, 2012. The 4.75% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our wholly owned homebuilding subsidiaries. At August 31, 2012, the carrying amount of the 4.75% Senior Notes was $400.0 million.
During the three months ended August 31, 2012, we repurchased $204.7 million aggregate principal amount of our 5.95% Senior Notes through a tender offer that ran from July 17, 2012 through August 14, 2012, resulting in a pre-tax loss of $6.5 million included in Lennar Homebuilding other income (expense), net.
Under the Credit Facility agreement (the "Agreement"), as of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately $1.5 billion plus the sum of 50% of the cumulative consolidated net income from February 29, 2012, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 29, 2012. We are required to maintain a leverage ratio of 67% or less at the end of each fiscal quarter during our 2012 fiscal year, starting with our second fiscal quarter of 2012, and through the first two fiscal quarters of our 2013 fiscal year; a leverage ratio of 65% or less at the end of the last two fiscal quarters of our 2013 fiscal year and through the first two fiscal quarters of our 2014 fiscal year; and a leverage ratio of 60% or less at the end of the last two fiscal quarters of our 2014 fiscal year through the maturity of the Agreement in May 2015. As of the end of each fiscal quarter, we are also required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended.
The following are computations of the minimum net worth test, maximum leverage ratio, and liquidity test, as calculated per the Agreement as of August 31, 2012:
(Dollars in thousands)
Covenant Level
 
Level Achieved as of August 31, 2012
Minimum net worth test (1)
$
1,718,756

 
2,400,501

Maximum leverage ratio (2)
67.0
%
 
49.7
%
Liquidity test (3)
1.00

 
3.34

The terms minimum net worth test, maximum leverage ratio and liquidity test used in the Agreement are specifically calculated per the Agreement and differ in specified ways from comparable GAAP or common usage terms. Our minimum net worth test, maximum leverage ratio and liquidity test were calculated for purposes of the Agreement as of August 31, 2012 as follows:
(1)
The minimum consolidated tangible net worth and the consolidated tangible net worth as calculated per the Agreement are as follows:
Minimum consolidated tangible net worth
 
(Dollars in thousands)
As of August 31, 2012
Stated minimum consolidated tangible net worth per the Agreement
$
1,459,657

Plus: 50% of cumulative consolidated net income as calculated per the Agreement, if positive
259,099

Required minimum consolidated tangible net worth per the Agreement
$
1,718,756

Consolidated tangible net worth
 
(Dollars in thousands)
As of August 31, 2012
Total equity
$
3,858,377

Less: Intangible assets (a)
(51,968
)
Tangible net worth as calculated per the Agreement
3,806,409

Less: Consolidated equity of mortgage banking, Rialto and other designated subsidiaries (b)
(1,269,340
)
Less: Lennar Homebuilding noncontrolling interests
(136,568
)
Consolidated tangible net worth as calculated per the Agreement
$
2,400,501

(a)
Intangible assets represent the Financial Services' title operations goodwill and title plant assets.

64



(b)
Consolidated equity of mortgage banking subsidiaries represents the equity of the Lennar Financial Services segment's mortgage banking operations. Consolidated equity of other designated subsidiaries represents the equity of certain subsidiaries included within the Lennar Financial Services segment's title operations that are prohibited from being guarantors under this Agreement. The consolidated equity of Rialto, as calculated per the Agreement, represents Rialto total assets minus Rialto total liabilities as disclosed in Note 8 of the notes to our condensed consolidated financial statements as of August 31, 2012. The consolidated equity of mortgage banking subsidiaries, Rialto and other designated subsidiaries are included in equity in our condensed consolidated balance sheet as of August 31, 2012.
(2)
The leverage ratio as calculated per the Agreement is as follows:
Leverage ratio:
 
(Dollars in thousands)
As of August 31, 2012
Lennar Homebuilding senior notes and other debts payable
$
3,671,595

Less: Debt of Lennar Homebuilding consolidated entities (a)
(222,530
)
Funded debt as calculated per the Agreement
3,449,065

Plus: Financial letters of credit (b)
201,763

Plus: Lennar's recourse exposure related to Lennar Homebuilding unconsolidated/consolidated entities, net (c)
99,330

Consolidated indebtedness as calculated per the Agreement
3,750,158

Less: Unrestricted cash and cash equivalents in excess of required liquidity per the Agreement (d)
(695,879
)
Numerator as calculated per the Agreement
$
3,054,279

Denominator as calculated per the Agreement
$
6,150,659

Leverage ratio (e)
49.7
%
(a)
Debt of our Lennar Homebuilding consolidated entities is included in Lennar Homebuilding senior notes and other debts payable in our condensed consolidated balance sheet as of August 31, 2012.
(b)
Our financial letters of credit outstanding include $201.2 million disclosed in Note 11 of the notes to our condensed consolidated financial statements as of August 31, 2012 and $0.6 million of financial letters of credit related to the Financial Services segment's title operations.
(c)
Lennar's recourse exposure related to the Lennar Homebuilding unconsolidated and consolidated entities, net includes $48.2 million of net recourse exposure related to Lennar Homebuilding unconsolidated entities and $51.1 million of recourse exposure related to Lennar Homebuilding consolidated entities, which is included in Lennar Homebuilding senior notes and other debts payable in our condensed consolidated balance sheet as of August 31, 2012.
(d)
Unrestricted cash and cash equivalents include $692.0 million of Lennar Homebuilding cash and cash equivalents and $13.9 million of Lennar Financial Services cash and cash equivalents, excluding cash and cash equivalents from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services segment.
(e)
Leverage ratio consists of the numerator as calculated per the Agreement divided by the denominator as calculated per the Agreement (consolidated indebtedness as calculated per the Agreement, plus consolidated tangible net worth as calculated per the Agreement).
(3)
Liquidity as calculated per the Agreement is as follows:
Liquidity test
 
(Dollars in thousands)
As of August 31, 2012
Unrestricted cash and cash equivalents as calculated per the Agreement (a)
$
692,724

Consolidated interest incurred as calculated per the Agreement (b)
$
207,248

Liquidity (c)
3.34

(a)
Unrestricted cash and cash and cash equivalents at August 31, 2012 for the liquidity test calculation includes $692.0 million of Lennar Homebuilding cash and cash equivalents plus $13.9 million of Lennar Financial Services cash and cash equivalents, excluding cash and cash equivalents from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services segment, minus $13.2 million of cash and cash equivalents of Lennar Homebuilding consolidated joint ventures.

65



(b)
Consolidated interest incurred as calculated per the Agreement for the last twelve months ended August 31, 2012 includes Lennar Homebuilding interest incurred of $214.1 million, minus (1) interest incurred related to our partner's share of Lennar Homebuilding consolidated joint ventures included within Lennar Homebuilding interest incurred, (2) Lennar Homebuilding interest income included within Lennar Homebuilding other income, net, and (3) Lennar Financial Services interest income, excluding interest income from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services operations.
(c)
We are only required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended. Although we are in compliance with our debt covenants for both calculations, we have only disclosed the detailed calculation of our liquidity test.
At August 31, 2012, our Lennar Financial Services segment had a 364-day warehouse repurchase facility with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $50 million that matures in February 2013, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $150 million that matures in June 2013, and another 364-day warehouse repurchase facility with a maximum aggregate commitment of $200 million that matures in July 2013. The maximum aggregate commitment and uncommitted amount under these facilities totaled $450 million and $50 million, respectively, as of August 31, 2012.
Our Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $357.7 million and $410.1 million, respectively, at August 31, 2012 and November 30, 2011, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $383.2 million and $431.6 million, respectively, at August 31, 2012 and November 30, 2011.
Since our Lennar Financial Services segment’s borrowings under the warehouse repurchase facilities are generally repaid with the proceeds from the sale of mortgage loans and receivables on loans that secure those borrowings, the facilities are not likely to be a call on our current cash or future cash resources. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling mortgage loans held-for-sale and by collecting on receivables on loans sold to investors but not yet paid. Without the facilities, our Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Changes in Capital Structure
We have a stock repurchase program which permits the purchase of up to 20 million shares of our outstanding common stock. During both the nine months ended August 31, 2012 and 2011, there were no repurchases of common stock under the stock repurchase program. As of August 31, 2012, 6.2 million shares of common stock can be repurchased in the future under the program.
During the three months ended August 31, 2012, treasury stock had no change in Class A common shares. During the nine months ended August 31, 2012, treasury stock decreased by 0.3 million Class A common shares due to activity related to our equity compensation plan.
On July 25, 2012, we paid cash dividends of $0.04 per share for both our Class A and Class B common stock to holders of record at the close of business on July 11, 2012, as declared by our Board of Directors on June 26, 2012. On October 1, 2012, our Board of Directors declared a quarterly cash dividend of $0.04 per share on both our Class A and Class B common stock, payable on October 29, 2012 to holders of record at the close of business on October 15, 2012.
Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.
Off-Balance Sheet Arrangements
Lennar Homebuilding: Investments in Unconsolidated Entities
At August 31, 2012, we had equity investments in 36 homebuilding and land unconsolidated entities (of which 8 had recourse debt, 6 non-recourse debt and 22 had no debt), compared to 35 homebuilding and land unconsolidated entities at November 30, 2011. Historically, we invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, enabled us to acquire land to which we could not otherwise obtain access, or could not obtain access on

66



as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners.
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 and Selected Information
 
Three Months Ended
 
At or for the Nine Months Ended
 
August 31,
 
August 31,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
110,823

 
104,690

 
264,336

 
255,004

Costs and expenses
126,007

 
108,599

 
303,717

 
261,073

Other income
10,515

 

 
10,515

 
123,007

Net earnings (loss) of unconsolidated entities
$
(4,669
)
 
(3,909
)
 
(28,866
)
 
116,938

Our share of net earnings (loss)
$
(5,595
)
 
(4,218
)
 
(15,351
)
 
25,520

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)
$
(5,991
)
 
(4,552
)
 
(14,289
)
 
6,526

Our cumulative share of net earnings - deferred at August 31, 2012 and 2011,
      respectively
 
 
 
 
$
1,662

 
6,815

Our investments in unconsolidated entities
 
 
 
 
$
570,666

 
653,080

Equity of the unconsolidated entities
 
 
 
 
$
2,112,963

 
2,279,503

Our investment % in the unconsolidated entities
 
 
 
 
27
%
 
29
%
(1)
For the nine months ended August 31, 2012, Lennar Homebuilding equity in earnings (loss) includes $5.5 million of valuation adjustments related to strategic asset sales at Lennar Homebuilding's unconsolidated entities. For the nine months ended August 31, 2011, Lennar Homebuilding equity in earnings included a $15.4 million gain related to the Company’s share of a $123.0 million gain on debt extinguishment at a Lennar Homebuilding unconsolidated entity, partially offset by $5.2 million of valuation adjustments related to assets of Lennar Homebuilding’s unconsolidated entities.
Balance Sheets
(In thousands)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Cash and cash equivalents
$
108,024

 
90,584

Inventories
2,840,523

 
2,895,241

Other assets
233,199

 
277,152

 
$
3,181,746

 
3,262,977

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
284,939

 
246,384

Debt
783,844

 
960,627

Equity
2,112,963

 
2,055,966

 
$
3,181,746

 
3,262,977

As of August 31, 2012 and November 30, 2011, our recorded investments in Lennar Homebuilding unconsolidated entities were $570.7 million and $545.8 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of as of August 31, 2012 and November 30, 2011 was $675.0 million and $628.1 million, respectively, primarily as a result of us buying at a discount a partner's equity in a Lennar Homebuilding unconsolidated entity.
In fiscal 2007, we 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., Inc., in which we have approximately a 20% ownership interest and 50% voting

67



rights. Due to our continuing involvement, the transaction did not qualify as a sale by us under GAAP; thus, the inventory has remained on our condensed consolidated balance sheets in consolidated inventory not owned. As of August 31, 2012 and November 30, 2011, the portfolio of land (including land development costs) of $294.9 million and $372.0 million, respectively, is also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.
Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:
(Dollars in thousands)
August 31,
2012
 
November 30,
2011
Debt
$
783,844

 
960,627

Equity
2,112,963

 
2,055,966

Total capital
$
2,896,807

 
3,016,593

Debt to total capital of our unconsolidated entities
27.1
%
 
31.8
%
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Land development
$
492,520

 
461,077

Homebuilding
78,146

 
84,683

Total investments
$
570,666

 
545,760

The summary of our net recourse exposure related to the Lennar Homebuilding unconsolidated entities in which we have investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Several recourse debt - repayment
$
44,795

 
62,408

Joint and several recourse debt - repayment
22,043

 
46,292

Lennar’s maximum recourse exposure
66,838

 
108,700

Less: joint and several reimbursement agreements with our partners
(18,673
)
 
(33,795
)
Lennar’s net recourse exposure
$
48,165

 
74,905

During the nine months ended August 31, 2012, our maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $41.9 million, as a result of $13.7 million paid by us primarily through capital contributions to unconsolidated entities and $28.2 million primarily related to the joint ventures selling assets and other transactions.
As of August 31, 2012 and November 30, 2011, we had no obligation guarantees accrued. The obligation guarantees, if any, are estimated based on current facts and circumstances and any unexpected changes may lead us to incur obligation guarantees in the future.
Indebtedness of an unconsolidated entity is secured by its own assets. Some unconsolidated entities own multiple properties and other assets. There is no cross collateralization of debt to different unconsolidated entities. We also do not use our investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among Lennar Homebuilding unconsolidated entities.
In connection with a loan to a Lennar Homebuilding unconsolidated entity, we and our partners often guarantee to a lender either jointly and severally or on a several basis, any or all of the following: (i) the completion of the development, in whole or in part, (ii) indemnification of the lender from environmental issues, (iii) indemnification of the lender from “bad boy acts” of the unconsolidated entity (or full recourse liability in the event of unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan to cost will not exceed a certain percentage (maintenance or remargining guarantee) or that a percentage of the outstanding loan will be repaid (repayment guarantee).
In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we generally have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our

68



maximum exposure, which is the full amount covered by the joint and several guarantee.
The recourse debt exposure in the previous table represents our maximum exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay debt or to reimburse us for any payments on our guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of the Lennar Homebuilding unconsolidated entities with recourse debt were as follows.
(In thousands)
August 31,
2012
 
November 30,
2011
Assets
$
1,807,541

 
1,865,144

Liabilities
$
766,222

 
815,815

Equity
$
1,041,319

 
1,049,329

In addition, in most instances in which we have guaranteed debt of a Lennar Homebuilding unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. Historically, we have had repayment guarantees and maintenance guarantees. In a repayment guarantee, we and our venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if our venture partner does not have adequate financial resources to meet its obligation under our reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If we are required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would generally constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes. As of August 31, 2012, we do not have maintenance guarantees related to our Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, we and our 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.
During the three months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $1.3 million. During the three months ended August 31, 2011, there were: (1) no payments under our maintenance guarantees and (2) other loan paydowns of $3.1 million, a portion of which related to amounts paid under our repayment guarantees. During both the three months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
During the nine months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $5.2 million. During the nine months ended August 31, 2011, there were: (1) payments of $1.7 million under our maintenance guarantees and (2) other loan paydowns of $16.1 million, a portion of which related to amounts paid under our repayment guarantees. During both the nine months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
As of August 31, 2012, the fair values of the repayment guarantees and completion guarantees were not material. We believe that as of August 31, 2012, in the event we become 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 we and our partners would contribute additional capital into the venture. In certain instances, we have placed performance letters of credit and surety bonds with municipalities for our joint ventures (see Note 11).

69



The total debt of Lennar Homebuilding unconsolidated entities in which we have investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011

Lennar’s net recourse exposure
$
48,165

 
74,905

Reimbursement agreements from partners
18,673

 
33,795

Lennar’s maximum recourse exposure
$
66,838

 
108,700

Non-recourse bank debt and other debt (partner’s share of several recourse)
$
104,874

 
149,937

Non-recourse land seller debt or other debt
26,341

 
26,391

Non-recourse debt with completion guarantees
476,650

 
441,770

Non-recourse debt without completion guarantees
109,141

 
233,829

Non-recourse debt to Lennar
717,006

 
851,927

Total debt
$
783,844

 
960,627

Lennar’s maximum recourse exposure as a % of total JV debt
9
%
 
11
%
In view of current credit market conditions, it is not uncommon for lenders to real estate developers, including joint ventures in which we have interests, to assert non-monetary defaults (such as failure to meet construction completion deadlines or declines in the market value of collateral below required amounts) or technical monetary defaults against the real estate developers. In most instances, those asserted defaults are resolved by modifications of the loan terms, additional equity investments or other concessions by the borrowers. In addition, in some instances, real estate developers, including joint ventures in which we have interests, are forced to request temporary waivers of covenants in loan documents or modifications of loan terms, which are often, but not always obtained. However, in some instances developers, including joint ventures in which we have interests, are not able to meet their monetary obligations to lenders, and are thus declared in default. Because we sometimes guarantee all or portions of the obligations to lenders of joint ventures in which we have interests, when these joint ventures default on their obligations, lenders may or may not have claims against us. Normally, we do not make payments with regard to guarantees of joint venture obligations while the joint ventures are contesting assertions regarding sums due to their lenders. When it is determined that a joint venture is obligated to make a payment that we have guaranteed and the joint venture will not be able to make that payment, we accrue the amounts probable to be paid by us as a liability. Although we generally fulfill our guarantee obligations within a reasonable time after we determine that we are obligated with regard to them, at any point in time it is likely that we will have some balance of unpaid guarantee liability. At both August 31, 2012 and November 30, 2011, we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our condensed consolidated balance sheets.
The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities (“JVs”) debt as per current debt arrangements as of August 31, 2012 and does not represent estimates of future cash payments that will be made to reduce debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.
 
 
 
Principal Maturities of Unconsolidated JVs by Period
(In thousands)
Total JV
Assets (1)
 
Total JV
Debt
 
2012
 
2013
 
2014
 
Thereafter
 
Other
Debt (2)
Net recourse debt to Lennar
$
 
48,165

 
1,295

 
16,631

 
4,535

 
25,704

 

Reimbursement agreements
 
 
18,673

 

 

 

 
18,673

 

Maximum recourse debt exposure to
    Lennar
1,807,541

 
66,838

 
1,295

 
16,631

 
4,535

 
44,377

 

Debt without recourse to Lennar
962,522

 
717,006

 
16,704

 
98,571

 
27,066

 
544,808

 
29,857

Total
$
2,770,063

 
783,844

 
17,999

 
115,202

 
31,601

 
589,185

 
29,857

(1)
Excludes unconsolidated joint venture assets where the joint venture has no debt.
(2)
Represents land seller debt and other debt.
The following table is a breakdown of the assets, debt and equity of the Lennar Homebuilding unconsolidated joint ventures by partner type as of August 31, 2012:

70



(Dollars in thousands)
Total JV
Assets
 
Maximum
Recourse
Debt
Exposure
to Lennar
 
Reimbursement
Agreements
 
Net
Recourse
Debt to
Lennar
 
Total
Debt
Without
Recourse
to
Lennar
 
Total JV
Debt
 
Total JV
Equity
 
JV
Debt to
Total
Capital
Ratio
 
Remaining
Homes/
Homesites
in JV
Partner Type:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Financial
$
2,386,847

 
42,747

 
18,673

 
24,074

 
558,058

 
600,805

 
1,495,444

 
29
%
 
39,777

Land Owners/Developers
404,601

 
19,557

 

 
19,557

 
87,149

 
106,706

 
282,912

 
27
%
 
14,492

Strategic
103,838

 
2,034

 

 
2,034

 
9,186

 
11,220

 
91,123

 
11
%
 
2,024

Other Builders
286,460

 
2,500

 

 
2,500

 
32,756

 
35,256

 
243,484

 
13
%
 
4,927

Total
$
3,181,746

 
66,838

 
18,673

 
48,165

 
687,149

 
753,987

 
2,112,963

 
26
%
 
61,220

Land seller debt and other debt
$
 

 

 

 
29,857

 
29,857

 
 
 
 
 
 
Total JV debt
$
 
66,838

 
18,673

 
48,165

 
717,006

 
783,844

 
 
 
 
 
 
The table below indicates the assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of August 31, 2012:
(Dollars in thousands)
Lennar’s
Investment
 
Total JV
Assets
 
Maximum
Recourse
Debt
Exposure
to Lennar
 
Reimbursement
Agreements
 
Net
Recourse
Debt to
Lennar
 
Total
Debt
Without
Recourse
to
Lennar
 
Total JV
Debt
 
Total JV
Equity
 
JV
Debt to
Total
Capital
Ratio
Top Ten JVs (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Heritage Fields El Toro
$
133,730

 
1,446,320

 
22,000

 

 
22,000

 
480,406

 
502,406

 
858,315

 
37
%
Central Park West Holdings
61,970

 
133,385

 
20,748

 
18,673

 
2,075

 
62,243

 
82,991

 
48,689

 
63
%
Newhall Land Development
45,291

 
451,034

 

 

 

 

 

 
262,228

 
%
Ballpark Village
42,019

 
131,137

 

 

 

 
46,910

 
46,910

 
83,818

 
36
%
Runkle Canyon
38,343

 
77,847

 

 

 

 

 

 
76,686

 
%
LS College Park
36,054

 
73,878

 

 

 

 

 

 
70,584

 
%
MS Rialto Residential Holdings
35,689

 
299,734

 

 

 

 
15,409

 
15,409

 
274,285

 
5
%
Treasure Island Community Development
27,472

 
55,787

 

 

 

 

 

 
54,975

 
%
Rocking Horse Partners
20,660

 
49,141

 

 

 

 
7,038

 
7,038

 
41,308

 
15
%
Willow Springs Properties
18,879

 
33,974

 

 

 

 

 

 
32,027

 
%
10 largest JV investments
460,107

 
2,752,237

 
42,748

 
18,673

 
24,075

 
612,006

 
654,754

 
1,802,915

 
27
%
Other JVs
110,559

 
429,509

 
24,090

 

 
24,090

 
75,143

 
99,233

 
310,048

 
24
%
Total
$
570,666

 
3,181,746

 
66,838

 
18,673

 
48,165

 
687,149

 
753,987

 
2,112,963

 
26
%
Land seller debt and other debt
$
 
 
 

 

 

 
29,857

 
29,857

 
 
 
 
Total JV debt
$
 
 
 
66,838

 
18,673

 
48,165

 
717,006

 
783,844

 
 
 
 
(1)
All of the joint ventures presented in the table above operate in our Homebuilding West segment except for Rocking Horse Partners and Willow Springs Properties, which operate in our Homebuilding Central segment and MS Rialto Residential Holdings, which operates in all of our homebuilding segments and Homebuilding Other.
The table below indicates the percentage of assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments, as of August 31, 2012:
 
% of
Total JV
Assets
 
% of
Maximum
Recourse
Debt
Exposure
to Lennar
 
% of Net
Recourse
Debt to
Lennar
 
% of Total
Debt
Without
Recourse to
Lennar
 
% of
Total JV
Equity
10 largest JVs
87
%
 
64
%
 
50
%
 
89
%
 
85
%
Other JVs
13
%
 
36
%
 
50
%
 
11
%
 
15
%
Total
100
%
 
100
%
 
100
%
 
100
%
 
100
%

71



Rialto Investments: Investments in Unconsolidated Entities
An affiliate of our Rialto segment is a sub-advisor to the AB PPIP fund and receives management fees for sub-advisory services. During the three months ended August 31, 2012, the AB PPIP fund started unwinding its operations, selling $4.5 billion in face amount of non-agency residential mortgage-backed securities and commercial mortgage-backed securities with a carrying value of $2.9 billion for $3.1 billion. As a result, we received $71.5 million in distributions. We also earned $8.1 million in fees from the segment's role as a sub-advisor to the AB PPIP fund, which were included in the Rialto Investments revenues. As of August 31, 2012, the remaining balance of investment securities in the AB PPIP fund was $412.6 million, which is included in the investment securities reflected in the summarized condensed balance sheets of Rialto’s unconsolidated entities. Monetization of the remaining securities in the AB PPIP fund is being finalized and liquidating distributions are expected during the fourth quarter of 2012. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the AB PPIP fund was $12.5 million and $65.2 million, respectively.
During 2010, we committed to invest $75 million in the Rialto segment’s Fund, of which our remaining outstanding commitment as of August 31, 2012 was $14.8 million. As of August 31, 2012, the equity commitments of the Fund were $700 million (including the $75 million committed by us). During the three and nine months ended August 31, 2012, the Company contributed $8.8 million and $26.8 million, respectively, to the Fund. Of the total contributions during the year, $13.9 million was distributed back to us as a return of excess capital contributions due to a securitization within the Fund. Total investor contributions to the Fund for the three and nine months ended August 31, 2012 were $196 million and $356 million, respectively. Of the total contributions during the nine months ended August 31, 2012, $130.0 million was distributed back to investors as a return of capital contributions due to a securitization within the Fund. Total investor contributions to the Fund since inception, including allocated income and net of the $130.0 million distribution were $868 million. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the Fund was $79.8 million and $50.1 million, respectively. For the three and nine months ended August 31, 2012, our share of earnings from the Fund was $6.2 million and $16.8 million, respectively. For the three and nine months ended August 31, 2011, our share of earnings from the Fund was $1.3 million and $0.9 million, respectively.
Additionally, another subsidiary in our Rialto segment also has approximately a 5% investment in the Servicer Provider, which provides services to the consolidated LLCs, among others. As of August 31, 2012 and November 30, 2011, the carrying value of our investment in the Servicer Provider was $8.7 million and $8.8 million, respectively.
Summarized condensed financial information on a combined 100% basis related to Rialto’s investment in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
August 31,
2012
 
November 30,
2011
Assets (1):
 
 
 
Cash and cash equivalents
$
192,212

 
60,936

Loans receivable
392,251

 
274,213

Real estate owned
147,306

 
47,204

Investment securities
712,636

 
4,336,418

Other assets
200,760

 
171,196

 
$
1,645,165

 
4,889,967

Liabilities and equity (1):
 
 
 
Accounts payable and other liabilities
$
116,946

 
320,353

Notes payable
160,310

 
40,877

Partner loans
163,516

 
137,820

Debt due to the U.S. Treasury

 
2,044,950

Equity
1,204,393

 
2,345,967

 
$
1,645,165

 
4,889,967

(1)
During the three months ended August 31, 2012, the AB PPIP fund started unwinding its operations by selling its investments. Therefore, the assets of the Rialto Investments unconsolidated entities decreased significantly from November 30, 2011 to August 31, 2012. Monetization of the remaining securities in the AB PPIP fund is being finalized and liquidating distributions are expected during the fourth quarter of 2012.

72



Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
115,800

 
122,153

 
357,328

 
355,085

Costs and expenses
75,233

 
53,183

 
178,414

 
139,699

Other income (expense), net (1)
366,696

 
(303,141
)
 
670,471

 
(382,271
)
Net earnings (loss) of unconsolidated entities
$
407,263

 
(234,171
)
 
849,385

 
(166,885
)
Rialto Investments equity in earnings (loss) from unconsolidated entities
$
13,551

 
(6,505
)
 
37,578

 
(4,953
)
(1)
Other income (expense), net, for the three and nine months ended August 31, 2012 includes the AB PPIP Fund’s mark-to-market unrealized gains and unrealized losses, as well as realized gains from the sale of investments in the portfolio underlying the AB PPIP fund, all of which our portion is a small percentage. Other income (expense), net, for the three and nine months ended August 31, 2011 includes the AB PPIP Fund’s mark-to-market unrealized gains and unrealized losses, all of which our portion is a small percentage.
Option Contracts
We have access to land through option contracts, which generally enables us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the options.
The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties (“optioned”) or unconsolidated joint ventures (“JVs”) (i.e., controlled homesites) at August 31, 2012 and 2011:
 
Controlled Homesites
 
 
 
 
August 31, 2012
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
3,909

 
339

 
4,248

 
34,437

 
38,685

Central
1,765

 
1,187

 
2,952

 
16,403

 
19,355

West
1,473

 
6,054

 
7,527

 
29,008

 
36,535

Southeast Florida
791

 
381

 
1,172

 
7,729

 
8,901

Houston
1,139

 
289

 
1,428

 
12,693

 
14,121

Other
753

 
67

 
820

 
5,415

 
6,235

Total homesites
9,830

 
8,317

 
18,147

 
105,685

 
123,832

 
Controlled Homesites
 
 
 
 
August 31, 2011
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
3,677

 
448

 
4,125

 
26,448

 
30,573

Central
826

 
1,611

 
2,437

 
15,984

 
18,421

West
578

 
6,189

 
6,767

 
28,331

 
35,098

Southeast Florida
990

 
323

 
1,313

 
5,393

 
6,706

Houston
878

 
296

 
1,174

 
9,866

 
11,040

Other
137

 
35

 
172

 
5,364

 
5,536

Total homesites
7,086

 
8,902

 
15,988

 
91,386

 
107,374

We evaluate all option contracts for land to determine whether they are VIEs and, if so, whether we are the primary beneficiary of certain of these option contracts. Although we do not have legal title to the optioned land, if we are deemed to be the primary beneficiary, we are required to consolidate the land under option at the purchase price of the optioned land. During the nine months ended August 31, 2012, the effect of consolidation of these option contracts was a net increase of $5.9 million to consolidated inventory not owned with a corresponding increase to liabilities related to consolidated inventory not owned in our condensed consolidated balance sheet as of August 31, 2012. To reflect the purchase price of the inventory consolidated, we reclassified the related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 31, 2012. The liabilities related to consolidated inventory not owned

73



primarily represent the difference between the option exercise prices for the optioned land and our cash deposits. The increase to consolidated inventory not owned was offset by our exercise of options to acquire land under certain contracts previously consolidated, resulting in a net decrease in consolidated inventory not owned of $62.3 million for the nine months ended August 31, 2012.
Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our non-refundable option deposits and pre-acquisitions costs totaling $169.8 million and $156.8 million, respectively, at August 31, 2012 and November 30, 2011. Additionally, we had posted $43.3 million and $44.1 million, respectively, of letters of credit in lieu of cash deposits under certain option contracts as of August 31, 2012 and November 30, 2011.
Contractual Obligations and Commercial Commitments
During the nine months ended August 31, 2012, our contractual obligations and commercial commitments with regard to debt related to our operations changed. During the three months ended August 31, 2012, we issued $400 million aggregate principal amount of 4.75% senior notes due 2017 and repurchased $204.7 million aggregate principal amount of 5.95% senior notes due 2013 through a tender offer. The following summarizes our contractual debt obligations as of August 31, 2012:
 
Payments Due by Period
(In thousands)
Total
 
Three Months ending November 30, 2012
 
December 1, 2012 through November 30, 2013
 
December 1, 2013 through November 30, 2015
 
December 1, 2015 through November 30, 2017
 
Thereafter
Lennar Homebuilding - Senior notes and other debts payable
$
3,671,595

 
113,103

 
131,895

 
905,279

 
761,317

 
1,760,001

Lennar Financial Services - Notes and other
    debts payable
357,713

 
357,713

 

 

 

 

Interest commitments under interest
     bearing debt (1)
909,892

 
49,539

 
188,708

 
329,980

 
216,568

 
125,097

Rialto Investments - Notes payable (2)
594,813

 
291

 
335,008

 
225,739

 
32,463

 
1,312

Operating leases
93,901

 
7,457

 
21,326

 
30,008

 
13,356

 
21,754

Other contractual obligation (3)
14,832

 
14,832

 

 

 

 

Total contractual obligations (4)
$
5,642,746

 
542,935

 
676,937

 
1,491,006

 
1,023,704

 
1,908,164

(1)
Interest commitments on variable interest-bearing debt are determined based on the interest rate as of August 31, 2012.
(2)
Amount includes $470.0 million of notes payable that was consolidated as part of the LLC consolidation related to the FDIC transaction and is non-recourse to Lennar; however, $186.0 million of cash collections on loans in excess of expenses had been deposited in a defeasance account established for the repayment of the FDIC notes payable.
(3)
Commitment to fund Rialto segment's equity investments ($14.8 million in the Fund).
(4)
Total contractual obligations excludes our gross unrecognized tax benefits of $12.3 million as of August 31, 2012, because we are unable to make reasonable estimates as to the period of cash settlement with the respective taxing authorities.
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our options. This reduces our financial risk associated with land holdings. At August 31, 2012, we had access to 18,147 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At August 31, 2012, we had $169.8 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and $43.3 million of letters of credit posted in lieu of cash deposits under certain option contracts.
At August 31, 2012, we had letters of credit outstanding in the amount of $301.5 million (which included the $43.3 million of letters of credit discussed above). These letters of credit are generally posted either with regulatory bodies to guarantee our performance of certain development and construction activities, or in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at August 31, 2012, we had outstanding performance and surety bonds related to site improvements at various projects (including certain projects in our joint ventures) of $591.2 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all of the development and construction activities are completed. As of August 31, 2012, there were approximately $319.9 million, or 54%, of anticipated future costs to complete related to these site improvements. We do not presently anticipate any draws upon these bonds, but if any such draws occur, we do not believe they would have a material effect on our financial position, results of operations or cash flows.

74



Our Lennar Financial Services segment had a pipeline of loan applications in process of $1.1 billion at August 31, 2012. Loans in process for which interest rates were committed to the borrowers and builder commitments for loan programs totaled approximately $393.2 million as of August 31, 2012. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or because borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements.
Our Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At August 31, 2012, we had open commitments amounting to $562.0 million to sell MBS with varying settlement dates through November 2012.

(3) New Accounting Pronouncements
See Note 16 of our condensed consolidated financial statements included under Item 1 of this Report for a discussion of new accounting pronouncements applicable to our Company.

(4) Critical Accounting Policies
We believe that there have been no significant changes to our critical accounting policies during the nine months ended August 31, 2012 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2011.


75



Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our investments, debt obligations, loans held-for-sale and loans held-for-investment. We utilize forward commitments and option contracts to mitigate the risks associated with our mortgage loan portfolio.
During the nine months ended August 31, 2012, our market risks with regard to debt related to our operations changed. During the three months ended August 31, 2012, we issued $400 million aggregate principal amount of 4.75% senior notes due 2017 and repurchased $204.7 million aggregate principal amount of 5.95% senior notes due 2013 through a tender offer.
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
August 31, 2012
 
Three Months Ending November 30,
 
Years Ending November 30,
 
 
 
 
 
Fair Value at August 31,
(Dollars in millions)
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
 
Total
 
2012
LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior Notes and
   other debts payable
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
2.5

 
84.9

 
289.5

 
515.9

 
278.9

 
394.5

 
1,760.0

 
3,326.2

 
4,089.5

Average interest rate

 
5.1
%
 
5.7
%
 
5.6
%
 
6.6
%
 
12.3
%
 
3.9
%
 
5.5
%
 

Variable rate
$
110.6

 
47.0

 
68.6

 
31.2

 

 
88.0

 

 
345.4

 
365.0

Average interest rate
2.5
%
 
5.5
%
 
3.3
%
 
3.3
%
 

 
3.2
%
 

 
3.4
%
 

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$

 

 

 

 

 

 

 

 

Average interest rate

 

 

 

 

 

 

 

 

Variable rate
$
357.7

 

 

 

 

 

 

 
357.7

 
357.7

Average interest rate
2.8
%
 

 

 

 

 

 

 
2.8
%
 

Rialto Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate (1)
$
0.3

 
316.5

 
158.5

 
1.2

 
4.9

 
1.2

 
1.3

 
483.9

 
479.3

Average interest rate
6.0
%
 

 
0.1
%
 
6.0
%
 
6.2
%
 
5.9
%
 
5.9
%
 
0.2
%
 

Variable rate
$

 
18.5

 
33.0

 
33.0

 
26.4

 

 

 
110.9

 
96.9

Average interest rate

 
4.5
%
 
4.5
%
 
4.5
%
 
4.5
%
 

 

 
4.5
%
 

(1)
Amount includes $470.0 million of notes payable that was consolidated as part of the LLC consolidation related to the FDIC transaction and is non-recourse to Lennar; however, $186.0 million of cash collections on loans in excess of expenses had been deposited in a defeasance account established for the repayment of the FDIC notes payable.

Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter that ended on August 31, 2012. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of August 31, 2012 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended August 31, 2012. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


76



Part II. Other Information

Item 1 - 5. Not Applicable

Item 6. Exhibits
 
31.1.
Rule 13a-14(a) certification by Stuart A. Miller, Chief Executive Officer.
31.2.
Rule 13a-14(a) certification by Bruce E. Gross, Vice President and Chief Financial Officer.
32.
Section 1350 certifications by Stuart A. Miller, Chief Executive Officer, and Bruce E. Gross, Vice President and Chief Financial Officer.
101.
The following financial statements from Lennar Corporation Quarterly Report on Form 10-Q for the quarter ended August 31, 2012, filed on October 10, 2012, were formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Consolidated Financial Statements.*

* In accordance with Rule 406T of Regulation S-T, the XBRL related to information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. 


77



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Lennar Corporation
 
 
(Registrant)
 
 
 
Date: October 10, 2012
 
/s/    Bruce E. Gross        
 
 
Bruce E. Gross
 
 
Vice President and Chief Financial Officer
 
 
 
Date: October 10, 2012
 
/s/    David M. Collins        
 
 
David M. Collins
 
 
Controller


78