LEN-2012.8.31-10Q


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 August 31, 2012
Commission File Number: 1-11749
 
Lennar Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4337490
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
(305) 559-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
Common stock outstanding as of September 30, 2012:
Class A 159,580,731
Class B   31,303,195




Part I. Financial Information
Item 1. Financial Statements

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

 
1,024,212

Restricted cash
6,601

 
8,590

Receivables, net
46,281

 
53,977

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

 
1,334,703

Land and land under development
3,015,444

 
2,636,510

Consolidated inventory not owned
326,985

 
389,322

Total inventories
5,035,650

 
4,360,535

Investments in unconsolidated entities
570,666

 
545,760

Other assets
913,469

 
524,694

 
7,264,671

 
6,517,768

Rialto Investments:
 
 
 
Cash and cash equivalents
72,679

 
83,938

Defeasance cash to retire notes payable
185,975

 
219,386

Loans receivable, net
496,802

 
713,354

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

 
143,677

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

 
582,111

Investments in unconsolidated entities
101,668

 
124,712

Other assets
54,323

 
29,970

 
1,674,392

 
1,897,148

Lennar Financial Services
779,437

 
739,755

Total assets
$
9,718,500

 
9,154,671

(1)
Under certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities (“VIEs”) and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.
As of August 31, 2012, total assets include $2,110.1 million related to consolidated VIEs of which $13.2 million is included in Lennar Homebuilding cash and cash equivalents, $6.2 million in Lennar Homebuilding receivables, net, $52.2 million in Lennar Homebuilding finished homes and construction in progress, $477.9 million in Lennar Homebuilding land and land under development, $62.4 million in Lennar Homebuilding consolidated inventory not owned, $44.1 million in Lennar Homebuilding investments in unconsolidated entities, $221.3 million in Lennar Homebuilding other assets, $72.1 million in Rialto Investments cash and cash equivalents, $186.0 million in Rialto Investments defeasance cash to retire notes payable, $400.3 million in Rialto Investments loans receivable, net, $83.0 million in Rialto Investments real estate owned, held-for-sale, $483.2 million in Rialto Investments real estate owned, held-and-used, net, $0.7 million in Rialto Investments in unconsolidated entities and $7.5 million in Rialto Investments other assets.
As of November 30, 2011, total assets include $2,317.4 million related to consolidated VIEs of which $19.6 million is included in Lennar Homebuilding cash and cash equivalents, $5.3 million in Lennar Homebuilding receivables, net, $0.1 million in Lennar Homebuilding finished homes and construction in progress, $538.2 million in Lennar Homebuilding land and land under development, $71.6 million in Lennar Homebuilding consolidated inventory not owned, $43.4 million in Lennar Homebuilding investments in unconsolidated entities, $219.6 million in Lennar Homebuilding other assets, $80.0 million in Rialto Investments cash and cash equivalents, $219.4 million in Rialto Investments defeasance cash to retire notes payable, $565.6 million in Rialto Investments loans receivable, net, $115.4 million in Rialto Investments real estate owned, held-for-sale, $428.0 million in Rialto Investments real estate owned, held-and-used, net, $0.6 million in Rialto Investments in unconsolidated entities and $10.6 million in Rialto Investments other assets.

See accompanying notes to condensed consolidated financial statements.
2
Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets – (Continued)
(In thousands, except shares and per share amounts)
(unaudited)

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

 
201,101

Liabilities related to consolidated inventory not owned
268,207

 
326,200

Senior notes and other debts payable
3,671,595

 
3,362,759

Other liabilities
611,763

 
602,231

 
4,721,428

 
4,492,291

Rialto Investments:
 
 
 
Notes payable and other liabilities
614,390

 
796,120

Lennar Financial Services
524,305

 
562,735

Total liabilities
5,860,123

 
5,851,146

Stockholders’ equity:
 
 
 
Preferred stock
—

 
—

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

 
16,910

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

 
3,298

Additional paid-in capital
2,378,574

 
2,341,079

Retained earnings
1,488,426

 
956,401

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

 
2,696,468

Noncontrolling interests
586,655

 
607,057

Total equity
3,858,377

 
3,303,525

Total liabilities and equity
$
9,718,500

 
9,154,671

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


See accompanying notes to condensed consolidated financial statements.
3
Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)


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

 
711,754

 
2,388,321

 
1,840,939

Lennar Financial Services
106,764

 
66,374

 
263,574

 
183,509

Rialto Investments
37,194

 
42,065

 
102,874

 
118,283

Total revenues
1,099,758

 
820,193

 
2,754,769

 
2,142,731

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

 
662,909

 
2,167,019

 
1,741,383

Lennar Financial Services
81,441

 
58,386

 
212,021

 
171,843

Rialto Investments
46,396

 
33,562

 
109,964

 
94,184

Corporate general and administrative
32,286

 
22,776

 
88,296

 
66,726

Total costs and expenses
1,010,555

 
777,633

 
2,577,300

 
2,074,136

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

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

 
11,419

 
46,411

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

 
(6,505
)
 
37,578

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

 
(23,675
)
 
38,275

Earnings before income taxes
58,635

 
24,079

 
117,191

 
86,200

Benefit (provision) for income taxes
12,776

 
(579
)
 
416,621

 
873

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

 
23,500

 
533,812

 
87,073

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

 
(20,968
)
 
25,152

Net earnings attributable to Lennar
$
87,109

 
20,730

 
554,780

 
61,921

Basic earnings per share
$
0.46

 
0.11

 
2.93

 
0.33

Diluted earnings per share
$
0.40

 
0.11

 
2.56

 
0.33

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

 
0.04

 
0.12

 
0.12

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

See accompanying notes to condensed consolidated financial statements.
4
Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)


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

 
87,073

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

 
12,321

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

 
12,618

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

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

 
11,410

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

Distributions of earnings from Rialto Investments unconsolidated entities
6,324

 
4,084

Share based compensation expense
24,181

 
16,220

Tax benefit from share-based awards
2,479

 
—

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

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

 
—

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

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

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

 
12,085

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

 
34,892

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

 
404

Decrease in receivables
48,949

 
10,633

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

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

 
25,280

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

 
—

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

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

 
52,849

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

 
55,283

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

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

 
—

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

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

 
11,127

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

 
6,938

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

 
(161,629
)

See accompanying notes to condensed consolidated financial statements.
5
Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)


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

 
—

Proceeds from convertible senior notes
50,000

 
—

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

Partial redemption of senior notes
(210,862
)
 
—

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

Proceeds from other borrowings
31,561

 
2,957

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

 
5,765

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

 
283

Common stock:
 
 
 
Issuances
16,323

 
5,547

Repurchases
—

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

 
1,394,135

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

 
927,331

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

 
800,332

Lennar Financial Services
80,475

 
57,423

Rialto Investments
72,679

 
69,576

 
$
845,158

 
927,331

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

 
17,047

Non-cash distributions from unconsolidated entities
$
—

 
12,043

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

 
—

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

 
126,525

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

 
—

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

 
55,733

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

 
396,190

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

 
2

Inventories
$
—

 
52,850

Investments in Lennar Homebuilding unconsolidated entities
$
—

 
(28,574
)
Other assets
$
—

 
380

Debts payable
$
—

 
(14,703
)
Other liabilities
$
—

 
(9,423
)
Noncontrolling interests
$
—

 
(532
)

See accompanying notes to condensed consolidated financial statements.
6


Lennar Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)

(1)
Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2011. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and nine months ended August 31, 2012 are not necessarily indicative of the results to be expected for the full year.
Reclassification
Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2012 presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

(2)
Operating and Reporting Segments
The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:
(1) Homebuilding East
(2) Homebuilding Central
(3) Homebuilding West
(4) Homebuilding Southeast Florida
(5) Homebuilding Houston
(6) Lennar Financial Services
(7) Rialto Investments
Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold,

7


selling, general and administrative expenses and other interest expense of the segment. The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately have operations located in:
East: Florida(1), Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(2) 
West: California and Nevada
Southeast Florida: Southeast Florida
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon and Washington
(1)Florida in the East reportable segment excludes Southeast Florida, which is its own reportable segment.
(2)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.
Operations of the Lennar Financial Services segment include mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations, as well as in other states.
Operations of the Rialto Investments (“Rialto”) segment include sourcing, underwriting, pricing, managing and ultimately monetizing real estate and real estate related assets, as well as providing similar services to others in markets across the country. Rialto’s operating earnings consists of revenues generated primarily from accretable interest income associated with portfolios of real estate loans acquired in partnership with the FDIC and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the segment's Real Estate Investment Fund (the “Fund”), fees for sub-advisory services, other income (expense), net, consisting primarily of gains upon foreclosure of real estate owned (“REO”) and gains on sale of REO, and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, REO expenses and other general administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s 2011 Annual Report on Form 10-K. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
Financial information relating to the Company’s operations was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Assets:
 
 
 
Homebuilding East
$
1,522,331

 
1,312,750

Homebuilding Central
731,466

 
681,859

Homebuilding West
2,332,904

 
2,169,503

Homebuilding Southeast Florida
628,599

 
604,415

Homebuilding Houston
295,094

 
230,076

Homebuilding Other
688,856

 
595,615

Rialto Investments (1)
1,674,392

 
1,897,148

Lennar Financial Services
779,437

 
739,755

Corporate and unallocated
1,065,421

 
923,550

Total assets
$
9,718,500

 
9,154,671

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

8


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

 
256,780

 
883,965

 
704,525

Homebuilding Central
138,728

 
101,151

 
339,005

 
260,312

Homebuilding West
179,114

 
144,898

 
459,909

 
362,177

Homebuilding Southeast Florida
106,876

 
66,763

 
227,543

 
153,784

Homebuilding Houston
136,075

 
96,065

 
323,364

 
230,904

Homebuilding Other
66,024

 
46,097

 
154,535

 
129,237

Lennar Financial Services
106,764

 
66,374

 
263,574

 
183,509

Rialto Investments
37,194

 
42,065

 
102,874

 
118,283

Total revenues (1)
$
1,099,758

 
820,193

 
2,754,769

 
2,142,731

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

 
19,504

 
66,468

 
50,299

Homebuilding Central (2)
10,012

 
(6,404
)
 
15,394

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

Homebuilding Southeast Florida (4)
14,882

 
10,900

 
45,692

 
20,871

Homebuilding Houston
15,746

 
7,205

 
30,524

 
10,130

Homebuilding Other
4,708

 
378

 
6,287

 
(8,616
)
Lennar Financial Services
25,323

 
7,988

 
51,553

 
11,666

Rialto Investments
(5,714
)
 
11,741

 
6,813

 
57,421

Total operating earnings
90,921

 
46,855

 
205,487

 
152,926

Corporate general and administrative expenses
32,286

 
22,776

 
88,296

 
66,726

Earnings before income taxes
$
58,635

 
24,079

 
117,191

 
86,200

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

9


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

 
412

 
864

 
1,588

Central
6

 
4,741

 
214

 
8,818

West
2,346

 
2,357

 
4,317

 
3,939

Southeast Florida
2,139

 
777

 
2,775

 
1,540

Houston
41

 
113

 
130

 
330

Other
40

 
1,262

 
780

 
1,587

Total
4,651

 
9,662

 
9,080

 
17,802

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

 
—

 
122

 
92

Central
15

 
1

 
15

 
180

West
—

 
—

 
1

 
—

Southeast Florida
22

 
—

 
354

 
—

Houston
—

 
11

 
—

 
21

Other
—

 
153

 
—

 
153

Total
144

 
165

 
492

 
446

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

 
380

 
1,632

 
726

Central
7

 
344

 
61

 
370

West
—

 
172

 
232

 
172

Houston
—

 
—

 
—

 
81

Other
—

 
—

 
156

 
—

Total
1,310

 
896

 
2,081

 
1,349

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

 
3

 
61

 
3

Central
—

 
—

 
—

 
371

West
27

 
683

 
5,464

 
2,343

Other
—

 
—

 
—

 
2,495

Total
88

 
686

 
5,525

 
5,212

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

 
—

 
18

 
8,412

West
—

 
2,077

 
—

 
2,077

Total
—

 
2,077

 
18

 
10,489

Write-offs of other receivables and other assets:
 
 
 
 
 
 
 
East
—

 
—

 
1,000

 
—

Other
—

 
—

 
—

 
4,806

Total
—

 
—

 
1,000

 
4,806

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

 
13,486

 
18,196

 
40,104

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

10


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

(3)
Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Revenues
$
110,823

 
104,690

 
264,336

 
255,004

Costs and expenses
126,007

 
108,599

 
303,717

 
261,073

Other income
10,515

 
—

 
10,515

 
123,007

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

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

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

 
90,584

Inventories
2,840,523

 
2,895,241

Other assets
233,199

 
277,152

 
$
3,181,746

 
3,262,977

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

 
246,384

Debt
783,844

 
960,627

Equity
2,112,963

 
2,055,966

 
$
3,181,746

 
3,262,977

As of August 31, 2012 and November 30, 2011, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $570.7 million and $545.8 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 31, 2012 and November 30, 2011 was $675.0 million, and $628.1 million, respectively, primarily as a result of the Company buying at a discount a partner's equity in a Lennar Homebuilding unconsolidated entity.
In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of August 31, 2012 and November 30, 2011, the portfolio of land (including land development costs) of $294.9 million and $372.0 million, respectively, is also reflected as inventory in the summarized

11


condensed financial information related to Lennar Homebuilding’s unconsolidated entities.
The Lennar Homebuilding unconsolidated entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.
The summary of the Company’s net recourse exposure related to Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Several recourse debt - repayment
$
44,795

 
62,408

Joint and several recourse debt - repayment
22,043

 
46,292

The Company’s maximum recourse exposure
66,838

 
108,700

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

 
74,905

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

 
1,865,144

Liabilities
$
766,222

 
815,815

Equity
$
1,041,319

 
1,049,329

In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Historically, the Company has had repayment guarantees and/or maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes. As of August 31, 2012, the Company does not have maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
During the three months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $1.3 million. During the three months ended August 31, 2011, there were: (1) no payments under the Company’s maintenance

12


guarantees and (2) other loan paydowns of $3.1 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the three months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
During the nine months ended August 31, 2012, there were other loan paydowns relating to recourse debt of $5.2 million. During the nine months ended August 31, 2011, there were: (1) payments of $1.7 million under the Company’s maintenance guarantees and (2) other loan paydowns of $16.1 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During both the nine months ended August 31, 2012 and 2011, there were no payments under completion guarantees.
As of August 31, 2012, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of August 31, 2012, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).
The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
The Company’s net recourse exposure
$
48,165

 
74,905

Reimbursement agreements from partners
18,673

 
33,795

The Company’s maximum recourse exposure
$
66,838

 
108,700

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

 
149,937

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

 
26,391

Non-recourse debt with completion guarantees
476,650

 
441,770

Non-recourse debt without completion guarantees
109,141

 
233,829

Non-recourse debt to the Company
717,006

 
851,927

Total debt
$
783,844

 
960,627

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


13


(4)
Equity and Comprehensive Earnings (Loss)
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the nine months ended August 31, 2012 and 2011:
 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2011
$
3,303,525

 
16,910

 
3,298

 
2,341,079

 
(621,220
)
 
956,401

 
607,057

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

 
—

 
—

 
—

 
—

 
554,780

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

 
212

 
—

 
13,215

 
5,522

 
—

 
—

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

 
—

 
—

 
2,479

 
—

 
—

 
—

Amortization of restricted stock
21,801

 
—

 
—

 
21,801

 
—

 
—

 
—

Cash dividends
(22,755
)
 
—

 
—

 
—

 
—

 
(22,755
)
 
—

Receipts related to
   noncontrolling interests
1,046

 
—

 
—

 
—

 
—

 
—

 
1,046

Payments related to
   noncontrolling interests
(480
)
 
—

 
—

 
—

 
—

 
—

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

 
17,122

 
3,298

 
2,378,574

 
(615,698
)
 
1,488,426

 
586,655

 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2010
$
3,194,383

 
16,701

 
3,297

 
2,310,339

 
(615,496
)
 
894,108

 
585,434

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

 
—

 
—

 
—

 
—

 
61,921

 
25,152

Employee stock and directors
   plans
9,045

 
39

 
1

 
9,034

 
(29
)
 
—

 
—

Amortization of restricted stock
13,001

 
—

 
—

 
13,001

 
—

 
—

 
—

Cash dividends
(22,425
)
 
—

 
—

 
—

 
—

 
(22,425
)
 
—

Receipts related to
   noncontrolling interests
5,765

 
—

 
—

 
—

 
—

 
—

 
5,765

Payments related to
   noncontrolling interests
(7,087
)
 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
—

 
532

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

 
16,740

 
3,298

 
2,332,374

 
(615,525
)
 
933,604

 
609,796

Comprehensive earnings attributable to Lennar for both the three and nine months ended August 31, 2012 and 2011 was the same as net earnings attributable to Lennar. Comprehensive earnings (loss) attributable to noncontrolling interests for both the three and nine months ended August 31, 2012 and 2011 was the same as net earnings (loss) attributable to noncontrolling interests.
The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both the three and nine months ended August 31, 2012 and 2011, there were no repurchases of common stock under the stock repurchase program. As of August 31, 2012, 6.2 million shares of common stock can be repurchased in the future under the program.
During three months ended August 31, 2012, treasury stock had no change in Class A common shares. During the nine months ended August 31, 2012, treasury stock decreased by 0.3 million Class A common shares due to activity related to the Company's equity compensation plan.

14


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

15


(6)
Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Basic and diluted earnings per share were calculated as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
87,109

 
20,730

 
554,780

 
61,921

Less: distributed earnings allocated to nonvested shares
151

 
94

 
378

 
288

Less: undistributed earnings allocated to nonvested shares
1,378

 
164

 
8,411

 
504

Numerator for basic earnings per share
85,580

 
20,472

 
545,991

 
61,129

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

 
871

 
8,504

 
2,614

Plus: undistributed earnings allocated to convertible shares
1,378

 
164

 
8,411

 
503

Less: undistributed earnings reallocated to convertible shares
1,215

 
166

 
7,352

 
508

Numerator for diluted earnings per share
$
88,453

 
21,341

 
555,554

 
63,738

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

 
184,665

 
186,397

 
184,480

Effect of dilutive securities:
 
 
 
 
 
 
 
Shared based payments
1,087

 
482

 
1,015

 
620

Convertible senior notes
31,732

 
10,005

 
29,723

 
10,005

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

 
195,152

 
217,135

 
195,105

Basic earnings per share
$
0.46

 
0.11

 
2.93

 
0.33

Diluted earnings per share
$
0.40

 
0.11

 
2.56

 
0.33

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


16


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

 
55,454

Restricted cash
12,682

 
16,319

Receivables, net (1)
131,293

 
220,546

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

 
303,780

Loans held-for-investment, net
21,672

 
24,262

Investments held-to-maturity
33,366

 
48,860

Goodwill
34,046

 
34,046

Other (3)
44,063

 
36,488

 
$
779,437

 
739,755

Liabilities:
 
 
 
Notes and other debts payable
$
357,713

 
410,134

Other (4)
166,592

 
152,601

 
$
524,305

 
562,735

(1)
Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 31, 2012 and November 30, 2011, respectively.
(2)
Loans held-for-sale relate to unsold loans carried at fair value.
(3)
Other assets include mortgage loan commitments carried at fair value of $11.7 million and $4.2 million, respectively, as of August 31, 2012 and November 30, 2011.
(4)
Other liabilities include $79.1 million and $75.4 million, respectively, as of August 31, 2012 and November 30, 2011, of certain of the Company’s self-insurance reserves related to general liability and workers’ compensation. Other liabilities also include forward contracts carried at fair value of $4.0 million and $1.4 million, respectively, as of August 31, 2012 and November 30, 2011.
At August 31, 2012, the Lennar Financial Services segment had a 364-day warehouse repurchase facility with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $50 million that matures in February 2013, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $150 million that matures in June 2013, and another 364-day warehouse repurchase facility with a maximum aggregate commitment of $200 million that matures in July 2013. As of August 31, 2012, the maximum aggregate commitment and uncommitted amount under these facilities totaled $450 million and $50 million, respectively.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $357.7 million and $410.1 million, respectively, at August 31, 2012 and November 30, 2011, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $383.2 million and $431.6 million, respectively, at August 31, 2012 and November 30, 2011. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Substantially all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreement. There has been an increased industry-wide effort by purchasers to defray their losses in an unfavorable economic environment by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the

17


losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
Loan origination liabilities, beginning of period
$
6,198

 
9,951

 
6,050

 
9,872

Provision for losses during the period
165

 
118

 
380

 
247

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

 
—

 
253

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

 
6,895

 
6,154

 
6,895

(1)
Payments/settlements during the three months ended August 31, 2011 include a settlement the Company paid to one of its largest investors, which settled all outstanding and potential future repurchase demands related to originations sold to them prior to 2009.
For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans as of August 31, 2012 and November 30, 2011 was $7.4 million and $8.8 million, respectively. At August 31, 2012, the recorded investment in the impaired loans with a valuation allowance was $2.7 million, net of an allowance of $4.7 million. At November 30, 2011, the recorded investment in the impaired loans with a valuation allowance was $3.7 million, net of an allowance of $5.1 million. The average recorded investment in impaired loans totaled $3.0 million and $3.2 million, respectively, for the three and nine months ended August 31, 2012. The average recorded investment in impaired loans totaled $3.8 million and $4.0 million, respectively, for the three and nine months ended August 31, 2011.

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

 
83,938

Defeasance cash to retire notes payable
185,975

 
219,386

Loans receivable, net
496,802

 
713,354

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

 
143,677

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

 
582,111

Investments in unconsolidated entities
101,668

 
124,712

Investments held-to-maturity
14,771

 
14,096

Other
39,552

 
15,874

 
$
1,674,392

 
1,897,148

Liabilities:
 
 
 
Notes payable
$
594,813

 
765,541

Other
19,577

 
30,579

 
$
614,390

 
796,120


18


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

 
42,065

 
102,874

 
118,283

Costs and expenses
46,396

 
33,562

 
109,964

 
94,184

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

 
(6,505
)
 
37,578

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

 
(23,675
)
 
38,275

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

 
6,813

 
57,421

(1)
Operating earnings (loss) for the three and nine months ended August 31, 2012 include net loss attributable to noncontrolling interests of $13.4 million and $14.6 million, respectively. Operating earnings (loss) for the three and nine months ended August 31, 2011 include net earnings attributable to noncontrolling interests of $6.1 million and $30.9 million, respectively.
Loans Receivable
In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of August 31, 2012 and November 30, 2011, the notes payable balance was $470.0 million and $626.9 million, respectively; however, as of August 31, 2012 and November 30, 2011, $186.0 million and $219.4 million, respectively, of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account are being and will be used to retire the notes payable upon their maturity. During the nine months ended August 31, 2012, the LLCs retired $156.9 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.
The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. At August 31, 2012, these consolidated LLCs had total combined assets and liabilities of $1.2 billion and $0.5 billion, respectively. At November 30, 2011, these consolidated LLCs had total combined assets and liabilities of $1.4 billion and $0.7 billion, respectively.
In September 2010, the Rialto segment acquired approximately 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions. The Company paid $310 million for the distressed real estate and real estate related assets of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions. During the nine months ended August 31, 2012, the Company retired $13 million principal amount of the 5-year senior unsecured note.
The following table displays the loans receivable by aggregate collateral type:
(In thousands)
August 31,
2012
 
November 30,
2011
Land
$
249,065

 
348,234

Single family homes
105,273

 
152,265

Commercial properties
96,959

 
172,799

Multi-family homes
23,186

 
28,108

Other
22,319

 
11,948

Loans receivable
$
496,802

 
713,354


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

19


The Rialto segment periodically evaluates its estimate of cash flows expected to be collected on its FDIC Portfolios and Bank Portfolios. These evaluations require the continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value of the loans to allocate purchase price. Subsequent changes in the estimated cash flows expected to be collected may result in changes in the accretable yield and nonaccretable difference or reclassifications from nonaccretable yield to accretable yield. Increases in the cash flows expected to be collected will generally result in an increase in interest income over the remaining life of the loan or pool of loans. Decreases in expected cash flows due to further credit deterioration will generally result in an impairment charge recognized as a provision for loan losses, resulting in an increase to the allowance for loan losses.
The outstanding balance and carrying value of loans accounted for under ASC 310-30 was as follows:
(In thousands)
August 31,
2012
 
November 30,
2011
Outstanding principal balance
$
903,402

 
1,331,094

Carrying value
$
446,216

 
639,642

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

 
396,311

Additions
43,306

 
16,173

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

 
252,071

Additions primarily represent reclasses from nonaccretable yield to accretable yield on the portfolios. Deletions represent loan impairments and disposal of loans, which includes foreclosure of underlying collateral and result in the removal of the loans from the accretable yield portfolios.
When forecasted principal and interest cannot be reasonably estimated at the loan acquisition date, management classifies the loan as nonaccrual and accounts for these assets in accordance with ASC 310-10, Receivables (“ASC 310-10”). When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Although these loans met the definition of ASC 310-10, these loans were not considered impaired relative to the Company’s recorded investment at the time of acquisition since they were acquired at a substantial discount to their unpaid principal balance. A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.
The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
August 31, 2012
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
28,682

 
4,203

 
5,365

 
9,568

Single family homes
24,357

 
2,217

 
11,744

 
13,961

Commercial properties
35,996

 
919

 
20,992

 
21,911

Multi-family homes
10,928

 
—

 
5,146

 
5,146

Loans receivable
$
99,963

 
7,339

 
43,247

 
50,586


20


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

 
—

 
24,692

 
24,692

Single family homes
55,377

 
1,956

 
13,235

 
15,191

Commercial properties
48,293

 
2,660

 
24,434

 
27,094

Multi-family homes
16,750

 
—

 
6,735

 
6,735

Other
405

 
—

 
—

 
—

Loans receivable
$
196,382

 
4,616

 
69,096

 
73,712

The average recorded investment in impaired loans totaled approximately $62 million and $183 million, respectively, for the nine months ended August 31, 2012 and 2011.
The loans receivable portfolios consist of loans acquired at a discount. Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. The following are the risk categories for the loans receivable portfolios:
Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses. As of August 31, 2012, the Company had an allowance on these loans of $14.1 million. During both the three and nine months ended August 31, 2012, the Company recorded $17.1 million of provision for loan losses offset by charge-offs of $3.0 million upon foreclosure of the loans. As of November 30, 2011, the Company did not have an allowance for losses against accrual loans.
Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. Although the Company believes the recorded investment balance will ultimately be realized, the risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. As of August 31, 2012 and November 30, 2011, the Company had an allowance on these loans of $3.0 million and $0.8 million, respectively. During the three months ended August 31, 2012 and 2011, the Company recorded $3.2 million and $5.2 million, respectively, of provision for loan losses offset by charge-offs of $0.4 million and $5.2 million, respectively, upon foreclosure of the loans. During the nine months ended August 31, 2012 and 2011, the Company recorded $5.5 million and $12.1 million, respectively, of provision for loan losses offset by charge-offs of $3.3 million and $12.1 million, respectively, upon foreclosure of the loans.
Accrual and nonaccrual loans receivable by risk categories were as follows:
August 31, 2012
(In thousands)
Accrual
 
Nonaccrual
 
Total
Land
$
239,497

 
9,568

 
249,065

Single family homes
91,312

 
13,961

 
105,273

Commercial properties
75,048

 
21,911

 
96,959

Multi-family homes
18,040

 
5,146

 
23,186

Other
22,319

 
—

 
22,319

Loans receivable
$
446,216

 
50,586

 
496,802


21


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

 
24,692

 
348,234

Single family homes
137,074

 
15,191

 
152,265

Commercial properties
145,705

 
27,094

 
172,799

Multi-family homes
21,373

 
6,735

 
28,108

Other
11,948

 
—

 
11,948

Loans receivable
$
639,642

 
73,712

 
713,354

In order to assess the risk associated with each risk category, the Rialto segment evaluates the forecasted cash flows and the value of the underlying collateral securing loans receivable on a quarterly basis or when an event occurs that suggest a decline in the collateral’s fair value.
Real Estate Owned
The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the condensed consolidated balance sheets as REO held-and-used, net and REO held-for-sale. When a property is determined to be held-and-used, net, the asset is recorded at fair value and depreciated over its useful life using the straight line method. When certain criteria set forth in ASC 360, Property, Plant and Equipment, are met; the property is classified as held-for-sale. When a real estate asset is classified as held-for-sale, the property is recorded at the lower of its cost basis or fair value less estimated costs to sell. The fair value of REO held-for-sale are determined in part by placing reliance on third party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity.
Upon the acquisition of REO through loan foreclosure, gains and losses are recorded in Rialto Investments other income (expense), net. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain upon foreclosure. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is generally recorded as a provision for loan losses.
At times, the Company may foreclose on a loan from an accrual loan pool in which the removal of the loan does not cause an overall decrease in the expected cash flows of the loan pool, and as such, no provision for loan losses is required to be recorded. However, the amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is recorded as an unrealized loss upon foreclosure.
The following tables present the activity in REO: 
 
Three Months Ended
 
Nine Months Ended
 
August 31,
 
August 31,
(In thousands)
2012
 
2011
 
2012
 
2011
REO - held-for-sale, beginning of period
$
113,115

 
514,249

 
143,677

 
250,286

Additions
6,428

 
125,881

 
7,783

 
406,090

Improvements
1,439

 
7,250

 
7,438

 
15,484

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

 
(2,432
)
 
—

Transfers to Lennar Homebuilding
(7,431
)
 
—

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

 
—

 
80,597

 
—

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

 
615,680

 
115,718

 
615,680


22


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

 
16,467

 
582,111

 
7,818

Additions
44,958

 
35,246

 
154,633

 
43,980

Improvements
2,070

 
—

 
2,850

 
—

Sales
—

 
—

 
(981
)
 
—

Impairments
(1,880
)
 
—

 
(5,153
)
 
—

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

 
(80,597
)
 
—

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

 
51,652

 
647,227

 
51,652

(1)
During the three and nine months ended August 31, 2012, the Rialto segment transferred certain properties to/from REO held-and-used, net to/from REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.
For the three and nine months ended August 31, 2012, the Company recorded $2.5 million and $10.9 million, respectively, of gains from sales of REO. For the three and nine months ended August 31, 2011, the Company recorded $2.7 million and $3.0 million, respectively, of gains from sales of REO. For the three and nine months ended August 31, 2012, the Company recorded gains (losses) of ($2.0) million and $1.7 million, respectively, from acquisitions of REO through foreclosure. For the three and nine months ended August 31, 2011, the Company recorded $18.9 million and $53.9 million, respectively, of gains from acquisitions of REO through foreclosure. These gains (losses) are recorded in Rialto Investments other income (expense), net.
Investments
In 2010, the Rialto segment invested in approximately $43 million of non-investment grade commercial mortgage-backed securities (“CMBS”) for $19.4 million, representing a 55% discount to par value. The CMBS have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically, to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were record