LEN-2015.5.31-10Q Q2


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2015
Commission File Number: 1-11749
 
Lennar Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4337490
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
(305) 559-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
Common stock outstanding as of May 31, 2015:
Class A 173,937,387
Class B 31,303,195




Part I. Financial Information
Item 1. Financial Statements

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

 
885,729

Restricted cash
12,373

 
9,849

Receivables, net
70,443

 
93,444

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

 
3,082,345

Land and land under development
4,984,978

 
4,601,802

Consolidated inventory not owned
51,255

 
52,453

Total inventories
8,753,776

 
7,736,600

Investments in unconsolidated entities
688,467

 
656,837

Other assets
591,082

 
672,589

 
10,755,133

 
10,055,048

Rialto
1,364,682

 
1,458,152

Lennar Financial Services
1,413,388

 
1,177,053

Lennar Multifamily
362,256

 
268,014

Total assets
$
13,895,459

 
12,958,267

(1)
Under certain provisions of Accounting Standards Codification (“ASC”) Topic 810, Consolidations, (“ASC 810”) the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities (“VIEs”) and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.
As of May 31, 2015, total assets include $709.3 million related to consolidated VIEs of which $14.4 million is included in Lennar Homebuilding cash and cash equivalents, $0.7 million in Lennar Homebuilding receivables, net, $0.4 million in Lennar Homebuilding finished homes and construction in progress, $174.5 million in Lennar Homebuilding land and land under development, $51.3 million in Lennar Homebuilding consolidated inventory not owned, $31.1 million in Lennar Homebuilding investments in unconsolidated entities, $25.1 million in Lennar Homebuilding other assets, $402.1 million in Rialto assets and $9.8 million in Lennar Multifamily assets.
As of November 30, 2014, total assets include $929.1 million related to consolidated VIEs of which $11.7 million is included in Lennar Homebuilding cash and cash equivalents, $0.3 million in Lennar Homebuilding restricted cash, $0.2 million in Lennar Homebuilding receivables, net, $0.2 million in Lennar Homebuilding finished homes and construction in progress, $208.2 million in Lennar Homebuilding land and land under development, $52.5 million in Lennar Homebuilding consolidated inventory not owned, $23.9 million in Lennar Homebuilding investments in unconsolidated entities, $104.6 million in Lennar Homebuilding other assets, $508.4 million in Rialto assets and $19.2 million in Lennar Multifamily assets.

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

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

 
412,558

Liabilities related to consolidated inventory not owned
43,897

 
45,028

Senior notes and other debts payable
5,291,136

 
4,690,213

Other liabilities
802,665

 
863,236

 
6,579,688

 
6,011,035

Rialto
712,744

 
747,044

Lennar Financial Services
1,075,515

 
896,643

Lennar Multifamily
51,793

 
52,243

Total liabilities
8,419,740

 
7,706,965

Stockholders’ equity:
 
 
 
Preferred stock
—

 
—

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

 
17,424

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

 
3,298

Additional paid-in capital
2,261,951

 
2,239,704

Retained earnings
2,941,595

 
2,660,034

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

 
4,827,020

Noncontrolling interests
336,981

 
424,282

Total equity
5,475,719

 
5,251,302

Total liabilities and equity
$
13,895,459

 
12,958,267

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


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


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

 
1,634,785

 
3,557,470

 
2,866,170

Lennar Financial Services
169,885

 
111,016

 
294,712

 
187,968

Rialto
67,931

 
54,393

 
109,128

 
101,348

Lennar Multifamily
38,976

 
18,551

 
75,433

 
26,354

Total revenues
2,392,604

 
1,818,745

 
4,036,743

 
3,181,840

Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding
1,825,482

 
1,392,643

 
3,090,657

 
2,456,998

Lennar Financial Services
130,832

 
92,723

 
240,132

 
165,210

Rialto
67,506

 
79,604

 
108,287

 
127,180

Lennar Multifamily
47,260

 
25,549

 
89,221

 
39,476

Corporate general and administrative
50,207

 
38,317

 
93,861

 
76,429

Total costs and expenses
2,121,287

 
1,628,836

 
3,622,158

 
2,865,293

Lennar Homebuilding equity in earnings from unconsolidated entities
6,494

 
394

 
35,393

 
5,384

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

 
6,116

 
5,151

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

 
17,939

 
9,992

 
23,293

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

 
(1,144
)
 
2,366

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

 
203,630

 
456,453

 
329,506

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

 
122,617

 
301,501

 
202,582

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

 
(15,102
)
 
3,522

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

 
137,719

 
297,979

 
215,836

Basic earnings per share
$
0.89

 
0.67

 
1.45

 
1.06

Diluted earnings per share
$
0.79

 
0.61

 
1.30

 
0.95

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

 
0.04

 
0.08

 
0.08

Comprehensive earnings attributable to Lennar
$
183,016

 
137,719

 
297,979

 
215,836

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

 
(15,102
)
 
3,522

 
(13,254
)


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


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

 
202,582

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

 
16,645

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

 
10,577

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

 
4,051

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

 
—

Lennar Multifamily equity in loss from unconsolidated entities
600

 
257

Share based compensation expense
20,650

 
17,291

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

 
99,683

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

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

 
44,126

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

 
2,357

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

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

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

 
66,015

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

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

 
—

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

 
74,766

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

 
30,086

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

 
42,377

Receipts of principal payments on Rialto loans receivable
13,335

 
8,357

Proceeds from sales of Rialto real estate owned
55,812

 
112,409

Purchase of investment carried at cost
(18,000
)
 
—

Proceeds from sale of commercial mortgage-backed securities bond
—

 
9,171

Purchases of commercial mortgage-backed securities bond
—

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

 
44,579

Acquisition, net of cash acquired
—

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

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

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

 
9,204

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


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


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

 
—

Net borrowings under Lennar Financial Services warehouse facilities
161,273

 
85,782

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

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

 
500,500

Proceeds from Rialto senior notes
—

 
104,525

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

Proceeds from Rialto structured notes
—

 
73,830

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

 
26,933

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

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

 
11,933

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

 
282

Common stock:
 
 
 
Issuances
9,412

 
13,302

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

 
523,524

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

 
970,505

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

 
960,239

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

 
627,615

Lennar Financial Services
103,093

 
86,164

Rialto
176,378

 
244,675

Lennar Multifamily
1,694

 
1,785

 
$
920,157

 
960,239

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

 
4,774

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

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

 
96,430

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

 
59,107

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

 
37,270

Non-cash acquisition of Servicer Provider
$
—

 
8,317

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

 
5,927

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

 
155,021

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

 
(30,647
)
Other liabilities
$
1,220

 
—

Noncontrolling interests
$
13,253

 
(105,906
)

See accompanying notes to condensed consolidated financial statements.
6


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


7


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

8


unconsolidated entities, less expenses related to construction activities, the costs related to sales of land and general and administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Form 10-K for the year ended November 30, 2014 and Section 4 of Item 2 of this Form 10-Q, “Critical Accounting Policies.” Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
Financial information relating to the Company’s operations was as follows:
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Homebuilding East
$
2,482,733

 
2,323,978

Homebuilding Central
1,373,787

 
1,233,991

Homebuilding West
3,989,066

 
3,454,611

Homebuilding Southeast Florida
737,192

 
722,706

Homebuilding Houston
483,008

 
398,538

Homebuilding Other
828,764

 
880,912

Rialto
1,364,682

 
1,458,152

Lennar Financial Services
1,413,388

 
1,177,053

Lennar Multifamily
362,256

 
268,014

Corporate and unallocated
860,583

 
1,040,312

Total assets
$
13,895,459

 
12,958,267

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

 
536,748

 
1,121,731

 
927,256

Homebuilding Central
302,509

 
235,208

 
513,017

 
397,702

Homebuilding West
627,361

 
423,354

 
1,010,134

 
738,369

Homebuilding Southeast Florida
184,839

 
129,492

 
327,187

 
231,656

Homebuilding Houston
189,647

 
178,663

 
320,904

 
309,286

Homebuilding Other
158,060

 
131,320

 
264,497

 
261,901

Lennar Financial Services
169,885

 
111,016

 
294,712

 
187,968

Rialto
67,931

 
54,393

 
109,128

 
101,348

Lennar Multifamily
38,976

 
18,551

 
75,433

 
26,354

Total revenues (1)
$
2,392,604

 
1,818,745

 
4,036,743

 
3,181,840

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

 
85,252

 
152,830

 
135,904

Homebuilding Central
30,715

 
24,074

 
45,767

 
34,734

Homebuilding West (2)
102,332

 
64,643

 
184,825

 
118,436

Homebuilding Southeast Florida
36,983

 
26,748

 
65,269

 
47,306

Homebuilding Houston
22,738

 
24,685

 
39,753

 
46,356

Homebuilding Other
5,438

 
9,109

 
11,989

 
13,993

Lennar Financial Services
39,053

 
18,293

 
54,580

 
22,758

Rialto
6,881

 
(3,677
)
 
9,689

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

 
241,947

 
550,314

 
405,935

Corporate general and administrative expenses
50,207

 
38,317

 
93,861

 
76,429

Earnings before income taxes
$
279,810

 
203,630

 
456,453

 
329,506


9


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

(3)
Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2015
 
2014
 
2015
 
2014
Revenues
$
180,790

 
32,111

 
623,747

 
175,805

Costs and expenses
154,139

 
65,098

 
453,018

 
210,737

Other income
—

 
—

 
2,943

 
—

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

 
(32,987
)
 
173,672

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

 
394

 
35,393

 
5,384

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

 
243,597

Inventories
2,725,167

 
2,889,267

Other assets
134,036

 
155,470

 
$
3,159,339

 
3,288,334

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

 
271,638

Debt
504,692

 
737,755

Equity
2,371,233

 
2,278,941

 
$
3,159,339

 
3,288,334

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

10


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

 
56,573

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

 
4,022

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

 
442,854

Non-recourse debt without completion guarantees
239,031

 
209,825

Non-recourse debt to the Company
482,004

 
713,274

The Company’s maximum recourse exposure
22,688

 
24,481

Total debt
$
504,692

 
737,755

The Company’s maximum recourse exposure as a % of total JV debt
4
%
 
3
%
(1)
The decrease in non-recourse debt with completion guarantees was primarily related to a debt paydown by El Toro as a result of land sales.
In most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Historically, the Company has had repayment guarantees and/or maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. As of both May 31, 2015 and November 30, 2014, the Company did not have any maintenance or joint and several guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
If the Company is required to make a payment under any guarantee, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes.
As of both May 31, 2015 and November 30, 2014, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2015, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 12).


11


(4)
Stockholders' Equity
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2015 and 2014:
 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional Paid-
in Capital
 
Treasury
Stock
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2014
$
5,251,302

 
17,424

 
3,298

 
2,239,704

 
(93,440
)
 
2,660,034

 
424,282

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

 
—

 
—

 
—

 
—

 
297,979

 
3,522

Employee stock and directors plans
9,433

 
5

 
—

 
1,523

 
7,905

 
—

 
—

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

 
—

 
—

 
113

 
—

 
—

 
—

Amortization of restricted stock
20,611

 
—

 
—

 
20,611

 
—

 
—

 
—

Cash dividends
(16,418
)
 
—

 
—

 
—

 
—

 
(16,418
)
 
—

Receipts related to noncontrolling interests
1,367

 
—

 
—

 
—

 
—

 
—

 
1,367

Payments related to noncontrolling interests
(78,937
)
 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

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

 
17,429

 
3,298

 
2,261,951

 
(85,535
)
 
2,941,595

 
336,981

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

 
18,483

 
3,298

 
2,721,246

 
(628,019
)
 
2,053,893

 
458,569

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

 
—

 
—

 
—

 
—

 
215,836

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

 
4

 
—

 
1,378

 
12,047

 
—

 
—

Retirement of treasury stock
—

 
(1,173
)
 
—

 
(541,019
)
 
542,192

 
—

 
—

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

 
—

 
—

 
282

 
—

 
—

 
—

Amortization of restricted stock
17,251

 
—

 
—

 
17,251

 
—

 
—

 
—

Cash dividends
(16,355
)
 
—

 
—

 
—

 
—

 
(16,355
)
 
—

Receipts related to noncontrolling interests
11,933

 
—

 
—

 
—

 
—

 
—

 
11,933

Payments related to noncontrolling interests
(72,737
)
 
—

 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
—

 
107,022

Non-cash activity related to noncontrolling interests
430

 
—

 
—

 
—

 
—

 
—

 
430

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

 
17,314

 
3,298

 
2,199,138

 
(73,780
)
 
2,253,374

 
491,963

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

12


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

13


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

 
137,719

 
297,979

 
215,836

Less: distributed earnings allocated to nonvested shares
89

 
97

 
180

 
195

Less: undistributed earnings allocated to nonvested shares
1,916

 
1,541

 
3,105

 
2,388

Numerator for basic earnings per share
181,011

 
136,081

 
294,694

 
213,253

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

 
1,982

 
3,964

 
3,964

Plus: undistributed earnings allocated to convertible shares
1,916

 
1,541

 
3,105

 
2,388

Less: undistributed earnings reallocated to convertible shares
1,705

 
1,388

 
2,774

 
2,162

Numerator for diluted earnings per share
$
183,204

 
138,216

 
298,989

 
217,443

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

 
202,000

 
202,961

 
201,977

Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
9

 
9

 
10

 
9

Convertible senior notes
28,041

 
26,001

 
27,708

 
25,835

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

 
228,010

 
230,679

 
227,821

Basic earnings per share
$
0.89

 
0.67

 
1.45

 
1.06

Diluted earnings per share
$
0.79

 
0.61

 
1.30

 
0.95

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


14


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

 
90,010

Restricted cash
8,998

 
8,609

Receivables, net (1)
301,048

 
150,858

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

 
738,396

Loans held-for-investment, net
29,776

 
26,894

Investments held-to-maturity
30,291

 
45,038

Goodwill
38,854

 
38,854

Other (3)
109,979

 
78,394

 
$
1,413,388

 
1,177,053

Liabilities:
 
 
 
Notes and other debts payable
$
865,416

 
704,143

Other (4)
210,099

 
192,500

 
$
1,075,515

 
896,643

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

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

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

Totals
$
1,000,000

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

15


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

 
9,585

 
11,818

 
9,311

Provision for losses (1)
1,225

 
449

 
2,027

 
742

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

 
9,774

 
13,660

 
9,774

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

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

 
303,889

Restricted cash (1)
20,826

 
46,975

Receivables, net (2)
—

 
153,773

Loans receivable, net
100,635

 
130,105

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

 
113,596

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

 
190,535

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

 
255,795

Investments in unconsolidated entities
195,135

 
175,700

Investments held-to-maturity
17,970

 
17,290

Other
126,567

 
70,494

 
$
1,364,682

 
1,458,152

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

 
623,246

Other
83,041

 
123,798

 
$
712,744

 
747,044

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

16

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

 
54,393

 
109,128

 
101,348

Costs and expenses (1)
67,506

 
79,604

 
108,287

 
127,180

Rialto equity in earnings from unconsolidated entities
7,328

 
17,939

 
9,992

 
23,293

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

 
(1,144
)
 
2,366

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

 
(3,677
)
 
9,689

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

 
14,234

 
7,674

 
23,743

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

 
10,046

 
24,359

 
20,224

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

 
(1,144
)
 
2,366

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

17

The loans receivable portfolios consist of loans acquired at a discount. Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. As of May 31, 2015 and November 30, 2014 management classified all loans receivable within the FDIC Portfolios and Bank Portfolios as nonaccrual loans as forecasted principal and interest cannot be reasonably estimated and accounted for these assets in accordance with ASC 310-10, Receivables (“ASC 310-10”). Prior to the fourth quarter of 2014, Rialto accounted for the majority of its loans receivable under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”).
When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. In accordance with ASC 310-10, a loan is considered impaired when based on current information and events it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. Although these loans met the definition of ASC 310-10, these loans were not considered impaired relative to the Company’s recorded investment at the time of acquisition since they were acquired at a substantial discount to their unpaid principal balance. A provision for loan losses is recognized when the recorded investment in the loan is in excess of its fair value. The fair value of the loan is determined by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.
The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
May 31, 2015
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
182,734

 
69,040

 
1,852

 
70,892

Single family homes
51,825

 
12,875

 
3,434

 
16,309

Commercial properties
17,382

 
3,070

 
644

 
3,714

Other
57,243

 
—

 
9,720

 
9,720

Loans receivable
$
309,184

 
84,985

 
15,650

 
100,635

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

 
85,912

 
3,691

 
89,603

Single family homes
66,183

 
18,096

 
2,306

 
20,402

Commercial properties
34,048

 
3,368

 
3,918

 
7,286

Other
64,284

 
5

 
12,809

 
12,814

Loans receivable
$
392,760

 
107,381

 
22,724

 
130,105

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

18

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

Additions
6,431

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

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

 
18,952

Provision for loan losses, net of recoveries
33,851

 
40,488

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

 
55,658

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

 
424

 
58,326

 
1,213

Provision for loan losses, net of recoveries
1,585

 
15

 
2,809

 
94

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

 
286

 
40,593

 
286

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

19

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

 
186,234

 
190,535

 
197,851

Improvements
1,591

 
1,130

 
3,295

 
2,723

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

 
53,930

 
54,066

 
83,744

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

 
192,829

 
195,386

 
192,829

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

 
405,675

 
255,795

 
428,989

Additions
5,431

 
26,093

 
14,343

 
34,127

Improvements
785

 
2,708

 
1,428

 
3,471

Impairments
—

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

 
—

 
(964
)
 
—

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

 
379,069

 
213,748

 
379,069

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

20

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

 
$
700,006

 
$
75,000

 
$
75,000

 
$
67,425

 
71,831

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

 
1,000,000

 
100,000

 
76,628

 
86,462

 
67,652

Rialto Mezzanine Partners Fund, LP
2013
 
300,000

 
213,536

 
33,799

 
24,058

 
23,531

 
20,226

Other investments
 
 
 
 
 
 
 
 
 
 
17,717

 
15,991

 
 
 
 
 
 
 
 
 
 
 
$
195,135

 
175,700

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

 
7,174

 
3,790

 
12,233

Rialto Real Estate Fund II, LP
2,286

 
2,402

 
3,179

 
2,440

Rialto Mezzanine Partners Fund, LP
451

 
493

 
926

 
782

Other investments
1,547

 
7,870

 
2,097

 
7,838

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

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

21

Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2015
 
November 30,
2014
Assets:
 
 
 
Cash and cash equivalents
$
96,193

 
141,609

Loans receivable
485,839

 
512,034

Real estate owned
426,201

 
378,702

Investment securities
929,711

 
795,306

Investments in partnerships
365,732

 
311,037

Other assets
38,047

 
45,451

 
$
2,341,723

 
2,184,139

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

 
20,573

Notes payable
326,878

 
395,654

Equity
1,995,022

 
1,767,912

 
$
2,341,723

 
2,184,139

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

 
33,177

 
81,058

 
64,604

Costs and expenses
25,082

 
23,304

 
48,087

 
49,413

Other income, net (1)
55,477

 
104,868

 
61,351

 
153,038

Net earnings of unconsolidated entities
$
69,715

 
114,741

 
94,322

 
168,229

Rialto equity in earnings from unconsolidated entities
$
7,328

 
17,939

 
9,992

 
23,293

(1)
Other income, net, included realized and unrealized gains (losses) on investments.
In 2010, the Rialto segment invested in non-investment grade commercial mortgage-backed securities (“CMBS”) at a 55% discount to par value. The carrying value of the investment securities at May 31, 2015 and November 30, 2014 was $18.0 million and $17.3 million, respectively. These securities bear interest at a coupon rate of 4% and have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during both the three and six months ended May 31, 2015 and 2014. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In December 2014, the Rialto segment invested in a private commercial real estate services company at a price of $18.0 million. The investment is carried at cost at May 31, 2015 and is included in Rialto's other assets.


22


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

 
2,186

Land under development
197,447

 
120,666

Consolidated inventory not owned
5,508

 
5,508

Investments in unconsolidated entities
129,818

 
105,674

Operating properties and equipment
771

 
15,740

Other assets
27,018

 
18,240

 
$
362,256

 
268,014

Liabilities:
 
 
 
Accounts payable and other liabilities
$
47,786

 
48,235

Liabilities related to consolidated inventory not owned
4,007

 
4,008

 
$
51,793

 
52,243

The unconsolidated entities in which the Lennar Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Lennar Multifamily unconsolidated entities, the Company (or entities related to them) has been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Additionally, the Company guarantees the construction costs of the project. Generally construction cost over-runs would be paid by the Company. Generally, these payments are increases to our investment in the entities and would increase our share of funds the entities distribute after the achievement of certain thresholds. As of both May 31, 2015 and November 30, 2014, the fair value of the completion guarantees was immaterial. Additionally, as of May 31, 2015 and November 30, 2014, the Lennar Multifamily segment had $22.2 million and $23.5 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities. These letters of credit outstanding are included in the disclos