Annual Statements Open main menu

LENNAR CORP /NEW/ - Quarter Report: 2015 May (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 May 31, 2015
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 May 31, 2015:
Class A 173,937,387
Class B 31,303,195






Part I. Financial Information
Item 1. Financial Statements

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except shares and per share amounts)
(unaudited)
 
May 31,
 
November 30,
 
2015 (1)
 
2014 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
638,992

 
885,729

Restricted cash
12,373

 
9,849

Receivables, net
70,443

 
93,444

Inventories:
 
 
 
Finished homes and construction in progress
3,717,543

 
3,082,345

Land and land under development
4,984,978

 
4,601,802

Consolidated inventory not owned
51,255

 
52,453

Total inventories
8,753,776

 
7,736,600

Investments in unconsolidated entities
688,467

 
656,837

Other assets
591,082

 
672,589

 
10,755,133

 
10,055,048

Rialto
1,364,682

 
1,458,152

Lennar Financial Services
1,413,388

 
1,177,053

Lennar Multifamily
362,256

 
268,014

Total assets
$
13,895,459

 
12,958,267

(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 May 31, 2015, total assets include $709.3 million related to consolidated VIEs of which $14.4 million is included in Lennar Homebuilding cash and cash equivalents, $0.7 million in Lennar Homebuilding receivables, net, $0.4 million in Lennar Homebuilding finished homes and construction in progress, $174.5 million in Lennar Homebuilding land and land under development, $51.3 million in Lennar Homebuilding consolidated inventory not owned, $31.1 million in Lennar Homebuilding investments in unconsolidated entities, $25.1 million in Lennar Homebuilding other assets, $402.1 million in Rialto assets and $9.8 million in Lennar Multifamily assets.
As of November 30, 2014, total assets include $929.1 million related to consolidated VIEs of which $11.7 million is included in Lennar Homebuilding cash and cash equivalents, $0.3 million in Lennar Homebuilding restricted cash, $0.2 million in Lennar Homebuilding receivables, net, $0.2 million in Lennar Homebuilding finished homes and construction in progress, $208.2 million in Lennar Homebuilding land and land under development, $52.5 million in Lennar Homebuilding consolidated inventory not owned, $23.9 million in Lennar Homebuilding investments in unconsolidated entities, $104.6 million in Lennar Homebuilding other assets, $508.4 million in Rialto assets and $19.2 million in Lennar Multifamily assets.

See accompanying notes to condensed consolidated financial statements.
2

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

 
May 31,
 
November 30,
 
2015 (2)
 
2014 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
441,990

 
412,558

Liabilities related to consolidated inventory not owned
43,897

 
45,028

Senior notes and other debts payable
5,291,136

 
4,690,213

Other liabilities
802,665

 
863,236

 
6,579,688

 
6,011,035

Rialto
712,744

 
747,044

Lennar Financial Services
1,075,515

 
896,643

Lennar Multifamily
51,793

 
52,243

Total liabilities
8,419,740

 
7,706,965

Stockholders’ equity:
 
 
 
Preferred stock

 

Class A common stock of $0.10 par value; Authorized: May 31, 2015 and November 30, 2014
- 300,000,000 shares; Issued: May 31, 2015 - 174,286,658 shares and November 30, 2014
- 174,241,570 shares
17,429

 
17,424

Class B common stock of $0.10 par value; Authorized: May 31, 2015 and November 30, 2014
- 90,000,000 shares; Issued: May 31, 2015 - 32,982,815 shares and November 30, 2014
- 32,982,815 shares
3,298

 
3,298

Additional paid-in capital
2,261,951

 
2,239,704

Retained earnings
2,941,595

 
2,660,034

Treasury stock, at cost; May 31, 2015 - 349,271 shares of Class A common stock and
1,679,620 shares of Class B common stock; November 30, 2014 - 505,420 shares of
Class A common stock and 1,679,620 shares of Class B common stock
(85,535
)
 
(93,440
)
Total stockholders’ equity
5,138,738

 
4,827,020

Noncontrolling interests
336,981

 
424,282

Total equity
5,475,719

 
5,251,302

Total liabilities and equity
$
13,895,459

 
12,958,267

(2)
As of May 31, 2015, total liabilities include $84.2 million related to consolidated VIEs as to which there was no recourse against the Company, of which $8.1 million is included in Lennar Homebuilding accounts payable, $43.9 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $14.6 million in Lennar Homebuilding other liabilities, $13.6 million in Rialto liabilities and $4.0 million in Lennar Multifamily liabilities.
As of November 30, 2014, total liabilities include $149.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $6.8 million is included in Lennar Homebuilding accounts payable, $45.0 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $61.6 million in Lennar Homebuilding senior notes and other debts payable, $14.8 million in Lennar Homebuilding other liabilities and $21.5 million in Rialto liabilities.


See accompanying notes to condensed consolidated financial statements.
3

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


 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Lennar Homebuilding
$
2,115,812

 
1,634,785

 
3,557,470

 
2,866,170

Lennar Financial Services
169,885

 
111,016

 
294,712

 
187,968

Rialto
67,931

 
54,393

 
109,128

 
101,348

Lennar Multifamily
38,976

 
18,551

 
75,433

 
26,354

Total revenues
2,392,604

 
1,818,745

 
4,036,743

 
3,181,840

Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding
1,825,482

 
1,392,643

 
3,090,657

 
2,456,998

Lennar Financial Services
130,832

 
92,723

 
240,132

 
165,210

Rialto
67,506

 
79,604

 
108,287

 
127,180

Lennar Multifamily
47,260

 
25,549

 
89,221

 
39,476

Corporate general and administrative
50,207

 
38,317

 
93,861

 
76,429

Total costs and expenses
2,121,287

 
1,628,836

 
3,622,158

 
2,865,293

Lennar Homebuilding equity in earnings from unconsolidated entities
6,494

 
394

 
35,393

 
5,384

Lennar Homebuilding other income (expense), net
(217
)
 
2,262

 
6,116

 
5,151

Other interest expense
(3,818
)
 
(10,287
)
 
(7,889
)
 
(22,978
)
Rialto equity in earnings from unconsolidated entities
7,328

 
17,939

 
9,992

 
23,293

Rialto other income (expense), net
(872
)
 
3,595

 
(1,144
)
 
2,366

Lennar Multifamily equity in loss from unconsolidated entities
(422
)
 
(182
)
 
(600
)
 
(257
)
Earnings before income taxes
279,810

 
203,630

 
456,453

 
329,506

Provision for income taxes
(95,226
)
 
(81,013
)
 
(154,952
)
 
(126,924
)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
184,584

 
122,617

 
301,501

 
202,582

Less: Net earnings (loss) attributable to noncontrolling interests
1,568

 
(15,102
)
 
3,522

 
(13,254
)
Net earnings attributable to Lennar
$
183,016

 
137,719

 
297,979

 
215,836

Basic earnings per share
$
0.89

 
0.67

 
1.45

 
1.06

Diluted earnings per share
$
0.79

 
0.61

 
1.30

 
0.95

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

 
0.04

 
0.08

 
0.08

Comprehensive earnings attributable to Lennar
$
183,016

 
137,719

 
297,979

 
215,836

Comprehensive earnings (loss) attributable to noncontrolling interests
$
1,568

 
(15,102
)
 
3,522

 
(13,254
)


See accompanying notes to condensed consolidated financial statements.
4

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


 
Six Months Ended
 
May 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
301,501

 
202,582

Adjustments to reconcile net earnings to net cash used in operating activities:
 
 
 
Depreciation and amortization
18,906

 
16,645

Amortization of discount/premium and accretion on debt, net
9,628

 
10,577

Lennar Homebuilding equity in earnings from unconsolidated entities
(35,393
)
 
(5,384
)
Distributions of earnings from Lennar Homebuilding unconsolidated entities
26,308

 
4,051

Rialto equity in earnings from unconsolidated entities
(9,992
)
 
(23,293
)
Distributions of earnings from Rialto unconsolidated entities
8,426

 

Lennar Multifamily equity in loss from unconsolidated entities
600

 
257

Share based compensation expense
20,650

 
17,291

Excess tax benefits from share-based awards
(113
)
 
(282
)
Deferred income tax expense
2,409

 
99,683

Gain on retirement of Rialto notes payable
(83
)
 
(2,627
)
Gain on sale of operating properties and equipment
(5,945
)
 

Unrealized and realized gains on Rialto real estate owned
(8,691
)
 
(16,635
)
Impairments of Rialto loans receivable and real estate owned
8,594

 
44,126

Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets
10,695

 
2,357

Changes in assets and liabilities:
 
 
 
Decrease (increase) in restricted cash
23,135

 
(13,193
)
Decrease (increase) in receivables
15,291

 
(63,071
)
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
(1,118,791
)
 
(981,096
)
Increase in other assets
(30,068
)
 
(24,262
)
Increase in Rialto loans held-for-sale
(206,698
)
 
(368
)
Increase in Lennar Financial Services loans held-for-sale
(53,905
)
 
(55,069
)
Increase in accounts payable and other liabilities
29,003

 
66,015

Net cash used in operating activities
(994,533
)
 
(721,696
)
Cash flows from investing activities:
 
 
 
Increase (decrease) in restricted cash related to LOCs
101

 
(478
)
Net additions of operating properties and equipment
(50,729
)
 
(8,212
)
Proceeds from the sale of operating properties and equipment
73,732

 

Investments in and contributions to Lennar Homebuilding unconsolidated entities
(26,983
)
 
(56,571
)
Distributions of capital from Lennar Homebuilding unconsolidated entities
17,832

 
74,766

Investments in and contributions to Rialto unconsolidated entities
(23,916
)
 
(18,206
)
Distributions of capital from Rialto unconsolidated entities
6,047

 
30,086

Investments in and contributions to Lennar Multifamily unconsolidated entities
(15,744
)
 
(14,110
)
Distributions of capital from Lennar Multifamily unconsolidated entities
11,262

 
42,377

Receipts of principal payments on Rialto loans receivable
13,335

 
8,357

Proceeds from sales of Rialto real estate owned
55,812

 
112,409

Purchase of investment carried at cost
(18,000
)
 

Proceeds from sale of commercial mortgage-backed securities bond

 
9,171

Purchases of commercial mortgage-backed securities bond

 
(8,705
)
Improvements to Rialto real estate owned
(4,723
)
 
(6,194
)
Purchases of Lennar Homebuilding investments available-for-sale
(28,093
)
 
(21,274
)
Proceeds from sales of Lennar Homebuilding investments available-for-sale

 
44,579

Acquisition, net of cash acquired

 
(4,808
)
Increase in Rialto loans held-for-investment
(2,750
)
 

Decrease (increase) in Lennar Financial Services loans held-for-investment, net
(2,480
)
 
889

Purchases of Lennar Financial Services investment securities
(28,365
)
 
(5,374
)
Proceeds from maturities of Lennar Financial Services investment securities
16,326

 
9,204

Net cash provided by (used in) investing activities
$
(7,336
)
 
187,906


See accompanying notes to condensed consolidated financial statements.
5

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


 
Six Months Ended
 
May 31,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Net borrowings under unsecured revolving credit facility
$
450,000

 

Net borrowings under Lennar Financial Services warehouse facilities
161,273

 
85,782

Net borrowings (repayments) under Rialto warehouse repurchase facilities
28,359

 
(31,593
)
Proceeds from Lennar Homebuilding senior notes
750,625

 
500,500

Proceeds from Rialto senior notes

 
104,525

Debt issuance costs
(6,510
)
 
(7,725
)
Redemption of senior notes
(500,000
)
 

Proceeds from Rialto structured notes

 
73,830

Principal payments on Rialto notes payable including structured notes
(20,940
)
 
(5,870
)
Proceeds from other borrowings
69,741

 
26,933

Principal payments on other borrowings
(206,901
)
 
(157,177
)
Exercise of land option contracts from an unconsolidated land investment venture

 
(1,540
)
Receipts related to noncontrolling interests
1,367

 
11,933

Payments related to noncontrolling interests
(78,937
)
 
(72,737
)
Excess tax benefits from share-based awards
113

 
282

Common stock:
 
 
 
Issuances
9,412

 
13,302

Repurchases
(972
)
 
(566
)
Dividends
(16,418
)
 
(16,355
)
Net cash provided by financing activities
640,212

 
523,524

Net decrease in cash and cash equivalents
(361,657
)
 
(10,266
)
Cash and cash equivalents at beginning of period
1,281,814

 
970,505

Cash and cash equivalents at end of period
$
920,157

 
960,239

Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
638,992

 
627,615

Lennar Financial Services
103,093

 
86,164

Rialto
176,378

 
244,675

Lennar Multifamily
1,694

 
1,785

 
$
920,157

 
960,239

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding and Lennar Multifamily:
 
 
 
Inventory acquired in satisfaction of other assets including investments available-for-sale
$
28,093

 
4,774

Non-cash sale of operating properties and equipment
$
(59,397
)
 

Purchases of inventories and other assets financed by sellers
$
29,977

 
96,430

Non-cash contributions to Lennar Multifamily unconsolidated entities
$
26,594

 
59,107

Rialto:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
13,326

 
37,270

Non-cash acquisition of Servicer Provider
$

 
8,317

Lennar Financial Services:
 
 
 
Purchase of mortgage servicing rights financed by seller
$

 
5,927

Consolidation/deconsolidation of unconsolidated/consolidated entities, net:
 
 
 
Inventories
$

 
155,021

Operating properties and equipment and other assets
$
(17,421
)
 
(18,468
)
Investments in unconsolidated entities
$
2,948

 
(30,647
)
Other liabilities
$
1,220

 

Noncontrolling interests
$
13,253

 
(105,906
)

See accompanying notes to condensed consolidated financial statements.
6



Lennar Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1)
Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 16) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2014. 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 six months ended May 31, 2015 are not necessarily indicative of the results to be expected for the full year.
Rialto - Management Fee Revenue
The Rialto segment provides services to a variety of legal entities and investment vehicles such as funds, joint ventures, co-invests, and other private equity structures to manage their respective investments. As a result, Rialto earns and receives management fees, underwriting fees and due diligence fees. These fees related to the Rialto segment are included in Rialto revenues and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. Rialto receives investment management fees from investment vehicles based on 1) a percentage of committed capital during the commitment period and after the commitment period ends and 2) a percentage of invested capital less the portion of such invested capital utilized to acquire investments that have been sold (in whole or in part) or liquidated. Fees earned for underwriting and due diligence services are based on actual costs incurred. In certain situations, Rialto may earn additional fees when the return on assets managed exceeds contractually established thresholds. Such revenue is only booked when the contract terms are met, the contract is at, or near, completion and the amounts are known and collectability is reasonably assured. Since such revenue is recognized during the latter half of the life of the investment vehicle, after substantially all of the assets have been sold and investment gains and losses realized, the possibility of clawbacks is limited. In addition, Rialto may also receive tax distributions in order to cover income tax obligations resulting from allocations of taxable income due to Rialto's carried interests in the funds. These distributions are not subject to clawbacks and therefore are recorded as revenue when received.
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.


7



(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
(8) Lennar Multifamily
Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, selling, general and administrative expenses and other interest expense of the segment.
The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately have operations located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2) 
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1)Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment.
(2)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.
Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. The Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations as well as in other states.
Operations of the Rialto segment include raising, investing and managing third-party capital, originating and securitizing commercial mortgage loans, as well as investing its own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities, as well as providing strategic real estate capital. Rialto’s operating earnings consist of revenues generated primarily from gains from securitization transactions and interest income from the Rialto Mortgage Finance (“RMF”) business, interest income associated with portfolios of real estate loans acquired in partnership with the FDIC and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the segment's investments in the real estate investment funds managed by the Rialto segment, fees for sub-advisory services, distributions with regard to partnership interests, other income (expense), net, consisting primarily of gains (losses) upon foreclosure of real estate owned (“REO”), gains on sale of REO, expenses related to owning and maintaining REO, impairments on REO and other expenses, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF and other general and administrative expenses.
Operations of the Lennar Multifamily segment include revenues generated primarily from construction activities and management fees generated from joint ventures as well as revenues from the sales of land and equity in earnings (loss) from

8



unconsolidated entities, less expenses related to construction activities, the costs related to sales of land and general and administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Form 10-K for the year ended November 30, 2014 and Section 4 of Item 2 of this Form 10-Q, “Critical Accounting Policies.” 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)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Homebuilding East
$
2,482,733

 
2,323,978

Homebuilding Central
1,373,787

 
1,233,991

Homebuilding West
3,989,066

 
3,454,611

Homebuilding Southeast Florida
737,192

 
722,706

Homebuilding Houston
483,008

 
398,538

Homebuilding Other
828,764

 
880,912

Rialto
1,364,682

 
1,458,152

Lennar Financial Services
1,413,388

 
1,177,053

Lennar Multifamily
362,256

 
268,014

Corporate and unallocated
860,583

 
1,040,312

Total assets
$
13,895,459

 
12,958,267

 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
653,396

 
536,748

 
1,121,731

 
927,256

Homebuilding Central
302,509

 
235,208

 
513,017

 
397,702

Homebuilding West
627,361

 
423,354

 
1,010,134

 
738,369

Homebuilding Southeast Florida
184,839

 
129,492

 
327,187

 
231,656

Homebuilding Houston
189,647

 
178,663

 
320,904

 
309,286

Homebuilding Other
158,060

 
131,320

 
264,497

 
261,901

Lennar Financial Services
169,885

 
111,016

 
294,712

 
187,968

Rialto
67,931

 
54,393

 
109,128

 
101,348

Lennar Multifamily
38,976

 
18,551

 
75,433

 
26,354

Total revenues (1)
$
2,392,604

 
1,818,745

 
4,036,743

 
3,181,840

Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
94,583

 
85,252

 
152,830

 
135,904

Homebuilding Central
30,715

 
24,074

 
45,767

 
34,734

Homebuilding West (2)
102,332

 
64,643

 
184,825

 
118,436

Homebuilding Southeast Florida
36,983

 
26,748

 
65,269

 
47,306

Homebuilding Houston
22,738

 
24,685

 
39,753

 
46,356

Homebuilding Other
5,438

 
9,109

 
11,989

 
13,993

Lennar Financial Services
39,053

 
18,293

 
54,580

 
22,758

Rialto
6,881

 
(3,677
)
 
9,689

 
(173
)
Lennar Multifamily
(8,706
)
 
(7,180
)
 
(14,388
)
 
(13,379
)
Total operating earnings
330,017

 
241,947

 
550,314

 
405,935

Corporate general and administrative expenses
50,207

 
38,317

 
93,861

 
76,429

Earnings before income taxes
$
279,810

 
203,630

 
456,453

 
329,506


9



(1)
Total revenues were net of sales incentives of $128.8 million ($21,500 per home delivered) and $222.5 million ($21,600 per home delivered) for the three and six months ended May 31, 2015, respectively, compared to $100.9 million ($20,300 per home delivered) and $177.4 million ($20,700 per home delivered) for the three and six months ended May 31, 2014, respectively.
(2)
For the three and six months ended May 31, 2015, operating earnings included Lennar Homebuilding equity in earnings from unconsolidated entities of $11.6 million and $43.0 million, respectively, primarily related to the sale of homesites and a commercial property to third parties by Heritage Fields El Toro, one of the Company's unconsolidated entities ("El Toro"). For the six months ended May 31, 2015, operating earnings included a $6.5 million gain on the sale of an operating property.
 
 
 
 
 
 
 
 

(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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
180,790

 
32,111

 
623,747

 
175,805

Costs and expenses
154,139

 
65,098

 
453,018

 
210,737

Other income

 

 
2,943

 

Net earnings (loss) of unconsolidated entities (1)
$
26,651

 
(32,987
)
 
173,672

 
(34,932
)
Lennar Homebuilding equity in earnings from unconsolidated entities (2)
$
6,494

 
394

 
35,393

 
5,384

(1)
For the six months ended May 31, 2015, net earnings of unconsolidated entities included the sale of approximately 300 homesites to Lennar by El Toro for $126.4 million, that resulted in $44.6 million of gross profit of which the Company's portion was deferred.
(2)
For the three months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $11.6 million of equity in earnings primarily related to the sale of a commercial property and homesites to third parties by El Toro. For the six months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $43.0 million of equity in earnings primarily related to the sale of approximately 660 homesites and a commercial property to third parties by El Toro. For the six months ended May 31, 2014, Lennar Homebuilding equity in earnings from unconsolidated entities included $4.7 million of equity in earnings primarily as a result of third-party land sales by one unconsolidated entity.
Balance Sheets
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
300,136

 
243,597

Inventories
2,725,167

 
2,889,267

Other assets
134,036

 
155,470

 
$
3,159,339

 
3,288,334

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
283,414

 
271,638

Debt
504,692

 
737,755

Equity
2,371,233

 
2,278,941

 
$
3,159,339

 
3,288,334

As of May 31, 2015 and November 30, 2014, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $688.5 million and $656.8 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2015 and November 30, 2014 was $755.2 million and $722.6 million, respectively. The basis difference is primarily as a result of the Company buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.
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.

10



The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments, including Lennar's maximum recourse exposure, were as follows:
(Dollars in thousands)
May 31,
2015
 
November 30,
2014
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
55,685

 
56,573

Non-recourse land seller debt or other debt
4,001

 
4,022

Non-recourse debt with completion guarantees (1)
183,287

 
442,854

Non-recourse debt without completion guarantees
239,031

 
209,825

Non-recourse debt to the Company
482,004

 
713,274

The Company’s maximum recourse exposure
22,688

 
24,481

Total debt
$
504,692

 
737,755

The Company’s maximum recourse exposure as a % of total JV debt
4
%
 
3
%
(1)
The decrease in non-recourse debt with completion guarantees was primarily related to a debt paydown by El Toro as a result of land sales.
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. As of both May 31, 2015 and November 30, 2014, the Company did not have any maintenance or joint and several 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.
If the Company is required to make a payment under any guarantee, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes.
As of both May 31, 2015 and November 30, 2014, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2015, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 12).


11



(4)
Stockholders' Equity
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2015 and 2014:
 
 
 
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, 2014
$
5,251,302

 
17,424

 
3,298

 
2,239,704

 
(93,440
)
 
2,660,034

 
424,282

Net earnings (including net earnings attributable to noncontrolling interests)
301,501

 

 

 

 

 
297,979

 
3,522

Employee stock and directors plans
9,433

 
5

 

 
1,523

 
7,905

 

 

Tax benefit from employee stock plans and vesting of restricted stock
113

 

 

 
113

 

 

 

Amortization of restricted stock
20,611

 

 

 
20,611

 

 

 

Cash dividends
(16,418
)
 

 

 

 

 
(16,418
)
 

Receipts related to noncontrolling interests
1,367

 

 

 

 

 

 
1,367

Payments related to noncontrolling interests
(78,937
)
 

 

 

 

 

 
(78,937
)
Non-cash deconsolidations, net
(13,253
)
 

 

 

 

 

 
(13,253
)
Balance at May 31, 2015
$
5,475,719

 
17,429

 
3,298

 
2,261,951

 
(85,535
)
 
2,941,595

 
336,981

 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid-
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2013
$
4,627,470

 
18,483

 
3,298

 
2,721,246

 
(628,019
)
 
2,053,893

 
458,569

Net earnings (including net loss attributable to noncontrolling interests)
202,582

 

 

 

 

 
215,836

 
(13,254
)
Employee stock and directors plans
13,429

 
4

 

 
1,378

 
12,047

 

 

Retirement of treasury stock

 
(1,173
)
 

 
(541,019
)
 
542,192

 

 

Tax benefit from employee stock plans and vesting of restricted stock
282

 

 

 
282

 

 

 

Amortization of restricted stock
17,251

 

 

 
17,251

 

 

 

Cash dividends
(16,355
)
 

 

 

 

 
(16,355
)
 

Receipts related to noncontrolling interests
11,933

 

 

 

 

 

 
11,933

Payments related to noncontrolling interests
(72,737
)
 

 

 

 

 

 
(72,737
)
Non-cash consolidations, net
107,022

 

 

 

 

 

 
107,022

Non-cash activity related to noncontrolling interests
430

 

 

 

 

 

 
430

Balance at May 31, 2014
$
4,891,307

 
17,314

 
3,298

 
2,199,138

 
(73,780
)
 
2,253,374

 
491,963

The Company has a stock repurchase program, which originally authorized the purchase of up to 20 million shares of its outstanding common stock. During both the three and six months ended May 31, 2015 and 2014, there were no share repurchases of common stock under the stock repurchase program. As of May 31, 2015, the remaining authorized shares that could be purchased under the stock repurchase program were 6.2 million shares of common stock.
During the three months ended May 31, 2015, treasury stock increased by an immaterial amount of shares of Class A common stock. During the six months ended May 31, 2015, treasury stock decreased 0.2 million shares of Class A common stock, respectively, due to activity related to the Company's equity compensation plan. During the three and six months ended May 31, 2014, treasury stock decreased 11.7 million and 12.1 million shares of Class A common stock, respectively, primarily due to the retirement of 11.7 million shares of Class A common stock authorized by the Company's Board of Directors during the three months ended May 31, 2014.

12



(5)
Income Taxes
During the three and six months ended May 31, 2015, the Company recorded a tax provision of $95.2 million and $155.0 million, respectively, primarily related to pre-tax earnings. During the three and six months ended May 31, 2014 , the Company recorded a tax provision of $81.0 million and $126.9 million, respectively, primarily related to pre-tax earnings. The effective tax rates for the three months ended May 31, 2015 and 2014 were 34.22% and 37.04%, respectively. The effective tax rates for the six months ended May 31, 2015 and 2014 were 34.21% and 37.03%, respectively. The effective tax rates for both the three and six months ended May 31, 2015 included a tax benefit for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense and interest accrued on uncertain tax positions.
As of May 31, 2015 and November 30, 2014, the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $311.4 million and $313.8 million, respectively.
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 each reporting period by the Company based on the consideration of all available positive and negative evidence using a “more-likely-than-not” standard with respect to whether deferred tax assets will be realized. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.
As of both May 31, 2015 and November 30, 2014, the net deferred tax assets included a valuation allowance of $8.0 million, primarily related to state net operating loss (“NOL”) carryforwards that are not more likely than not to be utilized due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states.
At both May 31, 2015 and November 30, 2014, the Company had federal tax effected NOL carryforwards totaling $2.0 million that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2029. At May 31, 2015 and November 30, 2014, the Company had state tax effected NOL carryforwards totaling $99.7 million and $113.8 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2015 and 2034.
At both May 31, 2015 and November 30, 2014, the Company had $7.3 million of gross unrecognized tax benefits. At May 31, 2015, the Company had $32.4 million accrued for interest and penalties, of which $1.0 million was recorded during the six months ended May 31, 2015. During the six months ended May 31, 2015, the accrual for interest and penalties was reduced by $0.1 million, primarily as a result of interest payments. At November 30, 2014, the Company had $31.5 million accrued for interest and penalties.

13



(6)
Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
183,016

 
137,719

 
297,979

 
215,836

Less: distributed earnings allocated to nonvested shares
89

 
97

 
180

 
195

Less: undistributed earnings allocated to nonvested shares
1,916

 
1,541

 
3,105

 
2,388

Numerator for basic earnings per share
181,011

 
136,081

 
294,694

 
213,253

Plus: interest on 3.25% convertible senior notes due 2021
1,982

 
1,982

 
3,964

 
3,964

Plus: undistributed earnings allocated to convertible shares
1,916

 
1,541

 
3,105

 
2,388

Less: undistributed earnings reallocated to convertible shares
1,705

 
1,388

 
2,774

 
2,162

Numerator for diluted earnings per share
$
183,204

 
138,216

 
298,989

 
217,443

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average common shares outstanding
202,991

 
202,000

 
202,961

 
201,977

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
9

 
9

 
10

 
9

Convertible senior notes
28,041

 
26,001

 
27,708

 
25,835

Denominator for diluted earnings per share - weighted average common shares outstanding
231,041

 
228,010

 
230,679

 
227,821

Basic earnings per share
$
0.89

 
0.67

 
1.45

 
1.06

Diluted earnings per share
$
0.79

 
0.61

 
1.30

 
0.95

For both the three and six months ended May 31, 2015 and 2014, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive.


14



(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
103,093

 
90,010

Restricted cash
8,998

 
8,609

Receivables, net (1)
301,048

 
150,858

Loans held-for-sale (2)
791,349

 
738,396

Loans held-for-investment, net
29,776

 
26,894

Investments held-to-maturity
30,291

 
45,038

Goodwill
38,854

 
38,854

Other (3)
109,979

 
78,394

 
$
1,413,388

 
1,177,053

Liabilities:
 
 
 
Notes and other debts payable
$
865,416

 
704,143

Other (4)
210,099

 
192,500

 
$
1,075,515

 
896,643

(1)
Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of May 31, 2015 and November 30, 2014, respectively.
(2)
Loans held-for-sale related to unsold loans carried at fair value.
(3)
As of May 31, 2015 and November 30, 2014, other assets included mortgage loan commitments carried at fair value of $18.9 million and $12.7 million, respectively, mortgage servicing rights carried at fair value of $16.5 million and $17.4 million, respectively, and other investment securities of $43.4 million and $16.8 million, respectively.
(4)
Other liabilities included $68.4 million and $69.3 million as of May 31, 2015 and November 30, 2014, respectively, of certain of the Company’s self-insurance reserves related to general liability and workers’ compensation. Other liabilities also included forward contracts carried at fair value of $7.6 million as of November 30, 2014.
At May 31, 2015, the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures June 2015 (1)
$
150,000

364-day warehouse repurchase facility that matures December 2015
450,000

364-day warehouse repurchase facility that matures March 2016 (2)
400,000

Totals
$
1,000,000

(1)
Maximum aggregate commitment includes a $50 million accordion feature that is available beginning the tenth (10th) calendar day immediately preceding the first day of a fiscal quarter-through 20 days after fiscal quarter-end. Subsequent to May 31, 2015, the warehouse repurchase facility maturity date was extended to July 2015.
(2)
Maximum aggregate commitment includes a $100 million accordion feature that is available 10 days prior to the end of each fiscal quarter through 20 days after each fiscal quarter end and an additional uncommitted $100 million available through 20 days after this fiscal quarter-end.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $865.4 million and $698.4 million at May 31, 2015 and November 30, 2014, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $948.9 million and $732.1 million at May 31, 2015 and November 30, 2014, respectively. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
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. Over the last several years there has been an increased industry-wide effort by purchasers to defray

15



their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the Company's condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Loan origination liabilities, beginning of period
$
12,476

 
9,585

 
11,818

 
9,311

Provision for losses (1)
1,225

 
449

 
2,027

 
742

Payments/settlements
(41
)
 
(260
)
 
(185
)
 
(279
)
Loan origination liabilities, end of period
$
13,660

 
9,774

 
13,660

 
9,774

(1)
Provision for losses included adjustments to pre-existing provisions for losses from changes in estimates.
 
 

(8)
Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
176,378

 
303,889

Restricted cash (1)
20,826

 
46,975

Receivables, net (2)

 
153,773

Loans receivable, net
100,635

 
130,105

Loans held-for-sale (3)
318,037

 
113,596

Real estate owned - held-for-sale
195,386

 
190,535

Real estate owned - held-and-used, net
213,748

 
255,795

Investments in unconsolidated entities
195,135

 
175,700

Investments held-to-maturity
17,970

 
17,290

Other
126,567

 
70,494

 
$
1,364,682

 
1,458,152

Liabilities:
 
 
 
Notes and other debts payable (4)
$
629,703

 
623,246

Other
83,041

 
123,798

 
$
712,744

 
747,044

(1)
Restricted cash primarily consists of cash held in escrow by the Company's loan servicer provider on behalf of customers and lenders and is disbursed in accordance with agreements between the transacting parties.
(2)
Receivables, net primarily relate to loans sold but not settled as of November 30, 2014.
(3)
Loans held-for-sale relate to unsold loans originated by RMF carried at fair value.
(4)
Notes and other debts payable included $351.7 million and $351.9 million related to the 7.00% Senior Notes due 2018 (“7.00% Senior Notes”) as of May 31, 2015 and November 30, 2014, respectively, $169.6 million and $141.3 million related to the RMF warehouse repurchase financing agreements as of May 31, 2015 and November 30, 2014, respectively, and $38.0 million and $58.0 million related to the notes issued through a structured note offering as of May 31, 2015 and November 30, 2014, respectively.

16


Rialto’s operating earnings (loss) were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
67,931

 
54,393

 
109,128

 
101,348

Costs and expenses (1)
67,506

 
79,604

 
108,287

 
127,180

Rialto equity in earnings from unconsolidated entities
7,328

 
17,939

 
9,992

 
23,293

Rialto other income (expense), net
(872
)
 
3,595

 
(1,144
)
 
2,366

Operating earnings (loss) (2)
$
6,881

 
(3,677
)
 
9,689

 
(173
)
(1)
Costs and expenses included loan impairments of $1.6 million and $2.8 million for the three and six months ended May 31, 2015, respectively, and $33.9 million and $40.6 million for the three and six months ended May 31, 2014, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating earnings for the three and six months ended May 31, 2015 included net loss attributable to noncontrolling interests of $0.7 million and $2.5 million, respectively. Operating loss for the three and six months ended May 31, 2014 included net loss attributable to noncontrolling interests of $17.1 million and $16.1 million, respectively.
The following is a detail of Rialto other income (expense), net:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Realized gains on REO sales, net
$
4,544

 
14,234

 
7,674

 
23,743

Unrealized losses on transfer of loans receivable to REO and impairments, net
(2,212
)
 
(8,274
)
 
(4,768
)
 
(10,651
)
REO and other expenses
(15,167
)
 
(12,411
)
 
(28,409
)
 
(30,950
)
Rental and other income
11,963

 
10,046

 
24,359

 
20,224

Rialto other income (expense), net
$
(872
)
 
3,595

 
(1,144
)
 
2,366

Loans Receivable
In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC (“FDIC Portfolios”), which retained 60% equity interests in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, the Company’s equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60%/40% with the FDIC. During the six months ended May 31, 2015 and 2014, the LLCs distributed $94.0 million and $98.2 million, respectively, of which $56.4 million and $59.6 million, respectively, was distributed to the FDIC and $37.6 million and $38.6 million, respectively, was distributed to Rialto, the parent company.
The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The Company was determined to be the primary beneficiary because it has the power to direct activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2015, these consolidated LLCs had total combined assets and liabilities of $402.1 million and $13.6 million, respectively. At November 30, 2014, these consolidated LLCs had total combined assets and liabilities of $508.4 million and $21.5 million, respectively.
In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. The Company paid $310 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions that was extended and is due on December 2016. As of both May 31, 2015 and November 30, 2014, the outstanding amount related to the 5-year unsecured note was $60.6 million.
In May 2014, the Rialto segment issued $73.8 million principal amount of notes through a structured note offering (the “Structured Notes”) collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserve, were $69.1 million. In November 2014, the Rialto segment issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is December 15, 2015. As of May 31, 2015 and November 30, 2014, the outstanding amount related to Rialto's structured note offering was $38.0 million and $58.0 million, respectively.

17


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. As of May 31, 2015 and November 30, 2014 management classified all loans receivable within the FDIC Portfolios and Bank Portfolios as nonaccrual loans as forecasted principal and interest cannot be reasonably estimated and accounted for these assets in accordance with ASC 310-10, Receivables (“ASC 310-10”). Prior to the fourth quarter of 2014, Rialto accounted for the majority of its loans receivable under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”).
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:
May 31, 2015
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
182,734

 
69,040

 
1,852

 
70,892

Single family homes
51,825

 
12,875

 
3,434

 
16,309

Commercial properties
17,382

 
3,070

 
644

 
3,714

Other
57,243

 

 
9,720

 
9,720

Loans receivable
$
309,184

 
84,985

 
15,650

 
100,635

November 30, 2014
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
228,245

 
85,912

 
3,691

 
89,603

Single family homes
66,183

 
18,096

 
2,306

 
20,402

Commercial properties
34,048

 
3,368

 
3,918

 
7,286

Other
64,284

 
5

 
12,809

 
12,814

Loans receivable
$
392,760

 
107,381

 
22,724

 
130,105

The average recorded investment in impaired loans was approximately $115 million and $7 million for the six months ended May 31, 2015 and 2014, respectively.
In order to assess the risk associated with each risk category, the Rialto segment evaluates the forecasted cash flows and the value of the underlying collateral securing loans receivable on a quarterly basis or when an event occurs that suggests a decline in the collateral’s fair value.
With regard to accrual loans that were accounted under ASC 310-30 prior to the fourth quarter of 2014, Rialto estimated the cash flows, at acquisition, it expected to collect on the FDIC Portfolios and Bank Portfolios and the difference between the contractually required payments and the cash flows expected to be collected at acquisition was referred to as the nonaccretable difference. This difference was neither accreted into income nor recorded on the Company’s condensed consolidated balance sheets. The excess of cash flows expected to be collected over the cost of the loans acquired was referred to as the accretable yield and was recognized in interest income over the remaining life of the loans using the effective yield method. During the fourth quarter of 2014, in an effort to better reflect the performance of the FDIC Portfolios and Bank Portfolios, Rialto changed from recording accretable yield income on a loan pool basis to recording income on a cost recovery basis per loan as the timing and amount of expected cash flows on the remaining loan portfolios could no longer be reasonably estimated.

18


For the six months ended May 31, 2015, there was no activity in the accretable yield for the FDIC Portfolios and Bank Portfolios as all the remaining accreting loans were classified as nonaccrual loans during the fourth quarter of 2014, as explained above. For the six months ended May 31, 2014 the activity in the accretable yield was as follows:
 
Six Months Ended
(In thousands)
May 31,
2014
Accretable yield, beginning of period
$
73,144

Additions
6,431

Deletions
(22,078
)
Accretions
(18,927
)
Accretable yield, end of period
$
38,570

Additions primarily represented reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represented loan impairments, net of recoveries, and disposal of loans, which included foreclosure of underlying collateral and resulted in the removal of the loans from the accretable yield portfolios.
Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses but can be reversed if conditions improve. For the six months ended May 31, 2015, there was no activity in the Company's allowance related to accrual loans as there were no loans classified as accrual loans at both May 31, 2015 and November 30, 2014. For the three and six months ended May 31, 2014, the activity in the Company's allowance rollforward related to accrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
(In thousands)
May 31, 2014
Allowance on accrual loans, beginning of period
$
24,922

 
18,952

Provision for loan losses, net of recoveries
33,851

 
40,488

Charge-offs
(3,115
)
 
(3,782
)
Allowance on accrual loans, end of period
$
55,658

 
55,658

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated. The risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds its fair value. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Allowance on nonaccrual loans, beginning of period
$
51,109

 
424

 
58,326

 
1,213

Provision for loan losses, net of recoveries
1,585

 
15

 
2,809

 
94

Charge-offs
(12,101
)
 
(153
)
 
(20,542
)
 
(1,021
)
Allowance on nonaccrual loans, end of period
$
40,593

 
286

 
40,593

 
286

Real Estate Owned
The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the condensed consolidated balance sheets as REO held-and-used, net and REO held-for-sale. When a property is determined to be held-and-used, net, the asset is recorded at fair value and depreciated over its useful life using the straight line method. When certain criteria set forth in ASC 360, Property, Plant and Equipment, are met, the property is classified as held-for-sale. When a real estate asset is classified as held-for-sale, the property is recorded at the lower of its cost basis or fair value less estimated costs to sell. The fair value of REO held-for-sale is determined in part by placing reliance on third-party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity.

19


The following tables represent the activity in REO:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
REO - held-for-sale, beginning of period
$
185,511

 
186,234

 
190,535

 
197,851

Improvements
1,591

 
1,130

 
3,295

 
2,723

Sales
(23,213
)
 
(47,433
)
 
(48,138
)
 
(88,666
)
Impairments and unrealized losses
(2,954
)
 
(1,032
)
 
(4,372
)
 
(2,823
)
Transfers from held-and-used, net (1)
34,451

 
53,930

 
54,066

 
83,744

REO - held-for-sale, end of period
$
195,386

 
192,829

 
195,386

 
192,829

 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
REO - held-and-used, net, beginning of period
$
242,569

 
405,675

 
255,795

 
428,989

Additions
5,431

 
26,093

 
14,343

 
34,127

Improvements
785

 
2,708

 
1,428

 
3,471

Impairments

 
(599
)
 
(1,413
)
 
(1,503
)
Depreciation
(586
)
 
(878
)
 
(1,375
)
 
(2,271
)
Transfers to held-for-sale (1)
(34,451
)
 
(53,930
)
 
(54,066
)
 
(83,744
)
Other

 

 
(964
)
 

REO - held-and-used, net, end of period
$
213,748

 
379,069

 
213,748

 
379,069

(1)
During the three and six months ended May 31, 2015 and 2014, the Rialto segment transferred certain properties from REO held-and-used, net to REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.
For both the three and six months ended May 31, 2015, the Company recorded net gains of $0.2 million from acquisitions of REO through foreclosure. For the three and six months ended May 31, 2014, the Company recorded net losses of $7.0 million and $7.1 million, respectively, from acquisitions of REO through foreclosure.
Rialto Mortgage Finance
RMF originates and sells into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. During the six months ended May 31, 2015, RMF originated loans with a total principal balance of $1.2 billion and sold $1.0 billion of loans into five separate securitizations. During the six months ended May 31, 2014, RMF originated loans with a total principal balance of $692.2 million and sold $691.5 million of loans into three separate securitizations. As November 30, 2014, $147.2 million of the originated loans were sold into a securitization trust but not settled and thus were included as receivables, net.
As of both May 31, 2015 and November 30, 2014, RMF had two warehouse repurchase financing agreements that mature in August and October 2015 with commitments totaling $650 million to finance the loans it makes. In March 2015, RMF entered into an additional warehouse repurchase facility with commitments totaling $250 million that matures in March 2016. Borrowings under these facilities were $169.6 million and $141.3 million as of May 31, 2015 and November 30, 2014, respectively. These warehouse repurchase facilities are non-recourse to the Company.
In November 2013, the Rialto segment issued $250 million aggregate principal amount of the 7.00% Senior Notes, at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were approximately $245 million. Rialto used a majority of the net proceeds of the sale of the 7.00% Senior Notes as working capital for RMF and used $100 million to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes, at a price of 102.25% of their face value in a private placement. Proceeds from the offering, after payment of expenses, were approximately $102 million. Rialto used the net proceeds of the offering to provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. Interest on the 7.00% Senior Notes is due semi-annually. At May 31, 2015 and November 30, 2014, the carrying amount of the 7.00% Senior Notes was $351.7 million and $351.9 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to or enter into transactions with Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. The Company believes it was in compliance with its debt covenants at May 31, 2015.

20


Investments
All of Rialto's investments in funds have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, as amended by ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the assets and liabilities of Rialto's funds investment are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations and the Company’s share is recorded in Rialto equity in earnings from unconsolidated entities in the Company's statement of operations.
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,
2015
 
May 31,
2015
 
November 30,
2014
(Dollars in thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to fund by the Company
 
Funds contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006

 
$
700,006

 
$
75,000

 
$
75,000

 
$
67,425

 
71,831

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

 
1,000,000

 
100,000

 
76,628

 
86,462

 
67,652

Rialto Mezzanine Partners Fund, LP
2013
 
300,000

 
213,536

 
33,799

 
24,058

 
23,531

 
20,226

Other investments
 
 
 
 
 
 
 
 
 
 
17,717

 
15,991

 
 
 
 
 
 
 
 
 
 
 
$
195,135

 
175,700

Rialto's share of earnings from unconsolidated entities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Rialto Real Estate Fund, LP
$
3,044

 
7,174

 
3,790

 
12,233

Rialto Real Estate Fund II, LP
2,286

 
2,402

 
3,179

 
2,440

Rialto Mezzanine Partners Fund, LP
451

 
493

 
926

 
782

Other investments
1,547

 
7,870

 
2,097

 
7,838

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

During the three and six months ended May 31, 2015, the Company received $4.8 million and $11.3 million, respectively, of advance distributions with regard to Rialto's carried interest in Rialto Real Estate Fund, LP ("Fund I") and Rialto Real Estate Fund II, LP ("Fund II") in order to cover income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds. These amounts of advance distributions are not subject to clawbacks and are included in Rialto's revenues.

21


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)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
96,193

 
141,609

Loans receivable
485,839

 
512,034

Real estate owned
426,201

 
378,702

Investment securities
929,711

 
795,306

Investments in partnerships
365,732

 
311,037

Other assets
38,047

 
45,451

 
$
2,341,723

 
2,184,139

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
19,823

 
20,573

Notes payable
326,878

 
395,654

Equity
1,995,022

 
1,767,912

 
$
2,341,723

 
2,184,139

Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
39,320

 
33,177

 
81,058

 
64,604

Costs and expenses
25,082

 
23,304

 
48,087

 
49,413

Other income, net (1)
55,477

 
104,868

 
61,351

 
153,038

Net earnings of unconsolidated entities
$
69,715

 
114,741

 
94,322

 
168,229

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

(1)
Other income, net, included realized and unrealized gains (losses) on investments.
In 2010, the Rialto segment invested in non-investment grade commercial mortgage-backed securities (“CMBS”) at a 55% discount to par value. The carrying value of the investment securities at May 31, 2015 and November 30, 2014 was $18.0 million and $17.3 million, respectively. These securities bear interest at a coupon rate of 4% and 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 six months ended May 31, 2015 and 2014. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In December 2014, the Rialto segment invested in a private commercial real estate services company at a price of $18.0 million. The investment is carried at cost at May 31, 2015 and is included in Rialto's other assets.


22



(9)
Lennar Multifamily Segment
The Company is actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. The Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
The assets and liabilities related to the Lennar Multifamily segment were as follows:
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
1,694

 
2,186

Land under development
197,447

 
120,666

Consolidated inventory not owned
5,508

 
5,508

Investments in unconsolidated entities
129,818

 
105,674

Operating properties and equipment
771

 
15,740

Other assets
27,018

 
18,240

 
$
362,256

 
268,014

Liabilities:
 
 
 
Accounts payable and other liabilities
$
47,786

 
48,235

Liabilities related to consolidated inventory not owned
4,007

 
4,008

 
$
51,793

 
52,243

The unconsolidated entities in which the Lennar Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Lennar Multifamily unconsolidated entities, the Company (or entities related to them) has been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. 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. Additionally, the Company guarantees the construction costs of the project. Generally construction cost over-runs would be paid by the Company. Generally, these payments are increases to our investment in the entities and would increase our share of funds the entities distribute after the achievement of certain thresholds. As of both May 31, 2015 and November 30, 2014, the fair value of the completion guarantees was immaterial. Additionally, as of May 31, 2015 and November 30, 2014, the Lennar Multifamily segment had $22.2 million and $23.5 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities. These letters of credit outstanding are included in the disclosure in Note 12 related to the Company's performance and financial letters of credit. As of May 31, 2015 and November 30, 2014, Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $333.5 million and $163.4 million, respectively.
During the three and six months ended May 31, 2015, the Lennar Multifamily segment provided general contractor services for construction of some of the rental properties owned by unconsolidated entities in which the Company has an investment and received fees totaling $35.1 million and $67.0 million, respectively, which are offset by costs related to those services of $33.7 million and $65.1 million, respectively. During the three and six months ended May 31, 2014, the Lennar Multifamily segment provided general contractor services for construction of some of its rental properties owned by unconsolidated entities in which the Company has an investment and received fees totaling $7.1 million and $13.2 million, respectively, which are offset by costs related to those services of $6.2 million and $12.2 million, respectively.

23



Summarized condensed financial information on a combined 100% basis related to Lennar Multifamily's investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
12,550

 
25,319

Operating properties and equipment
961,179

 
637,259

Other assets
18,119

 
14,742

 
$
991,848

 
677,320

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
129,979

 
87,151

Notes payable
333,461

 
163,376

Equity
528,408

 
426,793

 
$
991,848

 
677,320

Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
3,075

 
960

 
5,169

 
2,411

Costs and expenses
5,081

 
1,581

 
8,075

 
3,175

Net loss of unconsolidated entities
$
(2,006
)
 
(621
)
 
(2,906
)
 
(764
)
Lennar Multifamily equity in loss from unconsolidated entities
$
(422
)
 
(182
)
 
(600
)
 
(257
)

(10)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of May 31, 2015 and November 30, 2014 included $339.8 million and $263.2 million, respectively, of cash held in escrow for approximately three days.

(11)
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, as well as funds on deposit to secure and support performance obligations.


24



(12)
Lennar Homebuilding Senior Notes and Other Debts Payable
(Dollars in thousands)
May 31,
2015
 
November 30,
2014
6.50% senior notes due 2016
$
249,942

 
249,923

12.25% senior notes due 2017
396,807

 
396,278

4.75% senior notes due 2017
399,250

 
399,250

6.95% senior notes due 2018
248,652

 
248,485

4.125% senior notes due 2018
274,996

 
274,995

4.500% senior notes due 2019
500,431

 
500,477

4.50% senior notes due 2019
600,597

 
350,000

2.75% convertible senior notes due 2020
437,936

 
431,042

3.25% convertible senior notes due 2021
399,990

 
400,000

4.750% senior notes due 2022
571,656

 
571,439

4.750% senior notes due 2025
500,000

 

5.60% senior notes due 2015

 
500,272

Unsecured revolving credit facility
450,000

 

Mortgage notes on land and other debt
260,879

 
368,052

 
$
5,291,136

 
4,690,213

In April 2015, the Company amended its unsecured revolving credit facility (the “Credit Facility”) to reduce the interest rate on $1.18 billion of the Credit Facility, increase the maximum potential borrowings from $1.5 billion to $1.6 billion, which includes a $263 million accordion feature, subject to additional commitments, with certain financial institutions and extend the maturity of $1.18 billion of the Credit Facility from June 2018 to June 2019. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The Credit Facility agreement also provides that up to $500 million in commitments may be used for letters of credit. Under the Credit Facility agreement, the Company is required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. For more details refer to Management's Discussion and Analysis of Financial Conditions and Results of Operations in Item 2. The Company believes it was in compliance with its debt covenants at May 31, 2015. In addition, the Company had $315 million letter of credit facilities with different financial institutions.
The Company’s performance letters of credit outstanding were $246.5 million and $234.1 million, respectively, at May 31, 2015 and November 30, 2014. The Company’s financial letters of credit outstanding were $179.5 million and $190.4 million, respectively, at May 31, 2015 and November 30, 2014. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities. 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 May 31, 2015, 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 $964.6 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 May 31, 2015, there were approximately $422.8 million, or 44%, of anticipated future costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds or letters of credit, 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 April 2015, the Company issued $500 million aggregate principal amount of 4.750% senior notes due 2025 (the "4.750% Senior Notes" ) at a price of 100%. Proceeds from the offering, after payment of expenses, were $495.6 million. The Company used the net proceeds from the sales of the 4.750% Senior Notes, together with cash on hand, to retire its $500 million of 5.60% senior notes due May 2015 for 100% of the outstanding principal amount, plus accrued and unpaid interest. Interest on the 4.750% Senior Notes is due semi-annually beginning November 30, 2015. The 4.750% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
In November 2014, the Company originally issued $350 million aggregate principal amount of 4.50% senior notes due 2019 (the “4.50% Senior Notes”) at a price of 100%. In February 2015, the Company issued an additional $250 million aggregate principal amount of its 4.50% Senior Notes at a price of 100.25%. Proceeds from the offerings, after payment of expenses, were $595.8 million. The Company used the net proceeds from the sales of the 4.50% Senior Notes for working

25



capital and general corporate purposes. Interest on the 4.50% Senior Notes is due semi-annually beginning May 15, 2015. The 4.50% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
At both May 31, 2015 and November 30, 2014, the carrying and principal amount of the 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”) was $400.0 million. 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 shares of Class A common stock 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. The 3.25% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
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. Shares are included in the calculation of diluted earnings per share because even though it is the Company’s intent to settle the face value of the 2.75% Convertible Senior Notes in cash, the Company's volume weighted average stock price exceeded the conversion price. The Company’s volume weighted average stock price for the three months ended May 31, 2015 and 2014 was $48.84 and $39.92, respectively, which exceeded the conversion price, thus 11.0 million shares and 9.0 million shares, respectively, were included in the calculation of diluted earnings per share. The Company’s volume weighted average stock price for the six months ended May 31, 2015 and 2014 was $47.01 and $39.32, respectively, which exceeded the conversion price, thus 10.7 million shares and 8.8 million shares, respectively, were included in the calculation of diluted earnings per share.
Holders of the 2.75% Convertible Senior Notes have the right to convert them, during any fiscal quarter (and only during such fiscal quarter), if the last reported sale price of the Company’s Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day.
Subsequent to May 31, 2015, the Company exchanged approximately $106 million in aggregate principal amount of the 2.75% Convertible Senior Notes for approximately $106 million in cash and 2.5 million shares of Class A common stock, plus accrued and unpaid interest through the date of completion of the exchanges.
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 shares of Class A common stock 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. The 2.75% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
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 May 31, 2015 and November 30, 2014, the principal amount of the 2.75% Convertible Senior Notes was $446.0 million. At May 31, 2015 and November 30, 2014, the carrying amount of the equity component included in stockholders’ equity was $8.1 million and $15.0 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 $437.9 million and $431.0 million, respectively.
Although the guarantees by substantially all of the Company's 100% owned homebuilding subsidiaries are full, unconditional and joint and several while they are in effect, (i) a subsidiary will cease to be a guarantor at any time when it is not directly or indirectly guaranteeing at least $75 million of debt of Lennar Corporation (the parent company), and (ii) a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.


26



(13)
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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Warranty reserve, beginning of period
$
116,271

 
101,097

 
115,927

 
102,580

Warranties issued
20,469

 
14,580

 
33,792

 
24,972

Adjustments to pre-existing warranties from changes in estimates (1)
1,723

 
3,456

 
5,384

 
5,576

Payments
(18,853
)
 
(13,434
)
 
(35,493
)
 
(27,429
)
Warranty reserve, end of period
$
119,610

 
105,699

 
119,610

 
105,699

(1)
The adjustments to pre-existing warranties from changes in estimates during the three and six months ended May 31, 2015 and 2014 primarily related to specific claims related to certain of our homebuilding communities and other adjustments.

(14)
Share-Based Payments
During both the three and six months ended May 31, 2015 and 2014, 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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Stock options
$
38

 
38

 
39

 
40

Nonvested shares
10,361

 
8,512

 
20,611

 
17,251

Total compensation expense for share-based awards
$
10,399

 
8,550

 
20,650

 
17,291


(15)
Financial Instruments and Fair Value Disclosures
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at May 31, 2015 and November 30, 2014, 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, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
 
 
 
May 31, 2015
 
November 30, 2014
 
Fair Value
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Hierarchy
 
Amount
 
Value
 
Amount
 
Value
ASSETS
 
 
 
 
 
 
 
 
 
Rialto:
 
 
 
 
 
 
 
 
 
Loans receivable, net
Level 3
 
$
100,635

 
104,298

 
130,105

 
135,881

Investments held-to-maturity
Level 3
 
$
17,970

 
17,574

 
17,290

 
17,155

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Loans held-for-investment, net
Level 3
 
$
29,776

 
29,008

 
26,894

 
26,723

Investments held-to-maturity
Level 2
 
$
30,291

 
30,308

 
45,038

 
45,051

LIABILITIES
 
 
 
 
 
 
 
 
 
Lennar Homebuilding senior notes and other debts payable
Level 2
 
$
5,291,136

 
6,398,288

 
4,690,213

 
5,760,075

Rialto notes and other debts payable
Level 2
 
$
629,703

 
662,221

 
623,246

 
640,335

Lennar Financial Services notes and other debts payable
Level 2
 
$
865,416

 
865,416

 
704,143

 
704,143


27



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—The fair values for loans receivable, net are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable. The fair value for investments held-to-maturity is based on discounted cash flows. For notes and other debts payable, the fair value is calculated based on discounted cash flows using the Company’s weighted average borrowing rate and for the warehouse repurchase financing agreements fair values approximate their carrying value due to their short maturities.
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. For notes and other debts payable, the fair values approximate their carrying value due to variable interest pricing terms and short-term nature of the borrowings.
Fair Value Measurements:
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 Company’s financial instruments measured at fair value on a recurring basis are summarized below:
Financial Instruments
Fair Value
Hierarchy
 
Fair Value at
May 31,
2015
 
Fair Value at
November 30,
2014
(In thousands)
 
 
 
 
 
Lennar Financial Services:
 
 
 
 
 
Loans held-for-sale (1)
Level 2
 
$
791,349

 
738,396

Mortgage loan commitments
Level 2
 
$
18,882

 
12,687

Forward contracts
Level 2
 
$
155

 
(7,576
)
Mortgage servicing rights
Level 3
 
$
16,504

 
17,353

Lennar Homebuilding:
 
 
 
 
 
Investments available-for-sale
Level 3
 
$
492

 
480

Rialto:
 
 
 
 
 
Loans held-for-sale (2)
Level 3
 
$
318,037

 
113,596

(1)
The aggregate fair value of Lennar Financial Services loans held-for-sale of $791.3 million at May 31, 2015 exceeds their aggregate principal balance of $762.1 million by $29.3 million. The aggregate fair value of loans held-for-sale of $738.4 million at November 30, 2014 exceeds their aggregate principal balance of $706.0 million by $32.4 million.
(2)
The aggregate fair value of Rialto loans held-for-sale of $318.0 million at May 31, 2015 is below their aggregate principal balance of $318.3 million by $0.3 million. The aggregate fair value of loans held-for-sale of $113.6 million at November 30, 2014 exceeds their aggregate principal balance of $111.8 million by $1.8 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:
Lennar Financial Services 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

28



Lennar Financial Services’ loans held-for-sale as of May 31, 2015 and November 30, 2014. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.
Lennar Financial Services 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. 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 servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets.
Lennar Financial Services forward contracts— Fair value is based on quoted market prices for similar financial instruments. The fair value of forward contracts is included in the Lennar Financial Services segment's other assets as of May 31, 2015. The fair value of forward contracts is included in the Lennar Financial Services segment's other liabilities as of November 30, 2014.
Lennar Financial Services mortgage servicing rights Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis, at the time of securitization or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of May 31, 2015, the key assumptions used in determining the fair value include a 12.1% mortgage prepayment rate, a 12.0% discount rate and a 5.9% delinquency rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.
Lennar Homebuilding investments available-for-sale— The fair value of these investments is based on third-party valuations and/or estimated by the Company on the basis of discounted cash flows and it is included in the Lennar Homebuilding segment's other assets.
Rialto loans held-for-sale— The fair value of loans held-for-sale is calculated from model-based techniques that use discounted cash flow assumptions and the Company’s own estimates of CMBS spreads, market interest rate movements and the underlying loan credit quality. Loan values are calculated by allocating the change in value of an assumed CMBS capital structure to each loan. The value of an assumed CMBS capital structure is calculated, generally, by discounting the cash flows associated with each CMBS class at market interest rates and at the Company’s own estimate of CMBS spreads. The Company estimates CMBS spreads by observing the pricing of recent CMBS offerings, secondary CMBS markets, changes in the CMBX index, and general capital and commercial real estate market conditions. Considerations in estimating CMBS spreads include comparing the Company’s current loan portfolio with comparable CMBS offerings containing loans with similar duration, credit quality and collateral composition. These methods use unobservable inputs in estimating a discount rate that is used to assign a value to each loan. While the cash payments on the loans are contractual, the discount rate used and assumptions regarding the relative size of each class in the CMBS capital structure can significantly impact the valuation. Therefore, the estimates used could differ materially from the fair value determined when the loans are sold to a securitization trust.
The changes in fair values for Level 1 and Level 2 financial instruments measured on a recurring basis are shown below by financial instrument and financial statement line item:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Changes in fair value included in Lennar Financial Services revenues:
 
 
 
 
 
 
 
Loans held-for-sale
$
4,181

 
8,392

 
(3,119
)
 
7,152

Mortgage loan commitments
$
(84
)
 
4,904

 
6,195

 
7,698

Forward contracts
$
210

 
(2,038
)
 
7,731

 
(7,759
)
Interest income on Lennar Financial Services loans held-for-sale and Rialto loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded as revenues in the Lennar Financial Services’ statement of operations and Rialto's statement of operations, respectively.
The Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge its 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 the Company’s counterparties to investment banks, federally

29



regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s 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 May 31, 2015, the segment had open commitments amounting to $1.0 billion to sell MBS with varying settlement dates through August 2015.
The following table represents the reconciliation of the beginning and ending balance for the Level 3 recurring fair value measurements:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Mortgage servicing rights, beginning of period
$
16,786

 
11,955

 
17,353

 
11,455

Purchases and retention of mortgage servicing rights (1)
652

 
6,808

 
996

 
7,968

Disposals
(1,095
)
 

 
(1,874
)
 

Changes in fair value (2)
161

 
(521
)
 
29

 
(1,181
)
Mortgage servicing rights, end of period
$
16,504

 
18,242

 
16,504

 
18,242

(1)
For both the three and six months ended May 31, 2014, purchases and retention of mortgage servicing rights included the $5.9 million acquisition of a portfolio of mortgage servicing rights.
(2)
Amount represents changes in fair value included in Lennar Financial Services revenues.
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Investments available-for-sale, beginning of period
$
28,573

 
59,880

 
480

 
40,032

Purchases and other (1)

 
5,280

 
28,093

 
21,274

Sales

 
(44,579
)
 

 
(44,579
)
Changes in fair value (2)
12

 
222

 
12

 
5,150

Settlements (3)
(28,093
)
 
(387
)
 
(28,093
)
 
(1,461
)
Investments available-for-sale, end of period
$
492

 
20,416

 
492

 
20,416

(1)
Represents investments in community development district bonds that mature at various dates between 2015 and 2039.
(2)
The changes in fair value were not included in other comprehensive income because the changes in fair value were deferred as a result of the Company's continuing involvement in the underlying real estate collateral.
(3)
The investments available-for-sale that were settled related to investments in community development district bonds, which were in default upon purchase and reissued by the municipalities prior to being settled with third parties.
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Rialto loans held-for-sale, beginning of period
$
360,045

 
86,857

 
113,596

 
44,228

Loan originations
683,179

 
396,648

 
1,248,694

 
692,156

Origination loans sold, including those not settled
(723,479
)
 
(438,498
)
 
(1,041,583
)
 
(691,536
)
Interest and principal paydowns
(161
)
 
370

 
(369
)
 
(24
)
Changes in fair value (1)
(1,547
)
 
(312
)
 
(2,301
)
 
241

Rialto loans held-for-sale, end of period
$
318,037

 
45,065

 
318,037

 
45,065

(1)
Amount represents changes in fair value included in Rialto revenues.

30



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. The fair values included in the table below represents 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:
 
 
 
Three Months Ended May 31,
 
 
 
2015
 
2014
(In thousands)
Fair Value
Hierarchy
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
 
Carrying Value
 
Fair Value
 
Total Losses (1)
Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans receivable
Level 3
 
$
81,108

 
79,523

 
(1,585
)
 
196,173

 
162,306

 
(33,867
)
Non-financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finished homes and construction in progress (2)

Level 3

 
$
46,339

 
36,736

 
(9,603
)
 

 

 

Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
REO - held-for-sale (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
8,733

 
8,209

 
(524
)
 
6,617

 
6,220

 
(397
)
Upon management periodic valuations
Level 3
 
$
11,258

 
8,828

 
(2,430
)
 
4,422

 
3,787

 
(635
)
REO - held-and-used, net (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
4,689

 
5,431

 
742

 
32,356

 
25,713

 
(6,643
)
Upon management periodic valuations
Level 3
 
$

 

 

 
2,884

 
2,285

 
(599
)
(1)
Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended May 31, 2015 and 2014.
(2)
Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's condensed consolidated statement of operations for the three months ended May 31, 2015.
(3)
REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of the transfer or acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-for-sale is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO held-for-sale. The losses upon the transfer or acquisition of REO and impairments were included in Rialto other income (expense), net, in the Company’s condensed consolidated statement of operations for the three months ended May 31, 2015 and 2014.
(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. 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. In addition, management periodically performs valuations of its REO held-and-used, net. The gains (losses) upon acquisition of REO held-and-used, net and impairments were included in Rialto other income (expense), net, in the Company’s condensed consolidated statement of operations for the three months ended May 31, 2015 and 2014.

31



 
 
 
Six Months Ended May 31,
 
 
 
2015
 
2014
(In thousands)
Fair Value
Hierarchy
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
 
Carrying Value
 
Fair Value
 
Total Losses (1)
Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Rialto Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans receivable
Level 3
 
$
103,209

 
100,400

 
(2,809
)
 
173,328

 
132,745

 
(40,583
)
Non-financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$
46,339

 
36,736

 
(9,603
)
 

 

 

Land and land under development (2)
Level 3
 
$

 

 

 
7,013

 
6,143

 
(870
)
Rialto Investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
REO - held-for-sale (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
13,617

 
12,800

 
(817
)
 
13,050

 
12,267

 
(783
)
Upon management periodic valuations
Level 3
 
$
16,862

 
13,307

 
(3,555
)
 
23,740

 
21,700

 
(2,040
)
REO - held-and-used, net (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
13,326

 
14,343

 
1,017

 
40,072

 
33,747

 
(6,325
)
Upon management periodic valuations
Level 3
 
$
2,689

 
1,276

 
(1,413
)
 
12,433

 
10,930

 
(1,503
)
(1)
Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the six months ended May 31, 2015 and 2014.
(2)
Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's condensed consolidated statement of operations for the six months ended May 31, 2015 and 2014.
(3)
REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of the transfer or acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-for-sale is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO held-for-sale. The losses upon the transfer or acquisition of REO and impairments were included in Rialto other income (expense), net, in the Company’s condensed consolidated statement of operations for the six months ended May 31, 2015 and 2014.
(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. 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. In addition, management periodically performs valuations of its REO held-and-used, net. The gains (losses) upon acquisition of REO held-and-used, net and impairments were included in Rialto other income (expense), net, in the Company’s condensed consolidated statement of operations for the six months ended May 31, 2015 and 2014.
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. The Company discloses its accounting policy related to inventories and its review for indicators of impairments in the Summary of Significant Accounting Policies in its Form 10-K for the year ended November 30, 2014.
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 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, market deterioration or changes in assumptions may lead the Company to incur additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired but for which indicators of impairment may arise if market deterioration occurs.
As of May 31, 2015 and 2014, there were 665 and 578 active communities, excluding unconsolidated entities, respectively. For May 31, 2015, the Company reviewed its communities for potential indicators of impairments and identified 21 communities with 790 homesites and a corresponding carrying value of $160.3 million as having potential indicators of impairment. Of those communities, the Company recorded a valuation adjustment of $9.6 million on 67 homesites in one

32



community with a carrying value of $46.3 million for the six months ended May 31, 2015 related to a strategic decision to move forward on an inactive asset.
For May 31, 2014, the Company reviewed its communities for potential indicators of impairments and identified 33 communities with 1,778 homesites and a corresponding carrying value of $138.8 million as having potential indicators of impairment. The Company recorded no impairments for the six months ended May 31, 2014.
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 six months ended May 31, 2015:
 
Six Months Ended

 
May 31, 2015
Unobservable inputs
 
Average selling price
$1,300,000
Absorption rate per quarter (homes)
9
Discount rate
12%
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 the Company's local homebuilding operations, if applicable, and current trends in the market and economy impacting the REO. Using 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. Generally, the capitalization rates used to estimate fair value ranged from 8% to 12% 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 upon foreclosure in the Company’s consolidated 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 generally recorded as a provision for loan losses in the Company’s condensed consolidated statement of operations.

33



(16)
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, 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 six months ended May 31, 2015. Based on the Company's evaluation during the six months ended May 31, 2015, the Company deconsolidated an entity within its Lennar Multifamily segment that had total combined assets of $17.4 million (primarily operating properties and equipment) and liabilities of $1.2 million. In addition, during the six months ended May 31, 2015, there were no VIEs that were consolidated.
At May 31, 2015 and November 30, 2014, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $688.5 million and $656.8 million, respectively, the Rialto segment’s investments in unconsolidated entities were $195.1 million and $175.7 million, respectively, and the Lennar Multifamily segment's investments in unconsolidated entities were $129.8 million and $105.7 million, respectively.
Consolidated VIEs
As of May 31, 2015, the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $709.3 million and $84.2 million, respectively. As of November 30, 2014, the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $929.1 million and $149.8 million, 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 and other debts payable. In addition, the assets held by a VIE usually are collateral for that VIE’s debt. The Company and 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.

34



Unconsolidated VIEs
The Company’s recorded investment in unconsolidated VIEs and its estimated maximum exposure to loss were as follows:
As of May 31, 2015
(In thousands)
Investments in
Unconsolidated
VIEs
 
Lennar’s
Maximum
Exposure
to Loss
Lennar Homebuilding (1)
$
115,634

 
124,035

Rialto (2)
17,970

 
17,970

Lennar Multifamily (3)
40,722

 
63,392

 
$
174,326

 
205,397

As of November 30, 2014
(In thousands)
Investments in
Unconsolidated
VIEs
 
Lennar’s
Maximum
Exposure
to Loss
Lennar Homebuilding (1)
$
124,311

 
194,321

Rialto (2)
17,290

 
17,290

Lennar Multifamily (3)
41,600

 
65,810

 
$
183,201

 
277,421

(1)
At May 31, 2015 and November 30, 2014, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $8.3 million and $70.0 million, respectively, remaining commitment to fund an unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing.
(2)
At both May 31, 2015 and November 30, 2014, the maximum recourse exposure to loss of Rialto’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs. At May 31, 2015 and November 30, 2014, investments in unconsolidated VIEs and Lennar’s maximum exposure to loss included $18.0 million and $17.3 million, respectively, related to Rialto’s investments held-to-maturity.
(3)
At May 31, 2015 and November 30, 2014, the maximum exposure to loss of Lennar Multifamily's investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $22.1 million and $23.4 million, respectively, of letters of credit outstanding for certain of the unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements.
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.
The Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for $22.1 million of letters of credit outstanding for certain Lennar Multifamily unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements. In addition, 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, except with regard to an $8.3 million remaining commitment to fund an unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing. Except for the unconsolidated VIEs discussed above, the Company and the other partners did not guarantee any debt of the other unconsolidated 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.

35



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 or makes a significant deposit for optioned land, it may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2015, consolidated inventory not owned decreased by $1.2 million with a corresponding decrease to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2015. The decrease was primarily due to a higher amount of homesite takedowns than construction started on homesites not owned. To reflect the purchase price of the inventory consolidated, the Company had a net reclass related to option deposits from consolidated inventory not owned to land under development in the accompanying condensed consolidated balance sheet as of May 31, 2015. 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 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 $68.5 million and $85.6 million at May 31, 2015 and November 30, 2014, respectively. Additionally, the Company had posted $35.9 million and $34.5 million of letters of credit in lieu of cash deposits under certain option contracts as of May 31, 2015 and November 30, 2014, respectively.
(17)
Commitments and Contingent Liabilities
The Company has been engaged in litigation since 2008 in the United States District Court for the District of Maryland regarding whether the Company is required by a contract it entered into in 2005 to purchase a property in Maryland. After entering into the contract, the Company later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In January 2015, the District Court rendered a decision ordering the Company to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. The Company believes the decision is contrary to applicable law and will appeal the decision. The Company does not believe it is probable that a loss has occurred and, therefore, no liability has been recorded with respect to this case.
If the District Court decision were affirmed in its entirety, the Company would purchase the property and record it at fair value, which the Company believes would not result in an impairment. The amount of interest the Company would be required to pay has been the subject of further proceedings before the court. On June 29, 2015, the court ruled that interest will be calculated as simple interest at the rate of 12% per annum from May 27, 2008 until the date the Company purchases the property. Simple interest on $114 million at 12% per annum will accrue at the rate of $13.7 million per year, totaling approximately $96 million as of May 31, 2015. In addition, if the Company is required to purchase the property, it will be obligated to reimburse the seller for real estate taxes, which currently total $1.6 million. The Company has not engaged in discovery regarding the amount of the plaintiffs’ attorneys’ fees. If the District Court decision was totally reversed on appeal, the Company would not have to purchase the property or pay interest, real estate taxes or attorneys’ fees.
In its June 29, 2015 ruling, the District Court determined that the Company will be permitted to stay the judgment during appeal by posting a bond in the amount of $223.4 million. The District Court calculated this amount by adding 12% per annum simple interest to the $114 million purchase price for the period beginning May 27, 2008 through May 26, 2016, the date the District Court estimates the appeal of the case will be concluded. The posting of this bond will not have a material impact on the Company's condensed consolidated financial statements.

36





37



(18)
New Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. ASU 2014-09 will be effective for the Company’s fiscal year beginning December 1, 2017 and subsequent interim periods The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this ASU recognized at the date of initial application. Early adoption is not permitted. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. ASU 2015-02 requires management to reevaluate all legal entities under a revised consolidation model specifically (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. ASU 2015-02 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. Early adoption is permitted. The Company is evaluating the impact that ASU 2015-03 will have on the Company’s condensed consolidated financial statements.

38



(19)
Supplemental Financial Information
The indentures governing the Company’s 6.50% senior notes due 2016, 12.25% senior notes due 2017, 4.75% senior notes due 2017, 6.95% senior notes due 2018, 4.125% senior notes due 2018, 4.500% senior notes due 2019, 4.50% senior notes due 2019, 2.75% convertible senior notes due 2020, 3.25% convertible senior notes due 2021, 4.750% senior notes due 2022 and 4.750% senior notes due 2025 require that, if any of the Company’s 100% 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 are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because at May 31, 2015 they were guaranteeing Lennar Corporation's letter of credit facilities and its Credit Facility, disclosed in Note 12. The guarantees are full, unconditional and joint and several and the guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. A subsidiary's guarantee will be suspended at any time when it is not directly or indirectly guaranteeing at least $75 million principal amount of debt of Lennar Corporation, and a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
For purposes of the condensed consolidating statement of cash flows included in the following supplemental financial information, the Company's accounting policy is to treat cash received by Lennar Corporation (“the Parent”) from its subsidiaries, to the extent of net earnings from such subsidiaries as a dividend and accordingly a return on investment within cash flows from operating activities. Distributions of capital received by the Parent from its subsidiaries are reflected as cash flows from investing activities. The cash outflows associated with the return on investment dividends and distributions of capital received by the Parent are reflected by the Guarantor and Non-Guarantor subsidiaries in the Dividends line item within cash flows from financing activities. All other cash flows between the Parent and its subsidiaries represent the settlement of receivables and payables between such entities in conjunction with the Parent's centralized cash management arrangement with its subsidiaries, which operates with the characteristics of a revolving credit facility, and are accordingly reflected net in the Intercompany line item within cash flows from investing activities for the Parent and net in the Intercompany line item within cash flows from financing activities for the Guarantor and Non-Guarantor subsidiaries.


39

(19) Supplemental Financial Information - (Continued)

Supplemental information for the subsidiaries that were guarantor subsidiaries at May 31, 2015 was as follows:

Condensed Consolidating Balance Sheet
May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and receivables, net
$
415,426

 
287,875

 
18,507

 

 
721,808

Inventories

 
8,568,928

 
184,848

 

 
8,753,776

Investments in unconsolidated entities

 
649,479

 
38,988

 

 
688,467

Other assets
223,025

 
297,825

 
57,457

 
12,775

 
591,082

Investments in subsidiaries
4,043,687

 
266,025

 

 
(4,309,712
)
 

Intercompany
5,997,043

 

 

 
(5,997,043
)
 

 
10,679,181

 
10,070,132

 
299,800

 
(10,293,980
)
 
10,755,133

Rialto

 

 
1,364,682

 

 
1,364,682

Lennar Financial Services

 
77,765

 
1,335,623

 

 
1,413,388

Lennar Multifamily

 

 
362,256

 

 
362,256

Total assets
$
10,679,181

 
10,147,897

 
3,362,361

 
(10,293,980
)
 
13,895,459

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
489,188

 
667,493

 
87,974

 

 
1,244,655

Liabilities related to consolidated inventory not owned

 
43,897

 

 

 
43,897

Senior notes and other debts payable
5,051,255

 
229,031

 
10,850

 

 
5,291,136

Intercompany

 
5,398,483

 
598,560

 
(5,997,043
)
 

 
5,540,443

 
6,338,904

 
697,384

 
(5,997,043
)
 
6,579,688

Rialto

 

 
712,744

 

 
712,744

Lennar Financial Services

 
31,674

 
1,037,692

 
6,149

 
1,075,515

Lennar Multifamily

 

 
45,167

 
6,626

 
51,793

Total liabilities
5,540,443

 
6,370,578

 
2,492,987

 
(5,984,268
)
 
8,419,740

Stockholders’ equity
5,138,738

 
3,777,319

 
532,393

 
(4,309,712
)
 
5,138,738

Noncontrolling interests

 

 
336,981

 

 
336,981

Total equity
5,138,738

 
3,777,319

 
869,374

 
(4,309,712
)
 
5,475,719

Total liabilities and equity
$
10,679,181

 
10,147,897

 
3,362,361

 
(10,293,980
)
 
13,895,459


40

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Balance Sheet
November 30, 2014
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and receivables, net
$
653,491

 
323,325

 
12,206

 

 
989,022

Inventories

 
7,528,633

 
207,967

 

 
7,736,600

Investments in unconsolidated entities

 
632,973

 
23,864

 

 
656,837

Other assets
159,564

 
402,076

 
104,619

 
6,330

 
672,589

Investments in subsidiaries
4,073,687

 
299,432

 

 
(4,373,119
)
 

Intercompany
4,709,544

 

 

 
(4,709,544
)
 

 
9,596,286

 
9,186,439

 
348,656

 
(9,076,333
)
 
10,055,048

Rialto

 

 
1,458,152

 

 
1,458,152

Lennar Financial Services

 
76,428

 
1,100,625

 

 
1,177,053

Lennar Multifamily

 
248,784

 
19,230

 

 
268,014

Total assets
$
9,596,286

 
9,511,651

 
2,926,663

 
(9,076,333
)
 
12,958,267

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
447,104

 
756,991

 
71,699

 

 
1,275,794

Liabilities related to consolidated inventory not owned

 
45,028

 

 

 
45,028

Senior notes and other debts payable
4,322,162

 
287,700

 
80,351

 

 
4,690,213

Intercompany

 
4,579,314

 
130,230

 
(4,709,544
)
 

 
4,769,266

 
5,669,033

 
282,280

 
(4,709,544
)
 
6,011,035

Rialto

 

 
747,044

 

 
747,044

Lennar Financial Services

 
28,705

 
861,608

 
6,330

 
896,643

Lennar Multifamily

 
52,150

 
93

 

 
52,243

Total liabilities
4,769,266

 
5,749,888

 
1,891,025

 
(4,703,214
)
 
7,706,965

Stockholders’ equity
4,827,020

 
3,761,763

 
611,356

 
(4,373,119
)
 
4,827,020

Noncontrolling interests

 

 
424,282

 

 
424,282

Total equity
4,827,020

 
3,761,763

 
1,035,638

 
(4,373,119
)
 
5,251,302

Total liabilities and equity
$
9,596,286

 
9,511,651

 
2,926,663

 
(9,076,333
)
 
12,958,267



41

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Three Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
2,115,812

 

 

 
2,115,812

Lennar Financial Services

 
52,822

 
122,075

 
(5,012
)
 
169,885

Rialto

 

 
67,931

 

 
67,931

Lennar Multifamily

 

 
38,981

 
(5
)
 
38,976

Total revenues

 
2,168,634

 
228,987

 
(5,017
)
 
2,392,604

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
1,807,439

 
19,511

 
(1,468
)
 
1,825,482

Lennar Financial Services

 
49,524

 
84,816

 
(3,508
)
 
130,832

Rialto

 

 
67,506

 

 
67,506

Lennar Multifamily

 

 
47,260

 

 
47,260

Corporate general and administrative
48,941

 

 

 
1,266

 
50,207

Total costs and expenses
48,941

 
1,856,963

 
219,093

 
(3,710
)
 
2,121,287

Lennar Homebuilding equity in earnings from unconsolidated entities

 
3,892

 
2,602

 

 
6,494

Lennar Homebuilding other income (expense), net
163

 
1,277

 
(1,504
)
 
(153
)
 
(217
)
Other interest expense
(1,460
)
 
(3,818
)
 

 
1,460

 
(3,818
)
Rialto equity in earnings from unconsolidated entities

 

 
7,328

 

 
7,328

Rialto other expense, net

 

 
(872
)
 

 
(872
)
Lennar Multifamily equity in loss from unconsolidated entities

 

 
(422
)
 

 
(422
)
Earnings (loss) before income taxes
(50,238
)
 
313,022

 
17,026

 

 
279,810

Benefit (provision) for income taxes
17,196

 
(105,552
)
 
(6,870
)
 

 
(95,226
)
Equity in earnings from subsidiaries
219,792

 
6,236

 

 
(226,028
)
 

Net earnings (including net earnings attributable to noncontrolling interests)
186,750

 
213,706

 
10,156

 
(226,028
)
 
184,584

Less: Net earnings attributable to noncontrolling interests

 

 
1,568

 

 
1,568

Net earnings attributable to Lennar
$
186,750

 
213,706

 
8,588

 
(226,028
)
 
183,016

Comprehensive earnings attributable to Lennar
$
186,750

 
213,706

 
8,588

 
(226,028
)
 
183,016

Comprehensive earnings attributable to noncontrolling interests
$

 

 
1,568

 

 
1,568



42

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Three Months Ended May 31, 2014
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
1,634,785

 

 

 
1,634,785

Lennar Financial Services

 
39,602

 
76,887

 
(5,473
)
 
111,016

Rialto

 

 
54,393

 

 
54,393

Lennar Multifamily

 
18,551

 

 

 
18,551

Total revenues

 
1,692,938

 
131,280

 
(5,473
)
 
1,818,745

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
1,392,211

 
1,072

 
(640
)
 
1,392,643

Lennar Financial Services

 
38,371

 
59,097

 
(4,745
)
 
92,723

Rialto

 

 
79,604

 

 
79,604

Lennar Multifamily

 
25,549

 

 

 
25,549

Corporate general and administrative
37,052

 

 

 
1,265

 
38,317

Total costs and expenses
37,052

 
1,456,131

 
139,773

 
(4,120
)
 
1,628,836

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities

 
(3,001
)
 
3,395

 

 
394

Lennar Homebuilding other income, net

 
2,369

 

 
(107
)
 
2,262

Other interest expense
(1,460
)
 
(10,287
)
 

 
1,460

 
(10,287
)
Rialto equity in earnings from unconsolidated entities

 

 
17,939

 

 
17,939

Rialto other income, net

 

 
3,595

 

 
3,595

Lennar Multifamily equity in loss from unconsolidated entities

 
(182
)
 

 

 
(182
)
Earnings (loss) before income taxes
(38,512
)
 
225,706

 
16,436

 

 
203,630

Benefit (provision) for income taxes
14,265

 
(83,475
)
 
(11,803
)
 

 
(81,013
)
Equity in earnings from subsidiaries
161,966

 
10,615

 

 
(172,581
)
 

Net earnings (including net loss attributable to noncontrolling interests)
137,719

 
152,846

 
4,633

 
(172,581
)
 
122,617

Less: Net loss attributable to noncontrolling interests

 

 
(15,102
)
 

 
(15,102
)
Net earnings attributable to Lennar
$
137,719

 
152,846

 
19,735

 
(172,581
)
 
137,719

Comprehensive earnings attributable to Lennar
$
137,719

 
152,846

 
19,735

 
(172,581
)
 
137,719

Comprehensive loss attributable to noncontrolling interests
$

 

 
(15,102
)
 

 
(15,102
)


43

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Six Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
3,557,470

 

 

 
3,557,470

Lennar Financial Services

 
90,971

 
213,734

 
(9,993
)
 
294,712

Rialto

 

 
109,128

 

 
109,128

Lennar Multifamily

 

 
75,438

 
(5
)
 
75,433

Total revenues

 
3,648,441

 
398,300

 
(9,998
)
 
4,036,743

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
3,076,932

 
20,030

 
(6,305
)
 
3,090,657

Lennar Financial Services

 
87,750

 
156,092

 
(3,710
)
 
240,132

Rialto

 

 
108,287

 

 
108,287

Lennar Multifamily

 

 
89,221

 

 
89,221

Corporate general and administrative
91,330

 

 

 
2,531

 
93,861

Total costs and expenses
91,330

 
3,164,682

 
373,630

 
(7,484
)
 
3,622,158

Lennar Homebuilding equity in earnings from unconsolidated entities

 
26,387

 
9,006

 

 
35,393

Lennar Homebuilding other income (expense), net
394

 
7,601

 
(1,504
)
 
(375
)
 
6,116

Other interest expense
(2,889
)
 
(7,889
)
 

 
2,889

 
(7,889
)
Rialto equity in earnings from unconsolidated entities

 

 
9,992

 

 
9,992

Rialto other expense, net

 

 
(1,144
)
 

 
(1,144
)
Lennar Multifamily equity in loss from unconsolidated entities

 

 
(600
)
 

 
(600
)
Earnings (loss) before income taxes
(93,825
)
 
509,858

 
40,420

 

 
456,453

Benefit (provision) for income taxes
32,098

 
(171,646
)
 
(15,404
)
 

 
(154,952
)
Equity in earnings from subsidiaries
359,706

 
20,086

 

 
(379,792
)
 

Net earnings (including net earnings attributable to noncontrolling interests)
297,979

 
358,298

 
25,016

 
(379,792
)
 
301,501

Less: Net earnings attributable to noncontrolling interests

 

 
3,522

 

 
3,522

Net earnings attributable to Lennar
$
297,979

 
358,298

 
21,494

 
(379,792
)
 
297,979

Comprehensive earnings attributable to Lennar
$
297,979

 
358,298

 
21,494

 
(379,792
)
 
297,979

Comprehensive earnings attributable to noncontrolling interests
$

 

 
3,522

 

 
3,522



44

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations
Six Months Ended May 31, 2014
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$

 
2,866,170

 

 

 
2,866,170

Lennar Financial Services

 
70,471

 
128,311

 
(10,814
)
 
187,968

Rialto

 

 
101,348

 

 
101,348

Lennar Multifamily

 
26,354

 

 

 
26,354

Total revenues

 
2,962,995

 
229,659

 
(10,814
)
 
3,181,840

Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding

 
2,459,563

 
(1,385
)
 
(1,180
)
 
2,456,998

Lennar Financial Services

 
73,066

 
101,517

 
(9,373
)
 
165,210

Rialto

 

 
127,180

 

 
127,180

Lennar Multifamily

 
39,476

 

 

 
39,476

Corporate general and administrative
73,898

 

 

 
2,531

 
76,429

Total costs and expenses
73,898

 
2,572,105

 
227,312

 
(8,022
)
 
2,865,293

Lennar Homebuilding equity in earnings from unconsolidated entities

 
2,310

 
3,074

 

 
5,384

Lennar Homebuilding other income, net

 
5,248

 

 
(97
)
 
5,151

Other interest expense
(2,889
)
 
(22,978
)
 

 
2,889

 
(22,978
)
Rialto equity in earnings from unconsolidated entities

 

 
23,293

 

 
23,293

Rialto other income, net

 

 
2,366

 

 
2,366

Lennar Multifamily equity in loss from unconsolidated entities

 
(257
)
 

 

 
(257
)
Earnings (loss) before income taxes
(76,787
)
 
375,213

 
31,080

 

 
329,506

Benefit (provision) for income taxes
28,434

 
(138,835
)
 
(16,523
)
 

 
(126,924
)
Equity in earnings from subsidiaries
264,189

 
16,181

 

 
(280,370
)
 

Net earnings (including net loss attributable to noncontrolling interests)
215,836

 
252,559

 
14,557

 
(280,370
)
 
202,582

Less: Net loss attributable to noncontrolling interests

 

 
(13,254
)
 

 
(13,254
)
Net earnings attributable to Lennar
$
215,836

 
252,559

 
27,811

 
(280,370
)
 
215,836

Comprehensive earnings attributable to Lennar
$
215,836

 
252,559

 
27,811

 
(280,370
)
 
215,836

Comprehensive loss attributable to noncontrolling interests
$

 

 
(13,254
)
 

 
(13,254
)


45

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net earnings attributable to noncontrolling interests)
$
297,979

 
358,298

 
25,016

 
(379,792
)
 
301,501

Distributions of earnings from guarantor and non-guarantor subsidiaries
359,706

 
20,086

 

 
(379,792
)
 

Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities
(315,966
)
 
(985,129
)
 
(374,731
)
 
379,792

 
(1,296,034
)
Net cash provided by (used in) operating activities
341,719

 
(606,745
)
 
(349,715
)
 
(379,792
)
 
(994,533
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Proceeds from sale of operating properties

 

 
73,732

 

 
73,732

(Investments in and contributions to) and distributions of capital from Lennar Homebuilding unconsolidated entities

 
(11,716
)
 
2,565

 

 
(9,151
)
Investments in and contributions to Rialto unconsolidated entities, net of distributions of capital

 

 
(17,869
)
 

 
(17,869
)
Investments in and contributions to Lennar Multifamily unconsolidated entities, net of distributions of capital


 

 
(4,482
)
 

 
(4,482
)
Receipts of principal payments on Rialto loans receivable

 

 
13,335

 

 
13,335

Proceeds from sales of Rialto real estate owned

 

 
55,812

 

 
55,812

Other
(23,345
)
 
(42,038
)
 
(53,330
)
 

 
(118,713
)
Distributions of capital from guarantor and non-guarantor subsidiaries
30,000

 
30,000

 

 
(60,000
)
 

Intercompany
(1,286,061
)
 

 

 
1,286,061

 

Net cash provided by (used in) investing activities
(1,279,406
)
 
(23,754
)
 
69,763

 
1,226,061

 
(7,336
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net borrowings under unsecured revolving credit facility
450,000

 

 

 

 
450,000

Net borrowings under Lennar Financial Services warehouse facilities

 

 
161,273

 

 
161,273

Net borrowings under Rialto warehouse repurchase facilities

 

 
28,359

 

 
28,359

Proceeds from senior notes and debt issue costs
744,409

 

 
(294
)
 

 
744,115

Redemption of senior notes
(500,000
)
 

 

 

 
(500,000
)
Principal payments on Rialto notes payable including structured notes

 

 
(20,940
)
 

 
(20,940
)
Net proceeds (repayments) on other borrowings
20,988

 
(88,647
)
 
(69,501
)
 

 
(137,160
)
Net payments related to noncontrolling interests

 

 
(77,570
)
 

 
(77,570
)
Excess tax benefits from share-based awards
113

 

 

 

 
113

Common stock:
 
 
 
 
 
 
 
 

Issuances
9,412

 

 

 

 
9,412

Repurchases
(972
)
 

 

 

 
(972
)
Dividends
(16,418
)
 
(388,298
)
 
(51,494
)
 
439,792

 
(16,418
)
Intercompany

 
1,089,924

 
196,137

 
(1,286,061
)
 

Net cash provided by financing activities
707,532

 
612,979

 
165,970

 
(846,269
)
 
640,212

Net decrease in cash and cash equivalents
(230,155
)
 
(17,520
)
 
(113,982
)
 

 
(361,657
)
Cash and cash equivalents at beginning of period
633,318

 
255,501

 
392,995

 

 
1,281,814

Cash and cash equivalents at end of period
$
403,163

 
237,981

 
279,013

 

 
920,157



46

(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended May 31, 2014
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net loss attributable to noncontrolling interests)
$
215,836

 
252,559

 
14,557

 
(280,370
)
 
202,582

Distributions of earnings from guarantor and non-guarantor subsidiaries
264,189

 
16,181

 

 
(280,370
)
 

Other adjustments to reconcile net earnings (including net loss attributable to noncontrolling interests) to net cash provided by (used in) operating activities
(247,474
)
 
(869,113
)
 
(88,061
)
 
280,370

 
(924,278
)
Net cash provided by (used in) operating activities
232,551

 
(600,373
)
 
(73,504
)
 
(280,370
)
 
(721,696
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Distributions of capital from Lennar Homebuilding unconsolidated entities, net of investments in and contributions to

 
15,976

 
2,219

 

 
18,195

Distributions of capital from Rialto unconsolidated entities, net of investments in and contributions to

 

 
11,880

 

 
11,880

Distributions of capital from Lennar Multifamily unconsolidated entities, net of investments in and contributions to

 
28,267

 

 

 
28,267

Receipts of principal payments on Rialto loans receivable

 

 
8,357

 

 
8,357

Proceeds from sales of Rialto real estate owned

 

 
112,409

 

 
112,409

Other
(408
)
 
20,121

 
(10,915
)
 

 
8,798

Distribution of capital from guarantor subsidiaries
160,000

 

 

 
(160,000
)
 

Intercompany
(975,792
)
 

 

 
975,792

 

Net cash provided by (used in) investing activities
(816,200
)
 
64,364

 
123,950

 
815,792

 
187,906

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net borrowings under Lennar Financial Services warehouse facilities

 

 
85,782

 

 
85,782

Net repayments under Rialto warehouse repurchase facilities

 

 
(31,593
)
 

 
(31,593
)
Net proceeds from senior notes
495,725

 

 
175,405

 

 
671,130

Principal payments on Rialto notes payable

 

 
(5,870
)
 

 
(5,870
)
Net payments on other borrowings
(1,150
)
 
(119,358
)
 
(9,736
)
 

 
(130,244
)
Exercise of land option contracts from an unconsolidated land investment venture

 
(1,540
)
 

 

 
(1,540
)
Net payments related to noncontrolling interests

 

 
(60,804
)
 

 
(60,804
)
Excess tax benefit from share-based awards
282

 

 

 

 
282

Common stock:
 
 
 
 
 
 
 
 

Issuances
13,302

 

 

 

 
13,302

Repurchases
(566
)
 

 

 

 
(566
)
Dividends
(16,355
)
 
(252,559
)
 
(187,811
)
 
440,370

 
(16,355
)
Intercompany

 
930,341

 
45,451

 
(975,792
)
 

Net cash provided by financing activities
491,238

 
556,884

 
10,824

 
(535,422
)
 
523,524

Net (decrease) increase in cash and cash equivalents
(92,411
)
 
20,875

 
61,270

 

 
(10,266
)
Cash and cash equivalents at beginning of period
547,101

 
152,753

 
270,651

 

 
970,505

Cash and cash equivalents at end of period
$
454,690

 
173,628

 
331,921

 

 
960,239



47



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, 2014.
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,” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Forward-looking statements contained herein may include opinions formed based upon general observations, anecdotal evidence and industry experience, but that are not supported by specific investigation or analysis. The forward-looking statements in this Quarterly Report include statements regarding: our belief that we are in the early stages of a multi-year slow but steady housing recovery, our belief regarding the drivers of such recovery, and our belief that we are well positioned to benefit from such recovery; our belief that the recovery will continue to benefit the rental market; our expectation that we will see some margin contraction; our expectation that we will continue to invest in carefully underwritten strategic land acquisitions; our expectation that we are on track to achieve another year of profitability in fiscal 2015; our belief that our main driver of earnings will continue to be our Homebuilding and Lennar Financial Services operations; our expectation that our ancillary businesses will enhance stockholder value; our belief that we will continue to benefit from our strategic land acquisitions and new community openings; our expectation regarding the Lennar Multifamily segment’s development pipeline; our intent to settle the face value of the 2.75% convertible senior notes due 2020 in cash; our expectation regarding variability in our quarterly results; our expectations regarding the renewal or replacement of our warehouse facilities; our belief regarding draws upon our bonds or letters of credit, and our belief regarding the impact to the Company if there were such a draw; our belief that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity; our belief regarding legal proceedings in which we are involved, and, in particular, our belief that the Court’s decision in the Settlers Crossing case is contrary to applicable law; and our estimates regarding certain tax matters and accounting valuations, including our expectations regarding the result of anticipated settlements with various taxing authorities.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: a slowdown in the recovery of real estate markets across the nation, or any downturn in such markets; changes in general economic and financial conditions, and demographic trends, in the U.S. leading to decreased demand for our services and homes, lower profit margins and reduced access to credit; unfavorable outcomes in legal proceedings that substantially exceed our expectations; the possibility that we will incur nonrecurring costs that may not have a material adverse effect on our business or financial condition, but may have a material adverse effect on our condensed financial statements for a particular reporting period; decreased demand for our Lennar Multifamily rental properties, and our ability to successfully sell our rental properties once rents and occupancies have stabilized; the ability of our Financial Services segment to maintain or increase its capture rate and benefit from Lennar home deliveries; our ability to acquire land and pursue real estate opportunities at anticipated prices; increased competition for home sales from other sellers of new and resale homes; conditions in the capital, credit and financial markets, including mortgage lending standards, the availability of mortgage financing and mortgage foreclosure rates; changes in interest and unemployment rates, and inflation; a decline in the value of the land and home inventories we maintain or possible future write-downs of the carrying value of our real estate assets; increases in operating costs, including costs related to real estate taxes, construction materials, labor and insurance, and our ability to manage our cost structure, both in our Homebuilding and Lennar Multifamily businesses; our inability to maintain anticipated pricing levels and our inability to predict the effect of interest rates on demand; the ability and willingness of the participants in various joint ventures to honor their commitments; our ability to successfully and timely obtain land-use entitlements and construction financing, and address issues that arise in connection with the use and development of our land; natural disasters and other unforeseen damage for which our insurance may not provide adequate coverage; our inability to successfully grow our ancillary businesses; potential liability under environmental or construction laws, or other laws or regulations affecting our business; regulatory changes that adversely affect the profitability of our businesses; our ability to comply with the terms of our debt instruments, our ability to refinance our debt on terms that are acceptable to us; and our ability to successfully estimate the impact of certain regulatory, accounting and tax matters.

48



Please see our Form 10-K, for the fiscal year ended November 30, 2014 and other filings with the SEC for a further discussion of these and other risks and uncertainties which could also affect our future results. We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.
This Management’s Discussion and Analysis and other portions of this Report contain statements of opinion or belief regarding market conditions and similar matters. In many instances those opinions and beliefs are based upon general observations by members of our management, anecdotal evidence and our experience in the conduct of our businesses, without specific investigation or statistical analyses. Therefore, while they reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views that are necessarily shared by all who are involved in those industries or markets.

Outlook
We continue to believe that we are in the early stages of a multi-year slow but steady housing recovery. This year's spring selling season confirms that the market is continuing to improve at a very consistent pace. The recovery has been supported on the downside by the production deficit that has yielded a limited supply of both rental and for-sale housing in the country. At the same time, the recovery has been constrained by a limited supply of available homes on the market, limited supply of land available to add to the supply of homes and constrained demand from purchasers who would like to buy but are unable to access the mortgage market. This continues to create pent-up demand against a very limited supply.
The millennial generation's attitudes towards home purchases are proving to be different, but we expect that the doubling up of the millennials during the downturn will ultimately unwind and give way to household formation. We expect that the recovery will also continue to benefit the rental market as first-time home purchasers find limited access to the "for sale" market as a result of a challenging mortgage approval process. We believe that any pullback in the housing market will be short-lived, as there is a need for shelter across the country, there is very little inventory and very little chance of mortgage foreclosures, given the stringent underwriting standards of the past several years. While demand has remained constrained, homebuyers have continued a steady return to household formation and home ownership as the market opens up, driven by consistently low interest rates, and now higher wages and lower unemployment.
These are the themes that have continued to define our operating strategies across the Company. We continued through 2015 with a solid second quarter, with net earnings increasing 33% on a 32% increase in revenues, compared to the second quarter of 2014. Our gross margin was 23.8%, which exceeded our expectations. This gross margin, combined with our selling, general and administrative expenses of 10.0%, resulted in an operating margin of 13.8%. In addition, we ended the quarter with a strong sales backlog, up 18% in home deliveries and 23% in dollar value. During the second quarter of 2015, we also had strong performances from our other business segments. Our Financial Services segment produced $39.1 million of pretax earnings primarily driven by our strategic positioning to capture the increase in refinance transactions, a higher capture rate of the increased Lennar Homebuilding business and an increase in purchase mortgages originated for non-Lennar homebuyers. Rialto generated $7.6 million of operating earnings net which included an add back of net loss attributable to noncontrolling interests, benefiting from Rialto Mortgage Finance (“RMF”), our mortgage origination and securitization business, and a transition from a capital-intensive business model to an asset light, fund model. While approximately 25% of our homebuilding business continues to be geared to first-time home purchasers, our broader, new household strategy has been aimed at the rental market. Our Multifamily rental business continued to grow during the second quarter of 2015, and we ended the quarter with interests in 26 multifamily communities, of which 2 communities were completed and operating, 6 communities were partially completed and leasing, and the remaining 18 communities were under construction. Our Multifamily strategy is proving to be well timed, as rental rates are rising and vacancies are at historical lows, driven by a supply-demand imbalance. Finally, through our investment in Heritage Fields El Toro, one of our unconsolidated entities ("El Toro"), which is managed by our FivePoint Communities venture, we earned $11.6 million primarily related to the sale of a commercial property and homesites to third parties.
We believe that all the segments of our company are well positioned. Our company’s strategy continues to be driven by our belief that the real estate market remains positioned to continue to recover and that our company remains well positioned to benefit from such recovery. Our principal focus in our homebuilding operations will continue to be on generating strong operating margins on the homes we sell by delivering homes from what we believe are excellent land positions, although we expect to see some margin contraction compared to prior year due to cost increases outpacing sales price increases, competitive pressures and the inclusion of some additional previously inactive land assets being developed. We will continue to carefully balance pricing power, sales incentives, brokerage commissions and advertising expenses to maximize our results. In addition, we plan to continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets that we expect will continue to support our homebuilding operations going forward and help us increase operating leverage as our deliveries

49



increase. We expect that our Company's main driver of earnings will continue to be our homebuilding and Financial Services operations. We are also focused on our multiple platforms including Rialto, Multifamily, and FivePoint as such ancillary businesses continue to mature and expand their franchises providing profitable opportunities that we expect will enhance stockholder value. Overall, we believe we are on track to achieve another year of increased profitability in fiscal 2015, as the housing market recovery continues and we will continue to benefit from our strategic land acquisitions and new community openings.

50



(1) Results of Operations
Overview
We historically have experienced, and expect to continue to experience, variability in quarterly results. As a result, our results of operations for the three and six months ended May 31, 2015 are not necessarily indicative of the results to be expected for the full year. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in the second half of our fiscal year. However, periods of economic downturn in the industry, such as we have experienced in previous years, can alter seasonal patterns.
Our net earnings attributable to Lennar were $183.0 million, or $0.79 per diluted share ($0.89 per basic share), in the second quarter of 2015, compared to net earnings attributable to Lennar of $137.7 million, or $0.61 per diluted share ($0.67 per basic share), in the second quarter of 2014. Our net earnings attributable to Lennar were $298.0 million, or $1.30 per diluted share ($1.45 per basic share), in the six months ended May 31, 2015, compared to net earnings attributable to Lennar of $215.8 million, or $0.95 per diluted share ($1.06 per basic share), in the six months ended May 31, 2014.
Financial information relating to our operations was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Lennar Homebuilding revenues:
 
 
 
 
 
 
 
Sales of homes
$
2,081,113

 
1,605,366

 
3,484,681

 
2,745,597

Sales of land
34,699

 
29,419

 
72,789

 
120,573

Total Lennar Homebuilding revenues
2,115,812

 
1,634,785

 
3,557,470

 
2,866,170

Lennar Homebuilding costs and expenses:
 
 
 
 
 
 
 
Costs of homes sold
1,585,259

 
1,195,751

 
2,664,055

 
2,049,929

Costs of land sold
31,204

 
23,786

 
57,229

 
98,858

Selling, general and administrative
209,019

 
173,106

 
369,373

 
308,211

Total Lennar Homebuilding costs and expenses
1,825,482

 
1,392,643

 
3,090,657

 
2,456,998

Lennar Homebuilding operating margins
290,330

 
242,142

 
466,813

 
409,172

Lennar Homebuilding equity in earnings from unconsolidated entities
6,494

 
394

 
35,393

 
5,384

Lennar Homebuilding other income (expense), net
(217
)
 
2,262

 
6,116

 
5,151

Other interest expense
(3,818
)
 
(10,287
)
 
(7,889
)
 
(22,978
)
Lennar Homebuilding operating earnings
292,789

 
234,511

 
500,433

 
396,729

Lennar Financial Services revenues
169,885

 
111,016

 
294,712

 
187,968

Lennar Financial Services costs and expenses
130,832

 
92,723

 
240,132

 
165,210

Lennar Financial Services operating earnings
39,053

 
18,293

 
54,580

 
22,758

Rialto revenues
67,931

 
54,393

 
109,128

 
101,348

Rialto costs and expenses
67,506

 
79,604

 
108,287

 
127,180

Rialto equity in earnings from unconsolidated entities
7,328

 
17,939

 
9,992

 
23,293

Rialto other income (expense), net
(872
)
 
3,595

 
(1,144
)
 
2,366

Rialto operating earnings (loss)
6,881

 
(3,677
)
 
9,689

 
(173
)
Lennar Multifamily revenues
38,976

 
18,551

 
75,433

 
26,354

Lennar Multifamily costs and expenses
47,260

 
25,549

 
89,221

 
39,476

Lennar Multifamily equity in loss from unconsolidated entities
(422
)
 
(182
)
 
(600
)
 
(257
)
Lennar Multifamily operating loss
(8,706
)
 
(7,180
)
 
(14,388
)
 
(13,379
)
Total operating earnings
330,017

 
241,947

 
550,314

 
405,935

Corporate general and administrative expenses
(50,207
)
 
(38,317
)
 
(93,861
)
 
(76,429
)
Earnings before income taxes
$
279,810

 
203,630

 
456,453

 
329,506


51



Three Months Ended May 31, 2015 versus Three Months Ended May 31, 2014
Revenues from home sales increased 30% in the second quarter of 2015 to $2.1 billion from $1.6 billion in the second quarter of 2014. Revenues were higher primarily due to a 20% increase in the number of home deliveries, excluding unconsolidated entities, and an 8% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 5,989 homes in the second quarter of 2015 from 4,976 homes in the second quarter of 2014. There was an increase in home deliveries in all our Homebuilding segments and Homebuilding Other, which was primarily driven by an increase in active communities over the last year. The average sales price of homes delivered increased to $348,000 in the second quarter of 2015 from $322,000 in the second quarter of 2014, primarily due to increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $21,500 per home delivered in the second quarter of 2015, or 5.8% as a percentage of home sales revenue, compared to $20,300 per home delivered in the second quarter of 2014, or 5.9% as a percentage of home sales revenue, and $21,800 per home delivered in the first quarter of 2015, or 6.3% as a percentage of home sales revenue.
Gross margins on home sales were $495.9 million, or 23.8%, in the second quarter of 2015, compared to $409.6 million, or 25.5%, in the second quarter of 2014. Gross margin percentage on home sales decreased compared to the second quarter of 2014, primarily due to an increase in land costs, partially offset by an increase in the the average sales price of homes delivered. Gross margin on home sales in the second quarter of 2014 included $9.6 million of insurance recoveries and other nonrecurring items, which increased the gross margin percentage in that period by 60 basis points.
Gross profits on land sales were $3.5 million in the second quarter of 2015, compared to $5.6 million in the second quarter of 2014.
Selling, general and administrative expenses were $209.0 million in the second quarter of 2015, compared to $173.1 million in the second quarter of 2014. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 10.0% in the second quarter of 2015, from 10.8% in the second quarter of 2014 primarily due to improved operating leverage as a result of an increase in home deliveries.
Lennar Homebuilding equity in earnings from unconsolidated entities was $6.5 million in the second quarter of 2015, compared to $0.4 million in the second quarter of 2014. In the second quarter of 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $11.6 million of equity in earnings primarily related to the sale of a commercial property and homesites to third parties by El Toro, partially offset by our share of operating losses of various Lennar Homebuilding unconsolidated entities.
Lennar Homebuilding other income (expense), net, totaled ($0.2) million in the second quarter of 2015, compared to $2.3 million in the second quarter of 2014.
Lennar Homebuilding interest expense was $57.7 million in the second quarter of 2015 ($53.2 million was included in costs of homes sold, $0.6 million in costs of land sold and $3.8 million in other interest expense), compared to $49.2 million in the second quarter of 2014 ($38.6 million was included in costs of homes sold, $0.3 million in costs of land sold and $10.3 million in other interest expense). Interest expense increased primarily due to an increase in our outstanding debt and an increase in home deliveries, partially offset by an increase in qualifying assets eligible for interest capitalization and lower borrowing costs.
Operating earnings for our Lennar Financial Services segment were $39.1 million in the second quarter of 2015, compared to $18.3 million in the second quarter of 2014. The increase in profitability was primarily due to an increase in mortgage originations driven by a stronger refinance market and an increase in purchase volume as a result of increased Lennar home deliveries and an increase in purchase mortgages originated for non-Lennar homebuyers. The increase in volume also benefited the title operations.
Operating earnings for our Rialto segment were $7.6 million in the second quarter of 2015 (which included $6.9 million of operating earnings and an add back of $0.7 million of net loss attributable to noncontrolling interests), compared to operating earnings of $13.4 million (which was comprised of a $3.7 million operating loss and an add back of $17.1 million of net loss attributable to noncontrolling interests) in the second quarter of 2014.
Rialto revenues were $67.9 million in the second quarter of 2015, compared to $54.4 million in the second quarter of 2014. Revenues increased primarily due to an increase in securitization revenue and interest income from RMF and the receipt of $4.8 million of advance distributions with regard to Rialto's carried interests in Rialto Real Estate Fund, LP ("Fund I") and Rialto Real Estate Fund II, LP ("Fund II") in order to cover income tax obligations resulting from the allocations of taxable income to Rialto's carried interests in these funds. This increase was partially offset by a decrease in interest income as a result of a decrease in the portfolio of loans Rialto owns because of loan collections, resolutions and real estate owned ("REO") foreclosures and because Rialto no longer recognizes interest income under the accretable yield method, instead interest income is recognized to the extent that loan collections exceed their carrying value.

52



Rialto expenses were $67.5 million in the second quarter of 2015, compared to $79.6 million in the second quarter of 2014. Expenses decreased primarily due to a decrease in loan impairments of $32.3 million, partially offset by an increase in other general and administrative expenses and RMF securitization expenses.
Rialto equity in earnings from unconsolidated entities was $7.3 million and $17.9 million in the second quarter of 2015 and 2014, respectively, primarily related to Rialto's share of earnings from its real estate funds. The decrease in equity in earnings was related to marking up certain assets in the Rialto real estate funds to a lesser degree in the second quarter of 2015 than in the same period last year.
In the second quarter of 2015, Rialto other expense, net, was $0.9 million, which consisted primarily of expenses related to owning and maintaining REO, $2.4 million of impairments on REO and other expenses, partially offset by net realized gains on the sale of REO of $4.5 million and rental and other income. In the second quarter of 2014, Rialto other income, net, was $3.6 million, which consisted primarily of net realized gains on the sale of REO of $14.2 million and rental and other income, partially offset by expenses related to owning and maintaining REO, $1.2 million of impairments on REO and other expenses.
Operating loss for our Lennar Multifamily segment was $8.7 million in the second quarter of 2015, compared to $7.2 million in the second quarter of 2014. In both the second quarter of 2015 and 2014, the operating loss primarily related to general and administrative expenses, partially offset by management fee income.
Corporate general and administrative expenses were $50.2 million, or 2.1% as a percentage of total revenues, in the second quarter of 2015, compared to $38.3 million, or 2.1% as a percentage of total revenues, in the second quarter of 2014.
Net earnings (loss) attributable to noncontrolling interests were $1.6 million and ($15.1) million in the second quarter of 2015 and 2014, respectively. Net earnings attributable to noncontrolling interests during the second quarter of 2015 were primarily attributable to a strategic transaction by one of Lennar Homebuilding's consolidated joint ventures that impacted noncontrolling interests by $2.3 million, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC. Net loss attributable to noncontrolling interests during the second quarter of 2014 were primarily related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the second quarter of 2015 and 2014, we had a tax provision of $95.2 million and $81.0 million, respectively, primarily related to pre-tax earnings of the periods. Our overall effective income tax rates were 34.22% and 37.04% in the second quarter of 2015 and 2014, respectively. The effective tax rate for the second quarter of 2015 included a tax benefit for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense and interest accrued on uncertain tax positions.
Six Months Ended May 31, 2015 versus Six Months Ended May 31, 2014
Revenues from home sales increased 27% in the six months ended May 31, 2015 to $3.5 billion from $2.7 billion in the six months ended May 31, 2014. Revenues were higher primarily due to a 20% increase in the number of home deliveries, excluding unconsolidated entities, and a 6% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 10,290 homes in the six months ended May 31, 2015 from 8,573 homes in the six months ended May 31, 2014. There was an increase in home deliveries in all our Homebuilding segments and Homebuilding Other, which was primarily driven by an increase in active communities over the last year. The average sales price of homes delivered increased to $339,000 in the six months ended May 31, 2015 from $320,000 in the six months ended May 31, 2014, primarily due to increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $21,600 per home delivered in the six months ended May 31, 2015, or 6.0% as a percentage of home sales revenue, compared to $20,700 per home delivered in the six months ended May 31, 2014, or 6.1% as a percentage of home sales revenue. Currently, our biggest competition is from sales of existing and foreclosed homes. We differentiate our new homes from those homes by issuing new home warranties, updated floor plans, our Everything's Included marketing program, community amenities and in certain markets by emphasizing energy efficiency and new technologies.
Gross margins on home sales were $820.6 million, or 23.5%, in the six months ended May 31, 2015, compared to $695.7 million, or 25.3%, in the six months ended May 31, 2014. Gross margin percentage on home sales decreased compared to the six months ended May 31, 2014, primarily due to an increase in land costs, partially offset by an increase in the the average sales price of homes delivered. Gross margin on home sales in the six months ended May 31, 2014 included $15.1 million of insurance recoveries and other nonrecurring items, which increased the gross margin percentage in that period by 60 basis points.
Gross profits on land sales totaled $15.6 million in the six months ended May 31, 2015, compared to $21.7 million in the six months ended May 31, 2014.
Selling, general and administrative expenses were $369.4 million in the six months ended May 31, 2015, compared to $308.2 million in the six months ended May 31, 2014. As a percentage of revenues from home sales, selling, general and

53



administrative expenses improved to 10.6% in the six months ended May 31, 2015, from 11.2% in the six months ended May 31, 2014 primarily due to improved operating leverage as a result of an increase in home deliveries as well as a decrease in insurance reserves.
Lennar Homebuilding equity in earnings from unconsolidated entities was $35.4 million in the six months ended May 31, 2015, compared to $5.4 million in the six months ended May 31, 2014. In the six months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $43.0 million of equity in earnings primarily related to the sale of approximately 660 homesites and a commercial property to third parties by El Toro, partially offset by our share of operating losses of various Lennar Homebuilding unconsolidated entities. In the six months ended May 31, 2014, Lennar Homebuilding equity in earnings from unconsolidated entities included $4.7 million of equity in earnings primarily related to third-party land sales by one of our unconsolidated entities.
Lennar Homebuilding other income, net, totaled $6.1 million in the six months ended May 31, 2015, compared to $5.2 million in the six months ended May 31, 2014.
Lennar Homebuilding interest expense was $95.7 million in the six months ended May 31, 2015 ($86.8 million was included in costs of homes sold, $1.0 million in costs of land sold and $7.9 million in other interest expense), compared to $90.2 million in the six months ended May 31, 2014 ($65.0 million was included in costs of homes sold, $2.2 million in costs of land sold and $23.0 million in other interest expense). Interest expense increased primarily due to an increase in our outstanding debt and an increase in home deliveries, partially offset by an increase in qualifying assets eligible for interest capitalization and lower borrowing costs.
Operating earnings for our Lennar Financial Services segment were $54.6 million in the six months ended May 31, 2015, compared to $22.8 million in the six months ended May 31, 2014. The increase in profitability was primarily due to an increase in mortgage originations driven by a stronger refinance market and an increase in purchase volume as a result of increased Lennar home deliveries and an increase in purchase mortgages originated for non-Lennar homebuyers. The increase in volume also benefited the title operations.
Operating earnings for our Rialto segment were $12.2 million in the six months ended May 31, 2015 (which included $9.7 million of operating earnings and an add back of $2.5 million of net loss attributable to noncontrolling interests), compared to operating earnings of $15.9 million (which was comprised of a $0.2 million operating loss and an add back of $16.1 million of net loss attributable to noncontrolling interests) in the six months ended May 31, 2014.
Rialto revenues were $109.1 million in the six months ended May 31, 2015, compared to $101.3 million in the six months ended May 31, 2014. Revenues increased due to an increase in securitization revenue and interest income from RMF and the receipt of $11.3 million of advance distributions with regard to Rialto's carried interests in Fund I and Fund II in order to cover income tax obligations resulting from the allocations of taxable income to Rialto's carried interests in these funds. This increase was partially offset by a decrease in interest income as a result of a decrease in the portfolio of loans Rialto owns because of loan collections, resolutions and REO foreclosures and because Rialto no longer recognizes interest income under the accretable yield method, instead interest income is recognized to the extent that loan collections exceed their carrying value.
Rialto expenses were $108.3 million in the six months ended May 31, 2015, compared to $127.2 million in the six months ended May 31, 2014. Expenses decreased primarily due to a decrease in loan impairments of $37.8 million, partially offset by an increase in other general and administrative expenses, RMF securitization expenses and interest expense.
Rialto equity in earnings from unconsolidated entities was $10.0 million and $23.3 million in the six months ended May 31, 2015 and 2014, respectively, primarily related to Rialto's share of earnings from its real estate funds. The decrease in equity in earnings was related to marking up certain assets in the Rialto real estate funds to a lesser degree in the six months ended May 31, 2015 than in the same period last year.
In the six months ended May 31, 2015, Rialto other expense net, was $1.1 million, which consisted primarily of expenses related to owning and maintaining REO, $5.0 million of impairments on REO and other expenses, partially offset by net realized gains on the sale of REO of $7.7 million and rental and other income. In the six months ended May 31, 2014, Rialto other income, net, was $2.4 million, which consisted primarily of net realized gains on the sale of REO of $23.7 million and rental and other income, partially offset by expenses related to owning and maintaining REO, $3.5 million of impairments on REO and other expenses.
Operating loss for our Lennar Multifamily segment was $14.4 million in the six months ended May 31, 2015, compared to $13.4 million in the six months ended May 31, 2014. In both the six months ended May 31, 2015 and 2014, the operating loss primarily related to general and administrative expenses, partially offset by management fee income.
Corporate general and administrative expenses were $93.9 million, or 2.3% as a percentage of total revenues, in the six months ended May 31, 2015, compared to $76.4 million, or 2.4% as a percentage of total revenues, in the six months ended May 31, 2014.

54



Net earnings (loss) attributable to noncontrolling interests were $3.5 million and ($13.3) million in the six months ended May 31, 2015 and 2014, respectively. Net earnings attributable to noncontrolling interests during the six months ended May 31, 2015 were primarily attributable to a strategic transaction by one of Lennar Homebuilding's consolidated joint ventures that impacted noncontrolling interests by $2.3 million and earnings related to consolidated joint ventures. Net loss attributable to noncontrolling interests during the six months ended May 31, 2014 were primarily related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the six months ended May 31, 2015 and 2014, we had a tax provision of $155.0 million and $126.9 million, respectively, primarily related to pre-tax earnings of the periods. Our overall effective income tax rates were 34.21% and 37.03% in the six months ended May 31, 2015 and 2014, respectively. The effective tax rate for both the three and six months ended May 31, 2015 included a tax benefit for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense and interest accrued on uncertain tax positions.

Homebuilding Segments
We have aggregated 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 May 31, 2015, 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, Tennessee and Washington
(1)Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment.
(2)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

55



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
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Homebuilding revenues:
 
 
 
 
 
 
 
East:
 
 
 
 
 
 
 
Sales of homes
$
646,610

 
532,615

 
1,103,160

 
922,286

Sales of land
6,786

 
4,133

 
18,571

 
4,970

Total East
653,396

 
536,748

 
1,121,731

 
927,256

Central:
 
 
 
 
 
 
 
Sales of homes
301,338

 
233,437

 
506,078

 
373,253

Sales of land
1,171

 
1,771

 
6,939

 
24,449

Total Central
302,509

 
235,208

 
513,017

 
397,702

West:
 
 
 
 
 
 
 
Sales of homes
608,301

 
413,184

 
990,961

 
713,283

Sales of land
19,060

 
10,170

 
19,173

 
25,086

Total West
627,361

 
423,354

 
1,010,134

 
738,369

Southeast Florida:
 
 
 
 
 
 
 
Sales of homes
184,839

 
129,268

 
315,337

 
231,075

Sales of land

 
224

 
11,850

 
581

Total Southeast Florida
184,839

 
129,492

 
327,187

 
231,656

Houston:
 
 
 
 
 
 
 
Sales of homes
182,633

 
166,151

 
307,563

 
288,270

Sales of land
7,014

 
12,512

 
13,341

 
21,016

Total Houston
189,647

 
178,663

 
320,904

 
309,286

Other:
 
 
 
 
 
 
 
Sales of homes
157,391

 
130,711

 
261,581

 
217,430

Sales of land
669

 
609

 
2,916

 
44,471

Total Other
158,060

 
131,320

 
264,497

 
261,901

Total homebuilding revenues
$
2,115,812

 
1,634,785

 
3,557,470

 
2,866,170


56



 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Operating earnings:
 
 
 
 
 
 
 
East:
 
 
 
 
 
 
 
Sales of homes
$
94,280

 
86,073

 
148,230

 
138,030

Sales of land
665

 
704

 
7,770

 
791

Equity in earnings (loss) from unconsolidated entities
365

 
(40
)
 
410

 
1,097

Other income (expense), net
240

 
1,441

 
(723
)
 
2,167

Other interest expense
(967
)
 
(2,926
)
 
(2,857
)
 
(6,181
)
Total East
94,583

 
85,252

 
152,830

 
135,904

Central:
 
 
 
 
 
 
 
Sales of homes
30,485

 
26,052

 
46,234

 
32,942

Sales of land
214

 
800

 
1,611

 
6,764

Equity in earnings from unconsolidated entities
16

 
8

 
55

 
38

Other income (expense), net
660

 
(1,223
)
 
(904
)
 
(1,588
)
Other interest expense
(660
)
 
(1,563
)
 
(1,229
)
 
(3,422
)
Total Central
30,715

 
24,074

 
45,767

 
34,734

West:
 
 
 
 
 
 
 
Sales of homes
95,129

 
65,495

 
142,912

 
111,789

Sales of land
620

 
1,227

 
312

 
6,793

Equity in earnings from unconsolidated entities (1)
6,121

 
529

 
34,947

 
4,802

Other income, net (2)
1,863

 
801

 
9,069

 
2,947

Other interest expense
(1,401
)
 
(3,409
)
 
(2,415
)
 
(7,895
)
Total West
102,332

 
64,643

 
184,825

 
118,436

Southeast Florida:
 
 
 
 
 
 
 
Sales of homes
40,474

 
26,688

 
68,998

 
47,835

Sales of land

 
121

 
221

 
315

Equity in loss from unconsolidated entities
(102
)
 
(153
)
 
(208
)
 
(364
)
Other income (expense), net (3)
(3,134
)
 
885

 
(3,296
)
 
1,388

Other interest expense
(255
)
 
(793
)
 
(446
)
 
(1,868
)
Total Southeast Florida
36,983

 
26,748

 
65,269

 
47,306

Houston:
 
 
 
 
 
 
 
Sales of homes
21,080

 
22,077

 
34,826

 
41,383

Sales of land
2,074

 
2,851

 
4,017

 
6,059

Equity in earnings (loss) from unconsolidated entities
(2
)
 
21

 
10

 
11

Other income (expense), net
(225
)
 
250

 
1,224

 
(66
)
Other interest expense
(189
)
 
(514
)
 
(324
)
 
(1,031
)
Total Houston
22,738

 
24,685

 
39,753

 
46,356

Other:
 
 
 
 
 
 
 
Sales of homes
5,387

 
10,124

 
10,053

 
15,478

Sales of land
(78
)
 
(70
)
 
1,629

 
993

Equity in earnings (loss) from unconsolidated entities
96

 
29

 
179

 
(200
)
Other income, net
379

 
108

 
746

 
303

Other interest expense
(346
)
 
(1,082
)
 
(618
)
 
(2,581
)
Total Other
5,438

 
9,109

 
11,989

 
13,993

Total homebuilding operating earnings
$
292,789

 
234,511

 
500,433

 
396,729

(1)
Lennar Homebuilding equity in earnings from unconsolidated entities for the three and six months ended May 31, 2015, included $11.6 million and $43.0 million, respectively, of equity in earnings related to the sale of homesites and a commercial property to third parties by El Toro. Lennar Homebuilding equity in earnings for the six months ended May 31, 2014 included $4.7 million of equity in earnings related to third-party land sales by one of our unconsolidated entities.

57



(2)
Lennar Homebuilding other income, net for the six months ended May 31, 2015, included a $6.5 million gain on the sale of an operating property.
(3)
Other expense, net for the three and six months ended May 31, 2015 primarily related to a loss on a strategic sale of an operating property from one of our consolidated joint ventures, partially offset by noncontrolling interests.
Summary of Homebuilding Data
Deliveries:
 
Three Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
2,189

 
1,859

 
$
648,307

 
533,991

 
$
296,000

 
287,000

Central
951

 
831

 
301,339

 
233,438

 
317,000

 
281,000

West
1,353

 
985

 
624,042

 
418,136

 
461,000

 
425,000

Southeast Florida
519

 
374

 
184,839

 
129,268

 
356,000

 
346,000

Houston
636

 
600

 
182,633

 
166,152

 
287,000

 
277,000

Other
367

 
338

 
157,391

 
130,711

 
429,000

 
387,000

Total
6,015

 
4,987

 
$
2,098,551

 
1,611,696

 
$
349,000

 
323,000

Of the total homes delivered listed above, 26 homes with a dollar value of $17.4 million and an average sales price of $671,000 represent home deliveries from unconsolidated entities for the three months ended May 31, 2015, compared to 11 home deliveries with a dollar value of $6.3 million and an average sales price of $575,000 for the three months ended May 31, 2014.
 
Six Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
3,797

 
3,253

 
$
1,105,127

 
925,964

 
$
291,000

 
285,000

Central
1,632

 
1,353

 
506,079

 
373,253

 
310,000

 
276,000

West
2,279

 
1,717

 
1,006,702

 
723,427

 
442,000

 
421,000

Southeast Florida
897

 
672

 
315,337

 
231,075

 
352,000

 
344,000

Houston
1,097

 
1,038

 
307,563

 
288,271

 
280,000

 
278,000

Other
615

 
563

 
261,581

 
217,430

 
425,000

 
386,000

Total
10,317

 
8,596

 
$
3,502,389

 
2,759,420

 
$
339,000

 
321,000

Of the total homes delivered listed above, 27 homes with a dollar value of $17.7 million and an average sales price of $656,000 represent home deliveries from unconsolidated entities for the six months ended May 31, 2015, compared to 23 home deliveries with a dollar value of $13.8 million and an average sales price of $601,000 for the six months ended May 31, 2014.

58



Sales Incentives (1):
 
Three Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
$
49,752

 
40,021

 
$
22,800

 
21,600

 
7.1
%
 
7.0
%
Central
21,772

 
18,170

 
22,900

 
21,900

 
6.7
%
 
7.2
%
West
20,405

 
12,544

 
15,300

 
12,800

 
3.2
%
 
2.9
%
Southeast Florida
12,289

 
10,067

 
23,700

 
26,900

 
6.2
%
 
7.2
%
Houston
17,023

 
14,519

 
26,800

 
24,200

 
8.5
%
 
8.0
%
Other
7,606

 
5,596

 
20,700

 
16,600

 
4.6
%
 
4.1
%
Total
$
128,847

 
100,917

 
$
21,500

 
20,300

 
5.8
%
 
5.9
%
 
Six Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
$
88,329

 
71,694

 
$
23,300

 
22,100

 
7.4
%
 
7.2
%
Central
38,073

 
29,704

 
23,300

 
22,000

 
7.0
%
 
7.4
%
West
36,061

 
22,196

 
16,000

 
13,000

 
3.5
%
 
3.0
%
Southeast Florida
20,779

 
18,120

 
23,200

 
27,000

 
6.2
%
 
7.3
%
Houston
27,360

 
26,005

 
24,900

 
25,100

 
8.2
%
 
8.3
%
Other
11,885

 
9,651

 
19,300

 
17,100

 
4.3
%
 
4.3
%
Total
$
222,487

 
177,370

 
$
21,600

 
20,700

 
6.0
%
 
6.1
%
(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
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
2,589

 
2,182

 
$
777,847

 
629,410

 
$
300,000

 
288,000

Central
1,217

 
1,045

 
398,694

 
305,069

 
328,000

 
292,000

West
1,756

 
1,307

 
818,981

 
558,602

 
466,000

 
427,000

Southeast Florida
590

 
523

 
204,984

 
169,456

 
347,000

 
324,000

Houston (3)
684

 
753

 
203,386

 
206,223

 
297,000

 
274,000

Other
435

 
373

 
185,542

 
154,083

 
427,000

 
413,000

Total
7,271

 
6,183

 
$
2,589,434

 
2,022,843

 
$
356,000

 
327,000

Of the total new orders listed above, 24 homes with a dollar value of $17.7 million and an average sales price of $737,000 represent new orders from unconsolidated entities for the three months ended May 31, 2015, compared to 12 new orders with a dollar value of $8.6 million and an average sales price of $714,000 for the three months ended May 31, 2014.

59



 
Six Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
4,569

 
3,828

 
$
1,379,443

 
1,100,028

 
$
302,000

 
287,000

Central
2,129

 
1,811

 
685,369

 
523,196

 
322,000

 
289,000

West
2,946

 
2,146

 
1,346,565

 
937,311

 
457,000

 
437,000

Southeast Florida
940

 
889

 
329,408

 
289,104

 
350,000

 
325,000

Houston (3)
1,204

 
1,313

 
349,109

 
362,906

 
290,000

 
276,000

Other
770

 
661

 
328,321

 
272,408

 
426,000

 
412,000

Total
12,558

 
10,648

 
$
4,418,215

 
3,484,953

 
$
352,000

 
327,000

Of the total new orders listed above, 50 homes with a dollar value of $30.0 million and an average sales price of $600,000 represent new orders from unconsolidated entities for the six months ended May 31, 2015, compared to 24 new orders with a dollar value of $15.0 million and an average sales price of $625,000 for the six months ended May 31, 2014.
(2)
New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three and six months ended May 31, 2015 and 2014.
(3)
The decrease in new orders was primarily due to less demand in our higher-end homes in the Houston area driven by volatility in the energy sector during the three and the six months ended May 31, 2015.
Backlog:
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
East
2,984

 
2,543

 
$
945,152

 
777,063

 
$
317,000

 
306,000

Central
1,458

 
1,102

 
490,007

 
346,958

 
336,000

 
315,000

West
1,658

 
1,045

 
777,451

 
471,574

 
469,000

 
451,000

Southeast Florida
619

 
824

 
228,748

 
274,163

 
370,000

 
333,000

Houston
937

 
944

 
267,415

 
255,720

 
285,000

 
271,000

Other
417

 
400

 
180,390

 
224,717

 
433,000

 
562,000

Total
8,073

 
6,858

 
$
2,889,163

 
2,350,195

 
$
358,000

 
343,000

Of the total homes in backlog listed above, 90 homes with a backlog dollar value of $52.1 million and an average sales price of $579,000 represent the backlog from unconsolidated entities at May 31, 2015, compared to 5 homes with a backlog dollar value of $3.7 million and an average sales price of $736,000 at May 31, 2014.
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. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.
We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
 
2015
 
2014
 
2015
 
2014
East
15
%
 
14
%
 
15
%
 
15
%
Central
18
%
 
17
%
 
17
%
 
17
%
West
11
%
 
12
%
 
12
%
 
13
%
Southeast Florida
14
%
 
11
%
 
14
%
 
11
%
Houston
24
%
 
22
%
 
25
%
 
22
%
Other
10
%
 
12
%
 
11
%
 
11
%
Total
15
%
 
15
%
 
16
%
 
15
%

60



Active Communities:
 
May 31,
 
2015
 
2014
East
254

 
210

Central
130

 
114

West
117

 
106

Southeast Florida
37

 
30

Houston
74

 
74

Other
55

 
45

Total
667

 
579

Of the total active communities listed above, two communities and one community represent active communities being developed by unconsolidated entities as of May 31, 2015 and 2014, respectively.
The following table details our gross margins on home sales for the three and six months ended May 31, 2015 and 2014 for each of our reportable homebuilding segments and Homebuilding Other:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
East:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
$
646,610

 
 
 
532,615

 
 
 
1,103,160

 
 
 
922,286

 
 
Costs of homes sold
483,373

 
 
 
387,946

 
 
 
830,171

 
 
 
679,422

 
 
Gross margins on home sales
163,237

 
25.2%
 
144,669

 
27.2%
 
272,989

 
24.7
%
 
242,864

 
26.3
%
Central:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
301,338

 
 
 
233,437

 
 
 
506,078

 
 
 
373,253

 
 
Costs of homes sold
238,388

 
 
 
180,020

 
 
 
403,215

 
 
 
292,670

 
 
Gross margins on home sales
62,950

 
20.9%
 
53,417

 
22.9%
 
102,863

 
20.3
%
 
80,583

 
21.6
%
West:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
608,301

 
 
 
413,184

 
 
 
990,961

 
 
 
713,283

 
 
Costs of homes sold
459,781

 
 
 
306,268

 
 
 
754,267

 
 
 
527,465

 
 
Gross margins on home sales
148,520

 
24.4%
 
106,916

 
25.9%
 
236,694

 
23.9
%
 
185,818

 
26.1
%
Southeast Florida:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
184,839

 
 
 
129,268

 
 
 
315,337

 
 
 
231,075

 
 
Costs of homes sold
128,638

 
 
 
90,832

 
 
 
219,144

 
 
 
161,720

 
 
Gross margins on home sales
56,201

 
30.4%
 
38,436

 
29.7%
 
96,193

 
30.5
%
 
69,355

 
30.0
%
Houston:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
182,633

 
 
 
166,151

 
 
 
307,563

 
 
 
288,270

 
 
Costs of homes sold
141,822

 
 
 
126,304

 
 
 
238,749

 
 
 
214,448

 
 
Gross margins on home sales
40,811

 
22.3%
 
39,847

 
24.0%
 
68,814

 
22.4
%
 
73,822

 
25.6
%
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
157,391

 
 
 
130,711

 
 
 
261,581

 
 
 
217,430

 
 
Costs of homes sold
133,256

 
 
 
104,381

 
 
 
218,508

 
 
 
174,204

 
 
Gross margins on home sales
24,135

 
15.3%
 
26,330

 
20.1%
 
43,073

 
16.5
%
 
43,226

 
19.9
%
Total gross margins on home sales
$
495,854

 
23.8%
 
409,615

 
25.5%
 
820,626

 
23.5
%
 
695,668

 
25.3
%
Three Months Ended May 31, 2015 versus Three Months Ended May 31, 2014
Homebuilding East: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries in all the states in the segment and an increase in the average sales price of homes delivered in all the states in the segment, except Georgia. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. 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 in certain of our communities due to favorable market conditions. The decrease in average sales price of homes delivered in

61



Georgia was primarily due to a change in product mix due to the timing of deliveries in certain communities. Gross margin percentage on home sales for the three months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction costs per home, partially offset by an increase in average sales price of homes delivered.
Homebuilding Central: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries in all the states in this segment, except Arizona and an increase average sales price of homes delivered in all the states in this segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. The decrease in the number of home deliveries in Arizona was primarily due to a decrease in active communities over the last year. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the three months ended May 31, 2015 decreased compared to the same period last year as the three months ended May 31, 2014 included $6.4 million of insurance recoveries and other nonrecurring items, which increased the gross margin percentage in that period by 280 basis points. Gross margin percentage on home sales for the three months ended May 31, 2015 was positively impacted by an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in land costs per home.
Homebuilding West: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries and the average sales price of homes delivered in all the states in this segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the three months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction and land costs per home as a result of a change in product mix due to the timing of deliveries, and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Southeast Florida: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries and the average sales price of homes delivered in this segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the three months ended May 31, 2015 increased compared to the same period last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Houston: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries and the average sales price of homes delivered in this segment. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the three months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in average sales price of homes delivered.
Homebuilding Other: Revenues from home sales increased for the three months ended May 31, 2015 compared to the three months ended May 31, 2014, primarily due to an increase in the number of home deliveries and in the average sales price of homes delivered in all the states in Homebuilding Other, except Minnessota and Tennessee where the number of home deliveries were flat year-over-year. The increase in the number of home deliveries was driven by by an increase in active communities over the last year. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the three months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in land costs per home, which included a valuation adjustment of $9.6 million in our Northeast Urban operations primarily related to a strategic decision to move forward on an inactive asset. This decrease was partially offset by an increase in the average sales price of homes delivered.
Six Months Ended May 31, 2015 versus Six Months Ended May 31, 2014
Homebuilding East: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries in all the states in the segment and

62



an increase in the average sales price of homes delivered in all the states in the segment, except Georgia. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. 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 in certain of our communities due to favorable market conditions. The decrease in the average sales price of homes delivered in Georgia was primarily due to a change in product mix due to the timing of deliveries in certain communities. Gross margin percentage on home sales for the six months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in average sales price of homes delivered.
Homebuilding Central: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries in all the states in this segment, except Arizona, and an increase in the average sales price of homes delivered in all the states in the segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. The decrease in the number of homes delivered in Arizona was primarily due to a decrease in active communities over the last year. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2015 decreased compared to the same period last year as the six months ended May 31, 2014 included $6.4 million of insurance recoveries and other nonrecurring items, which increased the gross margin percentage in that period by 170 basis points. Gross margin percentage on home sales for the six months ended May 31, 2015 was positively impacted by an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in land costs per home.
Homebuilding West: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries and the average sales price of homes delivered in all the states in this segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction and land costs per home as a result of a change in product mix due to the timing of deliveries and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Southeast Florida: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries and the average sales price of homes delivered in this segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. 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 in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2015 increased compared to the same period last year primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Houston: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. Average sales price of homes delivered in this segment was consistent with the same period last year. Gross margin percentage on home sales for the six months ended May 31, 2015 decreased compared to the same period last year primarily due to an increase in direct construction costs per home. In addition, gross margin percentage on home sales for the six months ended May 31, 2014 included a $5.5 million insurance recovery, which increased the gross margin percentage in that period by 190 basis points.
Homebuilding Other: Revenues from home sales increased for the six months ended May 31, 2015 compared to the six months ended May 31, 2014, primarily due to an increase in the number of home deliveries in all the states in Homebuilding Other, except Minnesota and Tennessee, and an increase in the average sales price of homes delivered in all the states in Homebuilding Other, except Minnesota. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. The decrease in the number of home deliveries in Minnesota was primarily due to less demand as the number of deliveries per active community decreased. The decrease in the number of home deliveries in Tennessee was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. 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 in certain of our communities due to favorable market conditions. The decrease in the average sales price of homes delivered in Minnesota is due to a change in product mix due to the timing of deliveries from certain communities. Gross margin percentage on home sales for the six months ended May 31, 2015 decreased compared to

63



the same period last year primarily due to an increase in land costs per home, which included a valuation adjustment of $9.6 million in our Northeast Urban operations primarily related to a strategic decision to move forward on an inactive asset. This decrease was partially offset by an increase in the average sales price of homes delivered.
Lennar Financial Services Segment
Our Lennar Financial Services segment provides mortgage financing, title insurance and closing services for both buyers of our homes and others. Our Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, 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 operational information related to our Lennar Financial Services segment:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
169,885

 
111,016

 
294,712

 
187,968

Costs and expenses
130,832

 
92,723

 
240,132

 
165,210

Operating earnings
$
39,053

 
18,293

 
54,580

 
22,758

Dollar value of mortgages originated
$
2,402,000

 
1,400,000

 
4,030,000

 
2,286,000

Number of mortgages originated
8,800

 
5,500

 
15,000

 
9,100

Mortgage capture rate of Lennar homebuyers
82
%
 
77
%
 
81
%
 
76
%
Number of title and closing service transactions
30,700

 
22,800

 
53,400

 
41,300

Number of title policies issued
62,600

 
52,100

 
119,500

 
93,100

Rialto Segment
Our Rialto segment is a commercial real estate investment, investment management, and finance company focused on raising, investing and managing third-party capital, originating and selling into securitizations commercial mortgage loans, as well as investing our own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities, as well as providing strategic real estate capital. Rialto's primary focus is to manage third-party capital and to originate and sell into securitizations commercial mortgage loans. Rialto has commenced the workout and/or oversight of billions of dollars of real estate assets across the United States, including commercial and residential real estate loans and properties, as well as mortgage backed securities with the objective of generating superior, risk-adjusted returns. To date, many of the investment and management opportunities have arisen from the dislocation in the United States real estate markets and the restructuring and recapitalization of those markets.
Rialto's operating earnings (loss) were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
67,931

 
54,393

 
109,128

 
101,348

Costs and expenses (1)
67,506

 
79,604

 
108,287

 
127,180

Rialto equity in earnings from unconsolidated entities
7,328

 
17,939

 
9,992

 
23,293

Rialto other income (expense), net
(872
)
 
3,595

 
(1,144
)
 
2,366

Operating earnings (loss) (2)
$
6,881

 
(3,677
)
 
9,689

 
(173
)
(1)
Costs and expenses included loan impairments of $1.6 million and $2.8 million for the three and six months ended May 31, 2015, respectively, and $33.9 million and $40.6 million for the three and six months ended May 31, 2014, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating earnings for the three and six months ended May 31, 2015 included net loss attributable to noncontrolling interests of $0.7 million and $2.5 million, respectively. Operating loss for the three and six months ended May 31, 2014 included net loss attributable to noncontrolling interests of $17.1 million and $16.1 million, respectively.

64



The following is a detail of Rialto other income (expense), net:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Realized gains on REO sales, net
$
4,544

 
14,234

 
7,674

 
23,743

Unrealized losses on transfer of loans receivable to REO and impairments, net
(2,212
)
 
(8,274
)
 
(4,768
)
 
(10,651
)
REO and other expenses
(15,167
)
 
(12,411
)
 
(28,409
)
 
(30,950
)
Rental and other income
11,963

 
10,046

 
24,359

 
20,224

Rialto other income (expense), net
$
(872
)
 
3,595

 
(1,144
)
 
2,366

Loans Receivable
In February 2010, our Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”) in partnership with the FDIC, which retained 60% equity interests in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs held performing and non-performing loans formerly owned by 22 failed financial institutions and when our Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans. If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, our equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60%/40% with the FDIC. During the six months ended May 31, 2015 and 2014, the LLCs distributed $94.0 million and $98.2 million, respectively, of which $56.4 million and $59.6 million, respectively, was distributed to the FDIC and $37.6 million and $38.6 million, respectively, was distributed to Rialto, the parent company.
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. We were determined to be the primary beneficiary because we have the power to direct the activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2015, these consolidated LLCs had total combined assets and liabilities of $402.1 million and $13.6 million, respectively. At November 30, 2014, these consolidated LLCs had total combined assets and liabilities of $508.4 million and $21.5 million, respectively.
In September 2010, our 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 that was extended and is due on December 2016. As of both May 31, 2015 and November 30, 2014, the outstanding amount related to the 5-year unsecured note was $60.6 million.
Rialto Mortgage Finance
RMF originates and sells into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. This business has become a significant contributor to Rialto's revenues.
During the six months ended May 31, 2015, RMF originated loans with a total principal balance of $1.2 billion and sold $1.0 billion of loans into five separate securitizations. During the six months ended May 31, 2014, RMF originated loans with a total principal balance of $692.2 million and sold $691.5 million of loans into three separate securitizations.
Investments
Rialto is the sponsor of and an investor in private equity vehicles that invest in and manage real estate related assets and other related investments. This includes:
Rialto Real Estate Fund, LP (“Fund I”) that was formed in 2010 to invest in distressed real estate assets and other related investments to which investors have committed and contributed a total of $700 million of equity;
Rialto Real Estate Fund II, LP (“Fund II”) that was formed in 2012 to invest in distressed real estate assets and other related investments to which investors have committed $1.3 billion; and
Rialto Mezzanine Partners Fund, LP (“Mezzanine Fund”) that was formed in 2013 to which investors have committed $300 million in capital to invest in performing mezzanine commercial loans that have expected durations of one to two years and are secured by equity interests in the borrowing entity owning the real estate assets.

65



Rialto also earns fees for its role as a manager of these vehicles and for providing asset management and other services to those vehicles and other third parties.
Rialto's share of earnings from unconsolidated entities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Rialto Real Estate Fund, LP
$
3,044

 
7,174

 
3,790

 
12,233

Rialto Real Estate Fund II, LP
2,286

 
2,402

 
3,179

 
2,440

Rialto Mezzanine Partners Fund, LP
451

 
493

 
926

 
782

Other investments
1,547

 
7,870

 
2,097

 
7,838

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

In 2010, the Rialto segment invested in non-investment grade commercial mortgage-backed securities at a 55% discount to par value. The carrying value of the investment securities at May 31, 2015 and November 30, 2014 was $18.0 million and $17.3 million, respectively. These securities bear interest at a coupon rate of 4% and have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In December 2014, the Rialto segment invested in a private commercial real estate services company at a price of $18.0 million. The investment is carried at cost at May 31, 2015 and is included in Rialto's other assets.

Lennar Multifamily Segment
We have been actively involved, primarily through unconsolidated entities, in the development of multifamily rental properties. Our Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
As of May 31, 2015 and November 30, 2014, our balance sheet had $362.3 million and $268.0 million, respectively, of assets related to our Lennar Multifamily segment, which included investments in unconsolidated entities of $129.8 million and $105.7 million, respectively. Our net investment in the Lennar Multifamily segment as of May 31, 2015 and November 30, 2014 was $310.5 million and $203.7 million, respectively. Our Lennar Multifamily segment had 28 and 26 unconsolidated entities, as of May 31, 2015 and November 30, 2014, respectively. As of May 31, 2015, our interests in Lennar Multifamily segment had interests in 26 communities with development costs of $1.7 billion, of which two communities were completed and operating, six communities were partially completed and leasing and 18 communities were under construction. Our Lennar Multifamily segment also had a pipeline of potential future projects totaling $4.5 billion in assets across a number of states that would be developed primarily by unconsolidated entities. We are focused on creating an investment fund, which we would manage and in which we would make an investment, to provide funding for the rental communities we develop.

(2) Financial Condition and Capital Resources
At May 31, 2015, we had cash and cash equivalents related to our homebuilding, financial services, Rialto and multifamily operations of $920.2 million, compared to $1.3 billion at November 30, 2014 and $960.2 million at May 31, 2014.
We finance all of our activities including homebuilding, financial services, Rialto, multifamily 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 six months ended May 31, 2015 and 2014, cash used in operating activities totaled $994.5 million and $721.7 million, respectively. During the six months ended May 31, 2015, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases and land development costs, an increase in Rialto loans held-for-sale related to RMF and an increase in Lennar Financial Services loans held-for-sale, partially offset by our net earnings and an increase in accounts payable and other liabilities and an increase in distribution of earnings from Lennar Homebuilding and Rialto unconsolidated entities.
During the six months ended May 31, 2014, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases, an increase in receivables and a increase in Lennar Financial Services loans held-for-sale, partially offset by our net earnings and an increase in accounts payable and other liabilities.

66



Investing Cash Flow Activities
During the six months ended May 31, 2015 and 2014, cash provided by (used in) investing activities totaled ($7.3) million and $187.9 million, respectively. During the six months ended May 31, 2015, our cash used in investing activities was primarily impacted by $28.1 million for purchases of Lennar Homebuilding investments available-for-sale, cash contributions of $27.0 million to Lennar Homebuilding unconsolidated entities primarily for working capital, $23.9 million to Rialto unconsolidated entities comprised of $18.4 million contributed to Fund II, $3.5 million contributed to the Mezzanine Fund and $2.0 million contributed to other investments, and $15.7 million to Lennar Multifamily unconsolidated entities primarily for working capital. This was partially offset by the receipt of $73.7 million of proceeds from the sale of a Lennar Homebuilding operating property, $55.8 million of proceeds from the sales of REO and distributions of capital of $17.8 million from Lennar Homebuilding unconsolidated entities, $11.3 million from Lennar Multifamily unconsolidated entities and $6.0 million from Rialto unconsolidated entities comprised of $2.7 million distributed by Fund II, $1.2 million distributed by Mezzanine Fund and $2.1 million distributed by other investments.
During the six months ended May 31, 2014, our cash provided by investing activities was primarily impacted by the receipt of $112.4 million of proceeds from the sales of REO, $44.6 million of proceeds from the sales of investments available-for-sale and distributions of capital of $74.8 million from Lennar Homebuilding unconsolidated entities, $42.4 million from Lennar Multifamily unconsolidated entities and $30.1 million from Rialto unconsolidated entities comprised of $14.8 million distributed by Fund I, $3.5 million distributed by Fund II, $8.4 million distributed by Mezzanine Fund and $3.4 million distributed by other investments. This was partially offset by cash contributions of $56.6 million to Lennar Homebuilding unconsolidated entities primarily for working capital, $18.2 million to Rialto unconsolidated entities comprised of $8.6 million contributed to the Mezzanine Fund and $9.6 million contributed to other investments and $14.1 million to Lennar Multifamily unconsolidated entities primarily for working capital, and $21.3 million for purchases of Lennar Homebuilding investments available-for-sale.
We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness for cash or equity, the acquisition of homebuilders and other companies, the sale of our assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or pursuing other financing alternatives. In connection with some of our more recently formed businesses, such as Rialto and Multifamily, and our consolidated joint venture FivePoint Communities that manages several large properties in California, we may also consider other types of transactions such as restructurings, joint ventures, spin-offs or initial public offerings. We are focused on creating an investment fund, which we would manage and in which we would make an investment, to provide funding for the rental communities we develop. If any of these transactions are implemented, they could materially impact the amount and composition of our indebtedness outstanding, increase our interest expense, dilute our existing stockholders and/or affect the book value of our assets. At May 31, 2015, we had no agreements or understandings regarding any significant acquisition transactions.
Financing Cash Flow Activities
During the six months ended May 31, 2015 and 2014, our cash provided by financing activities totaled $640.2 million and $523.5 million, respectively. During the six months ended May 31, 2015, our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the sale of an additional $250 million aggregate principal amount of 4.50% senior notes due 2019 (the “4.50% Senior Notes”), proceeds related to the sale of $500 million aggregate principal amount of 4.750% senior notes due 2025 (the "4.750% Senior Notes"), $450 million of net borrowings under our unsecured revolving credit facility (the “Credit Facility”), $161.3 million of net borrowings under our Lennar Financial Services' 364-day warehouse repurchase facilities and $28.4 million of net borrowings under Rialto's warehouse repurchase facilities. The cash provided by financing activities was partially offset by $500.0 million redemption of our 5.60% senior notes due May 2015, $206.9 million of principal payments on other borrowings and $78.9 million of payments related to noncontrolling interests.
During the six months ended May 31, 2014, our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the sale of $500 million aggregate principal amount of 4.500% senior notes due 2019, proceeds related to the sale of $100 million aggregate principal amount of Rialto's 7.00% senior notes due 2018 (the "7.00% Senior Notes"), $73.8 million of proceeds related to the issuance of Rialto's 2.85% structured note offering and $85.8 million of net borrowings under our Lennar Financial Services' 364-day warehouse repurchase facilities, partially offset by $157.2 million of principal payments on other borrowings, $72.7 million of payments related to noncontrolling interests and $31.6 million of net repayments under Rialto's warehouse repurchase facilities.

67



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. Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital are calculated as follows:
(Dollars in thousands)
May 31,
2015
 
November 30,
2014
 
May 31,
2014
Lennar Homebuilding debt
$
5,291,136

 
4,690,213

 
4,683,438

Stockholders’ equity
5,138,738

 
4,827,020

 
4,399,344

Total capital
$
10,429,874

 
9,517,233

 
9,082,782

Lennar Homebuilding debt to total capital
50.7
%

49.3
%
 
51.6
%
Lennar Homebuilding debt
$
5,291,136

 
4,690,213

 
4,683,438

Less: Lennar Homebuilding cash and cash equivalents
638,992

 
885,729

 
627,615

Net Lennar Homebuilding debt
$
4,652,144

 
3,804,484

 
4,055,823

Net Lennar Homebuilding debt to total capital (1)
47.5
%
 
44.1
%
 
48.0
%
(1)
Net Lennar Homebuilding debt to total capital is a non-GAAP financial measure defined as 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). We believe the ratio of net Lennar Homebuilding debt to total capital is a relevant and a useful financial measure to investors in understanding the leverage employed in our Lennar Homebuilding operations. However, because net Lennar Homebuilding debt to total capital is not calculated in accordance with GAAP, this financial measure should not be considered in isolation or as an alternative to financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results.
At May 31, 2015, Lennar Homebuilding debt to total capital was lower compared to May 31, 2014, primarily as a result of an increase in stockholder’s equity primarily related to our net earnings, partially offset by a net increase in Lennar Homebuilding debt due to the issuance of senior notes.
In addition to the use of capital in our homebuilding, financial services, Rialto and multifamily operations, we actively evaluate various other uses of capital. This may include acquisitions of, or investments in, other entities, the payment of dividends or repurchases of our outstanding common stock or debt. These activities may be funded through any combination of our credit facility, warehouse lines of credit, cash generated from operations, sales of assets or the issuance into capital markets of debt, common stock or preferred stock.
Our Lennar Homebuilding average debt outstanding was $5.1 billion with an average rate for interest incurred of 5.1% for the six months ended May 31, 2015, compared to $4.6 billion with an average rate for interest incurred of 5.2% for the six months ended May 31, 2014. Interest incurred related to Lennar Homebuilding debt for the six months ended May 31, 2015 was $146.5 million, compared to $135.6 million in the same period last year.
In April 2015, we amended our unsecured revolving Credit Facility to reduced the interest rate on $1.18 billion of the Credit Facility, increase the maximum potential borrowings from $1.5 billion to $1.6 billion, which includes a $263 million accordion feature, subject to additional commitments, with certain financial institutions and extend the maturity of $1.18 billion of the Credit Facility from June 2018 to June 2019. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The Credit Facility agreement also provides that up to $500 million in commitments may be used for letters of credit. As of May 31, 2015, the Company had $450 million of outstanding borrowings under the Credit Facility. As of November 30, 2014, we had no outstanding borrowings under the Credit Facility. We may from time to time, borrow and repay amounts under the Credit Facility. Consequently, the amount outstanding under the Credit Facility at the end of a period may not be reflective of the total amounts outstanding during the period. We believe that we were in compliance with our debt covenants at May 31, 2015. In addition, we had $315 million of letter of credit facilities with different financial institutions.
Our performance letters of credit outstanding were $246.5 million and $234.1 million at May 31, 2015 and November 30, 2014, respectively. Our financial letters of credit outstanding were $179.5 million and $190.4 million at May 31, 2015 and November 30, 2014, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral.
In April 2015, we issued $500 million aggregate principal amount of 4.750% Senior Notes at a price of 100%. Proceeds from the offering, after payment of expenses, were $495.6 million. We used the net proceeds from the sale of the 4.750% Senior Notes, together with cash on hand, to retire our $500 million of 5.60% senior notes due May 2015 for 100% of the outstanding principal amount, plus accrued and unpaid interest. Interest on the 4.750% Senior Notes is due semi-annually beginning November 30, 2015. The 4.750% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries.

68



In November 2014, we originally issued $350 million aggregate principal amount of 4.50% Senior Notes at a price of 100%. In February 2015, we issued an additional $250 million aggregate principal amount of our 4.50% Senior Notes at a price of 100.25%. Proceeds from the offerings, after payment of expenses, were $595.8 million. We used the net proceeds from the sales of the 4.50% Senior Notes for working capital and general corporate purposes. Interest on the 4.50% Senior Notes is due semi-annually beginning May 15, 2015. The 4.50% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries.
Subsequent to May 31, 2015, the Company exchanged approximately $106 million in aggregate principal amount of the 2.75% Convertible Senior Notes for approximately $106 million in cash and 2.5 million shares of Class A common stock, plus accrued and unpaid interest through the date of completion of the exchanges.
Currently, substantially all of our 100% owned homebuilding subsidiaries are guaranteeing all our Senior Notes (the “Guaranteed Notes”). The guarantees are full and unconditional. The principal reason our 100% owned homebuilding subsidiaries are guaranteeing the Guaranteed Notes is so holders of the Guaranteed Notes will have rights at least as great with regard to our subsidiaries as any other holders of a material amount of our unsecured debt. Therefore, the guarantees of the Guaranteed Notes will remain in effect only while the guarantor subsidiaries guarantee a material amount of the debt of Lennar Corporation, as a separate entity, to others. At any time when a guarantor subsidiary is no longer guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes, either directly or by guaranteeing other subsidiaries’ obligations as guarantors of Lennar Corporation’s debt, the guarantor subsidiary’s guarantee of the Guaranteed Notes will be suspended. Therefore, if the guarantor subsidiaries cease guaranteeing Lennar Corporation’s obligations under our Credit Facility and our letter of credit facilities and are not guarantors of any new debt, the guarantor subsidiaries’ guarantees of the Guaranteed Notes will be suspended until such time, if any, as they again are guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes.
If our guarantor subsidiaries are guaranteeing revolving credit lines totaling at least $75 million, we will treat the guarantees of the Guaranteed Notes as remaining in effect even during periods when Lennar Corporation’s borrowings under the revolving credit lines are less than $75 million. A subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
Under the amended Credit Facility agreement executed in April 2015 (the “Credit 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 that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar quarters. The leverage ratio will have a floor of 60%. If our interest coverage ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar quarters, the leverage ratio we will be required to maintain will be increased by 2.5% per quarter to a maximum of 65%. 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 equal to or greater than 1.50:1.00 for the last twelve months then ended.
The following are computations of our compliance with the minimum net worth test, maximum leverage ratio, and liquidity test, as calculated per the Credit Agreement as of May 31, 2015:
 
As of May 31, 2015
(Dollars in thousands)
Covenant Level
 
Level Achieved
Minimum net worth test (1)
$
2,380,497

 
4,061,178

Maximum leverage ratio (2)
65.0
%
 
50.7
%
Liquidity test (3)
1.00

 
2.30

The terms minimum net worth test, maximum leverage ratio and liquidity test used in the Credit Agreement are specifically calculated per the Credit 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 Credit Agreement as of May 31, 2015 as follows:
(1)
The minimum consolidated tangible net worth and the consolidated tangible net worth as calculated per the Credit Agreement were as follows:

69



Minimum consolidated tangible net worth
 
(In thousands)
As of May 31, 2015
Stated minimum consolidated tangible net worth per the Credit Agreement
$
1,459,657

Plus: 50% of cumulative consolidated net income as calculated per the Credit Agreement, if positive
920,840

Required minimum consolidated tangible net worth per the Credit Agreement
$
2,380,497

Consolidated tangible net worth
 
(In thousands)
As of May 31, 2015
Total equity
$
5,475,719

Less: Intangible assets (a)
(51,246
)
Tangible net worth as calculated per the Credit Agreement
5,424,473

Less: Consolidated equity of mortgage banking, Rialto and other designated subsidiaries, and, from and after March 1, 2015, equity of Lennar Commercial, Lennar Multifamily and Sunstreet subsidiaries (b)
(1,263,284
)
Less: Lennar Homebuilding noncontrolling interests
(100,011
)
Consolidated tangible net worth as calculated per the Credit Agreement
$
4,061,178

(a)
Intangible assets represent the Lennar Financial Services segment's title operations goodwill and title plant assets.
(b)
Consolidated equity of mortgage banking subsidiaries represents the equity of the Lennar Financial Services segment's mortgage banking operations. The consolidated equity of Rialto, as calculated per the Credit Agreement, represents Rialto's total assets minus Rialto's total liabilities as disclosed in Note 8 of the notes to our condensed consolidated financial statements as of May 31, 2015. 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 the Credit Agreement. The consolidated equity of Lennar Commercial subsidiaries represents the equity of certain subsidiaries within Lennar Homebuilding that engage in activities related to commercial properties. The consolidated equity of Lennar Multifamily represents Lennar Multifamily’s total assets minus Lennar Multifamily’s total liabilities disclosed in Note 9 of the notes to our condensed consolidated financial statements as of May 31, 2015. The consolidated equity of Sunstreet subsidiaries represents the equity of certain subsidiaries within Lennar Homebuilding that engage in activities related to solar power systems. The consolidated equity of mortgage banking, Rialto, Lennar Commercial, Lennar Multifamily, Sunstreet subsidiaries and other designated subsidiaries are included in equity in our condensed consolidated balance sheet as of May 31, 2015.
(2)
The leverage ratio as calculated per the Agreement was as follows:
Leverage ratio
 
(Dollars in thousands)
As of May 31, 2015
Lennar Homebuilding senior notes and other debts payable
$
5,291,136

Less: Debt of Lennar Homebuilding consolidated entities (a)
(10,850
)
Funded debt as calculated per the Credit Agreement
5,280,286

Plus: Financial letters of credit (b)
179,596

Plus: Lennar's recourse exposure related to Lennar Homebuilding unconsolidated/consolidated entities, net (c)
33,538

Consolidated indebtedness as calculated per the Credit Agreement
5,493,420

Less: Unrestricted cash and cash equivalents in excess of required liquidity per the Credit Agreement (d)
(649,204
)
Numerator as calculated per the Credit Agreement
$
4,844,216

Denominator as calculated per the Credit Agreement
$
9,554,598

Leverage ratio (e)
50.7
%
(a)
Debt of our Lennar Homebuilding consolidated joint ventures is included in Lennar Homebuilding senior notes and other debts payable in our condensed consolidated balance sheet as of May 31, 2015.
(b)
As of May 31, 2015, our financial letters of credit outstanding include $179.5 million as disclosed in Note 12 of the notes to our condensed consolidated financial statements and $0.1 million of financial letters of credit related to the Lennar Financial Services segment's title operations.
(c)
Lennar's recourse exposure related to the Lennar Homebuilding unconsolidated and consolidated entities, net includes $22.7 million of net recourse exposure related to Lennar Homebuilding unconsolidated entities and $10.8 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 May 31, 2015.

70



(d)
As of May 31, 2015, unrestricted cash and cash equivalents include $638.3 million of Lennar Homebuilding cash and cash equivalents, excluding cash and cash equivalents from Lennar Commercial and Sunstreet subsidiaries within Lennar Homebuilding, and $20.9 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 Credit Agreement divided by the denominator as calculated per the Credit Agreement (consolidated indebtedness as calculated per the Credit Agreement, plus consolidated tangible net worth as calculated per the Credit Agreement).
(3)
Liquidity as calculated per the Credit Agreement was as follows:
Liquidity test
 
(Dollars in thousands)
As of May 31, 2015
Unrestricted cash and cash equivalents as calculated per the Credit Agreement (a)
$
644,854

Consolidated interest incurred as calculated per the Credit Agreement (b)
$
280,592

Liquidity (c)
2.30

(a)
Unrestricted cash and cash and cash equivalents at May 31, 2015 for the liquidity test calculation includes $638.3 million of Lennar Homebuilding cash and cash equivalents, excluding cash and cash equivalents from Lennar Commercial and Sunstreet subsidiaries within Lennar Homebuilding, plus $20.9 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 $14.3 million of cash and cash equivalents of Lennar Homebuilding consolidated joint ventures.
(b)
Consolidated interest incurred as calculated per the Credit Agreement for the twelve months ended May 31, 2015 includes Lennar Homebuilding interest incurred of $284.3 million, plus Lennar Financial Services interest incurred excluding interest incurred from mortgage banking subsidiaries and other designated subsidiaries within the Lennar Financial Services operations, 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 (expense), 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.
Our Lennar Financial Services segment warehouse facilities at May 31, 2015 were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures June 2015 (1)
$
150,000

364-day warehouse repurchase facility that matures December 2015
450,000

364-day warehouse repurchase facility that matures March 2016 (2)
400,000

Totals
$
1,000,000

(1)
Maximum aggregate commitment includes a $50 million accordion feature that is available beginning the tenth (10th) calendar day immediately preceding the first day of a fiscal quarter-through 20 days after fiscal quarter-end. Subsequent to May 31, 2015, the warehouse repurchase facility maturity date was extended to July 2015.
(2)
Maximum aggregate commitment includes a $100 million accordion feature that is available 10 days prior to the end of each fiscal quarter through 20 days after each fiscal quarter end and an additional uncommitted $100 million available through 20 days after this fiscal quarter-end.
Our Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $865.4 million and $698.4 million at May 31, 2015 and November 30, 2014, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $948.9 million and $732.1 million, at May 31, 2015 and November 30, 2014, respectively. Without the facilities, our Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities. 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

71



resources. If the facilities are not renewed or replaced, 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.
As of both May 31, 2015 and November 30, 2014, RMF had two warehouse repurchase financing agreements that mature in August and October 2015 with commitments totaling $650 million to finance the loans it makes. In March 2015, RMF entered into an additional warehouse repurchase facility with commitments totaling $250 million that matures in March 2016. Rialto uses these warehouse repurchase financing agreements to finance the mortgage loans that RMF originates. Borrowings under these facilities were $169.6 million and $141.3 million as of May 31, 2015 and November 30, 2014, respectively. These warehouse repurchase facilities are non-recourse to us.
As of May 31, 2015 and November 30, 2014, the carrying amount of Rialto's 7.00% Senior Notes was $351.7 million and $351.9 million, respectively.
As of May 31, 2015 and November 30, 2014, the outstanding amount related to Rialto's structured note offering (the “Structured Notes”) was $38.0 million and $58.0 million, respectively.
Changes in Capital Structure
We have a stock repurchase program adopted in 2001, which originally authorized us to purchase up to 20 million shares of our outstanding common stock. During both the three and six months ended May 31, 2015 and 2014, there were no share repurchases of common stock under the stock repurchase program. As of May 31, 2015, the remaining authorized shares that could be purchased under the stock repurchase program were 6.2 million shares of common stock.
During the three months ended May 31, 2015, treasury stock increased by an immaterial amount of Class A common stock. During the six months ended May 31, 2015, treasury stock decreased 0.2 million shares of Class A common stock due to activity related to our equity compensation plan. During the three and six months ended May 31, 2014, treasury stock decreased 11.7 million and 12.1 million shares of Class A common stock, respectively, primarily due to the retirement of 11.7 million shares of Class A common stock authorized by the Board of Directors during the three months ended May 31, 2014.
On May 6, 2015, 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 April 22, 2015, as declared by our Board of Directors on April 8, 2015. On June 23, 2015, 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 July 22, 2015 to holders of record at the close of business on July 8, 2015.
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.

72



Off-Balance Sheet Arrangements
Lennar Homebuilding: Investments in Unconsolidated Entities
At May 31, 2015, we had equity investments in 34 homebuilding and land unconsolidated entities (of which 4 had recourse debt, 5 had non-recourse debt and 25 had no debt), compared to 35 homebuilding and land unconsolidated entities at November 30, 2014. 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 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
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
180,790

 
32,111

 
623,747

 
175,805

Costs and expenses
154,139

 
65,098

 
453,018

 
210,737

Other income

 

 
2,943

 

Net earnings (loss) of unconsolidated entities (1)
$
26,651

 
(32,987
)
 
173,672

 
(34,932
)
Our share of net earnings
$
6,433

 
444

 
45,930

 
3,611

Lennar Homebuilding equity in earnings from unconsolidated entities (2)
$
6,494

 
394

 
35,393

 
5,384

Our cumulative share of net earnings - deferred at May 31, 2015 and 2014, respectively
 
 
 
 
$
23,173

 
11,520

Our investments in unconsolidated entities
 
 
 
 
$
688,467

 
690,035

Equity of the unconsolidated entities
 
 
 
 
$
2,371,233

 
2,330,314

Our investment % in the unconsolidated entities


 


 
29
%
 
30
%
(1)
For the six months ended May 31, 2015, net earnings of unconsolidated entities included the sale of approximately 300 homesites to us by El Toro, for $126.4 million, resulting in $44.6 million of gross profit of which our portion was deferred.
(2)
For the three months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $11.6 million of equity in earnings primarily related to the sale of a commercial property and homesites to third parties by El Toro. For the six months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $43.0 million of equity in earnings primarily related to the sale of approximately 660 homesites and a commercial property to third parties by El Toro. For the six months ended May 31, 2014, Lennar Homebuilding equity in earnings from unconsolidated entities included $4.7 million of equity in earnings primarily as a result of third-party land sales by one of our unconsolidated entities.

73



Balance Sheets
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
300,136

 
243,597

Inventories
2,725,167

 
2,889,267

Other assets
134,036

 
155,470

 
$
3,159,339

 
3,288,334

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
283,414

 
271,638

Debt
504,692

 
737,755

Equity
2,371,233

 
2,278,941

 
$
3,159,339

 
3,288,334

As of May 31, 2015 and November 30, 2014, our recorded investments in Lennar Homebuilding unconsolidated entities were $688.5 million and $656.8 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2015 and November 30, 2014 was $755.2 million and $722.6 million, respectively. The basis difference is primarily as a result of us buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.
The Lennar Homebuilding unconsolidated entities in which we have investments usually finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities.
Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:
(Dollars in thousands)
May 31,
2015
 
November 30,
2014
Debt
$
504,692

 
737,755

Equity
2,371,233

 
2,278,941

Total capital
$
2,875,925

 
3,016,696

Debt to total capital of our unconsolidated entities
17.5
%
 
24.5
%
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
(In thousands)
May 31,
2015
 
November 30,
2014
Land development
$
571,837

 
535,960

Homebuilding
116,630

 
120,877

Total investments
$
688,467

 
656,837

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 of 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 loans 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 an 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 sometimes 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 maximum exposure, which is the full amount covered by the joint and several guarantee.

74



The total debt of Lennar Homebuilding unconsolidated entities in which we have investments, including Lennar's maximum recourse exposure, were as follows:
(Dollars in thousands)
May 31,
2015
 
November 30,
2014
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
55,685

 
56,573

Non-recourse land seller debt or other debt
4,001

 
4,022

Non-recourse debt with completion guarantees (1)
183,287

 
442,854

Non-recourse debt without completion guarantees
239,031

 
209,825

Non-recourse debt to Lennar
482,004

 
713,274

Lennar’s maximum recourse exposure
22,688

 
24,481

Total debt
$
504,692

 
737,755

Lennar’s maximum recourse exposure as a % of total JV debt
4
%
 
3
%
(1)
The decrease in non-recourse debt with completion guarantees was primarily related to a debt paydown by El Toro as a result of land sales.
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)
May 31,
2015
 
November 30,
2014
Assets
$
1,473,620

 
1,669,285

Liabilities
$
294,711

 
557,261

Equity
$
1,178,909

 
1,112,024

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. As of both May 31, 2015 and November 30, 2014, we did not have any maintenance or joint and several 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.
If we are required to make a payment under any guarantee, 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 both May 31, 2015 and November 30, 2014, the fair values of the repayment and completion guarantees were not material. We believe that as of May 31, 2015, 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 12 of the notes to our condensed consolidated financial statements).
In view of recent credit market conditions, it is not uncommon for lenders and/or 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

75



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 May 31, 2015 and November 30, 2014, 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 May 31, 2015 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
Debt
 
2015
 
2016
 
2017
 
Thereafter
 
Other
Debt (1)
Maximum recourse debt exposure to Lennar
$
22,688

 
1,157

 

 
10,276

 
11,255

 

Debt without recourse to Lennar
482,004

 
8,307

 
84,454

 
77,786

 
307,456

 
4,001

Total
$
504,692

 
9,464

 
84,454

 
88,062

 
318,711

 
4,001

(1)
Represents land seller debt and other debt.
The table below indicates the assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of May 31, 2015:
(Dollars in thousands)
Lennar’s
Investment
 
Total JV
Assets
 
Maximum
Recourse
Debt
Exposure
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
$
210,943

 
1,329,016

 
11,256

 
104,706

 
115,962

 
1,082,770

 
10
%
Runkle Canyon
61,303

 
124,112

 

 

 

 
122,606

 

Newhall Land Development
60,233

 
458,347

 

 
299

 
299

 
350,689

 

Central Park West Holdings
60,092

 
57,488

 

 

 

 
52,248

 

The Shipyard Communities (Hunters Point)
45,046

 
428,742

 

 
267,581

 
267,581

 
145,048

 
65
%
Ballpark Village
42,701

 
136,924

 

 
47,000

 
47,000

 
85,864

 
35
%
Treasure Island Community Development
33,726

 
72,771

 

 

 

 
67,483

 

MS Rialto Residential Holdings
25,280

 
93,129

 

 

 

 
89,189

 

Krome Groves Land Trust
21,447

 
90,560

 
9,276

 
19,761

 
29,037

 
59,171

 
33
%
Willow Springs Properties
18,971

 
34,119

 

 

 

 
32,208

 

10 largest JV investments
579,742

 
2,825,208

 
20,532

 
439,347

 
459,879

 
2,087,276

 
18
%
Other JVs
108,725

 
334,131

 
2,156

 
38,656

 
40,812

 
283,957

 
13
%
Total
$
688,467

 
3,159,339

 
22,688

 
478,003

 
500,691

 
2,371,233

 
17
%
Land seller debt and other debt
 
 
 
 

 
4,001

 
4,001

 
 
 
 
Total JV debt
 
 
 
 
$
22,688

 
482,004

 
504,692

 
 
 
 
(1)
All of the joint ventures presented in the table above operate in our Homebuilding West segment except for Krome Groves Land Trust, which operates in our Homebuilding Southeast Florida segment and Willow Springs Properties, which operates in our Homebuilding Central segment.

76



The table below indicates the percentage of assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments, as of May 31, 2015:
 
% of
Total JV
Assets
 
% of Maximum
Recourse Debt
Exposure to Lennar
 
% of Total Debt
Without Recourse to
Lennar
 
% of
Total JV
Equity
10 largest JVs
89
%
 
90
%
 
92
%
 
88
%
Other JVs
11
%
 
10
%
 
8
%
 
12
%
Total
100
%
 
100
%
 
100
%
 
100
%
Rialto: Investments in Unconsolidated Entities
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,
2015
 
May 31,
2015
 
November 30,
2014
(In thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to fund by the Company
 
Funds contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006

 
$
700,006

 
$
75,000

 
$
75,000

 
$
67,425

 
71,831

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

 
1,000,000

 
100,000

 
76,628

 
86,462

 
67,652

Rialto Mezzanine Partners Fund, LP
2013
 
300,000

 
213,536

 
33,799

 
24,058

 
23,531

 
20,226

Other investments

 
 
 
 
 
 
 
 
 
17,717

 
15,991

 
 
 
 
 
 
 
 
 
 
 
$
195,135

 
175,700

Rialto's share of earnings from unconsolidated entities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Rialto Real Estate Fund, LP
$
3,044

 
7,174

 
3,790

 
12,233

Rialto Real Estate Fund II, LP
2,286

 
2,402

 
3,179

 
2,440

Rialto Mezzanine Partners Fund, LP
451

 
493

 
926

 
782

Other investments
1,547

 
7,870

 
2,097

 
7,838

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

As manager of real estate funds, we are entitled to receive additional revenue through a carried interest if they meet certain performance thresholds. During the three and six months ended May 31, 2015, Rialto received $2.5 million and $6.0 million, respectively, as an advance distribution related to its carried interest in order to cover income tax obligations resulting from allocations of taxable income to Rialto’s carried interest in Fund I. If Fund I had ceased operations and liquidated all its investments for their estimated fair values on May 31, 2015, we would have received $107.7 million with regard to our carried interest, which is net of $40.7 million already received as advance distributions since inception of Fund I. These amounts of advance distributions are not subject to clawbacks but would serve to reduce future carried interest payments earned from Fund I. However, Fund I did not cease operations and liquidate its investments on May 31, 2015, and the ultimate sum we will receive with regard to our carried interest in Fund I may be substantially higher or lower than $148.4 million, including the $40.7 million received, discussed above. During the three and six months ended May 31, 2015, Rialto received $2.3 million and $5.3 million, respectively, as an advance distribution related to its carried interest in order to cover income tax obligations resulting from allocations of taxable income to Rialto’s carried interest in Fund II. This amount of advance distribution is not subject to clawbacks but would serve to reduce future carried interest payments earned from Fund II.

77



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)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
96,193

 
141,609

Loans receivable
485,839

 
512,034

Real estate owned
426,201

 
378,702

Investment securities
929,711

 
795,306

Investments in partnerships
365,732

 
311,037

Other assets
38,047

 
45,451

 
$
2,341,723

 
2,184,139

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
19,823

 
20,573

Notes payable
326,878

 
395,654

Equity
1,995,022

 
1,767,912

 
$
2,341,723

 
2,184,139

Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
39,320

 
33,177

 
81,058

 
64,604

Costs and expenses
25,082

 
23,304

 
48,087

 
49,413

Other income, net (1)
55,477

 
104,868

 
61,351

 
153,038

Net earnings of unconsolidated entities
$
69,715

 
114,741

 
94,322

 
168,229

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

Rialto's investments in unconsolidated entities
 
 
 
 
$
195,135

 
157,693

Equity of the unconsolidated entities
 
 
 
 
$
1,995,022

 
1,481,349

Rialto's investment % in the unconsolidated entities


 


 
10
%
 
11
%
(1)
Other income, net, included realized and unrealized gains (losses) on investments.
Lennar Multifamily: Investments in Unconsolidated Entities
At May 31, 2015 and November 30, 2014, we had equity investments in 28 and 26 unconsolidated entities, respectively (all of which had non-recourse debt or no debt). We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners’ capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners.
The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint ventures except for cost over-runs relating to the construction of the project. In all cases, we have been required to provide guarantees of completion and cost over-runs to the lenders and partners. These completion guarantees may require us to complete the improvements for which the financing was obtained. Therefore, our risk is limited to our equity contribution, draws on letters of credit and potential future payments under the guarantees of completion and cost over-runs. In certain instances, payments made under the cost over-run guarantees are considered capital contributions.
Additionally, the joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of the rental projects. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, the joint venture debt does not have payment or maintenance guarantees.

78



Neither we nor the other equity partners are a party to the debt instruments. In some cases, we agree to provide credit support in the form of a letter of credit provided to the bank.
We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. All of the joint ventures were in compliance with their debt covenants at May 31, 2015.
As described above, the liquidity needs of joint ventures in which we have investments vary on an entity-by-entity basis depending on each entity’s purpose and the stage in its life cycle. During formation and development activities, the entities generally require cash, which is provided through a combination of equity contributions and debt financing, to fund acquisition, development and construction of multifamily rental properties. As the properties are completed and sold, cash generated will be available to repay debt and for distribution to the joint venture’s members. Thus, the amount of cash available for a joint venture to distribute at any given time is primarily a function of the scope of the joint venture’s activities and the stage in the joint venture’s life cycle.
Summarized financial information on a combined 100% basis related to Lennar Multifamily’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
12,550

 
25,319

Operating properties and equipment
961,179

 
637,259

Other assets
18,119

 
14,742

 
$
991,848

 
677,320

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
129,979

 
87,151

Notes payable
333,461

 
163,376

Equity
528,408

 
426,793

 
$
991,848

 
677,320

Statements of Operations and Selected Information
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
3,075

 
960

 
5,169

 
2,411

Costs and expenses
5,081

 
1,581

 
8,075

 
3,175

Net loss of unconsolidated entities
$
(2,006
)
 
(621
)
 
(2,906
)
 
(764
)
Lennar Multifamily equity in loss from unconsolidated entities
$
(422
)
 
(182
)
 
$
(600
)
 
(257
)
Lennar Multifamily's investments in unconsolidated entities
 
 
 
 
$
129,818

 
77,534

Equity of the unconsolidated entities
 
 
 
 
$
528,408

 
300,168

Lennar Multifamily's investment % in the unconsolidated entities (1)


 


 
25
%
 
26
%
(1)
Our share of profit and cash distributions from the sales of operating properties could be higher compared to our ownership interest in unconsolidated entities if certain specified internal rate of return milestones are achieved.

79



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 JVs (i.e., controlled homesites) at May 31, 2015 and 2014:
 
Controlled Homesites
 
 
 
 
May 31, 2015
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
13,417

 
57

 
13,474

 
45,104

 
58,578

Central
4,951

 
1,135

 
6,086

 
21,039

 
27,125

West
1,803

 
4,829

 
6,632

 
39,254

 
45,886

Southeast Florida
4,413

 
446

 
4,859

 
8,694

 
13,553

Houston
2,166

 

 
2,166

 
12,161

 
14,327

Other
1,611

 

 
1,611

 
6,845

 
8,456

Total homesites
28,361

 
6,467

 
34,828

 
133,097

 
167,925

 
Controlled Homesites
 
 
 
 
May 31, 2014
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
7,940

 
265

 
8,205

 
47,695

 
55,900

Central
4,919

 
1,135

 
6,054

 
20,617

 
26,671

West
1,712

 
5,359

 
7,071

 
39,366

 
46,437

Southeast Florida
2,963

 
446

 
3,409

 
8,362

 
11,771

Houston
1,221

 
36

 
1,257

 
12,757

 
14,014

Other
1,751

 

 
1,751

 
7,203

 
8,954

Total homesites
20,506

 
7,241

 
27,747

 
136,000

 
163,747

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 or make a significant deposit for optioned land, we may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2015, consolidated inventory not owned decreased by $1.2 million with a corresponding decrease to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2015. The decrease was primarily due to a higher amount of homesite takedowns than construction started on homesites not owned. To reflect the purchase price of the inventory consolidated, we had a net reclass related to option deposits from consolidated inventory not owned to land under development in the accompanying condensed consolidated balance sheet as of May 31, 2015. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and our cash deposits.
Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our non-refundable option deposits and pre-acquisition costs totaling $68.5 million and $85.6 million at May 31, 2015 and November 30, 2014, respectively. Additionally, we had posted $35.9 million and $34.5 million of letters of credit in lieu of cash deposits under certain option contracts as of May 31, 2015 and November 30, 2014, respectively.


80



Contractual Obligations and Commercial Commitments
During the six months ended May 31, 2015, we issued an additional $250 million aggregate principal amount of our 4.50% Senior Notes and $500 million of our 4.750% Senior Notes.
The following summarizes our contractual debt obligations as of May 31, 2015:
 
Payments Due by Period
(In thousands)
Total
 
Six Months ending November 30, 2015
 
December 1, 2015 through November 30, 2016
 
December 1, 2016 through November 30, 2018
 
December 1, 2018 through November 30, 2020
 
Thereafter
Lennar Homebuilding - Senior notes and other debts payable (1)
$
5,291,136

 
45,533

 
347,022

 
1,156,973

 
1,777,738

 
1,963,870

Lennar Financial Services - Notes and other debts payable
865,416

 
865,416

 

 

 

 

Rialto - Notes and other debts payable (2)
629,703

 
171,324

 
74,016

 
32,640

 
351,723

 

Interest commitments under interest bearing debt (3)
1,190,354

 
139,687

 
258,931

 
399,125

 
207,799

 
184,812

Operating leases
150,317

 
19,295

 
34,302

 
54,304

 
28,009

 
14,407

Other contractual obligations (4)
71,848

 
71,848

 

 

 

 

Total contractual obligations (5)
$
8,198,774

 
1,313,103

 
714,271

 
1,643,042

 
2,365,269

 
2,163,089

(1)
Some of the senior notes and other debts payable are convertible senior notes, which have been included in this table based on maturity dates, but they are putable to, or callable by, us at earlier dates than the maturity dates disclosed in this table.
(2)
Amount includes notes payable and other debts payable of $351.7 million related to Rialto's 7.00% Senior Notes, $60.6 million related to Rialto's 5-year senior unsecured note, $169.6 million related to the RMF warehouse repurchase financing agreements and $38.0 million related to Rialto's Structured Notes with an estimated final payment date of December 15, 2015.
(3)
Interest commitments on variable interest-bearing debt are determined based on the interest rate as of May 31, 2015.
(4)
Amount includes $23.4 million of commitments to fund Rialto's Fund II, $9.7 million of commitments to fund Rialto's Mezzanine Fund, $30.4 million of commitments to fund loans to RMF and $8.3 million of remaining commitments to fund a Lennar Homebuilding unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing.
(5)
Total contractual obligations excludes our gross unrecognized tax benefits and accrued interest and penalties totaling $39.6 million as of May 31, 2015, 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 May 31, 2015, we had access to 34,828 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At May 31, 2015, we had $68.5 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $35.9 million of letters of credit in lieu of cash deposits under certain option contracts.
At May 31, 2015, we had letters of credit outstanding in the amount of $426.0 million (which included the $35.9 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 May 31, 2015, we had outstanding performance and surety bonds related to site improvements at various projects (including certain projects in our joint ventures) of $964.6 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 May 31, 2015, there were approximately $422.8 million, or 44%, of anticipated future costs to complete related to these site improvements. We do not presently anticipate any draws upon these bonds or letters of credit, 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.
Our Lennar Financial Services segment had a pipeline of loan applications in process of $2.5 billion at May 31, 2015. Loans in process for which interest rates were committed to the borrowers totaled approximately $687.8 million as of May 31, 2015. 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, future contracts and investor commitments to hedge our mortgage-related interest rate exposure. These

81



instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts, future 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 May 31, 2015, we had open commitments amounting to $1.0 billion to sell MBS with varying settlement dates through August 2015 and open future contracts in the amount of $648.0 million with settlement dates through March 2022.

(3) New Accounting Pronouncements
See Note 18 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 six months ended May 31, 2015 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, 2014. Even though our critical accounting policies have not changed in any significant way during the six months ended May 31, 2015, the following provides additional disclosures about Rialto's management fee revenue accounting policy.
Rialto - Management Fees Revenue
Our Rialto segment provides services to a variety of legal entities and investment vehicles such as funds, joint ventures, co-invests, and other private equity structures to manage their respective investments. As a result, Rialto earns and receives management fees, underwriting fees and due diligence fees. These fees related to our Rialto segment are included in Rialto revenues and are recorded over the period in which the services are performed, fees are determinable and collectability is reasonably assured. Rialto receives investment management fees from investment vehicles based on 1) a percentage of committed capital during the commitment period and after the commitment period ends and 2) a percentage of invested capital less the portion of such invested capital utilized to acquire investments that have been sold (in whole or in part) or liquidated. Fees earned for underwriting and due diligence services are based on actual costs incurred. In certain situations, Rialto may earn additional fees when the return on assets managed exceeds contractually established thresholds. Such revenue is only booked when the contract terms are met, the contract is at, or near, completion and the amounts are known and collectability is reasonably assured. Since such revenue is recognized during the latter half of the life of the investment vehicle, after substantially all of the assets have been sold and investment gains and losses realized, the possibility of clawbacks is limited. In addition, Rialto may also receive tax distributions in order to cover income tax obligations resulting from allocations of taxable income due to Rialto's carried interests in the funds. These distributions are not subject to clawbacks and therefore are recorded as revenue when received.
We believe the way we record Rialto management fees revenue is a significant accounting policy because it represents a significant portion of our Rialto segment's revenue and is expected to continue to grow in the future as the segment manages more assets.


82



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 six months ended May 31, 2015, we issued an additional $250 million aggregate principal amount of our 4.50% senior notes due 2019 and $500 million of our 4.750% senior notes due 2025.
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
May 31, 2015
 
Six Months Ending November 30,
 
Years Ending November 30,
 
 
 
 
 
Fair Value at May 31,
(Dollars in millions)
2015
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
 
2015
LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
26.3

 
283.8

 
404.1

 
653.0

 
1,378.9

 
2.8

 
1,963.9

 
4,712.8

 
5,783.6

Average interest rate
1.5
%
 
6.0
%
 
12.1
%
 
5.6
%
 
4.4
%
 
3.5
%
 
4.0
%
 
5.1
%
 

Variable rate
$
19.2

 
63.2

 
45.9

 
54.0

 
396.0

 

 

 
578.3

 
614.7

Average interest rate
3.5
%
 
2.9
%
 
2.8
%
 
2.7
%
 
2.4
%
 

 

 
2.6
%
 

Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
1.7

 
43.7

 
1.2

 
1.2

 
351.7

 

 

 
399.5

 
432.2

Average interest rate
4.1
%
 
4.3
%
 
5.9
%
 
5.9
%
 
7.0
%
 

 

 
6.7
%
 

Variable rate
$
169.6

 
30.3

 
30.3

 

 

 

 

 
230.2

 
230.0

Average interest rate
2.5
%
 
4.5
%
 
4.5
%
 

 

 

 

 
2.5
%
 

Lennar Financial Services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate
$
865.4

 

 

 

 

 

 

 
865.4

 
865.4

Average interest rate
2.3
%
 

 

 

 

 

 

 
2.3
%
 



83



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 the period covered by this report. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of May 31, 2015 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 May 31, 2015. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings
We have been engaged in litigation since 2008 in the United States District Court for the District of Maryland (U.S. Home Corporation v. Settlers Crossing, LLC, et al., Civil Action No. DKC 08-1863) regarding whether we are required by a contract we entered into in 2005 to purchase a property in Maryland. After entering into the contract, we later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In January 2015, the District Court rendered a decision ordering us to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. We believe the decision is contrary to applicable law and will appeal the decision. The amount of interest we would be required to pay has been the subject of further proceedings before the court.
On June 29, 2015, the court ruled that interest will be calculated as simple interest at the rate of 12% per annum from May 27, 2008 until the date we purchase the property. Simple interest on $114 million at 12% per annum will accrue at the rate of $13.7 million per year, totaling approximately $96 million as of May 31, 2015. In addition, if we are required to purchase the property, we will be obligated to reimburse the seller for real estate taxes, which currently total $1.6 million. We have not engaged in discovery regarding the amount of the plaintiffs’ attorneys’ fees. If the District Court decision was totally reversed on appeal, we would not have to purchase the property or pay interest, real estate taxes or attorneys’ fees.
In its June 29, 2015 ruling, the District Court determined that we will be permitted to stay the judgment during appeal by posting a bond in the amount of $223.4 million. The District Court calculated this amount by adding 12% per annum simple interest to the $114 million purchase price for the period beginning May 27, 2008 through May 26, 2016, the date the District Court estimates the appeal of the case will be concluded.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended November 30, 2014.

84



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our repurchases of common stock during the three months ended May 31, 2015:
Period:
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Number of Shares that may yet be Purchased under the Plans or Programs (2)
March 1 to March 31, 2015

 
$

 

 
6,218,968

April 1 to April 30, 2015

 
$

 

 
6,218,968

May 1 to May 31, 2015
2,569

 
$
46.66

 

 
6,218,968

(1)
Represents shares of Class A common stock withheld by us to cover withholding taxes due, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.
(2)
In June 2001, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to 20 million shares of our outstanding Class A common stock or Class B common stock. This repurchase authorization has no expiration date.
Item 3 - 5. Not Applicable

85



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 May 31, 2015, filed on July 2, 2015, 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 Condensed 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. 


86



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: July 2, 2015
 
/s/    Bruce E. Gross        
 
 
Bruce E. Gross
 
 
Vice President and Chief Financial Officer
 
 
 
Date: July 2, 2015
 
/s/    David M. Collins        
 
 
David M. Collins
 
 
Controller


87