Edgar Filing: LENNAR CORP /NEW/

LEN-2013.5.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2013

Commission File Number: 1-11749

Lennar Corporation

(Exact name of registrant as specified in its charter)



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

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

(305) 559-4000

(Registrant’s telephone number, including area code)

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

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

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



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

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

Common stock outstanding as of June 30, 2013:

Class A 161,708,831

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,
	2013 (1)		2012 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents	$	727,505	1,146,867
Restricted cash	8,602		8,096
Receivables, net	60,178		53,745
Inventories:
Finished homes and construction in progress	2,131,982		1,625,048
Land and land under development	3,392,505		3,119,804
Consolidated inventory not owned	306,138		326,861
Total inventories	5,830,625		5,071,713
Investments in unconsolidated entities	729,876		565,360
Other assets	1,023,268		956,070
	8,380,054		7,801,851
Rialto Investments:
Cash and cash equivalents	91,631		105,310
Defeasance cash to retire notes payable	37,903		223,813
Loans receivable, net	370,694		436,535
Real estate owned, held-for-sale	204,385		134,161
Real estate owned, held-and-used, net	478,314		601,022
Investments in unconsolidated entities	115,313		108,140
Other assets	39,037		38,379
	1,337,277		1,647,360
Lennar Financial Services	776,826		912,995
Total assets	$	10,494,157	10,362,206

(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, 2013, total assets include $1,540.7 million related to consolidated VIEs of which $10.1 million is included in Lennar Homebuilding cash and cash equivalents, $5.7 million in Lennar Homebuilding receivables, net, $15.3 million in Lennar Homebuilding finished homes and construction in progress, $126.3 million in Lennar Homebuilding land and land under development, $68.1 million in Lennar Homebuilding consolidated inventory not owned, $168.5 million in Lennar Homebuilding investments in unconsolidated entities, $216.9 million in Lennar Homebuilding other assets, $89.8 million in Rialto Investments cash and cash equivalents, $37.9 million in Rialto Investments defeasance cash to retire notes payable, $291.8 million in Rialto Investments loans receivable, net, $121.7 million in Rialto Investments real estate owned, held-for-sale, $382.6 million in Rialto Investments real estate owned, held-and-used, net $0.7 million in Rialto Investments in unconsolidated entities and $5.3 million in Rialto Investments other assets.

As of November 30, 2012, total assets include $2,128.6 million related to consolidated VIEs of which $13.2 million is included in Lennar Homebuilding cash and cash equivalents, $6.0 million in Lennar Homebuilding receivables, net, $57.4 million in Lennar Homebuilding finished homes and construction in progress, $482.6 million in Lennar Homebuilding land and land under development, $65.2 million in Lennar Homebuilding consolidated inventory not owned, $43.7 million in Lennar Homebuilding investments in unconsolidated entities, $224.1 million in Lennar Homebuilding other assets, $104.8 million in Rialto Investments cash and cash equivalents, $223.8 million in Rialto Investments defeasance cash to retire notes payable, $350.2 million in Rialto Investments loans receivable, net, $94.2 million in Rialto Investments real estate owned, held-for-sale, $454.9 million in Rialto Investments real estate owned, held-and-used, net, $0.7 million in Rialto Investments in unconsolidated entities and $7.8 million in Rialto Investments other assets.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets – (Continued)

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

(unaudited)



	May 31,			November 30,
	2013 (2)			2012 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable	$	228,491		220,690
Liabilities related to consolidated inventory not owned	250,607			268,159
Senior notes and other debts payable	4,538,344			4,005,051
Other liabilities	655,544			635,524
	5,672,986			5,129,424
Rialto Investments:
Notes payable and other liabilities	276,723			600,602
Lennar Financial Services	499,609			630,972
Total liabilities	6,449,318			6,360,998
Stockholders’ equity:
Preferred stock	—			—
Class A common stock of $0.10 par value; Authorized: May 31, 2013 and November 30, 2012 - 300,000,000 shares; Issued: May 31, 2013 - 173,415,395 shares and November 30, 2012 -172,397,149 shares	17,342			17,240
Class B common stock of $0.10 par value; Authorized: May 31, 2013 and November 30, 2012 - 90,000,000 shares; Issued: May 31, 2013 - 32,982,815 shares and November 30, 2012 - 32,982,815 shares	3,298			3,298
Additional paid-in capital	2,396,074			2,421,941
Retained earnings	1,784,669			1,605,131
Treasury stock, at cost; May 31, 2013 - 11,705,489 Class A common stock and 1,679,620 Class B common stock; November 30, 2012 - 12,152,816 Class A common stock and 1,679,620 Class B common stock	(615,781		)	(632,846	)
Total stockholders’ equity	3,585,602			3,414,764
Noncontrolling interests	459,237			586,444
Total equity	4,044,839			4,001,208
Total liabilities and equity	$	10,494,157		10,362,206

(2)

As of May 31, 2013, total liabilities include $405.2 million related to consolidated VIEs as to which there was no recourse against the Company, of which $4.3 million is included in Lennar Homebuilding accounts payable, $38.2 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $172.8 million in Lennar Homebuilding senior notes and other debts payable, $12.5 million in Lennar Homebuilding other liabilities and $177.4 million in Rialto Investments notes payable and other liabilities.

As of November 30, 2012, total liabilities include $737.2 million related to consolidated VIEs as to which there was no recourse against the Company, of which $10.6 million is included in Lennar Homebuilding accounts payable, $35.9 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $181.6 million in Lennar Homebuilding senior notes and other debts payable, $15.7 million in Lennar Homebuilding other liabilities and $493.4 million in Rialto Investments notes payable and other liabilities.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(Dollars in thousands, except per share amounts)

(unaudited)



	Three Months Ended					Six Months Ended
	May 31,					May 31,
	2013			2012		2013		2012
Revenues:
Lennar Homebuilding	$	1,281,344		808,088		2,149,788		1,432,521
Lennar Financial Services	119,096			88,595		214,976		156,810
Rialto Investments	25,684			33,472		51,306		65,680
Total revenues	1,426,124			930,155		2,416,070		1,655,011
Costs and expenses:
Lennar Homebuilding	1,108,570			731,842		1,887,244		1,316,587
Lennar Financial Services	89,924			70,615		169,702		130,580
Rialto Investments	28,305			30,198		60,076		63,568
Corporate general and administrative	33,853			29,168		65,123		56,010
Total costs and expenses	1,260,652			861,823		2,182,145		1,566,745
Lennar Homebuilding equity in earnings (loss) unconsolidated entities	13,461			(9,381	)	12,594		(8,298	)
Lennar Homebuilding other income (expense), net	(2,686		)	12,758		1,580		16,825
Other interest expense	(25,109		)	(23,803	)	(51,140	)	(48,652	)
Rialto Investments equity in earnings from unconsolidated entities	4,505			5,569		10,678		24,027
Rialto Investments other income (expense), net	6,646			(1,372	)	7,973		(13,612	)
Earnings before income taxes	162,289			52,103		215,610		58,556
(Provision) benefit for income taxes	(19,491		)	402,321		(15,854	)	403,845
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	142,798		454,424		199,756		462,401
Less: Net earnings (loss) attributable to noncontrolling interests (1)	5,362			1,721		4,828		(5,270	)
Net earnings attributable to Lennar	$	137,436		452,703		194,928		467,671
Basic earnings per share	$	0.71		2.39		1.01		2.47
Diluted earnings per share	$	0.61		2.06		0.88		2.16
Cash dividends per each Class A and Class B common share	$	0.04		0.04		0.08		0.08
Comprehensive earnings attributable to Lennar	$	137,436		452,703		194,928		467,671
Comprehensive earnings (loss) attributable to noncontrolling interests	$	5,362		1,721		4,828		(5,270	)

(1)

Net earnings (loss) attributable to noncontrolling interests for the three and six months ended May 31, 2013 includes $5.7 million and $5.4 million respectively, of net earnings attributable to noncontrolling interests related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC. Net earnings (loss) attributable to noncontrolling interests for the three and six months ended May 31, 2012 includes $3.2 million and ($1.2) million, respectively, of net earnings (loss) attributable to noncontrolling interests related to the FDIC’s interest in the portfolio of real estate loans that the Company acquired in partnership with the FDIC.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)



	Six Months Ended
	May 31,
	2013			2012
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	199,756		462,401
Adjustments to reconcile net earnings (including net earnings (loss) attributable to noncontrolling interests) to net cash used in operating activities:
Depreciation and amortization	13,739			12,491
Amortization of discount/premium on debt, net	11,268			10,750
Lennar Homebuilding equity in (earnings) loss from unconsolidated entities	(12,594		)	8,298
Distributions of earnings from Lennar Homebuilding unconsolidated entities	220			954
Rialto Investments equity in earnings from unconsolidated entities	(10,678		)	(24,027	)
Distributions of earnings from Rialto Investments unconsolidated entities	197			4,110
Share based compensation expense	13,194			15,932
Tax benefit from share-based awards	8,435			—
Excess tax benefits from share-based awards	(8,240		)	—
Deferred income tax (benefit) expense	6,174			(403,012	)
Gains on retirement of Lennar Homebuilding other debts payable	(1,000		)	(988	)
Unrealized and realized gains on Rialto Investments real estate owned	(25,483		)	(12,101	)
Impairments of Rialto Investments loans receivable and REO	15,197			7,166
Valuation adjustments and write-offs of option deposits and pre-acquisition costs	5,118			6,566
Changes in assets and liabilities:
(Increase) decrease in restricted cash	(798		)	985
Decrease in receivables	22,346			74,900
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs	(952,662		)	(329,933	)
Increase in other assets	(31,872		)	(16,445	)
Decrease in Lennar Financial Services loans-held-for-sale	120,922			34,549
Increase (decrease) in accounts payable and other liabilities	16,852			(66,403	)
Net cash used in operating activities	(609,909		)	(213,807	)
Cash flows from investing activities:
Net (additions) disposals of operating properties and equipment	(2,979		)	390
Investments in and contributions to Lennar Homebuilding unconsolidated entities	(33,068		)	(44,843	)
Distributions of capital from Lennar Homebuilding unconsolidated entities	122,889			21,180
Investments in and contributions to Rialto Investments unconsolidated entities	(33,636		)	(19,884	)
Distributions of capital from Rialto Investments unconsolidated entities	37,106			14,009
Decrease in Rialto Investments defeasance cash to retire notes payable	185,910			80,721
Receipts of principal payments on Rialto Investments loans receivable	34,288			41,788
Proceeds from sales of Rialto Investments real estate owned	104,482			91,473
Improvements to Rialto Investments real estate owned	(5,396		)	(6,779	)
Purchase of loans receivable	(5,450		)	—
Purchases of Lennar Homebuilding investments available-for-sale	(15,417		)	(7,224	)
Proceeds from sales of Lennar Homebuilding investments available-for-sale	—			6,436
(Increase) decrease in Lennar Financial Services loans held-for-investment, net	(248		)	1,660
Purchases of Lennar Financial Services investment securities	(13,460		)	(1,804	)
Proceeds from maturities of Lennar Financial Services investment securities	26,991			1,073
Net cash provided by investing activities	$	402,012		178,196

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)



	Six Months Ended
	May 31,
	2013			2012
Cash flows from financing activities:
Net repayments under Lennar Financial Services debt	$	(123,253	)	(146,661	)
Proceeds from senior notes	500,000			50,000
Redemption of senior notes	(63,001		)	—
Debt issuance costs of senior notes and convertible senior notes	(5,117		)	(1,035	)
Principal repayments on Rialto Investments notes payable	(314,597		)	(170,589	)
Proceeds from other borrowings	65,500			30,546
Principal payments on other borrowings	(105,630		)	(42,067	)
Exercise of land option contracts from an unconsolidated land investment venture	(19,857		)	(16,490	)
Receipts related to noncontrolling interests	575			888
Payments related to noncontrolling interests	(168,176		)	(145	)
Excess tax benefits from share-based awards	8,240			—
Common stock:
Issuances	29,620			12,074
Repurchases	(83		)	—
Dividends	(15,390		)	(15,132	)
Net cash used in financing activities	(211,169		)	(298,611	)
Net decrease in cash and cash equivalents	(419,066		)	(334,222	)
Cash and cash equivalents at beginning of period	1,310,743			1,163,604
Cash and cash equivalents at end of period	$	891,677		829,382
Summary of cash and cash equivalents:
Lennar Homebuilding	$	727,505		667,111
Lennar Financial Services	72,541			69,312
Rialto Investments	91,631			92,959
	$	891,677		829,382
Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding:
Non-cash contributions to unconsolidated entities	$	241,921		7,612
Inventory acquired in satisfaction of other assets including investments available-for-sale	$	—		90,385
Non-cash purchases of investments available-for-sale	$	—		12,520
Purchases of inventories and other assets financed by sellers	$	73,355		61,872
Non-cash reduction of equity due to purchase of noncontrolling interest	99,066			—
Non-cash purchase of noncontrolling interests	63,500			—
Rialto Investments:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable	$	27,784		107,370

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)


(1)	Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K and related amendments for the year ended November 30, 2012. 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, 2013 are not necessarily indicative of the results to be expected for the full year.

Rialto Management Fees Revenue

The Rialto Investments 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 Investments segment are included in Rialto Investments revenue 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 drawn commitments less the portion of such drawn commitments utilized to acquire investments that have been sold (in whole or in part) or liquidated (except to the extent such drawn commitments are subsequently reinvested in other investments) or completely written off. Fees earned for underwriting and due diligence services are based on actual costs incurred. The Company believes the way it records Rialto Investments' management fees revenue is a significant accounting policy because it represents a significant portion of the Rialto Investments segment's revenues and is expected to continue to grow in the future as the segment manages more assets.

Reclassifications/Revisions

Subsequent to the issuance of the November 30, 2012 consolidated financial statements, the Company determined it needed to revise its disclosures and presentations with respect to the supplemental financial information included in Note 17. These revisions do not affect the Company's consolidated financial statements and relate solely to transactions between Lennar Corporation and its subsidiaries and only impact the Supplemental Consolidating Financial Statements that are presented as supplemental information. Subsequent to the filing of this Form 10-Q, the Company will be filing a Form 10-K/A for its year ended November 30, 2012 and Form 10-Q/A for its first quarter ended February 28, 2013 to revise Note 17 of those respective filings. The amended Form 10-K/A and Form 10-Q/A will not affect the Company's consolidated financial statements.

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

Operations of the Rialto Investments (“Rialto”) segment include 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, LP (the “Fund I”), fees for sub-advisory services, other income (expense), net, consisting primarily of net gains upon foreclosure of real estate owned (“REO”) and net gains on sale of REO, and equity in earnings 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 2012 Annual Report on Form 10-K and the Rialto management fees revenue significant accounting policy described in Note 1 of this Form 10-Q. 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, 2013		November 30, 2012
Assets:
Homebuilding East	$	1,752,334	1,565,439
Homebuilding Central	884,423		729,300
Homebuilding West	2,680,725		2,396,515
Homebuilding Southeast Florida	701,511		603,360
Homebuilding Houston	343,518		273,605
Homebuilding Other (1)	843,928		724,461
Rialto Investments (2)	1,337,277		1,647,360
Lennar Financial Services	776,826		912,995
Corporate and unallocated	1,173,615		1,509,171
Total assets	$	10,494,157	10,362,206


(1)	Includes assets related to the Company's multifamily business of $91.6 million and $29.1 million, respectively, as of May 31, 2013 and November 30, 2012.


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



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2013		2012		2013	2012
Revenues:
Homebuilding East	$	433,329	310,149		722,221	554,982
Homebuilding Central	181,774		114,564		330,806	200,277
Homebuilding West	269,565		157,710		443,640	280,795
Homebuilding Southeast Florida	123,883		70,878		195,734	120,667
Homebuilding Houston	145,394		102,455		253,912	187,289
Homebuilding Other	127,399		52,332		203,475	88,511
Lennar Financial Services	119,096		88,595		214,976	156,810
Rialto Investments	25,684		33,472		51,306	65,680
Total revenues (1)	$	1,426,124	930,155		2,416,070	1,655,011
Operating earnings (loss):
Homebuilding East	$	52,810	26,291		75,685	40,238
Homebuilding Central	12,836		4,318		26,793	5,382
Homebuilding West	45,698		(9,405	)	58,301	(16,978	)
Homebuilding Southeast Florida (2)	28,764		24,176		38,172	30,810
Homebuilding Houston	15,026		10,262		24,532	14,778
Homebuilding Other	3,306		178		2,095	1,579
Lennar Financial Services	29,172		17,980		45,274	26,230
Rialto Investments	8,530		7,471		9,881	12,527
Total operating earnings	196,142		81,271		280,733	114,566
Corporate general and administrative expenses	33,853		29,168		65,123	56,010
Earnings before income taxes	$	162,289	52,103		215,610	58,556


(1)	Total revenues are net of sales incentives of $89.9 million ($20,200 per home delivered) and $163.9 million ($21,500 per home delivered), respectively for the three and six months ended May 31, 2013, compared to $95.3 million ($29,800 per home delivered) and $179.7 million ($31,700 per home delivered) for the three and six months ended May 31, 2012.


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

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



	Three Months Ended			Six Months Ended
	May 31,			May 31,
(In thousands)	2013		2012	2013	2012
Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:
East	$	30	568	79	785
Central	5		55	42	208
West	156		1,441	254	1,971
Southeast Florida	2,738		308	3,788	636
Houston	—		28	—	89
Other	5		4	26	740
Total	2,934		2,404	4,189	4,429
Valuation adjustments to land the Company intends to sell or has sold to third parties:
East	160		15	243	15
Central	—		—	2	—
West	—		1	158	1
Southeast Florida	—		332	—	332
Total	160		348	403	348
Write-offs of option deposits and pre-acquisition costs:
East	242		322	413	329
Central	1		5	27	54
West	32		—	50	232
Other	—		154	—	156
Total	275		481	490	771
Company’s share of valuation adjustments related to assets of unconsolidated entities:
West	—		5,437	—	5,437
Total	—		5,437	—	5,437
Valuation adjustments to investments of unconsolidated entities:
East	36		7	36	18
Total	36		7	36	18
Write-offs of other receivables and other assets:
East	—		1,000	—	1,000
Total	—		1,000	—	1,000
Total valuation adjustments and write-offs of option deposits and pre-acquisition costs, other receivables and other assets	$	3,405	9,677	5,118	12,003

During the three and six months ended May 31, 2013, the Company recorded lower valuation adjustments than during the three and six months ended May 31, 2012. Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.


(3)	Lennar Homebuilding Investments in Unconsolidated Entities

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

Statements of Operations



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2013		2012		2013	2012
Revenues	$	179,790	70,869		261,014	153,513
Costs and expenses	127,985		94,288		209,622	177,710
Other income	—		—		13,361	—
Net earnings (loss) of unconsolidated entities	$	51,805	(23,419	)	64,753	(24,197	)
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)	$	13,461	(9,381	)	12,594	(8,298	)

(1)

For both the three and six months ended May 31, 2013, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities includes $13.0 million of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity. For both the three and six months ended May 31, 2012, Lennar Homebuilding equity in earnings (loss) includes $5.4 million of valuation adjustments related to strategic asset sales at Lennar Homebuilding's unconsolidated entities.

Balance Sheets



(In thousands)	May 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	145,729	157,340
Inventories	3,138,835		2,792,064
Other assets	220,166		250,940
	$	3,504,730	3,200,344
Liabilities and equity:
Accounts payable and other liabilities	$	256,106	310,496
Debt	588,242		759,803
Equity	2,660,382		2,130,045
	$	3,504,730	3,200,344

As of May 31, 2013 and November 30, 2012, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $729.9 million and $565.4 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2013 and November 30, 2012 was $1.0 billion, and $681.6 million, respectively, primarily as a result of the Company buying the interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has approximately a 20% ownership interest and 50% voting rights. Due to the nature of the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s condensed consolidated balance sheet in consolidated inventory not owned. As of both May 31, 2013 and November 30, 2012, the portfolio of land (including land development costs) of $246.9 million and $264.9 million, respectively, is also reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.

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

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



(In thousands)	May 31, 2013			November 30, 2012
Several recourse debt - repayment	$	37,526		48,020
Joint and several recourse debt - repayment	15,000			18,695
The Company’s maximum recourse exposure	52,526			66,715
Less: joint and several reimbursement agreements with the Company’s partners	(13,500		)	(16,826	)
The Company’s net recourse exposure	$	39,026		49,889

During the six months ended May 31, 2013, the Company’s maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $14.2 million, as a result of $0.9 million paid by the Company primarily through capital contributions to unconsolidated entities and $13.3 million primarily related to the joint ventures selling assets and other transactions.

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



(In thousands)	May 31, 2013		November 30, 2012
Assets	$	1,744,264	1,843,163
Liabilities	$	602,333	765,295
Equity	$	1,141,931	1,077,868

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 both May 31, 2013 and November 30, 2012, the Company does not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.

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

During the three months ended May 31, 2013 and 2012, there were $0.9 million and $0.5 million, respectively, of loan paydowns by Lennar relating to recourse debt. During both the three months ended May 31, 2013 and 2012, there were no payments under completion guarantees.

During the six months ended May 31, 2013 and 2012, there were $0.9 million and $3.9 million, respectively, of loan paydowns by Lennar relating to recourse debt. During both the six months ended May 31, 2013 and 2012, there were no payments under completion guarantees.

As of May 31, 2013, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2013, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the

collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).

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



(In thousands)	May 31, 2013			November 30, 2012
The Company’s net recourse exposure	$	39,026		49,889
Reimbursement agreements from partners	13,500			16,826
The Company’s maximum recourse exposure	$	52,526		66,715
Non-recourse bank debt and other debt (partner’s share of several recourse)	$	87,009		114,900
Non-recourse land seller debt or other debt	18,457			26,340
Non-recourse debt with completion guarantees	347,500			458,418
Non-recourse debt without completion guarantees	82,750			93,430
Non-recourse debt to the Company	535,716			693,088
Total debt	$	588,242		759,803
The Company’s maximum recourse exposure as a % of total JV debt	9		%	9	%


(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, 2013 and May 31, 2012:



				Stockholders’ Equity
(In thousands)	Total Equity			Class A Common Stock	Class B Common Stock	Additional Paid- in Capital		Treasury Stock		Retained Earnings		Noncontrolling Interests
Balance at November 30, 2012	$	4,001,208		17,240	3,298	2,421,941		(632,846	)	1,605,131		586,444
Net earnings (including net loss attributable to noncontrolling interests)	199,756			—	—	—		—		194,928		4,828
Employee stock and directors plans	30,134			102	—	12,967		17,065		—		—
Tax benefit from employee stock plans and vesting of restricted stock	8,435			—	—	8,435		—		—		—
Amortization of restricted stock	13,161			—	—	13,161		—		—		—
Cash dividends	(15,390		)	—	—	—		—		(15,390	)	—
Equity adjustment related to purchase of noncontrolling interests	38,636			—	—	(60,430	)	—		—		99,066
Receipts related to noncontrolling interests	575			—	—	—		—		—		575
Payments related to noncontrolling interests	(168,176		)	—	—	—		—		—		(168,176	)
Non-cash purchase of noncontrolling interests	(63,500		)	—	—	—		—		—		(63,500	)
Balance at May 31, 2013	$	4,044,839		17,342	3,298	2,396,074		(615,781	)	1,784,669		459,237



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

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both the three and six months ended May 31, 2013 and May 31, 2012, there were no repurchases of common stock under the stock repurchase program. As of May 31, 2013, 6.2 million shares of common stock can be repurchased in the future under the program.

During the three months ended May 31, 2013, treasury stock increased by an immaterial amount of Class A common stock. During the three months ended May 31, 2012, treasury stock had no changes in Class A Common stock. During the six months ended May 31, 2013 and 2012, treasury stock decreased by approximately 0.5 million and 0.3 million, respectively, in Class A common stock due to activity related to the Company's equity compensation plan.


(5)	Income Taxes

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed each reporting period by the Company based on the more-likely-than-not realization threshold criterion. In the assessment of the need 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 profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.

During the year ended November 30, 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 as detailed in the Company's Form 10-K for the year ended November 30, 2012. Accordingly, the Company reversed a majority of its valuation allowance against its deferred tax assets. As of November 30, 2012, the Company had a valuation allowance of $88.8 million, primarily related to state net operating loss ("NOL") carryforwards.

During the six months ended May 31, 2013, 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 profitability, as well as the Company generating cumulative pre-tax earnings over a rolling four year period including the six months ended May 31, 2013. Accordingly, during the three and six months ended May 31, 2013, the Company reversed $41.3 million and $66.4 million, respectively, of its valuation allowance against its state deferred tax assets. This reversal was partially offset by a tax provision of $60.8 million and $82.3 million, respectively, primarily related to pre-tax earnings during the three and six months ended May 31, 2013. Therefore, the Company had a $19.5 million and $15.9 million provision for income taxes for the three and six months ended May 31, 2013, respectively. As of May 31, 2013, the Company's remaining valuation allowance against its deferred tax assets was $22.5 million, which is primarily related to state net operating loss carryforwards that may expire due to short carryforward periods. During the three and six months ended May 31, 2012, the Company recorded a tax benefit of $402.3 million and $403.8 million, respectively, primarily related to the reversal of the Company's valuation allowance.

As of May 31, 2013, the Company's deferred tax assets, net, were $500.0 million, of which $507.0 million were deferred tax assets included in Lennar Homebuilding's other assets on the Company's condensed consolidated balance sheets and $7.0 million were deferred tax liabilities included in Lennar Financial Services segment's liabilities on the Company's condensed consolidated balance sheets.

At May 31, 2013 and November 30, 2012, the Company had federal tax effected NOL carryforwards totaling $220.5 million and $278.8 million, respectively, that may be carried forward up to 20 years to offset future taxable income and begin to expire in 2025. As of May 31, 2013, the Company needs to generate $965.6 million of pre-tax earnings in future periods to realize all of its federal NOL carryforwards and federal deductible temporary tax differences. At May 31, 2013 and November 30, 2012, the Company had state tax effected NOL carryforwards totaling $166.8 million and $173.6 million, respectively, that may be carried forward from 5 to 20 years, depending on the tax jurisdiction, with losses expiring between 2013 and 2032. As of May 31, 2013, state tax effected NOL carryforwards totaling $7.9 million may expire over the next twelve months, if sufficient taxable income is not generated to utilize the net operating losses. At May 31, 2013, and November 30, 2012, the Company had a valuation allowance of $18.3 million and $84.6 million, respectively, against its state NOL carryforwards because the Company believes it is more likely than not that a portion of its state NOL carryforwards will not be realized due to the limited carryforward periods in certain states.

At May 31, 2013 and November 30, 2012, the Company had $8.8 million and $12.3 million of gross unrecognized tax benefits. If the Company were to recognize its gross unrecognized tax benefits as of May 31, 2013, $5.7 million would affect the Company’s effective tax rate. The Company expects the total amount of unrecognized tax benefits to decrease by $1.6 million within twelve months as a result of anticipated settlements with various taxing authorities.

During the six months ended May 31, 2013, the Company’s gross unrecognized tax benefits decreased by $3.5 million primarily as a result of state tax payments resulting from a previously settled IRS examination. The decrease in gross unrecognized tax benefits had no effect on the Company’s effective tax rate, which was 7.52%. As a result of the partial reversal of the valuation allowance against the Company's state deferred tax assets, the effective tax rate is not reflective of the Company's historical tax rate.

At May 31, 2013, the Company had $18.4 million accrued for interest and penalties, of which $0.7 million was recorded during the six months ended May 31, 2013. During the three and six months ended May 31, 2013, the accrual for interest and penalties was reduced by zero and $2.8 million, respectively, primarily as a result of the payment of interest related to state tax payments resulting from a previously settled IRS examination. At November 30, 2012, the Company had $20.5 million accrued for interest and penalties.

The IRS is currently examining the Company’s federal income tax return for fiscal year 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 the Compliance Assurance Process, "CAP," an IRS examination program. This program operates as a contemporaneous exam throughout the year in order to keep exam cycles current and achieve a higher level of compliance.


(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)	2013		2012	2013	2012
Numerator:
Net earnings attributable to Lennar	$	137,436	452,703	194,928	467,671
Less: distributed earnings allocated to nonvested shares	102		112	204	227
Less: undistributed earnings allocated to nonvested shares	1,747		6,594	2,405	6,807
Numerator for basic earnings per share	135,587		445,997	192,319	460,637
Plus: interest on 2.00% convertible senior notes due 2020 and 3.25% convertible senior notes due 2021	2,826		2,883	5,651	5,794
Plus: undistributed earnings allocated to convertible shares	1,747		6,594	2,405	6,807
Less: undistributed earnings reallocated to convertible shares	1,500		5,687	2,085	5,958
Numerator for diluted earnings per share	$	138,660	449,787	198,290	467,280
Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding	190,010		186,432	189,779	186,214
Effect of dilutive securities:
Shared based payments	339		1,074	456	979
Convertible senior notes	36,306		30,505	36,101	28,719
Denominator for diluted earnings per share - weighted average common shares outstanding	226,655		218,011	226,336	215,912
Basic earnings per share	$	0.71	2.39	1.01	2.47
Diluted earnings per share	$	0.61	2.06	0.88	2.16

For the three and six months ended May 31, 2013, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive. For the three and six months ended May 31, 2012, options to purchase 0.1 million and 0.4 million, respectively, shares of Class A common stock were outstanding and anti-dilutive.


(7)	Lennar Financial Services Segment

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



(In thousands)	May 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	72,541	58,566
Restricted cash	13,264		12,972
Receivables, net (1)	146,247		172,230
Loans held-for-sale (2)	380,577		502,318
Loans held-for-investment, net	24,671		23,982
Investments held-to-maturity	49,570		63,924
Goodwill	34,046		34,046
Other (3)	55,910		44,957
	$	776,826	912,995
Liabilities:
Notes and other debts payable	$	334,741	457,994
Other (4)	164,868		172,978
	$	499,609	630,972


(1)	Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of May 31, 2013 and November 30, 2012, 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 $5.8 million and $12.7 million as of May 31, 2013 and November 30, 2012, respectively. In addition, other assets also includes forward contracts carried at fair value of $15.4 million as of May 31, 2013.


(4)	Other liabilities include $75.9 million and $76.1 million as of May 31, 2013 and November 30, 2012, respectively, of certain of the Company’s self-insurance reserves related to general liability and workers’ compensation. Other liabilities also include forward contracts carried at fair value of $2.6 million as of November 30, 2012.

At May 31, 2013, 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 $100 million that matures in February 2014, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $200 million that matures in July 2013, a 364-day warehouse repurchase facility with a maximum aggregate commitment of $150 million that matures in May 2014 (plus a $100 million accordion feature that is usable from 10 days prior to quarter-end through 20 days after quarter-end) and a 364-day warehouse facility with a maximum aggregate commitment of $60 million, that matures in November 2013. As of May 31, 2013, the maximum aggregate commitment and uncommitted amount under these facilities totaled $610 million and $100 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 $334.7 million and $458.0 million at May 31, 2013 and November 30, 2012, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $405.9 million and $509.1 million at May 31, 2013 and November 30, 2012, respectively. 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.

The Lennar Financial Services segment sells substantially all of the loan 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 agreement. Since 2009, there has been an increased industry-wide effort by purchasers to defray their losses during unfavorable economic environments by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements. The Company’s mortgage operations have established reserves for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes reserves for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of

affected loans, as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the condensed consolidated balance sheets. The activity in the Company’s loan origination liabilities was as follows:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2013			2012		2013		2012
Loan origination liabilities, beginning of period	$	7,606		5,961		7,250		6,050
Provision for losses during the period	360			122		773		215
Adjustments to pre-existing provisions for losses from changes in estimates	428			245		524		253
Payments/settlements	(137		)	(130	)	(290	)	(320	)
Loan origination liabilities, end of period	$	8,257		6,198		8,257		6,198

For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans as of May 31, 2013 and November 30, 2012 was $7.8 million and $7.3 million, respectively. At May 31, 2013, the recorded investment in the impaired loans with a valuation allowance was $3.7 million, net of an allowance of $4.1 million. At November 30, 2012, the recorded investment in the impaired loans with a valuation allowance was $2.9 million, net of an allowance of $4.4 million. The average recorded investment in impaired loans totaled $3.6 million and $3.3 million for the three and six months ended May 31, 2013. The average recorded investment in impaired loans totaled $3.3 million and $3.5 million for the three and six months ended May 31, 2012 .


(8)	Rialto Investments Segment

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



(In thousands)	May 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	91,631	105,310
Defeasance cash to retire notes payable	37,903		223,813
Loans receivable, net	370,694		436,535
Real estate owned - held-for-sale	204,385		134,161
Real estate owned - held-and-used, net	478,314		601,022
Investments in unconsolidated entities	115,313		108,140
Investments held-to-maturity	15,522		15,012
Other	23,515		23,367
	$	1,337,277	1,647,360
Liabilities:
Notes payable	$	259,883	574,480
Other	16,840		26,122
	$	276,723	600,602

Rialto’s operating earnings were as follows:



	Three Months Ended				Six Months Ended
	May 31,				May 31,
(In thousands)	2013		2012		2013	2012
Revenues	$	25,684	33,472		51,306	65,680
Costs and expenses	28,305		30,198		60,076	63,568
Rialto Investments equity in earnings from unconsolidated entities	4,505		5,569		10,678	24,027
Rialto Investments other income (expense), net	6,646		(1,372	)	7,973	(13,612	)
Operating earnings (1)	$	8,530	7,471		9,881	12,527


(1)	Operating earnings for the three and six months ended May 31, 2013 include net earnings attributable to noncontrolling interests of $5.7 million and $5.4 million, respectively. Operating earnings (loss) for the three and six months ended May 31, 2012 include net earnings (loss) attributable to noncontrolling interests of $3.2 million, and ($1.2) million respectively.

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



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2013			2012		2013		2012
Realized gains on REO sales, net	$	18,535		8,397		27,206		8,439
Unrealized loss on transfer of loans receivable to REO, net	(6,980		)	(3,185	)	(6,310	)	(1,233	)
REO expenses	(10,348		)	(10,649	)	(22,904	)	(28,723	)
Rental income	5,439			4,065		9,981		7,905
Rialto Investments other income (expense), net	$	6,646		(1,372	)	7,973		(13,612	)

Loans Receivable

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of May 31, 2013 and November 30, 2012, the notes payable balance was $156.0 million and $470.0 million, respectively; however, as of May 31, 2013 and November 30, 2012, $37.9 million and $223.8 million, respectively, of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, under the agreement with the FDIC. The funds in the defeasance account are being and will be used to retire the notes payable upon their maturity. During the six months ended May 31, 2013, the LLCs retired $314.0 million principal amount of the notes payable under the agreement with the FDIC through the defeasance account.

The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. At May 31, 2013, these consolidated LLCs had total combined assets and liabilities of $929.7 million and $177.4 million, respectively. At November 30, 2012, these consolidated LLCs had total combined assets and liabilities of $1,236.4 million and $493.4 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 of which $33.0 million of principal amount was retired in 2012.

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



(In thousands)	May 31, 2013		November 30, 2012
Land	$	190,190	216,095
Single family homes	77,001		93,207
Commercial properties	83,558		96,226
Multi-family homes	5,296		12,776
Other	14,649		18,231
Loans receivable, net	$	370,694	436,535

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

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

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



(In thousands)	May 31, 2013		November 30, 2012
Outstanding principal balance	$	696,314	812,187
Carrying value	$	337,332	396,200

The activity in the accretable yield for the FDIC Portfolios and Bank Portfolios during the six months ended May 31, 2013 and 2012 were as follows:



(In thousands)	May 31, 2013			May 31, 2012
Accretable yield, beginning of period	$	112,899		209,480
Additions	40,879			8,423
Deletions	(22,463		)	(23,256	)
Accretions	(26,596		)	(40,890	)
Accretable yield, end of period	$	104,719		153,757

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:

May 31, 2013



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	7,805	221	3,158	3,379
Single family homes	17,309		4,715	4,143	8,858
Commercial properties	32,638		554	20,571	21,125
Loans receivable	$	57,752	5,490	27,872	33,362

November 30, 2012



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	23,163	4,983	2,844	7,827
Single family homes	18,966		8,311	2,244	10,555
Commercial properties	35,996		1,006	20,947	21,953
Loans receivable	$	78,125	14,300	26,035	40,335

The average recorded investment in impaired loans totaled approximately $37 million and $67 million for the six months ended May 31, 2013 and 2012, respectively.

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

Accrual — Loans in which forecasted cash flows under the loan agreement, as it might be modified from time to time, can be reasonably estimated at the date of acquisition. The risk associated with loans in this category relates to the possible default by the borrower with respect to principal and interest payments and the possible decline in value of the underlying collateral and thus, both could cause a decline in the forecasted cash flows used to determine accretable yield income and the recognition of an impairment through an allowance for loan losses. As of May 31, 2013, the Company had an allowance on these loans of $18.7 million. During the three and six months ended May 31, 2013, the Company recorded $3.5 million and $9.5 million, respectively, of provision for loan losses offset by charge-offs of $1.6 million and $3.0 million, respectively, upon resolution of the loans. As of November 30, 2012, the Company had an allowance on these loans of $12.2 million. During the both three and six months ended May 31, 2012, the Company did not record any provision for loan losses or charge-offs on these 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 May 31, 2013 and November 30, 2012, the Company had an allowance on these loans of $1.8 million and $3.7 million, respectively. During the three months ended May 31, 2013 and 2012, the Company recorded $0.1 million and $1.4 million, respectively, of provision for loan losses offset by charge-offs of zero and $1.3 million, respectively, upon foreclosure of the loans. During the six months ended May 31, 2013 and 2012, the Company recorded $1.1 million and $2.3 million, respectively, of provision for loan losses offset by charge-offs of $3.0 million and $2.9 million, respectively, upon foreclosure of the loans.

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

May 31, 2013



(In thousands)	Accrual		Nonaccrual	Total
Land	$	186,811	3,379	190,190
Single family homes	68,143		8,858	77,001
Commercial properties	62,433		21,125	83,558
Multi-family homes	5,296		—	5,296
Other	14,649		—	14,649
Loans receivable	$	337,332	33,362	370,694

November 30, 2012



(In thousands)	Accrual		Nonaccrual	Total
Land	$	208,268	7,827	216,095
Single family homes	82,652		10,555	93,207
Commercial properties	74,273		21,953	96,226
Multi-family homes	12,776		—	12,776
Other	18,231		—	18,231
Loans receivable	$	396,200	40,335	436,535

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

Real Estate Owned

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

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

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

The following tables present the activity in REO:



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2013			2012		2013		2012
REO - held-for-sale, beginning of period	$	178,678		101,579		134,161		143,677
Additions	739			221		1,333		1,355
Improvements	1,501			2,036		2,517		5,999
Sales	(51,496		)	(45,210	)	(77,276	)	(82,054	)
Impairments	(3,485		)	(382	)	(4,184	)	(1,622	)
Transfers to Lennar Homebuilding	—			(3,904	)	—		(3,904	)
Transfers from held-and-used, net (1)	78,448			58,775		147,834		49,664
REO - held-for-sale, end of period	$	204,385		113,115		204,385		113,115



	Three Months Ended					Six Months Ended
	May 31,					May 31,
(In thousands)	2013			2012		2013		2012
REO - held-and-used, net, beginning of period	$	547,273		630,570		601,022		582,111
Additions	8,536			63,434		24,728		109,675
Improvements	2,179			780		2,879		780
Sales	—			—		—		(981	)
Impairments	(307		)	(676	)	(403	)	(3,273	)
Depreciation	(919		)	(932	)	(2,078	)	(4,247	)
Transfers to held-for-sale (1)	(78,448		)	(58,775	)	(147,834	)	(49,664	)
REO - held-and-used, net, end of period	$	478,314		634,401		478,314		634,401


(1)	During the three and six months ended May 31, 2013 and 2012, the Rialto segment transferred certain properties from REO held-and-used, net to REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.

For the three and six months ended May 31, 2013, the Company recorded $18.5 million and $27.2 million, respectively, of net gains from sales of REO. For both the three and six months ended May 31, 2012, the Company recorded $8.4 million of net gains from sales of REO. For the three and six months ended May 31, 2013, the Company recorded net losses of $3.2 million and $1.7 million, respectively, from acquisitions of REO through foreclosure. For the three and six months ended May 31, 2012, the Company recorded net gains (losses) of ($2.1) million and $3.7 million, respectively, from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto Investments other income (expense), net.

Investments

In 2010, the Rialto segment invested in approximately $43 million of non-investment grade commercial mortgage-backed securities (“CMBS”) for $19.4 million, representing a 55% discount to par value. The CMBS have a stated and assumed final distribution date of November 2020 and a stated maturity date of October 2057. The Rialto segment reviews changes in estimated cash flows periodically, to determine if other-than-temporary impairment has occurred on its investment securities. Based on the Rialto segment’s assessment, no impairment charges were recorded during both the three and six months ended May 31, 2013 and 2012. The carrying value of the investment securities at May 31, 2013 and November 30, 2012, was $15.5 million and $15.0 million, respectively. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

In 2010, 2011 and 2012, the Rialto segment obtained investors in Fund I who made equity commitments of $700 million (including $75 million committed by the Company). All capital commitments have been called and funded, and Fund I is closed to additional commitments. Fund I was determined to have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, Fund I’s assets and liabilities are recorded at fair value with increases/decreases in fair value recorded in the statement of operations of Fund I, the Company’s share of which are recorded in the Rialto Investments equity in earnings from unconsolidated entities financial statement line item.

During the three and six months ended May 31, 2013, the Company received distributions of $29.4 million and $37.1 million, respectively, as a return of capital from Fund I. During the three and six months ended May 31, 2012, the Company contributed $10.7 million and $18.0 million to Fund I. Of these amounts contributed, $13.9 million was distributed back to the Company during the three months ended May 31, 2012 as a return of capital contributions due to a securitization within Fund I. As of May 31, 2013 and November 30, 2012, the carrying value of the Company’s investment in Fund I was $72.9 million and $98.9 million, respectively. For the three and six months ended May 31, 2013, the Company’s share of earnings from Fund I was $4.8 million and $11.1 million, respectively. For the three and six months ended May 31, 2012, the Company’s share of earnings from Fund I was $3.0 million and $10.6 million, respectively.

Additionally, another subsidiary in the Rialto segment has approximately a 5% investment in a service and infrastructure provider to the residential home loan market (the “Servicer Provider”), which provides services to the consolidated LLCs, among others. As of May 31, 2013 and November 30, 2012, the carrying value of the Company’s investment in the Servicer Provider was $8.5 million and $8.4 million, respectively.

In December 2012, the Rialto segment completed the first closing of the Real Estate Fund II, LP ("Fund II") with initial equity commitments of approximately $260 million, including $100 million committed by the Company. No cash was funded at the time of the closing. Fund II's objective during its three-year investment period is to invest in distressed real estate assets and other related investments that fit Fund II's investment parameters. As of May 31, 2013, the equity commitment of Fund II were $520 million. During the three months ended May 31, 2013, $175 million of the $520 million in equity commitments was called, of which, the Company contributed its portion of $33.6 million.

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, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	158,341	299,172
Loans receivable	425,562		361,286
Real estate owned	217,280		161,964
Investment securities	282,596		182,399
Investments in real estate partnerships	107,272		72,903
Other assets	188,618		199,839
	$	1,379,669	1,277,563
Liabilities and equity:
Accounts payable and other liabilities	$	162,470	155,928
Notes payable	294,191		120,431
Partner loans	163,940