Edgar Filing: LENNAR CORP /NEW/

LEN-2012.5.31-10Q

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, 2012

Commission File Number: 1-11749

Lennar Corporation

(Exact name of registrant as specified in its charter)



Delaware		95-4337490
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

(305) 559-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý

Common stock outstanding as of June 30, 2012:

Class A 158,014,450

Class B 31,303,195

Part I. Financial Information

Item 1. Financial Statements

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except shares and per share amounts)

(unaudited)



	May 31,		November 30,
	2012 (1)		2011 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents	$	667,111	1,024,212
Restricted cash	8,630		8,590
Receivables, net	44,843		53,977
Inventories:
Finished homes and construction in progress	1,560,307		1,334,703
Land and land under development	2,872,782		2,636,510
Consolidated inventory not owned	366,209		389,322
Total inventories	4,799,298		4,360,535
Investments in unconsolidated entities	566,576		545,760
Other assets	886,508		524,694
	6,972,966		6,517,768
Rialto Investments:
Cash and cash equivalents	92,959		83,938
Defeasance cash to retire notes payable	138,665		219,386
Loans receivable, net	578,375		713,354
Real estate owned, held-for-sale	113,115		143,677
Real estate owned, held-and-used, net	634,401		582,111
Investments in unconsolidated entities	150,733		124,712
Other assets	40,579		29,970
	1,748,827		1,897,148
Lennar Financial Services	629,416		739,755
Total assets	$	9,351,209	9,154,671

(1)

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

As of May 31, 2012, total assets include $2,136.9 million related to consolidated VIEs of which $17.1 million is included in Lennar Homebuilding cash and cash equivalents, $1.3 million in Lennar Homebuilding restricted cash, $6.9 million in Lennar Homebuilding receivables, net, $17.0 million in Lennar Homebuilding finished homes and construction in progress, $511.2 million in Lennar Homebuilding land and land under development, $65.5 million in Lennar Homebuilding consolidated inventory not owned, $43.8 million in Lennar Homebuilding investments in unconsolidated entities, $218.9 million in Lennar Homebuilding other assets, $92.3 million in Rialto Investments cash and cash equivalents, $138.7 million in Rialto Investments defeasance cash to retire notes payable, $464.1 million in Rialto Investments loans receivable, net, $91.0 million in Rialto Investments real estate owned, held-for-sale, $460.4 million in Rialto Investments real estate owned, held-and-used, net, $0.6 million in Rialto Investments in unconsolidated entities and $8.1 million in Rialto Investments other assets.

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

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets – (Continued)

(In thousands, except shares and per share amounts)

(unaudited)



	May 31,			November 30,
	2012 (2)			2011 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable	$	154,664		201,101
Liabilities related to consolidated inventory not owned	302,853			326,200
Senior notes and other debts payable	3,469,616			3,362,759
Other liabilities	601,132			602,231
	4,528,265			4,492,291
Rialto Investments:
Notes payable and other liabilities	612,598			796,120
Lennar Financial Services	430,438			562,735
Total liabilities	5,571,301			5,851,146
Stockholders’ equity:
Preferred stock	—			—
Class A common stock of $0.10 par value; Authorized: May 31, 2012 and November 30, 2011 - 300,000,000 shares; Issued: May 31, 2012 - 169,675,010 and November 30, 2011 - 169,099,760 shares	16,968			16,910
Class B common stock of $0.10 par value; Authorized: May 31, 2012 and November 30, 2011 - 90,000,000 shares; Issued: May 31, 2012 - 32,982,815 and November 30, 2011 - 32,982,815 shares	3,298			3,298
Additional paid-in capital	2,363,870			2,341,079
Retained earnings	1,408,940			956,401
Treasury stock, at cost; May 31, 2012 - 11,702,017 Class A common shares and 1,679,620 Class B common shares; November 30, 2011 - 12,000,017 Class A common shares and 1,679,620 Class B common shares	(615,698		)	(621,220	)
Total stockholders’ equity	3,177,378			2,696,468
Noncontrolling interests	602,530			607,057
Total equity	3,779,908			3,303,525
Total liabilities and equity	$	9,351,209		9,154,671

(2)

As of May 31, 2012, total liabilities include $742.8 million related to consolidated VIEs as to which neither Lennar Corporation, nor any of its subsidiaries, has any obligations, of which $7.6 million is included in Lennar Homebuilding accounts payable, $36.7 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $171.9 million in Lennar Homebuilding senior notes and other debts payable, $35.3 million in Lennar Homebuilding other liabilities and $491.3 million in Rialto Investments notes payable and other liabilities.

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

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)



	Three Months Ended					Six Months Ended
	May 31,					May 31,
	2012			2011		2012		2011
Revenues:
Lennar Homebuilding	$	808,088		662,476		1,432,521		1,129,185
Lennar Financial Services	88,595			59,422		156,810		117,135
Rialto Investments	33,472			42,595		65,680		76,218
Total revenues	930,155			764,493		1,655,011		1,322,538
Cost and expenses:
Lennar Homebuilding	731,842			630,711		1,316,587		1,078,474
Lennar Financial Services	70,615			56,927		130,580		113,457
Rialto Investments	30,198			32,273		63,568		60,622
Corporate general and administrative	29,168			20,598		56,010		43,950
Total costs and expenses	861,823			740,509		1,566,745		1,296,503
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities	(9,381		)	2,417		(8,298	)	11,078
Lennar Homebuilding other income, net (1)	12,758			9,511		16,825		39,471
Other interest expense	(23,803		)	(22,468	)	(48,652	)	(44,547	)
Rialto Investments equity in earnings (loss) from unconsolidated entities	5,569			(2,973	)	24,027		1,552
Rialto Investments other income (expense), net	(1,372		)	15,329		(13,612	)	28,532
Earnings before income taxes	52,103			25,800		58,556		62,121
Benefit (provision) for income taxes	402,321			(953	)	403,845		1,452
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	454,424		24,847		462,401		63,573
Less: Net earnings (loss) attributable to noncontrolling interests (2)	1,721			11,062		(5,270	)	22,382
Net earnings attributable to Lennar	$	452,703		13,785		467,671		41,191
Basic earnings per share	$	2.39		0.07		2.47		0.22
Diluted earnings per share	$	2.06		0.07		2.16		0.22
Cash dividends per each Class A and Class B common share	$	0.04		0.04		0.08		0.08


(1)	Lennar Homebuilding other income, net includes $8.4 million of valuation adjustments to the Company’s investments in Lennar Homebuilding’s unconsolidated entities for the six months ended May 31, 2011.

(2)

Net earnings (loss) attributable to noncontrolling interests for the three and six months ended May 31, 2012 includes $3.2 million and ($1.2) million, respectively, of earnings (loss) related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC. Net earnings (loss) attributable to noncontrolling interests for the three and six months ended May 31, 2011 includes $12.9 million and $24.8 million, respectively, of earnings related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	Six Months Ended
	May 31,
	2012			2011
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	462,401		63,573
Adjustments to reconcile net earnings (including net earnings (loss) attributable to noncontrolling interests) to net cash provided by (used in) operating activities:
Depreciation and amortization	12,491			7,651
Amortization of discount/premium on debt, net	10,750			8,400
Lennar Homebuilding equity in (earnings) loss from unconsolidated entities	8,298			(11,078	)
Distributions of earnings from Lennar Homebuilding unconsolidated entities	954			11,361
Rialto Investments equity in earnings from unconsolidated entities	(24,027		)	(1,552	)
Distributions of earnings from Rialto Investments unconsolidated entities	4,110			2,386
Share based compensation expense	15,932			11,506
Excess tax benefits from share-based awards	—			(261	)
Deferred income tax benefit	(403,012		)	—
Gains on retirement of Lennar Homebuilding other debts payable	(988		)	—
Unrealized and realized gains on Rialto Investments real estate owned	(12,101		)	(35,336	)
Gains on sale of Rialto Investments commercial mortgage-backed securities	—			(4,743	)
Impairments of Rialto Investments loans receivable and REO	7,166			6,942
Valuation adjustments and write-offs of option deposits and pre-acquisition costs, other receivables and other assets	6,566			22,092
Changes in assets and liabilities:
Decrease in restricted cash	985			2,658
Decrease in receivables	74,900			19,783
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs	(329,933		)	(50,724	)
Increase in other assets	(16,445		)	(40,923	)
Decrease in Lennar Financial Services loans-held-for-sale	34,549			74,255
Decrease in accounts payable and other liabilities	(66,403		)	(81,381	)
Net cash provided by (used in) operating activities	(213,807		)	4,609
Cash flows from investing activities:
Net disposals (additions) of operating properties and equipment	390			(1,307	)
Investments in and contributions to Lennar Homebuilding unconsolidated entities	(44,843		)	(75,901	)
Distributions of capital from Lennar Homebuilding unconsolidated entities	21,180			13,841
Investments in and contributions to Rialto Investments unconsolidated entities	(19,884		)	(29,708	)
Distributions of capital from Rialto Investments unconsolidated entities	14,009			—
Decrease (increase) in Rialto Investments defeasance cash to retire notes payable	80,721			(58,300	)
Receipts of principal payments on Rialto Investments loans receivable	41,788			38,079
Proceeds from sales of Rialto Investments real estate owned	91,473			20,851
Improvements to Rialto Investments real estate owned	(6,779		)	(8,234	)
Purchases of Lennar Homebuilding investments available-for-sale	(7,224		)	—
Proceeds from sales of Lennar Homebuilding investments available-for-sale	6,436			—
Decrease (increase) in Lennar Financial Services loans held-for-investment, net	1,660			(1,015	)
Purchases of Lennar Financial Services investment securities	(1,804		)	(5,280	)
Proceeds from sale of investments in commercial mortgage-backed securities	—			11,127
Proceeds from maturities of Lennar Financial Services investment securities	1,073			283
Net cash provided by (used in) investing activities	$	178,196		(95,564	)

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	Six Months Ended
	May 31,
	2012			2011
Cash flows from financing activities:
Net repayments under Lennar Financial Services debt	$	(146,661	)	(82,175	)
Proceeds from convertible senior notes	50,000			—
Debt issuance costs of convertible senior notes	(1,035		)	—
Principal repayments on Rialto Investments notes payable	(170,589		)	—
Proceeds from other borrowings	30,546			1,209
Principal payments on other borrowings	(42,067		)	(62,712	)
Exercise of land option contracts from an unconsolidated land investment venture	(16,490		)	(17,264	)
Receipts related to noncontrolling interests	888			5,222
Payments related to noncontrolling interests	(145		)	(6,164	)
Excess tax benefits from share-based awards	—			261
Common stock:
Issuances	12,074			4,853
Repurchases	—			(10	)
Dividends	(15,132		)	(14,946	)
Net cash used in financing activities	(298,611		)	(171,726	)
Net decrease in cash and cash equivalents	(334,222		)	(262,681	)
Cash and cash equivalents at beginning of period	1,163,604			1,394,135
Cash and cash equivalents at end of period	$	829,382		1,131,454
Summary of cash and cash equivalents:
Lennar Homebuilding	$	667,111		945,155
Lennar Financial Services	69,312			116,650
Rialto Investments	92,959			69,649
	$	829,382		1,131,454
Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding:
Non-cash contributions to unconsolidated entities	$	7,612		14,949
Non-cash distributions from unconsolidated entities	$	—		12,043
Inventory acquired in satisfaction of other assets including investments available-for-sale	$	90,385		—
Non-cash purchases of investments available-for-sale	$	12,520		—
Purchases of inventories and other assets financed by sellers	$	61,872		15,932
Lennar Financial Services:
Purchases of investment securities	$	—		46,660
Rialto Investments:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable	$	107,370		253,904
Consolidations of newly formed or previously unconsolidated entities, net:
Inventories	$	—		49,522
Investments in Lennar Homebuilding unconsolidated entities	$	—		(28,574	)
Other assets	$	—		3,707
Debts payable	$	—		(14,703	)
Other liabilities	$	—		(9,423	)
Noncontrolling interests	$	—		(529	)

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 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2011. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and six months ended May 31, 2012 are not necessarily indicative of the results to be expected for the full year.

Reclassification

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2012 presentation.

Use of Estimates

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


(2)	Operating and Reporting Segments

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

(1) Homebuilding East

(2) Homebuilding Central

(3) Homebuilding West

(4) Homebuilding Southeast Florida

(5) Homebuilding Houston

(6) Lennar Financial Services

(7) Rialto Investments

Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.

Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income, 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 and Washington

(1)Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment.

(2)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

Operations of the Lennar Financial Services segment include mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations, as well as in other states.

Operations of the Rialto Investments (“Rialto”) segment include sourcing, underwriting, pricing, managing and ultimately monetizing real estate and real estate related assets, as well as providing similar services to others in markets across the country. Rialto’s operating earnings consists of revenues generated primarily from accretable interest income associated with portfolios of real estate loans acquired in partnership with the FDIC and other portfolios of real estate loans and assets acquired, fees for sub-advisory services, other income (expense), net, consisting primarily of gains upon foreclosure of real estate owned (“REO”) and gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, REO expenses, due diligence expenses related to both completed and abandoned transactions, and other general administrative expenses.

Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s 2011 Annual Report on Form 10-K. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.

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



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Homebuilding East	$	1,473,193	1,312,750
Homebuilding Central	706,506		681,859
Homebuilding West	2,212,194		2,169,503
Homebuilding Southeast Florida	637,253		604,415
Homebuilding Houston	276,274		230,076
Homebuilding Other	660,065		595,615
Rialto Investments (1)	1,748,827		1,897,148
Lennar Financial Services	629,416		739,755
Corporate and unallocated	1,007,481		923,550
Total assets	$	9,351,209	9,154,671


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



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
Revenues:
Homebuilding East	$	310,149		265,374		554,982		447,745
Homebuilding Central	114,564			92,155		200,277		159,161
Homebuilding West	157,710			120,897		280,795		217,279
Homebuilding Southeast Florida	70,878			51,930		120,667		87,021
Homebuilding Houston	102,455			81,886		187,289		134,839
Homebuilding Other	52,332			50,234		88,511		83,140
Lennar Financial Services	88,595			59,422		156,810		117,135
Rialto Investments	33,472			42,595		65,680		76,218
Total revenues (1)	$	930,155		764,493		1,655,011		1,322,538

Operating earnings (loss):
Homebuilding East	$	26,291		25,134		40,238		30,795
Homebuilding Central (2)	4,318			(3,350	)	5,382		(18,474	)
Homebuilding West (3)	(9,405		)	(8,855	)	(16,978	)	40,490
Homebuilding Southeast Florida (4)	24,176			5,797		30,810		9,971
Homebuilding Houston	10,262			2,966		14,778		2,925
Homebuilding Other	178			(467	)	1,579		(8,994	)
Lennar Financial Services	17,980			2,495		26,230		3,678
Rialto Investments	7,471			22,678		12,527		45,680
Total operating earnings	81,271			46,398		114,566		106,071
Corporate general and administrative expenses	29,168			20,598		56,010		43,950
Earnings before income taxes	$	52,103		25,800		58,556		62,121


(1)	Total revenues are net of sales incentives of $95.3 million ($29,800 per home delivered) and $179.7 million ($31,700 per home delivered), respectively, for the three and six months ended May 31, 2012, compared to $89.9 million ($33,900 per home delivered) and $152.8 million ($33,500 per home delivered), respectively, for the three and six months ended May 31, 2011.


(2)	For the three and six months ended May 31, 2011, operating loss includes $1.0 million and $7.6 million, respectively, of expenses associated with remedying pre-existing liabilities of a previously acquired company.

(3)

For the six months ended May 31, 2011, operating earnings include $37.5 million related to the receipt of a litigation settlement, as well as $15.4 million related to the Company’s share of a gain on debt extinguishment and the recognition of $10.0 million of deferred management fees related to management services previously performed by the Company for one of its Lennar Homebuilding unconsolidated entities.


(4)	For both the three and six months ended May 31, 2012, operating earnings include a $15.0 million gain on the sale of an operating property.

Valuation adjustments and write-offs relating to the Company’s homebuilding operations were as follows:



	Three Months Ended			Six Months Ended
	May 31,			May 31,
(In thousands)	2012		2011	2012	2011
Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:
East	$	568	324	785	1,176
Central	55		201	208	4,077
West	1,441		1,568	1,971	1,582
Southeast Florida	308		763	636	763
Houston	28		168	89	217
Other	4		304	740	325
Total	2,404		3,328	4,429	8,140
Valuation adjustments to land the Company intends to sell or has sold to third parties:
East	15		72	15	92
Central	—		156	—	179
West	1		—	1	—
Southeast Florida	332		—	332	—
Houston	—		—	—	10
Total	348		228	348	281
Write-offs of option deposits and pre-acquisition costs:
East	322		346	329	346
Central	5		26	54	26
West	—		—	232	—
Houston	—		—	—	81
Other	154		—	156	—
Total	481		372	771	453
Company’s share of valuation adjustments related to assets of unconsolidated entities:
Central	—		—	—	371
West	5,437		—	5,437	1,660
Other	—		—	—	2,495
Total	5,437		—	5,437	4,526
Valuation adjustments to investments of unconsolidated entities:
East (1)	7		150	18	8,412
Total	7		150	18	8,412
Write-offs of other receivables and other assets:
East	1,000		—	1,000	—
Other	—		—	—	4,806
Total	1,000		—	1,000	4,806
Total valuation adjustments and write-offs of option deposits and pre-acquisition costs, other receivables and other assets	$	9,677	4,078	12,003	26,618

(1)

For both the three and six months ended May 31, 2011, the Company recorded a $0.1 million valuation adjustment related to a $29.8 million investment of a Lennar Homebuilding unconsolidated entity, which was the result of a linked transaction. The linked transaction resulted in a pre-tax gain of $38.6 million related to a debt extinguishment due to the Company's purchase of the Lennar Homebuilding entity debt's at a discount and a $38.7 million valuation adjustment of the Lennar Homebuilding unconsolidated entity's inventory upon acquisition. The net pre-tax loss of $0.1 million was included in Lennar Homebuilding other income (expense), net.

During the six months ended May 31, 2012, the Company recorded lower valuation adjustments than during the six months ended May 31, 2011. Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.


(3)	Lennar Homebuilding Investments in Unconsolidated Entities

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

Statements of Operations



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2012			2011	2012		2011
Revenues	$	70,869		83,251	153,513		150,314
Costs and expenses	94,288			63,894	177,710		152,474
Other income	—			—	—		123,007
Net earnings (loss) of unconsolidated entities	$	(23,419	)	19,357	(24,197	)	120,847
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)	$	(9,381	)	2,417	(8,298	)	11,078

(1)

For both the three and six months ended May 31, 2012, Lennar Homebuilding equity in earnings (loss) includes $5.4 million of valuation adjustments related to strategic asset sales at Lennar Homebuilding's unconsolidated entities. For the six months ended May 31, 2011, Lennar Homebuilding equity in earnings (loss) included a $15.4 million gain related to the Company’s share of a $123.0 million gain on debt extinguishment at a Lennar Homebuilding unconsolidated entity, partially offset by $4.5 million of valuation adjustments related to assets of Lennar Homebuilding’s unconsolidated entities.

Balance Sheets



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	113,225	90,584
Inventories	2,905,970		2,895,241
Other assets	237,225		277,152
	$	3,256,420	3,262,977
Liabilities and equity:
Account payable and other liabilities	$	276,793	246,384
Debt	868,719		960,627
Equity	2,110,908		2,055,966
	$	3,256,420	3,262,977

As of May 31, 2012, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $566.6 million while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets was $672.8 million, primarily as a result of the Company buying at a discount a partner's equity in a Lennar Homebuilding unconsolidated entity. As of November 30, 2011, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $545.8 million while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets was $628.1 million, primarily as a result of the Company buying at a discount a partner's equity in a Lennar Homebuilding unconsolidated entity.

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of May 31, 2012 and November 30, 2011, the portfolio of land (including land development costs) of $350.0 million and $372.0 million, respectively, is also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.

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

The summary of the Company’s net recourse exposure related to Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:



(In thousands)	May 31, 2012			November 30, 2011
Several recourse debt - repayment	$	44,889		62,408
Joint and several recourse debt - repayment	26,650			46,292
The Company’s maximum recourse exposure	71,539			108,700
Less: joint and several reimbursement agreements with the Company’s partners	(22,820		)	(33,795	)
The Company’s net recourse exposure	$	48,719		74,905

During the six months ended May 31, 2012, the Company’s maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $37.2 million, as a result of $3.4 million paid by the Company primarily through capital contributions to unconsolidated entities and $33.8 million primarily related to the joint ventures selling assets and other transactions.

As of May 31, 2012 and November 30, 2011, the Company had no obligation guarantees accrued. The obligation guarantees, if any, are estimated based on current facts and circumstances and any unexpected changes may lead the Company to incur obligation guarantees in the future.

The recourse debt exposure in the previous table represents the Company’s maximum recourse exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay the debt or to reimburse the Company for any payments on its guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of Lennar Homebuilding’s unconsolidated entities with recourse debt were as follows:



(In thousands)	May 31, 2012		November 30, 2011
Assets	$	1,824,741	1,865,144
Liabilities	$	777,650	815,815
Equity	$	1,047,091	1,049,329

In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Some of the Company’s guarantees are repayment guarantees and some are maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes. As of May 31, 2012, the Company does not have maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.

In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.

During the three months ended May 31, 2012, there were other loan paydowns of $0.5 million. During the three months ended May 31, 2011, there were: (1) no payments under the Company’s maintenance guarantees and (2) other loan paydowns of $12.4 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the three months ended May 31, 2012 and 2011, there were no payments under completion guarantees.

During the six months ended May 31, 2012, there were other loan paydowns of $3.9 million. During the six months ended May 31, 2011, there were: (1) payments of $1.7 million under the Company’s maintenance guarantees and (2) other loan paydowns of $13.0 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the six months ended May 31, 2012 and 2011, there were no payments under completion guarantees.

As of May 31, 2012, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2012, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).

The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:



(In thousands)	May 31, 2012			November 30, 2011
The Company’s net recourse exposure	$	48,719		74,905
Reimbursement agreements from partners	22,820			33,795
The Company’s maximum recourse exposure	$	71,539		108,700
Non-recourse bank debt and other debt (partner’s share of several recourse)	$	105,156		149,937
Non-recourse land seller debt or other debt	26,343			26,391
Non-recourse debt with completion guarantees	490,250			441,770
Non-recourse debt without completion guarantees	175,431			233,829
Non-recourse debt to the Company	797,180			851,927
Total debt	$	868,719		960,627
The Company’s maximum recourse exposure as a % of total JV debt	8		%	11	%


(4)	Equity and Comprehensive Earnings (Loss)

The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2012 and 2011:



				Stockholders’ Equity
(In thousands)	Total Equity			Class A Common Stock	Class B Common Stock	Additional Paid in Capital	Treasury Stock		Retained Earnings		Noncontrolling Interests
Balance at November 30, 2011	$	3,303,525		16,910	3,298	2,341,079	(621,220	)	956,401		607,057
Net earnings (including net loss attributable to noncontrolling interests)	462,401			—	—	—	—		467,671		(5,270	)
Employee stock and directors plans	14,239			58	—	8,659	5,522		—		—
Amortization of restricted stock	14,132			—	—	14,132	—		—		—
Cash dividends	(15,132		)	—	—	—	—		(15,132	)	—
Receipts related to noncontrolling interests	888			—	—	—	—		—		888
Payments related to noncontrolling interests	(145		)	—	—	—	—		—		(145	)
Balance at May 31, 2012	$	3,779,908		16,968	3,298	2,363,870	(615,698	)	1,408,940		602,530



				Stockholders’ Equity
(In thousands)	Total Equity			Class A Common Stock	Class B Common Stock	Additional Paid in Capital	Treasury Stock		Retained Earnings		Noncontrolling Interests
Balance at November 30, 2010	$	3,194,383		16,701	3,297	2,310,339	(615,496	)	894,108		585,434
Net earnings (including net earnings attributable to noncontrolling interests)	63,573			—	—	—	—		41,191		22,382
Employee stock and directors plans	7,439			31	1	7,417	(10	)	—		—
Amortization of restricted stock	9,212			—	—	9,212	—		—		—
Cash dividends	(14,946		)	—	—	—	—		(14,946	)	—
Receipts related to noncontrolling interests	5,222			—	—	—	—		—		5,222
Payments related to noncontrolling interests	(6,164		)	—	—	—	—		—		(6,164	)
Lennar Homebuilding non-cash consolidations	529			—	—	—	—		—		529
Balance at May 31, 2011	$	3,259,248		16,732	3,298	2,326,968	(615,506	)	920,353		607,403

Comprehensive earnings attributable to Lennar for both the three and six months ended May 31, 2012 and 2011 was the same as net earnings attributable to Lennar. Comprehensive earnings (loss) attributable to noncontrolling interests for both the three and six months ended May 31, 2012 and 2011 was the same as net earnings (loss) attributable to noncontrolling interests.

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both the three and six months ended May 31, 2012 and 2011, there were no repurchases of common stock under the stock repurchase program. As of May 31, 2012, 6.2 million shares of common stock can be repurchased in the future under the program.

During three months ended May 31, 2012, treasury stock had no change in Class A common shares. During the six months ended May 31, 2012, treasury stock decreased by 0.3 million Class A common shares due to activity related to the Company's equity compensation plan.


(5)	Income Taxes

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, actual earnings, forecasts of future earnings, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.

During the three months ended May 31, 2012, the Company concluded that it was more likely than not that the majority of the valuation allowance against its deferred tax assets would be utilized. This conclusion was based on a detailed evaluation of all relevant evidence, both positive and negative, including such factors as nine consecutive quarters of earnings, the expectation of continued earnings and signs of recovery in the housing markets the Company operates in. Accordingly, the company reversed $403.0 million of its valuation allowance against its deferred tax assets. After the reversal, the Company had a valuation allowance of $177.3 million against its deferred tax assets as of May 31, 2012. The Company's deferred tax assets, net, were $403.6 million at May 31, 2012 of which $408.5 million was included in Lennar Homebuilding's other assets on the Company's condensed consolidated balance sheets and $4.9 million was included in Lennar Financial Services segment's liabilities on the Company's condensed consolidated balance sheets. The valuation allowance against the Company’s deferred tax assets was $576.9 million at November 30, 2011. In accordance with GAAP, when a change in a valuation allowance is recognized as a result of a change in judgment in an interim period, a portion of the valuation allowance to be reversed needs to be spread over remaining interim periods. Additionally, a valuation allowance remains on some of the Company's state net operating loss carryforwards that are not more likely than not to be utilized at this time due to an inability to carry back these losses in most states and short carryforward periods that exist in certain states. In future periods, the remaining allowance could be reduced if sufficient positive evidence is present indicating that it is more likely that not that a portion or all of the Company's remaining deferred tax assets will be realized.

During the three and six months ended May 31, 2012, the Company recorded a tax benefit of $402.3 million and $403.8 million, respectively, primarily related to the reversal of the Company's valuation allowance.

At May 31, 2012 and November 30, 2011, the Company had $12.3 million and $36.7 million of gross unrecognized tax benefits. If the Company were to recognize its gross unrecognized tax benefits as of May 31, 2012, $5.5 million would affect the Company’s effective tax rate. The Company expects the total amount of unrecognized tax benefits to decrease by $3.8 million within twelve months as a result of settlements with various taxing authorities.

During the six months ended May 31, 2012, the Company’s gross unrecognized tax benefits decreased by $24.4 million primarily as a result of the resolution of an IRS examination, which included a settlement for certain losses carried back to prior years and the settlement of certain tax accounting method items. The decrease in gross unrecognized tax benefits reduced the Company’s effective tax rate from (631.17%) to (632.73%). As a result of the partial reversal of the valuation allowance against the Company's deferred tax assets, the effective tax rate is not reflective of the Company's historical tax rate.

At May 31, 2012, the Company had $20.7 million accrued for interest and penalties, of which $1.7 million and $2.0 million, respectively, was recorded during the three and six months ended May 31, 2012. During the three and six months ended May 31, 2012, the accrual for interest and penalties was reduced by $1.1 million and $1.3 million as a result of the payment of interest due to the settlement of an IRS examination and a state tax issue. At November 30, 2011, the Company had $20.0 million accrued for interest and penalties.

The IRS is currently examining the Company’s federal income tax returns for fiscal years 2009 through 2011, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal year 2005 and subsequent years.


(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)	2012		2011	2012	2011
Numerator:
Net earnings attributable to Lennar	$	452,703	13,785	467,671	41,191
Less: distributed earnings allocated to nonvested shares	112		93	227	194
Less: undistributed earnings allocated to nonvested shares	6,594		78	6,807	340
Numerator for basic earnings per share	445,997		13,614	460,637	40,657
Plus: interest on 2.00% convertible senior notes due 2020 and 3.25% convertible senior notes due 2021	2,883		871	5,794	1,743
Plus: undistributed earnings allocated to convertible shares	6,594		79	6,807	339
Less: undistributed earnings reallocated to convertible shares	5,687		85	5,958	342
Numerator for diluted earnings per share	$	449,787	14,479	467,280	42,397
Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding	186,432		184,621	186,214	184,388
Effect of dilutive securities:
Shared based payments	1,074		679	979	689
Convertible senior notes	30,505		10,005	28,719	10,005
Denominator for diluted earnings per share - weighted average common shares outstanding	218,011		195,305	215,912	195,082
Basic earnings per share	$	2.39	0.07	2.47	0.22
Diluted earnings per share	$	2.06	0.07	2.16	0.22

Options to purchase 0.1 million and 0.8 million shares, respectively, in total of Class A common stock were outstanding and anti-dilutive for the three months ended May 31, 2012 and 2011. Options to purchase 0.4 million and 1.2 million shares, respectively, in total of Class A and Class B common stock were outstanding and anti-dilutive for the six months ended May 31, 2012 and 2011.


(7)	Lennar Financial Services Segment

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



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	69,312	55,454
Restricted cash	15,294		16,319
Receivables, net (1)	125,268		220,546
Loans held-for-sale (2)	267,969		303,780
Loans held-for-investment, net	23,402		24,262
Investments held-to-maturity	48,609		48,860
Goodwill	34,046		34,046
Other (3)	45,516		36,488
	$	629,416	739,755
Liabilities:
Notes and other debts payable	$	263,472	410,134
Other (4)	166,966		152,601
	$	430,438	562,735


(1)	Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of May 31, 2012 and November 30, 2011, respectively.


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


(3)	Other assets include mortgage loan commitments carried at fair value of $11.4 million and $4.2 million, respectively, as of May 31, 2012 and November 30, 2011.


(4)	Other liabilities include $78.3 million and $75.4 million, 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 $5.4 million and $1.4 million as of May 31, 2012 and November 30, 2011, respectively.

At May 31, 2012, the Lennar Financial Services segment had a 364-day warehouse repurchase facility with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $52 million that matures in February 2013, and another 364-day warehouse repurchase facility with a maximum aggregate commitment of $175 million that matures in July 2012. As of May 31, 2012, the maximum aggregate commitment and uncommitted amount under these facilities totaled $275 million and $52 million, respectively. Subsequent to May 31, 2012, the Lennar Financial Services segment entered into an additional 364-day warehouse repurchase facility with a maximum aggregate commitment of $75 million and an additional uncommitted amount of $75 million that matures in June 2013.

The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $263.5 million and $410.1 million, respectively, at May 31, 2012 and November 30, 2011, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $275.6 million and $431.6 million, respectively, at May 31, 2012 and November 30, 2011. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreement. There has been an increased industry-wide effort by purchasers to defray their losses in an unfavorable economic environment by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the

losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2012			2011	2012		2011
Loan origination liabilities, beginning of period	$	5,961		9,872	6,050		9,872
Provision for losses during the period	122			59	215		129
Adjustments to pre-existing provisions for losses from changes in estimates	245			20	253		(50	)
Payments/settlements	(130		)	—	(320	)	—
Loan origination liabilities, end of period	$	6,198		9,951	6,198		9,951

For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans as of May 31, 2012 and November 30, 2011 was $8.2 million and $8.8 million, respectively. At May 31, 2012, the recorded investment in the impaired loans with a valuation allowance was $3.2 million, net of an allowance of $5.0 million. At November 30, 2011, the recorded investment in the impaired loans with a valuation allowance was $3.7 million, net of an allowance of $5.1 million. The average recorded investment in impaired loans totaled $3.3 million and $3.5 million, respectively, for the three and six months ended May 31, 2012. The average recorded investment in impaired loans totaled $4.0 million and $4.2 million, respectively, for the three and six months ended May 31, 2011.


(8)	Rialto Investments Segment

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



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	92,959	83,938
Defeasance cash to retire notes payable	138,665		219,386
Loans receivable, net	578,375		713,354
Real estate owned - held-for-sale	113,115		143,677
Real estate owned - held-and-used, net	634,401		582,111
Investments in unconsolidated entities	150,733		124,712
Investments held-to-maturity	14,538		14,096
Other	26,041		15,874
	$	1,748,827	1,897,148
Liabilities:
Notes payable	$	594,915	765,541
Other	17,683		30,579
	$	612,598	796,120

Rialto’s operating earnings were as follows:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
Revenues	$	33,472		42,595		65,680		76,218
Costs and expenses	30,198			32,273		63,568		60,622
Rialto Investments equity in earnings (loss) from unconsolidated entities	5,569			(2,973	)	24,027		1,552
Rialto Investments other income (expense), net	(1,372		)	15,329		(13,612	)	28,532
Operating earnings (1)	$	7,471		22,678		12,527		45,680


(1)	Operating earnings for the three and six months ended May 31, 2012 include net earnings (loss) attributable to noncontrolling

interests of $3.2 million and ($1.2) million, respectively. Operating earnings for the three and six months ended May 31, 2011 include net earnings (loss) attributable to noncontrolling interests of $12.9 million and $24.8 million, respectively.

Loans Receivable

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of May 31, 2012 and November 30, 2011, the notes payable balance was $470.0 million and $626.9 million, respectively; however, $138.7 million and $219.4 million, respectively, of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account are being and will be used to retire the notes payable upon their maturity. During the six months ended May 31, 2012, the LLCs retired $156.9 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.

The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. At May 31, 2012, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.5 billion, respectively. At November 30, 2011, these consolidated LLCs had total combined assets and liabilities of $1.4 billion and $0.7 billion, respectively.

In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. The Company paid $310 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions. During the six months ended May 31, 2012, the Company retired $13 million principal amount of the 5-year senior unsecured note.

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



(In thousands)	May 31, 2012		November 30, 2011
Land	$	304,239	348,234
Single family homes	126,656		152,265
Commercial properties	114,218		172,799
Multi-family homes	24,395		28,108
Other	8,867		11,948
Loans receivable	$	578,375	713,354

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

The Rialto segment periodically evaluates its estimate of cash flows expected to be collected on its FDIC Portfolios and Bank Portfolios. These evaluations require the continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value of the loans to allocate purchase price. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized as a provision for loan losses, resulting in an increase to the allowance for loan losses.

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



(In thousands)	May 31, 2012		November 30, 2011
Outstanding principal balance	$	1,040,569	1,331,094
Carrying value	$	517,967	639,642

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the six months ended May 31, 2012 and 2011were as follows:



(In thousands)	May 31, 2012			May 31, 2011
Accretable yield, beginning of period	$	209,480		396,311
Additions	8,423			16,173
Deletions	(23,256		)	(37,869	)
Accretions	(40,890		)	(61,114	)
Accretable yield, end of period	$	153,757		313,501

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent 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. As of May 31, 2012 and November 30, 2011, the Company had an allowance for loan losses against the nonaccrual loans of $0.2 million and $0.8 million, respectively.

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, 2012



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	40,590	—	16,694	16,694
Single family homes	28,458		1,156	14,410	15,566
Commercial properties	35,996		—	22,818	22,818
Multi-family homes	10,928		—	5,145	5,145
Other	295		—	185	185
Loans receivable	$	116,267	1,156	59,252	60,408

November 30, 2011



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	75,557	—	24,692	24,692
Single family homes	55,377		1,956	13,235	15,191
Commercial properties	48,293		2,660	24,434	27,094
Multi-family homes	16,750		—	6,735	6,735
Other	405		—	—	—
Loans receivable	$	196,382	4,616	69,096	73,712

The average recorded investment in impaired loans totaled approximately $67 million and $197 million, respectively, for the six months ended May 31, 2012 and 2011.

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

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

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. Although the Company believes the recorded investment balance will ultimately be realized, the risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. As of May 31, 2012 and November 30, 2011, the Company had an allowance on these loans of $0.2 million and $0.8 million, respectively. During the three months ended May 31, 2012, the Company recorded $1.4 million of provision for loan losses offset by charge-offs of $1.3 million upon foreclosure of the loans. During the six months ended May 31, 2012, the Company recorded $2.3 million of provision for loan losses offset by charge-offs of $2.9 million upon foreclosure of the loans.

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

May 31, 2012



(In thousands)	Accrual		Nonaccrual	Total
Land	$	287,545	16,694	304,239
Single family homes	111,090		15,566	126,656
Commercial properties	91,400		22,818	114,218
Multi-family homes	19,250		5,145	24,395
Other	8,682		185	8,867
Loans receivable	$	517,967	60,408	578,375

November 30, 2011



(In thousands)	Accrual		Nonaccrual	Total
Land	$	323,542	24,692	348,234
Single family homes	137,074		15,191	152,265
Commercial properties	145,705		27,094	172,799
Multi-family homes	21,373		6,735	28,108
Other	11,948		—	11,948
Loans receivable	$	639,642	73,712	713,354

In order to assess the risk associated with each risk category, the Rialto segment evaluates the forecasted cash flows and the value of the underlying collateral securing loans receivable on a quarterly basis or when an event occurs that suggest a

decline in the collateral’s fair value.

Real Estate Owned

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

Upon the acquisition of REO through loan foreclosure, gains and losses are recorded in Rialto Investments other income (expense), net. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain upon foreclosure. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is generally recorded as a provision for loan losses.

At times, the Company may foreclose on a loan from an accrual loan pool in which the removal of the loan does not cause an overall decrease in the expected cash flows of the loan pool, and as such, no provision for loan losses is required to be recorded. However, the amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is recorded as an unrealized loss upon foreclosure.

The following tables present the activity in REO:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
REO - held-for-sale, beginning of period	$	101,579		431,119		143,677		250,286
Additions	221			94,568		1,355		280,209
Improvements	2,036			5,516		5,999		8,234
Sales	(45,210		)	(13,028	)	(82,054	)	(20,554	)
Impairments	(382		)	—		(1,622	)	—
Transfers to Lennar Homebuilding	(3,904		)	(3,926	)	(3,904	)	(3,926	)
Transfers to/from held-and-used, net (1)	58,775			—		49,664		—
REO - held-for-sale, end of period	$	113,115		514,249		113,115		514,249



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2012			2011		2012		2011
REO - held-and-used, net, beginning of period	$	630,570		15,126		582,111		7,818
Additions	63,434			1,391		109,675		8,734
Improvements	780			—		780		—
Sales	—			—		(981	)	—
Impairments	(676		)	—		(3,273	)	—
Depreciation	(932		)	(50	)	(4,247	)	(85	)
Transfers to/from held-for-sale (1)	(58,775		)	—		(49,664	)	—
REO - held-and-used, net, end of period	$	634,401		16,467		634,401		16,467


(1)	During the three and six months ended May 31, 2012, the Rialto segment transferred certain properties to/from REO held-and-used, net to/from REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.

For both the three and six months ended May 31, 2012, the Company recorded $8.4 million of gains from sales of REO. For the three months ended May 31, 2011, there were no gains from sales of REO and for six months ended May 31, 2011 the Company recorded $0.3 million of gains from sales of REO. For the three and six months ended May 31, 2012, the Company recorded gains (losses) of ($2.1) million and $3.7 million, respectively, from acquisitions of REO through foreclosure. For the three and six months ended May 31, 2011, the Company recorded $17.9 million and $35.0 million, respectively, of gains from acquisitions of REO through foreclosure. These gains (losses) are recorded in Rialto Investments other income (expense), net.

Investments

In 2010, the Rialto segment invested in approximately $43 million of non-investment grade commercial mortgage-backed securities (“CMBS”) for $19.4 million, representing a 55% discount to par value. The CMBS have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically, to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during both the three and six months ended May 31, 2012 and 2011. During the six months ended May 31, 2011, the Rialto segment sold a portion of its CMBS for $11.1 million, resulting in a gain on sale of CMBS of $4.7 million. The carrying value of the investment securities at May 31, 2012 and November 30, 2011, was $14.5 million and $14.1 million, respectively. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

In addition to the acquisition and management of the FDIC Portfolios and Bank Portfolios, an affiliate in the Rialto segment is a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor receives management fees for sub-advisory services. The Company committed to invest $75 million, of which the remaining outstanding commitment as of May 31, 2012 was $5.6 million, of the total equity commitments of approximately $1.2 billion made by private investors in this fund, and the U.S. Treasury has committed to a matching amount of approximately $1.2 billion of equity in the fund, as well as agreed to extend up to approximately $2.3 billion of debt financing. During both the three and six months ended May 31, 2012, the Company contributed $1.9 million. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the AB PPIP fund was $76.7 million and $65.2 million, respectively.

In 2010, the Rialto segment completed its first closing of a real estate investment fund (the “Fund”) with initial equity commitments of approximately $300 million (including $75 million committed by the Company, of which the remaining outstanding commitment as of May 31, 2012 was $23.7 million). The Fund was determined to have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the Fund’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in the statement of operations of the Fund, the Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.

As of May 31, 2012, the equity commitments of the Fund were $700 million (including the $75 million committed by the Company). During the three and six months ended May 31, 2012, the Company contributed $10.7 million and $18.0 million, respectively, to the Fund. Of these amounts contributed, $13.9 million was distributed back to the Company during the three months ended May 31, 2012 as a return of capital contributions due to a securitization within the Fund. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Fund was $64.8 million and $50.1 million, respectively. For the three and six months ended May 31, 2012, the Company’s share of earnings from the Fund was $3.0 million and $10.6 million, respectively. For both the three and six months ended May 31, 2011, the Company's share of losses from the Fund was ($0.4) million.

Additionally, another subsidiary in the Rialto segment has approximately a 5% investment in a service and infrastructure provider to the residential home loan market (the “Servicer Provider”), which provides services to the consolidated LLCs, among others. As of May 31, 2012 and November 30, 2011, the carrying value of the Company’s investment in the Servicer Provider was $8.6 million and $8.8 million, respectively.

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

Balance Sheets



(In thousands)	May 31, 2012		November 30, 2011
Assets:
Cash and cash equivalents	$	137,104	60,936
Loans receivable	400,467		274,213
Real estate owned	107,363		47,204
Investment securities	4,081,846		4,336,418
Other assets	223,861		171,196
	$	4,950,641	4,889,967
Liabilities and equity:
Accounts payable and other liabilities	$	166,557	320,353
Notes payable	230,561		40,877
Partner loans	163,516		137,820
Debt due to the U.S. Treasury	1,492,950		2,044,950
Equity	2,897,057		2,345,967
	$	4,950,641	4,889,967

Statements of Operations

Three Months Ended

Six Months Ended

May 31,