Edgar Filing: LENNAR CORP /NEW/

LEN-2014.8.31-10Q Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2014

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 August 31, 2014:

Class A 173,941,743

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)



	August 31,		November 30,
	2014 (1)		2013 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents	$	542,241	695,424
Restricted cash	11,769		36,150
Receivables, net	83,420		51,935
Inventories:
Finished homes and construction in progress	3,159,148		2,269,116
Land and land under development	4,509,515		3,871,773
Consolidated inventory not owned	55,771		460,159
Total inventories	7,724,434		6,601,048
Investments in unconsolidated entities	697,623		716,949
Other assets	695,325		748,629
	9,754,812		8,850,135
Rialto Investments:
Cash and cash equivalents	211,030		201,496
Restricted cash	31,636		2,593
Receivables, net	—		111,833
Loans receivable, net	174,286		278,392
Loans held-for-sale	164,923		44,228
Real estate owned, held-for-sale	194,339		197,851
Real estate owned, held-and-used, net	335,472		428,989
Investments in unconsolidated entities	176,132		154,573
Other assets	95,925		59,358
	1,383,743		1,479,313
Lennar Financial Services	946,537		796,710
Lennar Multifamily	204,985		147,089
Total assets	$	12,290,077	11,273,247

(1)

Under certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities (“VIEs”) and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.

As of August 31, 2014, total assets include $979.8 million related to consolidated VIEs of which $13.2 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, $224.4 million in Lennar Homebuilding land and land under development, $55.8 million in Lennar Homebuilding consolidated inventory not owned, $13.2 million in Lennar Homebuilding investments in unconsolidated entities, $103.7 million in Lennar Homebuilding other assets, $37.6 million in Rialto Investments ("Rialto") cash and cash equivalents, $154.8 million in Rialto loans receivable, net, $119.3 million in Rialto real estate owned, held-for-sale, $236.3 million in Rialto real estate owned, held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities, $2.5 million in Rialto other assets and $17.8 million in Lennar Multifamily assets.

As of November 30, 2013, total assets include $1,195.3 million related to consolidated VIEs of which $8.3 million is included in Lennar Homebuilding cash and cash equivalents, $17.7 million in Lennar Homebuilding restricted cash, $2.4 million in Lennar Homebuilding receivables, net, $94.8 million in Lennar Homebuilding land and land under development, $243.6 million in Lennar Homebuilding consolidated inventory not owned, $14.7 million in Lennar Homebuilding investments in unconsolidated entities, $86.8 million in Lennar Homebuilding other assets, $44.8 million in Rialto cash and cash equivalents, $244.0 million in Rialto loans receivable, net, $122.0 million in Rialto real estate owned, held-for-sale, $313.8 million in Rialto real estate owned, held-and-used, net, $0.7 million in Rialto investments in unconsolidated entities and $1.8 million in Rialto other assets.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets – (Continued)

(Dollars in thousands, except shares and per share amounts)

(unaudited)



	August 31,			November 30,
	2014 (2)			2013 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable	$	349,382		271,365
Liabilities related to consolidated inventory not owned	47,507			384,876
Senior notes and other debts payable	4,692,880			4,194,432
Other liabilities	770,499			712,931
	5,860,268			5,563,604
Rialto Investments	659,648			497,008
Lennar Financial Services	697,799			543,639
Lennar Multifamily	34,221			41,526
Total liabilities	7,251,936			6,645,777
Stockholders’ equity:
Preferred stock	—			—
Class A common stock of $0.10 par value; Authorized: August 31, 2014 and November 30, 2013 - 300,000,000 shares; Issued: August 31, 2014 - 174,238,332 shares and November 30, 2013 - 184,833,120 shares	17,424			18,483
Class B common stock of $0.10 par value; Authorized: August 31, 2014 and November 30, 2013 - 90,000,000 shares; Issued: August 31, 2014 - 32,982,815 shares and November 30, 2013 - 32,982,815 shares	3,298			3,298
Additional paid-in capital	2,223,001			2,721,246
Retained earnings	2,422,921			2,053,893
Treasury stock, at cost; August 31, 2014 - 296,589 Class A common stock and 1,679,620 Class B common stock; November 30, 2013 - 12,063,466 Class A common stock and 1,679,620 Class B common stock	(85,165		)	(628,019	)
Total stockholders’ equity	4,581,479			4,168,901
Noncontrolling interests	456,662			458,569
Total equity	5,038,141			4,627,470
Total liabilities and equity	$	12,290,077		11,273,247

(2)

As of August 31, 2014, total liabilities include $142.7 million related to consolidated VIEs as to which there was no recourse against the Company, of which $5.5 million is included in Lennar Homebuilding accounts payable, $47.5 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $61.6 million in Lennar Homebuilding senior notes and other debts payable, $4.5 million in Lennar Homebuilding other liabilities and $23.6 million in Rialto Investments liabilities.

As of November 30, 2013, total liabilities include $294.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $3.0 million is included in Lennar Homebuilding accounts payable, $191.6 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $75.1 million in Lennar Homebuilding senior notes and other debts payable, $4.9 million in Lennar Homebuilding other liabilities and $20.2 million in Rialto Investments liabilities.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

(unaudited)



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
	2014			2013		2014		2013
Revenues:
Lennar Homebuilding	$	1,830,771		1,461,626		4,696,941		3,599,914
Lennar Financial Services	128,379			112,638		316,347		327,614
Rialto Investments	40,848			27,808		142,196		79,114
Lennar Multifamily	14,036			695		40,390		13,249
Total revenues	2,014,034			1,602,767		5,195,874		4,019,891
Costs and expenses:
Lennar Homebuilding	1,558,319			1,245,638		4,015,317		3,124,819
Lennar Financial Services	101,235			89,146		266,445		258,848
Rialto Investments	47,644			34,167		174,824		94,243
Lennar Multifamily	20,482			6,138		59,958		23,547
Corporate general and administrative	43,072			37,619		119,501		102,742
Total costs and expenses	1,770,752			1,412,708		4,636,045		3,604,199
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities	(2,080		)	10,458		3,304		23,085
Lennar Homebuilding other income (expense), net	(63		)	4,149		5,088		14,021
Other interest expense	(8,381		)	(22,230	)	(31,359	)	(73,370	)
Rialto Investments equity in earnings from unconsolidated entities	19,973			5,199		43,266		15,877
Rialto Investments other income (expense), net	(5,342		)	1,837		(2,976	)	9,810
Lennar Multifamily equity in earnings (loss) from unconsolidated entities	14,946			(113	)	14,689		(146	)
Earnings before income taxes	262,335			189,359		591,841		404,969
Provision for income taxes	(88,895		)	(67,205	)	(215,819	)	(83,059	)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	173,440		122,154		376,022		321,910
Less: Net earnings (loss) attributable to noncontrolling interests	(4,317		)	1,492		(17,571	)	6,320
Net earnings attributable to Lennar	$	177,757		120,662		393,593		315,590
Basic earnings per share	$	0.87		0.62		1.92		1.64
Diluted earnings per share	$	0.78		0.54		1.73		1.42
Cash dividends per each Class A and Class B common share	$	0.04		0.04		0.12		0.12
Comprehensive earnings attributable to Lennar	$	177,757		120,662		393,593		315,590
Comprehensive earnings (loss) attributable to noncontrolling interests	$	(4,317	)	1,492		(17,571	)	6,320

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)



	Nine Months Ended
	August 31,
	2014			2013
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	376,022		321,910
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization	27,161			21,683
Amortization of discount/premium on debt, net	16,140			17,641
Lennar Homebuilding equity in earnings from unconsolidated entities	(3,304		)	(23,085	)
Distributions of earnings from Lennar Homebuilding unconsolidated entities	4,456			718
Rialto Investments equity in earnings from unconsolidated entities	(43,266		)	(15,877	)
Distributions of earnings from Rialto Investments unconsolidated entities	354			648
Lennar Multifamily equity in (earnings) loss from unconsolidated entities	(14,689		)	146
Distributions of earnings from Lennar Multifamily unconsolidated entities	14,469			—
Share based compensation expense	28,590			23,527
Excess tax benefits from share-based awards	(3,007		)	(10,148	)
Deferred income tax expense	76,351			67,938
Gains on retirement of Lennar Homebuilding debt	—			(1,000	)
Gain on retirement of Rialto Investments notes payable	(4,135		)	—
Unrealized and realized gains on Rialto Investments real estate owned	(20,568		)	(38,056	)
Impairments of Rialto Investments loans receivable and REO	55,275			23,970
Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets	8,049			6,086
Changes in assets and liabilities:
Increase in restricted cash	(5,078		)	(7,476	)
Decrease in receivables	58,522			31,815
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs	(1,334,703		)	(1,469,381	)
Increase in other assets	(38,649		)	(17,616	)
Increase in Rialto Investments loans held-for-sale	(120,754		)	(244,137	)
Decrease (increase) in Lennar Financial Services loans held-for-sale	(127,685		)	156,799
Increase in accounts payable and other liabilities	151,948			136,156
Net cash used in operating activities	(898,501		)	(1,017,739	)
Cash flows from investing activities:
Decrease in restricted cash related to LOCs	19,012			—
Net additions of operating properties and equipment	(12,415		)	(4,931	)
Investments in and contributions to Lennar Homebuilding unconsolidated entities	(74,292		)	(45,947	)
Distributions of capital from Lennar Homebuilding unconsolidated entities	83,690			140,532
Investments in and contributions to Rialto Investments unconsolidated entities	(28,175		)	(41,483	)
Distributions of capital from Rialto Investments unconsolidated entities	41,235			39,837
Investments in and contributions to Lennar Multifamily unconsolidated entities	(25,072		)	(14,406	)
Distributions of capital from Lennar Multifamily unconsolidated entities	51,565			14,479
Decrease in Rialto Investments defeasance cash to retire notes payable	—			145,781
Receipts of principal payments on Rialto Investments loans receivable	20,827			49,560
Proceeds from sales of Rialto Investments real estate owned	168,946			182,220
Proceeds from sale of commercial mortgage-backed securities bond	9,171			—
Purchases of commercial mortgage-backed securities bond	(8,705		)	—
Improvements to Rialto Investments real estate owned	(9,924		)	(7,862	)
Purchases of loans receivables	—			(5,450	)
Purchases of Lennar Homebuilding investments available-for-sale	(21,274		)	(28,708	)
Proceeds from sales of Lennar Homebuilding investments available-for-sale	46,234			2,486
Acquisition, net of cash acquired	(5,489		)	—
Increase in Rialto Investments loans held-for-investment	(7,000		)	—
Decrease (increase) in Lennar Financial Services loans held-for-investment, net	1,242			(706	)
Purchases of Lennar Financial Services investment securities	(19,025		)	(21,504	)
Proceeds from maturities of Lennar Financial Services investment securities	11,904			30,146

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)



Net cash provided by investing activities	$	242,455	434,044



	Nine Months Ended
	August 31,
	2014			2013
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility	$	70,000		100,000
Net borrowings (repayments) under Lennar Financial Services debt	141,954			(167,710	)
Net borrowings (repayments) under Rialto Investments warehouse repurchase facilities	(4,596		)	133,103
Proceeds from Lennar Homebuilding senior notes	500,500			500,000
Proceeds from Rialto Investments senior notes	104,525			—
Proceeds from Rialto Investments structured notes	73,830			—
Principal payments on Rialto Investments structured notes	(18,836		)	—
Redemption of senior notes	—			(63,001	)
Debt issuance costs	(7,725		)	(5,189	)
Principal payments on Rialto Investments notes payable	(7,676		)	(360,956	)
Proceeds from other borrowings	33,103			76,966
Principal payments on other borrowings	(241,339		)	(187,648	)
Exercise of land option contracts from an unconsolidated land investment venture	(1,540		)	(27,329	)
Receipts related to noncontrolling interests	11,963			579
Payments related to noncontrolling interests	(115,001		)	(174,853	)
Excess tax benefits from share-based awards	3,007			10,148
Common stock:
Issuances	13,603			33,945
Repurchases	(12,153		)	(191	)
Dividends	(24,565		)	(23,142	)
Net cash provided by (used in) financing activities	519,054			(155,278	)
Net decrease in cash and cash equivalents	(136,992		)	(738,973	)
Cash and cash equivalents at beginning of period	970,505			1,310,743
Cash and cash equivalents at end of period	$	833,513		571,770
Summary of cash and cash equivalents:
Lennar Homebuilding	$	542,241		433,548
Lennar Financial Services	78,361			65,803
Rialto Investments	211,030			72,024
Lennar Multifamily	1,881			395
	$	833,513		571,770
Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding and Lennar Multifamily:
Non-cash contributions to Lennar Homebuilding unconsolidated entities	$	647		240,247
Inventory acquired in satisfaction of other assets including investments available-for-sale	$	4,774		—
Purchases of inventories and other assets financed by sellers	$	109,560		126,148
Non-cash reduction of equity due to purchase of noncontrolling interest	$	—		103,391
Non-cash purchase of noncontrolling interests	$	—		63,500
Non-cash contributions to Lennar Multifamily unconsolidated entities	$	72,552		14,070
Rialto Investments:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable	$	51,545		53,849
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		—
Investments in unconsolidated entities	$	(30,647	)	—
Operating properties and equipment and other assets	$	(7,218	)	—
Noncontrolling interests	$	(117,156	)	—

See accompanying notes to condensed consolidated financial statements.

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, 2013. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and nine months ended August 31, 2014 are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2014 presentation. These reclassifications had no impact on the Company's results of operations. As a result of the Company's change in reportable segments in the Company's Form 10-K for the year ended November 30, 2013 to reflect Lennar Multifamily as a separate reportable segment, the Company revised the presentation of certain prior year amounts in the condensed consolidated financial statements to conform with the 2014 presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.


(2)	Operating and Reporting Segments

The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:

(1) Homebuilding East

(2) Homebuilding Central

(3) Homebuilding West

(4) Homebuilding Southeast Florida

(5) Homebuilding Houston

(6) Lennar Financial Services

(7) Rialto Investments

(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 Investments (“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, other income (expense), net, consisting primarily of gains upon foreclosure of real estate owned (“REO”) and gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF, REO expenses and other general and administrative expenses.

Operations of the Lennar Multifamily segment include revenues generated from the sales of land, revenue from construction activities and management fees generated from joint ventures and equity in earnings (loss) from unconsolidated entities, less the cost of sales of land, expenses related to construction activities 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, 2013. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

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



(In thousands)	August 31, 2014		November 30, 2013
Assets:
Homebuilding East	$	2,257,064	1,890,138
Homebuilding Central	1,207,902		963,815
Homebuilding West	3,433,419		3,108,395
Homebuilding Southeast Florida	814,133		757,125
Homebuilding Houston	404,030		307,864
Homebuilding Other	884,778		808,496
Rialto Investments	1,383,743		1,479,313
Lennar Financial Services	946,537		796,710
Lennar Multifamily	204,985		147,089
Corporate and unallocated	753,486		1,014,302
Total assets	$	12,290,077	11,273,247



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2014		2013		2014		2013
Revenues:
Homebuilding East	$	570,698	510,788		1,497,954		1,221,509
Homebuilding Central	266,284		205,523		663,986		536,329
Homebuilding West	448,068		303,952		1,186,437		747,592
Homebuilding Southeast Florida	167,077		119,849		398,733		315,583
Homebuilding Houston	189,657		192,962		498,943		446,874
Homebuilding Other	188,987		128,552		450,888		332,027
Lennar Financial Services	128,379		112,638		316,347		327,614
Rialto Investments	40,848		27,808		142,196		79,114
Lennar Multifamily	14,036		695		40,390		13,249
Total revenues (1)	$	2,014,034	1,602,767		5,195,874		4,019,891
Operating earnings (loss):
Homebuilding East	$	83,403	78,523		219,307		150,771
Homebuilding Central (2)	21,531		11,102		56,265		37,895
Homebuilding West (3)	67,887		58,253		186,323		116,554
Homebuilding Southeast Florida (4)	40,579		25,367		87,885		63,539
Homebuilding Houston	27,740		27,893		74,096		52,425
Homebuilding Other (5)	20,788		7,227		34,781		17,647
Lennar Financial Services	27,144		23,492		49,902		68,766
Rialto Investments	7,835		677		7,662		10,558
Lennar Multifamily	8,500		(5,556	)	(4,879	)	(10,444	)
Total operating earnings	305,407		226,978		711,342		507,711
Corporate general and administrative expenses	43,072		37,619		119,501		102,742
Earnings before income taxes	$	262,335	189,359		591,841		404,969


(1)	Total revenues were net of sales incentives of $111.0 million ($20,400 per home delivered) and $288.4 million ($20,600 per home delivered) for the three and nine months ended August 31, 2014, respectively, compared to $92.8 million ($18,700 per home delivered) and $256.7 million ($20,400 per home delivered) for the three and nine months ended August 31, 2013, respectively.


(2)	For both the three and nine months ended August 31, 2014, operating earnings included $2.0 million in write-offs of other receivables. For both the three and nine months ended August 31, 2013, operating earnings included $0.9 million of valuation adjustments to investments of unconsolidated entities.


(3)	For both the three and nine months ended August 31, 2014, operating earnings included $2.0 million in write-offs of option deposits and pre-acquisition costs. For the nine months ended August 31, 2014, operating earnings included $0.9 million of valuation adjustments to land the Company intends to sell or has sold to third parties.


(4)	For both the three and nine months ended August 31, 2014, operating earnings included $1.0 million of valuation adjustments to other assets. For the nine months ended August 31, 2013, operating earnings included $3.8 million of valuation adjustments to finished homes, CIP and land on which the Company intends to build homes.


(5)	For the nine months ended August 31, 2014, operating earnings included $1.5 million in write-offs of option deposits and pre-acquisition costs.


(3)	Lennar Homebuilding Investments in Unconsolidated Entities

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

Statements of Operations



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2014			2013	2014		2013
Revenues	$	39,021		240,642	214,826		501,656
Costs and expenses	35,401			162,664	246,138		372,023
Other income	—			1,241	—		14,602
Net earnings (loss) of unconsolidated entities	$	3,620		79,219	(31,312	)	144,235
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)	$	(2,080	)	10,458	3,304		23,085

(1)

For the nine months ended August 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. For the three and nine months ended August 31, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included $8.6 million and $21.6 million, respectively, of equity in earnings primarily as a result of sales of homesites to third parties by another unconsolidated entity and previously deferred profit related to those homesites that was earned during the three months ended August 31, 2013.

Balance Sheets



(In thousands)	August 31, 2014		November 30, 2013
Assets:
Cash and cash equivalents	$	259,393	184,521
Inventories	2,795,009		2,904,795
Other assets	142,753		147,410
	$	3,197,155	3,236,726
Liabilities and equity:
Accounts payable and other liabilities	$	253,264	272,940
Debt	604,134		450,457
Equity	2,339,757		2,513,329
	$	3,197,155	3,236,726

As of August 31, 2014 and November 30, 2013, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $697.6 million and $716.9 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 31, 2014 and November 30, 2013 was $768.7 million and $829.5 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.

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co. ("MSR"), Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the nature of the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of November 30, 2013, the portfolio of land (including land development costs) of $241.8 million was also reflected as inventory in the summarized condensed financial information

related to Lennar Homebuilding’s unconsolidated entities above. In the second quarter of 2014, the Company entered into a new agreement with the joint venture, which required $155.0 million of inventory assets to remain consolidated due to the existence of option contracts on substantially all of the homesites and were reclassified into land and land under development. The remaining $70.3 million of inventory assets no longer under option by the Company were deconsolidated.

The Lennar Homebuilding unconsolidated entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.

The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments, including Lennar's maximum recourse exposure, were as follows:



(In thousands)	August 31, 2014			November 30, 2013
The Company’s net recourse exposure	$	24,588		27,496
Reimbursement agreements from partners	—			13,500
The Company’s maximum recourse exposure	$	24,588		40,996
Non-recourse bank debt and other debt (partner’s share of several recourse)	$	56,970		61,008
Non-recourse land seller debt or other debt	4,033			20,454
Non-recourse debt with completion guarantees	344,933			245,821
Non-recourse debt without completion guarantees	173,610			82,178
Non-recourse debt to the Company	579,546			409,461
Total debt	$	604,134		450,457
The Company’s maximum recourse exposure as a % of total JV debt	4		%	9	%

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. As of both August 31, 2014 and November 30, 2013, the Company did not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities. 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.

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 August 31, 2014, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of August 31, 2014, 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).


(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 nine months ended August 31, 2014 and 2013:



				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)	376,022			—		—	—		—		393,593		(17,571	)
Employee stock and directors plans	2,176			114		—	1,400		662		—		—
Retirement of treasury stock	—			(1,173	)	—	(541,019	)	542,192		—		—
Tax benefit from employee stock plans, vesting of restricted stock and prior year conversion of 2.00% convertible senior notes due 2020	12,892			—		—	12,892		—		—		—
Amortization of restricted stock	28,482			—		—	28,482		—		—		—
Cash dividends	(24,565		)	—		—	—		—		(24,565	)	—
Receipts related to noncontrolling interests	11,963			—		—	—		—		—		11,963
Payments related to noncontrolling interests	(115,001		)	—		—	—		—		—		(115,001	)
Non-cash consolidations, net	118,272			—		—	—		—		—		118,272
Non-cash activity related to noncontrolling interests	430			—		—	—		—		—		430
Balance at August 31, 2014	$	5,038,141		17,424		3,298	2,223,001		(85,165	)	2,422,921		456,662



				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, 2012	$	4,001,208		17,240	3,298	2,421,941		(632,846	)	1,605,131		586,444
Net earnings (including net loss attributable to noncontrolling interests)	321,910			—	—	—		—		315,590		6,320
Employee stock and directors plans	34,396			243	—	17,196		16,957		—		—
Tax benefit from employee stock plans and vesting of restricted stock	11,053			—	—	11,053		—		—		—
Amortization of restricted stock	23,430			—	—	23,430		—		—		—
Cash dividends	(23,142		)	—	—	—		—		(23,142	)	—
Equity adjustments related to purchase of noncontrolling interests	39,605			—	—	(61,945	)	—		—		101,550
Receipts related to noncontrolling interests	579			—	—	—		—		—		579
Payments related to noncontrolling interests	(174,853		)	—	—	—		—		—		(174,853	)
Non-cash purchase of noncontrolling interests	(63,500		)	—	—	—		—		—		(63,500	)
Balance at August 31, 2013	$	4,170,686		17,483	3,298	2,411,675		(615,889	)	1,897,579		456,540

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both the three and nine months ended August 31, 2014 and 2013, there were no repurchases of common stock under the stock repurchase program. As of August 31, 2014, 6.2 million shares of common stock could be repurchased in the future under the program.

During the three months ended August 31, 2014, treasury stock increased by 0.3 million shares of Class A common stock due to activity related to the Company's equity compensation plan. During the nine months ended August 31, 2014, treasury stock decreased by 11.8 million shares of Class A common stock primarily due to the retirement of 11.7 million shares of Class A common stock authorized by the Company's Board of Directors, partially offset by activity related to the Company's equity compensation plan. The retirement of Class A common stock resulted in a reclass between treasury stock and additional paid-in capital within stockholders' equity. During the three months ended August 31, 2013, treasury stock increased by an immaterial amount of Class A common stock. During the nine months ended August 31, 2013, treasury stock decreased by 0.4 million shares of Class A common stock due to activity related to the Company's equity compensation plan.


(5)	Income Taxes

During the three and nine months ended August 31, 2014, the Company recorded a tax provision of $88.9 million and $215.8 million, respectively, primarily related to pre-tax earnings. During the three and nine months ended August 31, 2013, the Company recorded a tax provision of $67.2 million and $83.1 million, respectively, which included a tax provision of $67.9 million and $150.2 million, respectively, primarily related to pre-tax earnings, partially offset by a reversal of the Company's valuation allowance of $0.7 million and $67.1 million, respectively. The effective tax rates for the three months ended August 31, 2014 and 2013 were 33.34% and 35.77%, respectively. The effective tax rates for the nine months ended August 31, 2014 and 2013 were 35.41% and 20.84%, respectively. The difference in tax rate between the two periods is primarily the result of a valuation allowance reversal during the nine months ended August 31, 2013.

In accordance with ASC 740, the Company evaluates its deferred tax assets quarterly to determine if adjustments to its valuation allowance are required. ASC 740 requires that companies assess whether a valuation allowance should be established 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 August 31, 2014 and November 30, 2013, the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $313.2 million and $376.8 million, respectively. The net deferred tax assets included a valuation allowance of $10.6 million and $12.7 million as of August 31, 2014 and November 30, 2013, respectively, primarily related to state net operating loss ("NOL") carryforwards that may expire due to short carryforward periods.

At August 31, 2014 and November 30, 2013, the Company had federal tax effected NOL carryforwards totaling $2.4 million and $88.1 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2025. At August 31, 2014 and November 30, 2013, the Company had state tax effected NOL carryforwards totaling $121.0 million and $143.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2014 and 2033.

At August 31, 2014 and November 30, 2013, the Company had $8.9 million and $10.5 million of gross unrecognized tax benefits, respectively. At August 31, 2014, the Company had $31.0 million accrued for interest and penalties, of which $13.5 million was recorded during the nine months ended August 31, 2014. During the nine months ended August 31, 2014, the accrual for interest and penalties was reduced by $1.6 million, primarily as a result of settlement with state tax authorities. At November 30, 2013, the Company had $19.1 million accrued for interest and penalties.


(6)	Earnings Per Share

Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.

Basic and diluted earnings per share were calculated as follows:



	Three Months Ended			Nine Months Ended
	August 31,			August 31,
(In thousands, except per share amounts)	2014		2013	2014	2013
Numerator:
Net earnings attributable to Lennar	$	177,757	120,662	393,593	315,590
Less: distributed earnings allocated to nonvested shares	109		122	305	326
Less: undistributed earnings allocated to nonvested shares	2,124		1,712	4,486	4,090
Numerator for basic earnings per share	175,524		118,828	388,802	311,174
Plus: interest on 3.25% convertible senior notes due 2021 and 2.00% convertible senior notes due 2020 (1)	1,982		2,826	5,946	8,477
Plus: undistributed earnings allocated to convertible shares	2,124		1,712	4,486	4,090
Less: undistributed earnings reallocated to convertible shares	1,908		1,489	4,047	3,549
Numerator for diluted earnings per share	$	177,722	121,877	395,187	320,192
Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding	202,354		190,799	202,103	190,119
Effect of dilutive securities:
Share-based payments	5		90	8	334
Convertible senior notes	25,869		34,446	25,846	35,549
Denominator for diluted earnings per share - weighted average common shares outstanding	228,228		225,335	227,957	226,002
Basic earnings per share	$	0.87	0.62	1.92	1.64
Diluted earnings per share	$	0.78	0.54	1.73	1.42


(1)	Interest on the 2.00% convertible senior notes due 2020 is included in the three and nine months ended August 31, 2013 because the holders of the 2.00% convertible senior notes due 2020 converted the notes into shares of Class A common stock on November 30, 2013.

For both the three and nine months ended August 31, 2014 and 2013, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive.


(7)	Lennar Financial Services Segment

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



(In thousands)	August 31, 2014		November 30, 2013
Assets:
Cash and cash equivalents	$	78,361	73,066
Restricted cash	8,661		10,283
Receivables, net (1)	121,185		127,223
Loans held-for-sale (2)	539,988		414,231
Loans held-for-investment, net	26,821		26,356
Investments held-to-maturity	57,023		62,344
Goodwill	38,854		34,046
Other (3)	75,644		49,161
	$	946,537	796,710
Liabilities:
Notes and other debts payable	$	522,047	374,166
Other (4)	175,752		169,473
	$	697,799	543,639


(1)	Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 31, 2014 and November 30, 2013, respectively.


(2)	Loans held-for-sale relate to unsold loans carried at fair value.

(3)

Other assets include mortgage loan commitments carried at fair value of $14.3 million and $7.3 million as of August 31, 2014 and November 30, 2013, respectively. Other assets also includes forward contracts carried at fair value of $1.4 million as of November 30, 2013. In addition, other assets include mortgage servicing rights carried at fair value of $19.4 million and $11.5 million as of August 31, 2014 and November 30, 2013, respectively.


(4)	Other liabilities include $72.7 million and $74.5 million as of August 31, 2014 and November 30, 2013, respectively, of certain of the Company’s self-insurance reserves related to general liability and workers’ compensation. Other liabilities also include forward contracts carried at fair value of $4.1 million as of August 31, 2014.

At August 31, 2014, the Lennar Financial Services segment warehouse facilities were as follows:



(In thousands)	Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures November 2014	$	325,000
364-day warehouse repurchase facility that matures January 2015 (1)	300,000
364-day warehouse repurchase facility that matures February 2015	150,000
364-day warehouse repurchase facility that matures June 2015 (2)	150,000
Totals	$	925,000


(1)	Maximum aggregate commitment includes a $100 million accordion feature that is usable 10 days prior to quarter-end through 20 days after quarter end.


(2)	Maximum aggregate commitment includes a $50 million accordion feature that is usable 10 days prior to quarter-end through 20 days after 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 $516.1 million and $374.2 million at August 31, 2014 and November 30, 2013, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $540.9 million and $452.5 million at August 31, 2014 and November 30, 2013, 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.

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. During recent years there has been an increased industry-wide effort

by purchasers to defray their losses in an unfavorable economic environment by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the 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					Nine Months Ended
	August 31,					August 31,
(In thousands)	2014			2013		2014		2013
Loan origination liabilities, beginning of period	$	9,774		8,257		9,311		7,250
Provision for losses during the period	918			569		1,660		1,342
Adjustments to pre-existing provisions for losses from changes in estimates	—			(176	)	—		348
Payments/settlements	(83		)	(16	)	(362	)	(306	)
Loan origination liabilities, end of period	$	10,609		8,634		10,609		8,634

For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans was as follows:



(In thousands)	August 31, 2014			November 30, 2013
Impaired loans unpaid principal balance	$	7,510		7,897
Valuation allowance	(3,768		)	(3,891	)
Investment in impaired loans	$	3,742		4,006

The average recorded investment in impaired loans totaled $3.8 million and $3.9 million for the three and nine months ended August 31, 2014, respectively. The average recorded investment in impaired loans totaled $3.9 million and $3.5 million for the three and nine months ended August 31, 2013, respectively.

In April 2014, the Lennar Financial Services segment acquired a Colorado-based mortgage company. At acquisition date the provisional fair value of the assets acquired was $1.4 million and the provisional goodwill recorded was $4.8 million.


(8)	Rialto Investments Segment

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



(In thousands)	August 31, 2014		November 30, 2013
Assets:
Cash and cash equivalents	$	211,030	201,496
Restricted cash (1)	31,636		2,593
Receivables, net (2)	—		111,833
Loans receivable, net	174,286		278,392
Loans held-for-sale (3)	164,923		44,228
Real estate owned - held-for-sale	194,339		197,851
Real estate owned - held-and-used, net	335,472		428,989
Investments in unconsolidated entities	176,132		154,573
Investments held-to-maturity	16,968		16,070
Other (4)	78,957		43,288
	$	1,383,743	1,479,313
Liabilities:
Notes and other debts payable (5)	$	582,659	441,883
Other (6)	76,989		55,125
	$	659,648	497,008


(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, 2013.


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


(4)	Other assets include credit default swaps carried at fair value of $1.3 million and $0.8 million as of August 31, 2014 and November 30, 2013, respectively.

(5)

Notes and other debts payable include $352.0 million and $250.0 million related to the 7.00% Senior Notes due 2018 ("7.00% Senior Notes") as of August 31, 2014 and November 30, 2013, respectively, and also include $71.4 million and $76.0 million as of August 31, 2014 and November 30, 2013, respectively, related to the RMF warehouse repurchase financing agreements. As of August 31, 2014, notes and other debts payable also include $55.0 million related to notes issued through a structured note offering.


(6)	Other liabilities include interest rate swaps and swap futures carried at fair value of $1.4 million as of August 31, 2014 and credit default swaps carried at fair value of $1.6 million and $0.3 million as of August 31, 2014 and November 30, 2013, respectively.

Rialto’s operating earnings were as follows:



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2014			2013	2014		2013
Revenues	$	40,848		27,808	142,196		79,114
Costs and expenses (1)	47,644			34,167	174,824		94,243
Rialto Investments equity in earnings from unconsolidated entities	19,973			5,199	43,266		15,877
Rialto Investments other income (expense), net	(5,342		)	1,837	(2,976	)	9,810
Operating earnings (2)	$	7,835		677	7,662		10,558

(1)

Costs and expenses for the three and nine months ended August 31, 2014 included loan impairments of $4.2 million and $44.7 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). For the three and nine months ended August 31, 2013, costs and expenses included loan impairments of $3.5 million and $14.1 million, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).


(2)	Operating earnings for the three and nine months ended August 31, 2014 included net loss attributable to noncontrolling interests of $4.5 million and $20.7 million, respectively. Operating earnings for the three and nine months ended August 31, 2013 included net earnings (loss) attributable to noncontrolling interests of ($0.8) million and $4.6 million, respectively.

The following is a detail of Rialto Investments other income (expense), net for the periods indicated:



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2014			2013		2014		2013
Realized gains on REO sales, net	$	4,106		9,651		27,849		36,857
Unrealized gains (losses) on transfer of loans receivable to REO and impairments, net	(7,165		)	(2,373	)	(17,816	)	(8,683	)
REO and other expenses	(13,027		)	(10,267	)	(43,977	)	(33,171	)
Rental and other income	10,744			4,826		30,968		14,807
Rialto Investments other income (expense), net	$	(5,342	)	1,837		(2,976	)	9,810

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 will continue being shared 60%/40% with the FDIC. During the nine months ended August 31, 2014, $146.7 million was distributed by the LLCs. The FDIC was distributed $88.0 million and Rialto, the parent company, was distributed $57.6 million.

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 August 31, 2014, these consolidated LLCs had total combined assets and liabilities of $551.2 million and $23.6 million, respectively. At November 30, 2013, these consolidated LLCs had total combined assets and liabilities of $727.1 million and $20.2 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. As of both August 31, 2014 and November 30, 2013, there was $90.9 million outstanding related to the 5-year senior unsecured note.

In May 2014, Rialto 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. The estimated final payment date of the Structured Notes is December 15, 2015. As of August 31, 2014, there was $55.0 million outstanding related to the Structured Notes.

The following table displays the loans receivable by aggregate collateral type:



(In thousands)	August 31, 2014		November 30, 2013
Land	$	101,047	166,950
Single family homes	28,698		59,647
Commercial properties	29,536		38,060
Other	15,005		13,735
Loans receivable, net	$	174,286	278,392

With regard to loans accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”), the Rialto segment estimated the cash flows, at acquisition, it expected to collect on the FDIC Portfolios and Bank Portfolios. In accordance with ASC 310-30, the difference between the contractually required payments and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. This difference is neither accreted into income nor recorded on the Company’s condensed consolidated balance sheets. The excess of cash flows expected to be collected over the cost of the loans acquired is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans using the effective yield method.

The Rialto segment periodically evaluates its estimate of cash flows expected to be collected on its FDIC Portfolios and Bank Portfolios. These evaluations require the continued use of key assumptions and estimates, similar to those used in the

initial estimate of fair value of the loans to allocate purchase price. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized as a provision for loan losses, resulting in an increase to the allowance for loan losses but can be reversed if conditions improve.

The outstanding balance and carrying value of loans accounted for under ASC 310-30 were as follows:



(In thousands)	August 31, 2014		November 30, 2013
Outstanding principal balance	$	438,046	586,901
Carrying value	$	169,636	270,075

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the nine months ended August 31, 2014 and 2013 was as follows:



	August 31,
(In thousands)	2014			2013
Accretable yield, beginning of period	$	73,144		112,899
Additions	8,785			53,652
Deletions	(25,621		)	(38,263	)
Accretions	(25,693		)	(38,455	)
Accretable yield, end of period	$	30,615		89,833

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

When forecasted principal and interest cannot be reasonably estimated at the loan acquisition date, management classifies the loan as nonaccrual and accounts for these assets in accordance with ASC 310-10, Receivables (“ASC 310-10”). When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Although these loans met the definition of ASC 310-10, these loans were not considered impaired relative to the Company’s recorded investment at the time of acquisition since they were acquired at a substantial discount to their unpaid principal balance. A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.

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

August 31, 2014



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	4,607	—	1,813	1,813
Single family homes	8,739		502	1,732	2,234
Commercial properties	1,500		—	603	603
Loans receivable	$	14,846	502	4,148	4,650

November 30, 2013



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	6,791	249	2,304	2,553
Single family homes	15,125		519	4,119	4,638
Commercial properties	3,400		498	628	1,126
Loans receivable	$	25,316	1,266	7,051	8,317

The average recorded investment in impaired loans totaled approximately $6 million and $29 million for the nine months ended August 31, 2014 and 2013, respectively.

The loans receivable portfolios consist of loans acquired at a discount. Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. The following are the risk categories for the loans receivable portfolios:

Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses but can be reversed if conditions improve. The activity in the Company's allowance rollforward related to accrual loans was as follows:



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2014			2013		2014		2013
Allowance on accrual loans, beginning of period	$	55,658		18,716		18,952		12,178
Provision for loan losses, net of recoveries	4,089			3,318		44,577		12,849
Charge-offs	(6,482		)	(1,940	)	(10,264	)	(4,933	)
Allowance on accrual loans, end of period	$	53,265		20,094		53,265		20,094

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. The risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. As of August 31, 2014 and November 30, 2013, the Company had an allowance on these loans of $0.3 million and $1.2 million, respectively.

Accrual and nonaccrual loans receivable by risk categories were as follows:

August 31, 2014



(In thousands)	Accrual		Nonaccrual	Total
Land	$	99,234	1,813	101,047
Single family homes	26,464		2,234	28,698
Commercial properties	28,933		603	29,536
Other	15,005		—	15,005
Loans receivable	$	169,636	4,650	174,286

November 30, 2013



(In thousands)	Accrual		Nonaccrual	Total
Land	$	164,397	2,553	166,950
Single family homes	55,009		4,638	59,647
Commercial properties	36,934		1,126	38,060
Other	13,735		—	13,735
Loans receivable	$	270,075	8,317	278,392

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.

Real Estate Owned

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

The following tables represent the activity in REO:



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2014			2013		2014		2013
REO - held-for-sale, beginning of period	$	192,829		204,385		197,851		134,161
Additions	—			14,833		—		16,166
Improvements	1,994			1,949		4,717		4,466
Sales	(52,431		)	(68,087	)	(141,097	)	(145,363	)
Impairments and unrealized losses	(6,087		)	(169	)	(8,910	)	(4,353	)
Transfers to Lennar Homebuilding	—			(430	)	—		(430	)
Transfers from held-and-used, net (1)	58,034			46,128		141,778		193,962
REO - held-for-sale, end of period	$	194,339		198,609		194,339		198,609



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2014			2013		2014		2013
REO - held-and-used, net, beginning of period	$	379,069		478,314		428,989		601,022
Additions	14,530			14,154		48,657		38,882
Improvements	1,736			517		5,207		3,396
Impairments	(1,333		)	(5,126	)	(2,836	)	(5,529	)
Depreciation	(496		)	(1,075	)	(2,767	)	(3,153	)
Transfers to held-for-sale (1)	(58,034		)	(46,128	)	(141,778	)	(193,962	)
REO - held-and-used, net, end of period	$	335,472		440,656		335,472		440,656


(1)	During the three and nine months ended August 31, 2014 and 2013, the Rialto segment transferred certain properties from REO held-and-used, net to REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.

For the three and nine months ended August 31, 2014, the Company recorded net losses of $0.2 million and $7.3 million, respectively, from acquisitions of REO through foreclosure. For the three and nine months ended August 31, 2013, the Company recorded net gains of $2.9 million and $1.2 million, respectively, from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto Investments other income (expense), net.

Rialto Mortgage Finance

In July 2013, RMF was formed to originate and sell 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 nine months ended August 31, 2014, RMF originated loans with a total principal balance of $1.1 billion and sold $983.6 million of loans into five separate securitizations. As of August 31, 2014 and November 30, 2013, RMF had two warehouse repurchase financing agreements that mature in fiscal year 2015 with commitments totaling $650 million to help finance the loans it makes. Borrowings under these facilities were $71.4 million and $76.0 million as of August 31, 2014 and November 30, 2013, respectively.

In November 2013, the Rialto segment issued $250 million aggregate principal amount of the 7.00% senior notes due 2018 ("7.00% Senior Notes"), at a price of 100% in a private placement. 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 offering with no registration rights. 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 with the first interest payment made on June 1, 2014. At August 31, 2014 and November 30, 2013, the carrying amount of the 7.00% Senior Notes was $352.0 million and $250.0 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 August 31, 2014.

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 investments 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 Investments 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:



								August 31, 2014		August 31, 2014		November 30, 2013
(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	$	80,741	75,729
Rialto Real Estate Fund II, LP	2012	1,305,000		660,058		100,000		50,579		57,528		53,103
Rialto Mezzanine Partners Fund	2013	168,600		145,267		27,299		23,521		23,397		16,724
Other investments										14,466		9,017
										$	176,132