Edgar Filing: LENNAR CORP /NEW/

LEN-2013.8.31-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 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 September 30, 2013:

Class A 163,111,599

Class B 31,303,195

Part I. Financial Information

Item 1. Financial Statements

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

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

(unaudited)



	August 31,		November 30,
	2013 (1)		2012 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents	$	433,943	1,146,867
Restricted cash	17,845		8,096
Receivables, net	58,609		53,745
Inventories:
Finished homes and construction in progress	2,321,797		1,625,048
Land and land under development	3,734,380		3,119,804
Consolidated inventory not owned	472,754		326,861
Total inventories	6,528,931		5,071,713
Investments in unconsolidated entities	755,253		565,360
Other assets	957,848		956,070
	8,752,429		7,801,851
Rialto Investments:
Cash and cash equivalents	72,024		105,310
Defeasance cash to retire notes payable	78,032		223,813
Loans receivable, net	328,667		436,535
Loans held-for-sale	244,666		—
Real estate owned, held-for-sale	198,609		134,161
Real estate owned, held-and-used, net	440,656		601,022
Investments in unconsolidated entities	125,263		108,140
Other assets	66,223		38,379
	1,554,140		1,647,360
Lennar Financial Services	709,024		912,995
Total assets	$	11,015,593	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 August 31, 2013, total assets include $1,466.5 million related to consolidated VIEs of which $12.7 million is included in Lennar Homebuilding cash and cash equivalents, $2.3 million in Lennar Homebuilding receivables, net, $1.8 million in Lennar Homebuilding finished homes and construction in progress, $95.0 million in Lennar Homebuilding land and land under development, $244.0 million in Lennar Homebuilding consolidated inventory not owned, $15.8 million in Lennar Homebuilding investments in unconsolidated entities, $214.9 million in Lennar Homebuilding other assets, $46.9 million in Rialto Investments cash and cash equivalents, $78.0 million in Rialto Investments defeasance cash to retire notes payable, $268.4 million in Rialto Investments loans receivable, net, $122.7 million in Rialto Investments real estate owned, held-for-sale, $359.0 million in Rialto Investments real estate owned, held-and-used, net $0.7 million in Rialto Investments in unconsolidated entities and $4.3 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)



	August 31,			November 30,
	2013 (2)			2012 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable	$	270,401		220,690
Liabilities related to consolidated inventory not owned	398,077			268,159
Senior notes and other debts payable	4,624,614			4,005,051
Other liabilities	707,633			635,524
	6,000,725			5,129,424
Rialto Investments:
Notes payable and other liabilities	391,071			600,602
Lennar Financial Services	453,111			630,972
Total liabilities	6,844,907			6,360,998
Stockholders’ equity:
Preferred stock	—			—
Class A common stock of $0.10 par value; Authorized: August 31, 2013 and November 30, 2012 - 300,000,000 shares; Issued: August 31, 2013 - 174,827,991 shares and November 30, 2012 -172,397,149 shares	17,483			17,240
Class B common stock of $0.10 par value; Authorized: August 31, 2013 and November 30, 2012 - 90,000,000 shares; Issued: August 31, 2013 - 32,982,815 shares and November 30, 2012 - 32,982,815 shares	3,298			3,298
Additional paid-in capital	2,411,675			2,421,941
Retained earnings	1,897,579			1,605,131
Treasury stock, at cost; August 31, 2013 - 11,708,564 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	(615,889		)	(632,846	)
Total stockholders’ equity	3,714,146			3,414,764
Noncontrolling interests	456,540			586,444
Total equity	4,170,686			4,001,208
Total liabilities and equity	$	11,015,593		10,362,206

(2)

As of August 31, 2013, total liabilities include $499.6 million related to consolidated VIEs as to which there was no recourse against the Company, of which $3.2 million is included in Lennar Homebuilding accounts payable, $193.1 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $164.7 million in Lennar Homebuilding senior notes and other debts payable, $5.4 million in Lennar Homebuilding other liabilities and $133.2 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					Nine Months Ended
	August 31,					August 31,
	2013			2012		2013		2012
Revenues:
Lennar Homebuilding	$	1,461,626		955,800		3,611,414		2,388,321
Lennar Financial Services	112,638			106,764		327,614		263,574
Rialto Investments	27,808			37,194		79,114		102,874
Total revenues	1,602,072			1,099,758		4,018,142		2,754,769
Costs and expenses:
Lennar Homebuilding	1,245,638			850,432		3,132,882		2,167,019
Lennar Financial Services	89,146			81,441		258,848		212,021
Rialto Investments	34,167			46,396		94,243		109,964
Corporate general and administrative	37,619			32,286		102,742		88,296
Total costs and expenses	1,406,570			1,010,555		3,588,715		2,577,300
Lennar Homebuilding equity in earnings (loss) unconsolidated entities	10,345			(5,991	)	22,939		(14,289	)
Lennar Homebuilding other income (expense), net	(1,294		)	(5,406	)	286		11,419
Other interest expense	(22,230		)	(22,659	)	(73,370	)	(71,311	)
Rialto Investments equity in earnings from unconsolidated entities	5,199			13,551		15,877		37,578
Rialto Investments other income (expense), net	1,837			(10,063	)	9,810		(23,675	)
Earnings before income taxes	189,359			58,635		404,969		117,191
(Provision) benefit for income taxes	(67,205		)	12,776		(83,059	)	416,621
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	122,154		71,411		321,910		533,812
Less: Net earnings (loss) attributable to noncontrolling interests (1)	1,492			(15,698	)	6,320		(20,968	)
Net earnings attributable to Lennar	$	120,662		87,109		315,590		554,780
Basic earnings per share	$	0.62		0.46		1.64		2.93
Diluted earnings per share	$	0.54		0.40		1.42		2.56
Cash dividends per each Class A and Class B common share	$	0.04		0.04		0.12		0.12
Comprehensive earnings attributable to Lennar	$	120,662		87,109		315,590		554,780
Comprehensive earnings (loss) attributable to noncontrolling interests	$	1,492		(15,698	)	6,320		(20,968	)

(1)

Net earnings (loss) attributable to noncontrolling interests for the three and nine months ended August 31, 2013 includes ($0.8) million and $4.6 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. Net earnings (loss) attributable to noncontrolling interests for the three and nine months ended August 31, 2012 includes ($13.4) million and ($14.6) million, respectively, of 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)



	Nine Months Ended
	August 31,
	2013			2012
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	321,910		533,812
Adjustments to reconcile net earnings (including net earnings (loss) attributable to noncontrolling interests) to net cash used in operating activities:
Depreciation and amortization	21,683			20,368
Amortization of discount/premium on debt, net	17,641			16,107
Lennar Homebuilding equity in (earnings) loss from unconsolidated entities	(22,939		)	14,289
Distributions of earnings from Lennar Homebuilding unconsolidated entities	718			1,005
Rialto Investments equity in earnings from unconsolidated entities	(15,877		)	(37,578	)
Distributions of earnings from Rialto Investments unconsolidated entities	648			6,324
Share based compensation expense	23,527			24,181
Tax benefit from share-based awards	11,053			2,479
Excess tax benefits from share-based awards	(10,148		)	(1,572	)
Deferred income tax (benefit) expense	67,938			(422,418	)
Gains on retirement of Lennar Homebuilding other debts payable	(1,000		)	(988	)
Loss on partial redemption of Lennar Homebuilding senior notes	—			6,510
Unrealized and realized gains on Rialto Investments real estate owned	(38,056		)	(12,519	)
Impairments of Rialto Investments loans receivable and REO	23,970			30,156
Valuation adjustments and write-offs of option deposits and pre-acquisition costs	6,086			12,671
Changes in assets and liabilities:
(Increase) decrease in restricted cash	(7,476		)	5,626
Decrease in receivables	31,815			48,949
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs	(1,469,381		)	(554,873	)
Increase in other assets	(17,616		)	(25,422	)
Increase in Rialto Investments loans held-for-sale	(244,137		)	—
Decrease (increase) in Lennar Financial Services loans held-for-sale	156,799			(119,929	)
Increase (decrease) in accounts payable and other liabilities	125,103			(37,685	)
Net cash used in operating activities	(1,017,739		)	(490,507	)
Cash flows from investing activities:
Net additions of operating properties and equipment	(4,931		)	(3,201	)
Investments in and contributions to Lennar Homebuilding unconsolidated entities	(60,353		)	(55,687	)
Distributions of capital from Lennar Homebuilding unconsolidated entities	155,011			26,538
Investments in and contributions to Rialto Investments unconsolidated entities	(41,483		)	(28,722	)
Distributions of capital from Rialto Investments unconsolidated entities	39,837			83,368
Decrease in Rialto Investments defeasance cash to retire notes payable	145,781			33,411
Receipts of principal payments on Rialto Investments loans receivable	49,560			52,913
Proceeds from sales of Rialto Investments real estate owned	182,220			121,848
Improvements to Rialto Investments real estate owned	(7,862		)	(10,288	)
Purchases of loans receivables	(5,450		)	—
Purchases of Lennar Homebuilding investments available-for-sale	(28,708		)	(7,224	)
Proceeds from sales of Lennar Homebuilding investments available-for-sale	2,486			10,853
(Increase) decrease in Lennar Financial Services loans held-for-investment, net	(706		)	3,114
Purchases of Lennar Financial Services investment securities	(21,504		)	(5,205	)
Proceeds from maturities of Lennar Financial Services investment securities	30,146			19,232
Net cash provided by investing activities	$	434,044		240,950

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

(unaudited)



	Nine Months Ended
	August 31,
	2013			2012
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility	$	100,000		—
Net repayments under Lennar Financial Services debt	(167,710		)	(52,420	)
Borrowings under Rialto Investments warehouse repurchase facility	133,103			—
Proceeds from senior notes	500,000			400,000
Proceeds from convertible senior notes	—			50,000
Redemption of senior notes	(63,001		)	(210,862	)
Debt issuance costs	(5,189		)	(4,814	)
Principal repayments on Rialto Investments notes payable	(360,956		)	(170,889	)
Proceeds from other borrowings	76,966			31,561
Principal payments on other borrowings	(187,648		)	(58,929	)
Exercise of land option contracts from an unconsolidated land investment venture	(27,329		)	(48,242	)
Receipts related to noncontrolling interests	579			1,046
Payments related to noncontrolling interests	(174,853		)	(480	)
Excess tax benefits from share-based awards	10,148			1,572
Common stock:
Issuances	33,945			16,323
Repurchases	(191		)	—
Dividends	(23,142		)	(22,755	)
Net cash used in financing activities	(155,278		)	(68,889	)
Net decrease in cash and cash equivalents	(738,973		)	(318,446	)
Cash and cash equivalents at beginning of period	1,310,743			1,163,604
Cash and cash equivalents at end of period	$	571,770		845,158
Summary of cash and cash equivalents:
Lennar Homebuilding	$	433,943		692,004
Lennar Financial Services	65,803			80,475
Rialto Investments	72,024			72,679
	$	571,770		845,158
Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding:
Non-cash contributions to unconsolidated entities	$	254,317		7,612
Inventory acquired in satisfaction of other assets including investments available-for-sale	$	—		91,554
Non-cash purchases of investments available-for-sale	$	—		12,520
Purchases of inventories and other assets financed by sellers	$	126,148		53,159
Non-cash reduction of equity due to purchase of noncontrolling interest	$	103,391		—
Non-cash purchase of noncontrolling interests	$	63,500		—
Rialto Investments:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable	$	53,849		160,754

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, as amended, 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 nine months ended August 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. 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 at the end 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 claw backs is limited. 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.

Rialto Mortgage Finance

Loans held-for-sale and Derivative Instruments – The originated mortgage loans are classified as Loans held-for-sale on the condensed consolidated balance sheet and are recorded at fair value. The Company elected the fair value option for its loans held-for-sale in accordance with ASC Topic 825, Financial Instruments, which permits entities to measure various financial instruments and certain other items at fair value on a contract-by-contract basis. Management believes that carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Changes in fair values of the loans and the derivative instruments are reflected in Rialto Investments' revenues in the accompanying condensed consolidated statements of operations. Interest income on these loans is calculated based on the interest rate of the loan and is recorded within Rialto Investments' revenues in the accompanying condensed consolidated statements of operations. Substantially all of the mortgage loans originated are sold within a short period of time in a securitization on a servicing released, non-recourse basis; although, the Company remains liable for certain limited industry-standard representations and warranties related to loan sales.

In the normal course of business, the Company uses derivative financial instruments as a hedge to these loans during the period from when the Company has originated the loan until the time in which the loan is sold. These derivatives are used for risk management purposes to reduce its exposure to fluctuations in mortgage-related interest rates as well as lessen its credit

risk. The Company hedges its interest rate exposure by entering into interest rate swap futures which had a notional outstanding balance of $195.7 million as of August 31, 2013. Credit exposure is managed at a portfolio level by entering into credit default swaps. As of August 31, 2013, Rialto had a notional outstanding balance of $170.0 million, consisting of both single “A”, “AAA” and “BBB” rated CMBX swaps. The Company does not enter into or hold derivatives for trading or speculative purposes. The Company believes the way it records Rialto Investments' revenues related to its loans held-for-sale is a significant accounting policy because while it currently represents a small portion of the Rialto Investments' revenues, it is expected to continue to grow in the future as the segment grows its mortgage finance business.

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 and filed an amended Form 10-K for the year ended November 30, 2012 and Form 10-Q for the three months ended February 28, 2013. These revisions did 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. As such, the supplemental financial information included in Note 17 has been revised for the three and nine months ended August 31, 2012.

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2013 presentation. These reclassifications had no impact on the Company's results of operations.

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

Operations of the Rialto Investments (“Rialto”) segment include 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 Funds, fees for sub-advisory services, revenues generated by the new Rialto Mortgage Finance ("RMF") business, which was formed to originate and securitize five, seven and ten year commercial first mortgage loans, 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 Form 10-K, as amended, for the year ended November 30, 2012, as well as the Rialto management fees revenue and Rialto Mortgage Finance ("RMF") loans held-for sale significant accounting policies 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)	August 31, 2013		November 30, 2012
Assets:
Homebuilding East	$	1,826,636	1,565,439
Homebuilding Central	940,764		729,300
Homebuilding West	3,151,425		2,396,515
Homebuilding Southeast Florida	739,809		603,360
Homebuilding Houston	328,000		273,605
Homebuilding Other (1)	943,672		724,461
Rialto Investments (2)	1,554,140		1,647,360
Lennar Financial Services	709,024		912,995
Corporate and unallocated	822,123		1,509,171
Total assets	$	11,015,593	10,362,206


(1)	Includes assets related to the Company's Multifamily business of $155.5 million and $29.1 million as of August 31, 2013 and November 30, 2012, respectively. The Company's net investment in the multifamily business as of August 31, 2013 was $120.1 million.


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



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2013		2012		2013	2012
Revenues:
Homebuilding East	$	510,787	328,983		1,233,008	883,965
Homebuilding Central	205,523		138,728		536,329	339,005
Homebuilding West	303,952		179,114		747,592	459,909
Homebuilding Southeast Florida	119,849		106,876		315,583	227,543
Homebuilding Houston	192,962		136,075		446,874	323,364
Homebuilding Other	128,553		66,024		332,028	154,535
Lennar Financial Services	112,638		106,764		327,614	263,574
Rialto Investments	27,808		37,194		79,114	102,874
Total revenues (1)	$	1,602,072	1,099,758		4,018,142	2,754,769
Operating earnings (loss):
Homebuilding East	$	78,523	26,230		154,208	66,468
Homebuilding Central	11,102		10,012		37,895	15,394
Homebuilding West	58,253		(266	)	116,554	(17,244	)
Homebuilding Southeast Florida (2)	25,367		14,882		63,539	45,692
Homebuilding Houston	27,893		15,746		52,425	30,524
Homebuilding Other	1,671		4,708		3,766	6,287
Lennar Financial Services	23,492		25,323		68,766	51,553
Rialto Investments	677		(5,714	)	10,558	6,813
Total operating earnings	226,978		90,921		507,711	205,487
Corporate general and administrative expenses	37,619		32,286		102,742	88,296
Earnings before income taxes	$	189,359	58,635		404,969	117,191


(1)	Total revenues are net of sales incentives of $92.8 million ($18,700 per home delivered) and $256.7 million ($20,400 per home delivered) for the three and nine months ended August 31, 2013, respectively, compared to $94.3 million ($26,100 per home delivered) and $274.0 million ($29,500 per home delivered) for the three and nine months ended August 31, 2012, respectively.


(2)	For the nine months ended August 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			Nine Months Ended
	August 31,			August 31,
(In thousands)	2013		2012	2013	2012
Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:
East	$	14	79	93	864
Central	2		6	44	214
West	—		2,346	254	4,317
Southeast Florida	2		2,139	3,790	2,775
Houston	—		41	—	130
Other	—		40	26	780
Total	18		4,651	4,207	9,080
Valuation adjustments to land the Company intends to sell or has sold to third parties:
East	27		107	270	122
Central	—		15	2	15
West	—		—	158	1
Southeast Florida	—		22	—	354
Total	27		144	430	492
Write-offs of option deposits and pre-acquisition costs:
East	46		1,303	459	1,632
Central	—		7	27	61
West	16		—	66	232
Other	—		—	—	156
Total	62		1,310	552	2,081
Company’s share of valuation adjustments related to assets of unconsolidated entities:
East	—		61	—	61
West	—		27	—	5,464
Total	—		88	—	5,525
Valuation adjustments to investments of unconsolidated entities:
East	—		—	36	18
Central	861		—	861	—
Total	861		—	897	18
Write-offs of other receivables and other assets:
East	—		—	—	1,000
Total	—		—	—	1,000
Total valuation adjustments and write-offs of option deposits and pre-acquisition costs, other receivables and other assets	$	968	6,193	6,086	18,196

Changes in market conditions and other specific developments may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.


(3)	Lennar Homebuilding Investments in Unconsolidated Entities

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

Statements of Operations



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2013		2012		2013	2012
Revenues	$	240,642	110,823		501,656	264,336
Costs and expenses	163,237		126,007		372,859	303,717
Other income	1,241		10,515		14,602	10,515
Net earnings (loss) of unconsolidated entities	$	78,646	(4,669	)	143,399	(28,866	)
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1)	$	10,345	(5,991	)	22,939	(14,289	)

(1)

For the three and nine months ended August 31, 2013, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities includes $8.6 million and $21.6 million, respectively, of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity and previously deferred profit related to those homesites that was earned during the three months ended August 31, 2013. For the nine months ended August 31, 2012, Lennar Homebuilding equity in earnings (loss) includes $5.5 million of valuation adjustments related to strategic asset sales at Lennar Homebuilding's unconsolidated entities.

Balance Sheets



(In thousands)	August 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	183,877	157,340
Inventories	3,039,135		2,792,064
Other assets	310,459		250,940
	$	3,533,471	3,200,344
Liabilities and equity:
Accounts payable and other liabilities	$	274,131	310,496
Debt	454,456		759,803
Equity	2,804,884		2,130,045
	$	3,533,471	3,200,344

As of August 31, 2013 and November 30, 2012, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $755.3 million and $565.4 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 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 August 31, 2013 and November 30, 2012, the portfolio of land (including land development costs) of $238.3 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)	August 31, 2013			November 30, 2012
Several recourse debt - repayment	$	26,126		48,020
Joint and several recourse debt - repayment	15,000			18,695
The Company’s maximum recourse exposure	41,126			66,715
Less: joint and several reimbursement agreements with the Company’s partners	(13,500		)	(16,826	)
The Company’s net recourse exposure	$	27,626		49,889

During the nine months ended August 31, 2013, the Company’s maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $25.6 million, as a result of $5.9 million paid by the Company primarily through capital contributions to unconsolidated entities and $19.7 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)	August 31, 2013		November 30, 2012
Assets	$	1,639,382	1,843,163
Liabilities	$	449,454	765,295
Equity	$	1,189,928	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 August 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 August 31, 2013 and 2012, there were $5.1 million and $1.3 million, respectively, of loan paydowns by Lennar relating to recourse debt. During both the three months ended August 31, 2013 and 2012, there were no payments under completion guarantees.

During the nine months ended August 31, 2013 and 2012, there were $6.0 million and $5.2 million, respectively, of loan paydowns by Lennar relating to recourse debt. During both the nine months ended August 31, 2013 and 2012, there were no payments under completion guarantees.

As of August 31, 2013, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of August 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)	August 31, 2013			November 30, 2012
The Company’s net recourse exposure	$	27,626		49,889
Reimbursement agreements from partners	13,500			16,826
The Company’s maximum recourse exposure	$	41,126		66,715
Non-recourse bank debt and other debt (partner’s share of several recourse)	$	61,258		114,900
Non-recourse land seller debt or other debt	20,454			26,340
Non-recourse debt with completion guarantees	250,934			458,418
Non-recourse debt without completion guarantees	80,684			93,430
Non-recourse debt to the Company	413,330			693,088
Total debt	$	454,456		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 nine months ended August 31, 2013 and 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)	321,910			—	—	—		—		315,590		6,320
Employee stock and directors plans	34,396			243	—	17,196		16,957		—		—
Tax benefit from employee stock plans and vesting of restricted stock	11,053			—	—	11,053		—		—		—
Amortization of restricted stock	23,430			—	—	23,430		—		—		—
Cash dividends	(23,142		)	—	—	—		—		(23,142	)	—
Equity adjustment related to purchase of noncontrolling interests	39,605			—	—	(61,945	)	—		—		101,550
Receipts related to noncontrolling interests	579			—	—	—		—		—		579
Payments related to noncontrolling interests	(174,853		)	—	—	—		—		—		(174,853	)
Non-cash purchase of noncontrolling interests	(63,500		)	—	—	—		—		—		(63,500	)
Balance at August 31, 2013	$	4,170,686		17,483	3,298	2,411,675		(615,889	)	1,897,579		456,540



				Stockholders’ Equity
(In thousands)	Total Equity			Class A Common Stock	Class B Common Stock	Additional Paid- in Capital	Treasury Stock		Retained Earnings		Noncontrolling Interests
Balance at November 30, 2011	$	3,303,525		16,910	3,298	2,341,079	(621,220	)	956,401		607,057
Net earnings (including net loss attributable to noncontrolling interests)	533,812			—	—	—	—		554,780		(20,968	)
Employee stock and directors plans	18,949			212	—	13,215	5,522		—		—
Tax benefit from employee stock plans and vesting of restricted stock	2,479			—	—	2,479	—		—		—
Amortization of restricted stock	21,801			—	—	21,801	—		—		—
Cash dividends	(22,755		)	—	—	—	—		(22,755	)	—
Receipts related to noncontrolling interests	1,046			—	—	—	—		—		1,046
Payments related to noncontrolling interests	(480		)	—	—	—	—		—		(480	)
Balance at August 31, 2012	$	3,858,377		17,122	3,298	2,378,574	(615,698	)	1,488,426		586,655

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

During the three months ended August 31, 2013, treasury stock increased by an immaterial amount of shares of Class A common stock. During the three months ended August 31, 2012, treasury stock had no changes in the amount of shares of Class A Common stock. During the nine months ended August 31, 2013 and 2012, treasury stock decreased by approximately 0.4 million and 0.3 million, respectively, of shares of 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, as amended, 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 nine months ended August 31, 2013, the Company concluded that it was more likely than not that a portion of its 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 pre-tax earnings achieved during the second quarter of 2013. Accordingly, during the three and nine months ended August 31, 2013, the Company reversed $0.7 million and $67.1 million, respectively, of its valuation allowance primarily against its state deferred tax assets. This reversal was partially offset by a tax provision of $67.9 million and $150.2 million, respectively, primarily related to pre-tax earnings during the three and nine months ended August 31, 2013, resulting in a $67.2 million and $83.1 million provision for income taxes for the three and nine months ended August 31, 2013, respectively. As of August 31, 2013, the Company's remaining valuation allowance against its deferred tax assets was $20.4 million, which is primarily related to state net operating loss carryforwards that may expire due to short carryforward periods. During the three and nine months ended August 31, 2012, the Company reversed $44.0 million and $447.0 million, respectively, of its valuation allowance against its deferred tax assets. During the three and nine months ended August 31, 2012, the Company recorded a tax benefit of $12.8 million and $416.6 million, respectively, primarily related to the reversal of the Company's valuation

allowance. As a result of the partial reversal of the valuation allowance against the Company's deferred tax assets in 2012 and 2013, the Company's effective tax rate is not reflective of its historical tax rate.

As of August 31, 2013, the Company's deferred tax assets, net, were $439.2 million, of which $458.3 million were deferred tax assets included in Lennar Homebuilding's other assets on the Company's condensed consolidated balance sheets, $4.7 million were deferred tax liabilities included in Lennar Financial Services segment's liabilities on the Company's condensed consolidated balance sheets and $14.4 million were deferred tax liabilities included in Rialto Investments segment's notes payable and other liabilities on the Company's condensed consolidated balance sheets.

At August 31, 2013 and November 30, 2012, the Company had federal tax effected NOL carryforwards totaling $182.6 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 August 31, 2013, the Company needs to generate $809.7 million of pre-tax earnings in future periods to realize all of its federal NOL carryforwards and federal deductible temporary tax differences. At August 31, 2013 and November 30, 2012, the Company had state tax effected NOL carryforwards totaling $162.6 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 August 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 August 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 August 31, 2013 and November 30, 2012, the Company had $10.5 million and $12.3 million, respectively, of gross unrecognized tax benefits. If the Company were to recognize its gross unrecognized tax benefits as of August 31, 2013, $6.8 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 nine months ended August 31, 2013, the Company’s gross unrecognized tax benefits decreased by $1.8 million primarily as a result of state tax payments resulting from a previously settled IRS examination, partially offset by an increase due to a state tax allocation. The increase in gross unrecognized tax benefits related to a state tax allocation increased the Company's effective tax rate from 20.43% to 20.84%.

At August 31, 2013, the Company had $16.3 million accrued for interest and penalties, of which $1.0 million was recorded during the nine months ended August 31, 2013. During the three and nine months ended August 31, 2013, the accrual for interest and penalties was reduced by $2.4 million and $5.2 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 2012 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			Nine Months Ended
	August 31,			August 31,
(In thousands, except per share amounts)	2013		2012	2013	2012
Numerator:
Net earnings attributable to Lennar	$	120,662	87,109	315,590	554,780
Less: distributed earnings allocated to nonvested shares	122		151	326	378
Less: undistributed earnings allocated to nonvested shares	1,712		1,378	4,090	8,411
Numerator for basic earnings per share	118,828		85,580	311,174	545,991
Plus: interest on 2.00% convertible senior notes due 2020 and 3.25% convertible senior notes due 2021	2,826		2,710	8,477	8,504
Plus: undistributed earnings allocated to convertible shares	1,712		1,378	4,090	8,411
Less: undistributed earnings reallocated to convertible shares	1,489		1,215	3,549	7,352
Numerator for diluted earnings per share	$	121,877	88,453	320,192	555,554
Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding	190,799		186,761	190,119	186,397
Effect of dilutive securities:
Shared based payments	90		1,087	334	1,015
Convertible senior notes	34,446		31,732	35,549	29,723
Denominator for diluted earnings per share - weighted average common shares outstanding	225,335		219,580	226,002	217,135
Basic earnings per share	$	0.62	0.46	1.64	2.93
Diluted earnings per share	$	0.54	0.40	1.42	2.56

For both the three and nine months ended August 31, 2013, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive. For the three months ended August 31, 2012, there were no options to purchase shares of Class A common stock that were outstanding and anti-dilutive. For the nine months ended August 31, 2012, there were 0.3 million options to purchase shares of Class A common stock that were outstanding and anti-dilutive.


(7)	Lennar Financial Services Segment

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



(In thousands)	August 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	65,803	58,566
Restricted cash	10,699		12,972
Receivables, net (1)	123,699		172,230
Loans held-for-sale (2)	344,607		502,318
Loans held-for-investment, net	25,264		23,982
Investments held-to-maturity	54,019		63,924
Goodwill	34,046		34,046
Other (3)	50,887		44,957
	$	709,024	912,995
Liabilities:
Notes and other debts payable	$	290,283	457,994
Other (4)	162,828		172,978
	$	453,111	630,972


(1)	Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 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 $10.8 million and $12.7 million as of August 31, 2013 and November 30, 2012, respectively. In addition, other assets also includes forward contracts carried at fair value of $1.8 million as of August 31, 2013.


(4)	Other liabilities include $73.9 million and $76.1 million as of August 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 August 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 $250 million that matures in July 2014, 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 August 31, 2013, the maximum aggregate commitment and uncommitted amount under these facilities totaled $660 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 $290.3 million and $458.0 million at August 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 $395.9 million and $509.1 million at August 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 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 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					Nine Months Ended
	August 31,					August 31,
(In thousands)	2013			2012		2013		2012
Loan origination liabilities, beginning of period	$	8,257		6,198		7,250		6,050
Provision for losses during the period	569			165		1,342		380
Adjustments to pre-existing provisions for losses from changes in estimates	(176		)	—		348		253
Payments/settlements	(16		)	(209	)	(306	)	(529	)
Loan origination liabilities, end of period	$	8,634		6,154		8,634		6,154

For Lennar Financial Services loans held-for-investment, net, a loan is deemed impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Interest income is not accrued or recognized on impaired loans unless payment is received. Impaired loans are written-off if and when the loan is no longer secured by collateral. The total unpaid principal balance of the impaired loans as of August 31, 2013 and November 30, 2012 was $8.2 million and $7.3 million, respectively. At August 31, 2013, the recorded investment in the impaired loans with a valuation allowance was $4.1 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 $3.9 million and $3.5 million for the three and nine months ended August 31, 2013, respectively. The average recorded investment in impaired loans totaled $3.0 million and $3.2 million for the three and nine months ended August 31, 2012, respectively.


(8)	Rialto Investments Segment

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



(In thousands)	August 31, 2013		November 30, 2012
Assets:
Cash and cash equivalents	$	72,024	105,310
Defeasance cash to retire notes payable	78,032		223,813
Loans receivable, net	328,667		436,535
Loans held-for-sale (1)	244,666		—
Real estate owned - held-for-sale	198,609		134,161
Real estate owned - held-and-used, net	440,656		601,022
Investments in unconsolidated entities	125,263		108,140
Investments held-to-maturity	15,791		15,012
Other (2)	50,432		23,367
	$	1,554,140	1,647,360
Liabilities:
Notes and other debts payable (3)	$	346,627	574,480
Other (4)	44,444		26,122
	$	391,071	600,602


(1)	Loans held-for-sale relate to unsold loans originated by Rialto Mortgage Finance carried at fair value.


(2)	Other assets include interest rate swap futures and credit default swaps carried at fair value of $0.6 million and $9.1 million, respectively, as of August 31, 2013.


(3)	As of August 31, 2013 notes and other debts payable includes $110.0 million of notes payable related to the FDIC portfolios and $133.1 million related to the RMF warehouse repurchase financing agreement. As of November 30, 2012, notes and other debts payable includes $470.0 million of notes payable related to the FDIC portfolios.


(4)	Other liabilities include interest rate swap futures carried at fair value of $0.7 million as of August 31, 2013.

Rialto’s operating earnings were as follows:



	Three Months Ended				Nine Months Ended
	August 31,				August 31,
(In thousands)	2013		2012		2013	2012
Revenues	$	27,808	37,194		79,114	102,874
Costs and expenses	34,167		46,396		94,243	109,964
Rialto Investments equity in earnings from unconsolidated entities	5,199		13,551		15,877	37,578
Rialto Investments other income (expense), net	1,837		(10,063	)	9,810	(23,675	)
Operating earnings (loss) (1)	$	677	(5,714	)	10,558	6,813


(1)	Operating earnings (loss) for the three and nine months ended August 31, 2013 include net earnings (loss) attributable to noncontrolling interests of ($0.8) million and $4.6 million, respectively. Operating earnings (loss) for the three and nine months ended August 31, 2012 include net earnings (loss) attributable to noncontrolling interests of ($13.4) million and ($14.6) million, respectively.

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



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2013			2012		2013		2012
Realized gains on REO sales, net	$	9,651		2,418		36,857		10,857
Unrealized loss on transfer of loans receivable to REO, net	(2,373		)	(4,690	)	(8,683	)	(5,923	)
REO expenses	(10,267		)	(12,035	)	(33,171	)	(40,758	)
Rental income	4,826			4,244		14,807		12,149
Rialto Investments other income (expense), net	$	1,837		(10,063	)	9,810		(23,675	)

Loans Receivable

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC. The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions and when the Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans (“FDIC Portfolios”). The FDIC retained 60% equity interests in the LLCs and provided $626.9 million of financing with 0% interest, which is non-recourse to the Company and the LLCs. As of August 31, 2013 and November 30, 2012, the notes payable balance was $110.0 million and $470.0 million, respectively; however, as of August 31, 2013 and November 30, 2012, $78.0 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 nine months ended August 31, 2013, the LLCs retired $360.0 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 August 31, 2013, these consolidated LLCs had total combined assets and liabilities of $880.0 million and $133.2 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. As of both August 31, 2013 and November 30, 2012, there was $90.9 million outstanding.

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



(In thousands)	August 31, 2013		November 30, 2012
Land	$	181,755	216,095
Single family homes	65,765		93,207
Commercial properties	62,798		96,226
Multi-family homes	5,000		12,776
Other	13,349		18,231
Loans receivable, net	$	328,667	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)	August 31, 2013		November 30, 2012
Outstanding principal balance	$	659,638	812,187
Carrying value	$	311,655	396,200

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



(In thousands)	August 31, 2013			August 31, 2012
Accretable yield, beginning of period	$	112,899		209,480
Additions	53,652			43,306
Deletions	(38,263		)	(71,830	)
Accretions	(38,455		)	(58,108	)
Accretable yield, end of period	$	89,833		122,848

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

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

the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell.

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

August 31, 2013



			Recorded Investment
(In thousands)	Unpaid Principal Balance		With Allowance	Without Allowance	Total Recorded Investment
Land	$	7,486	221	2,903	3,124
Single family homes	16,615		1,716	3,815	5,531
Commercial properties	14,694		554	7,803	8,357
Loans receivable	$	38,795	2,491	14,521	17,012

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 $29 million and $62 million for the nine months ended August 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 August 31, 2013, the Company had an allowance on these loans of $20.1 million. During the three and nine months ended August 31, 2013, the Company recorded $3.3 million and $12.8 million, respectively, of provision for loan losses offset by charge-offs of $1.9 million and $4.9 million, respectively, upon resolution of the loans. During both the three and nine months ended August 31, 2012, the Company recorded $17.1 million of provision for loan losses offset by charge-offs of $3.0 million upon foreclosure of these loans. As of November 30, 2012, the Company had an allowance on these loans of $12.2 million.

Nonaccrual — Loans in which forecasted principal and interest could not be reasonably estimated at the date of acquisition. Although the Company believes the recorded investment balance will ultimately be realized, the risk of nonaccrual loans relates to a decline in the value of the collateral securing the outstanding obligation and the recognition of an impairment through an allowance for loan losses if the recorded investment in the loan exceeds the fair value of the collateral less estimated cost to sell. As of August 31, 2013 and November 30, 2012, the Company had an allowance on these loans of $0.9 million and $3.7 million, respectively. During the three and nine months ended August 31, 2013, the Company recorded $0.1 million and $1.2 million, respectively, of provision for loan losses offset by charge-offs of $1.0 million and $4.0 million, respectively, upon foreclosure of the loans. During the three and nine months ended August 31, 2012, the Company recorded $3.2 million and $5.5 million, respectively, of provision for loan losses offset by charge-offs of $0.4 million and $3.3 million, respectively, upon foreclosure of the loans.

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

August 31, 2013



(In thousands)	Accrual		Nonaccrual	Total
Land	$	178,631	3,124	181,755
Single family homes	60,234		5,531	65,765
Commercial properties	54,441		8,357	62,798
Multi-family homes	5,000		—	5,000
Other	13,349		—	13,349
Loans receivable	$	311,655	17,012	328,667

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 suggests a decline in the collateral’s fair value.

Real Estate Owned

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

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

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

The following tables present the activity in REO:



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2013			2012		2013		2012
REO - held-for-sale, beginning of period	$	204,385		113,115		134,161		143,677
Additions	14,833			6,428		16,166		7,783
Improvements	1,949			1,439		4,466		7,438
Sales	(68,087		)	(27,956	)	(145,363	)	(110,010	)
Impairments	(169		)	(810	)	(4,353	)	(2,432	)
Transfers to Lennar Homebuilding	(430		)	(7,431	)	(430	)	(11,335	)
Transfers from held-and-used, net (1)	46,128			30,933		193,962		80,597
REO - held-for-sale, end of period	$	198,609		115,718		198,609		115,718



	Three Months Ended					Nine Months Ended
	August 31,					August 31,
(In thousands)	2013			2012		2013		2012
REO - held-and-used, net, beginning of period	$	478,314		634,401		601,022		582,111
Additions	14,154			44,958		38,882		154,633
Improvements	517			2,070		3,396		2,850
Sales	—			—		—		(981	)
Impairments	(5,126		)	(1,880	)	(5,529	)	(5,153	)
Depreciation	(1,075		)	(1,389	)	(3,153	)	(5,636	)
Transfers to held-for-sale (1)	(46,128		)	(30,933	)	(193,962	)	(80,597	)
REO - held-and-used, net, end of period	$	440,656		647,227		440,656