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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, 2016
Commission File Number: 1-11749
 
Lennar Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
95-4337490
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
700 Northwest 107th Avenue, Miami, Florida 33172
(Address of principal executive offices) (Zip Code)
(305) 559-4000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
 
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  ý
Common stock outstanding as of May 31, 2016:
Class A 187,853,075
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,
 
2016 (1)
 
2015 (1)
ASSETS
 
 
 
Lennar Homebuilding:
 
 
 
Cash and cash equivalents
$
601,192


 
893,408


Restricted cash
5,713


 
13,505


Receivables, net
45,000


 
74,538


Inventories:
 
 
 
Finished homes and construction in progress
4,269,767


 
3,957,167


Land and land under development
5,245,422


 
4,724,578


Consolidated inventory not owned
134,514


 
58,851


Total inventories
9,649,703


 
8,740,596


Investments in unconsolidated entities
785,883


 
741,551


Other assets
646,555


 
609,222


 
11,734,046


 
11,072,820


Rialto
1,171,987


 
1,505,500


Lennar Financial Services
1,423,679


 
1,425,837


Lennar Multifamily
518,089


 
415,352


Total assets
$
14,847,801


 
14,419,509


(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, 2016, total assets include $645.1 million related to consolidated VIEs of which $8.2 million is included in Lennar Homebuilding cash and cash equivalents, $0.1 million in Lennar Homebuilding receivables, net, $6.2 million in Lennar Homebuilding finished homes and construction in progress, $158.8 million in Lennar Homebuilding land and land under development, $134.5 million in Lennar Homebuilding consolidated inventory not owned, $4.5 million in Lennar Homebuilding investments in unconsolidated entities, $21.4 million in Lennar Homebuilding other assets, $280.0 million in Rialto assets and $31.4 million in Lennar Multifamily assets.
As of November 30, 2015, total assets include $652.3 million related to consolidated VIEs of which $9.6 million is included in Lennar Homebuilding cash and cash equivalents, $0.5 million in Lennar Homebuilding receivables, net, $3.9 million in Lennar Homebuilding finished homes and construction in progress, $154.2 million in Lennar Homebuilding land and land under development, $58.9 million in Lennar Homebuilding consolidated inventory not owned, $35.8 million in Lennar Homebuilding investments in unconsolidated entities, $22.7 million in Lennar Homebuilding other assets, $355.2 million in Rialto assets and $11.5 million in Lennar Multifamily assets.

See accompanying notes to condensed consolidated financial statements.
2

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets – (Continued)
(Dollars in thousands, except shares and per share amounts)
(unaudited)

 
May 31,
 
November 30,
 
2016 (2)
 
2015 (2)
LIABILITIES AND EQUITY
 
 
 
Lennar Homebuilding:
 
 
 
Accounts payable
$
451,517


 
475,909


Liabilities related to consolidated inventory not owned
115,814


 
51,431


Senior notes and other debts payable
5,316,235


 
5,025,130


Other liabilities
835,098


 
899,815


 
6,718,664


 
6,452,285


Rialto
596,628


 
866,224


Lennar Financial Services
1,079,498


 
1,083,978


Lennar Multifamily
90,077


 
66,950


Total liabilities
8,484,867


 
8,469,437


Stockholders’ equity:
 
 
 
Preferred stock


 


Class A common stock of $0.10 par value; Authorized: May 31, 2016 and November 30, 2015

- 300,000,000 shares; Issued: May 31, 2016 - 188,740,334 shares and November 30, 2015

- 180,658,550 shares
18,874


 
18,066


Class B common stock of $0.10 par value; Authorized: May 31, 2016 and November 30, 2015

- 90,000,000 shares; Issued: May 31, 2016 - 32,982,815 shares and November 30, 2015

- 32,982,815 shares
3,298


 
3,298


Additional paid-in capital
2,429,317


 
2,305,560


Retained earnings
3,775,094


 
3,429,736


Treasury stock, at cost; May 31, 2016 - 887,259 shares of Class A common stock and

1,679,620 shares of Class B common stock; November 30, 2015 - 815,959 shares of

Class A common stock and 1,679,620 shares of Class B common stock
(108,732
)
 
(107,755
)
Accumulated other comprehensive income
515


 
39


Total stockholders’ equity
6,118,366


 
5,648,944


Noncontrolling interests
244,568


 
301,128


Total equity
6,362,934


 
5,950,072


Total liabilities and equity
$
14,847,801


 
14,419,509


(2)
As of May 31, 2016, total liabilities include $146.5 million related to consolidated VIEs as to which there was no recourse against the Company, of which $1.7 million is included in Lennar Homebuilding accounts payable, $115.8 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $1.8 million in Lennar Homebuilding other liabilities, $11.3 million in Rialto liabilities and $15.9 million in Lennar Multifamily liabilities.
As of November 30, 2015, total liabilities include $84.4 million related to consolidated VIEs as to which there was no recourse against the Company, of which $2.0 million is included in Lennar Homebuilding accounts payable, $51.4 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $15.6 million in Lennar Homebuilding other liabilities, $11.3 million in Rialto liabilities and $4.0 million in Lennar Multifamily liabilities.



See accompanying notes to condensed consolidated financial statements.
3

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(Dollars in thousands, except per share amounts)
(unaudited)



 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Lennar Homebuilding
$
2,450,885


 
2,115,812


 
4,237,366


 
3,557,470


Lennar Financial Services
175,940


 
169,885


 
299,896


 
294,712


Rialto
44,838


 
67,931


 
88,549


 
109,128


Lennar Multifamily
74,152


 
38,976


 
113,668


 
75,433


Total revenues
2,745,815


 
2,392,604


 
4,739,479


 
4,036,743


Costs and expenses:
 
 
 
 
 
 
 
Lennar Homebuilding
2,112,288


 
1,825,482


 
3,680,493


 
3,090,657


Lennar Financial Services
131,852


 
130,832


 
240,877


 
240,132


Rialto
50,203


 
67,506


 
93,110


 
108,287


Lennar Multifamily
73,217


 
47,260


 
120,237


 
89,221


Corporate general and administrative
55,802


 
50,207


 
103,470


 
93,861


Total costs and expenses
2,423,362


 
2,121,287


 
4,238,187


 
3,622,158


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
(9,633
)
 
6,494


 
(6,633
)
 
35,393


Lennar Homebuilding other income (expense), net
14,925


 
(217
)
 
15,444


 
6,116


Other interest expense
(1,193
)
 
(3,818
)
 
(2,350
)
 
(7,889
)
Rialto equity in earnings from unconsolidated entities
6,864


 
7,328


 
8,361


 
9,992


Rialto other expense, net
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
Lennar Multifamily equity in earnings (loss) from unconsolidated entities
14,008


 
(422
)
 
33,694


 
(600
)
Earnings before income taxes
327,839


 
279,810


 
529,532


 
456,453


Provision for income taxes
(103,801
)
 
(95,226
)
 
(160,042
)
 
(154,952
)
Net earnings (including net earnings attributable to noncontrolling interests)
224,038


 
184,584


 
369,490


 
301,501


Less: Net earnings attributable to noncontrolling interests
5,569


 
1,568


 
6,941


 
3,522


Net earnings attributable to Lennar
$
218,469


 
183,016


 
362,549


 
297,979


Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Net unrealized gain (loss) on securities available-for-sale
919


 
(94
)
 
482


 
106


Reclassification adjustments for gains included in earnings, net of tax
(6
)
 
(23
)
 
(6
)
 
(23
)
Other comprehensive income attributable to Lennar
$
219,382


 
182,899


 
363,025


 
298,062


Other comprehensive income attributable to noncontrolling interests
$
5,569


 
1,568


 
6,941


 
3,522


Basic earnings per share
$
1.01


 
0.89


 
1.69


 
1.45


Diluted earnings per share
$
0.95


 
0.79


 
1.58


 
1.30


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


 
0.04


 
0.08


 
0.08







See accompanying notes to condensed consolidated financial statements.
4

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)



 
Six Months Ended
 
May 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net earnings (including net earnings attributable to noncontrolling interests)
$
369,490


 
301,501


Adjustments to reconcile net earnings to net cash used in operating activities:
 
 
 
Depreciation and amortization
22,752


 
18,906


Amortization of discount/premium and accretion on debt, net
8,054


 
9,628


Equity in earnings from unconsolidated entities
(35,422
)
 
(44,785
)
Distributions of earnings from unconsolidated entities
43,740


 
34,734


Share-based compensation expense
22,266


 
20,650


Excess tax benefits from share-based awards
(7,039
)
 
(113
)
Deferred income tax expense
45,538


 
2,409


Loss (gain) on retirement of debt and notes payable
415


 
(83
)
Gain on sale of operating property and equipment


 
(5,945
)
Unrealized and realized gains on real estate owned
(12,838
)
 
(8,691
)
Impairments of loans receivable and real estate owned
15,871


 
8,594


Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets
2,699


 
10,695


Changes in assets and liabilities:
 
 
 
Decrease in restricted cash
14,764


 
23,135


Decrease in receivables
236,084


 
15,291


Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
(868,779
)
 
(1,118,791
)
Increase in other assets
(28,014
)
 
(30,068
)
Decrease (increase) in loans held-for-sale
93,690


 
(260,603
)
(Decrease) increase in accounts payable and other liabilities
(98,653
)
 
29,003


Net cash used in operating activities
(175,382
)
 
(994,533
)
Cash flows from investing activities:
 
 
 
Increase in restricted cash related to LOCs


 
101


Net additions of operating properties and equipment
(39,216
)
 
(50,729
)
Proceeds from the sale of operating properties and equipment


 
73,732


Investments in and contributions to unconsolidated entities
(210,225
)
 
(66,643
)
Distributions of capital from unconsolidated entities
103,009


 
35,141


Proceeds from sales of real estate owned
43,412


 
55,812


Improvements to real estate owned
(1,717
)
 
(4,723
)
Receipts of principal payments on loans receivable and other
5,484


 
13,335


Originations of loans receivable
(16,864
)
 
(2,750
)
Purchase of investment carried at cost


 
(18,000
)
Purchases of commercial mortgage-backed securities bonds
(33,005
)
 


Acquisition, net of cash acquired
(600
)
 


Purchases of Lennar Homebuilding investments available-for-sale


 
(28,093
)
Decrease (increase) in Lennar Financial Services loans held-for-investment, net
1,060


 
(2,480
)
Purchases of Lennar Financial Services investment securities
(11,646
)
 
(28,365
)
Proceeds from maturities/sales of Lennar Financial Services investments securities
10,681


 
16,326


Net cash used in investing activities
$
(149,627
)
 
(7,336
)

See accompanying notes to condensed consolidated financial statements.
5

Lennar Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(unaudited)



 
Six Months Ended
 
May 31,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Net borrowings under unsecured revolving credit facility
$
375,000


 
450,000


Net (repayments) borrowings under warehouse facilities
(230,206
)
 
189,632


Proceeds from senior notes
499,024


 
750,625


Debt issuance costs
(3,796
)
 
(6,510
)
Redemption of senior notes
(250,000
)
 
(500,000
)
Conversions and exchanges on convertible senior notes
(233,893
)
 


Principal payments on Rialto notes payable including structured notes
(2,999
)
 
(20,940
)
Proceeds from other borrowings
15,657


 
69,741


Principal payments on other borrowings
(103,189
)
 
(206,901
)
Receipts related to noncontrolling interests
167


 
1,367


Payments related to noncontrolling interests
(73,195
)
 
(78,937
)
Excess tax benefits from share-based awards
7,039


 
113


Common stock:
 
 
 
Issuances
594


 
9,412


Repurchases
(971
)
 
(972
)
Dividends
(17,191
)
 
(16,418
)
Net cash (used in) provided by financing activities
(17,959
)
 
640,212


Net decrease in cash and cash equivalents
(342,968
)
 
(361,657
)
Cash and cash equivalents at beginning of period
1,158,445


 
1,281,814


Cash and cash equivalents at end of period
$
815,477


 
920,157


Summary of cash and cash equivalents:
 
 
 
Lennar Homebuilding
$
601,192


 
638,992


Rialto
103,622


 
176,378


Lennar Financial Services
105,596


 
103,093


Lennar Multifamily
5,067


 
1,694


 
$
815,477


 
920,157


Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Lennar Homebuilding and Lennar Multifamily:
 
 
 
Non-cash distributions from unconsolidated entities
$
16,331


 


Conversion of convertible senior notes to equity
$
67,535


 


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


 
28,093


Non-cash sale of operating properties and equipment
$


 
(59,397
)
Purchases of inventories and other assets financed by sellers
$
53,287


 
29,977


Non-cash contributions to unconsolidated entities
$
25,420


 
26,594


Rialto:
 
 
 
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
7,703


 
13,326


Consolidation/deconsolidation of unconsolidated/consolidated entities, net:
 
 
 
Inventories
$
111,347


 


Operating properties and equipment and other assets
$


 
(17,421
)
Investments in unconsolidated entities
$
(2,445
)
 
2,948


Liabilities related to consolidated inventory not owned
$
(96,424
)
 


Other liabilities
$


 
1,220


Noncontrolling interests
$
(12,478
)
 
13,253



See accompanying notes to condensed consolidated financial statements.
6




Lennar Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1)
Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2015. 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, 2016 are not necessarily indicative of the results to be expected for the full year.
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.
Reclassifications/Revisions
As a result of the Company's change in reportable segments in the first quarter of 2016, the Company restated certain prior year amounts in the condensed consolidated financial statements to conform with the 2016 presentation (See Note 2). These reclassifications had no impact on the Company's condensed consolidated financial statements.


(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 Houston
(5) Lennar Financial Services
(6) Rialto
(7) Lennar Multifamily
In the first quarter of 2016, the Company made the decision to divide the Southeast Florida operating division into two operating segments to maximize operational efficiencies given the continued growth of the division. As a result of this change in management structure, the Company re-evaluated its reportable segments and determined that neither operating segment met the reportable criteria set forth in Accounting Standards Codification ("ASC") 280, Segment Reporting. The Company aggregated these operating segments into the Homebuilding East reportable segment as these divisions exhibit similar economic characteristics, geography and product type as the other divisions in Homebuilding East. All prior year segment information has been restated to conform with the 2016 presentation. The change in the reportable segments has no effect on the Company's condensed consolidated financial position, results of operations or cash flows for the periods presented.
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.

7




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 homebuilding divisions located in:
East: Florida, Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(1) 
West: California and Nevada
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.
Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. The Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations as well as in other states.
Operations of the Rialto segment include raising, investing and managing third-party capital, originating and securitizing commercial mortgage loans as well as investing its own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and real estate related securities as well as providing strategic real estate capital. Rialto’s operating earnings consist of revenues generated primarily from gains from securitization transactions and interest income from the Rialto Mortgage Finance (“RMF”) business, interest income associated with portfolios of real estate loans acquired and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the real estate investment funds managed by the Rialto segment, fees for sub-advisory services, other income (expense), net and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF and other general and administrative expenses.
Operations of the Lennar Multifamily segment include revenues generated from the sales of land, revenue from construction activities and management fees generated from joint ventures and equity in earnings (loss) from unconsolidated entities, less the cost of sales of land, expenses related to construction activities and general and administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Form 10-K for the year ended November 30, 2015. 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.

8




Financial information relating to the Company’s operations was as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Homebuilding East
$
3,614,986


 
3,140,604


Homebuilding Central
1,529,601


 
1,421,195


Homebuilding West
4,445,575


 
4,157,616


Homebuilding Houston
525,167


 
481,386


Homebuilding Other
841,342


 
858,000


Rialto
1,171,987


 
1,505,500


Lennar Financial Services
1,423,679


 
1,425,837


Lennar Multifamily
518,089


 
415,352


Corporate and unallocated
777,375


 
1,014,019


Total assets
$
14,847,801


 
14,419,509




 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
954,298


 
838,235


 
1,613,352


 
1,448,918


Homebuilding Central
419,311


 
302,509


 
694,530


 
513,017


Homebuilding West
718,059


 
627,361


 
1,269,398


 
1,010,134


Homebuilding Houston
189,676


 
189,647


 
328,297


 
320,904


Homebuilding Other
169,541


 
158,060


 
331,789


 
264,497


Lennar Financial Services
175,940


 
169,885


 
299,896


 
294,712


Rialto
44,838


 
67,931


 
88,549


 
109,128


Lennar Multifamily
74,152


 
38,976


 
113,668


 
75,433


Total revenues (1)
$
2,745,815


 
2,392,604


 
4,739,479


 
4,036,743


Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
142,938


 
131,566


 
227,644


 
218,099


Homebuilding Central
45,679


 
30,715


 
66,002


 
45,767


Homebuilding West
113,807


 
102,332


 
202,641


 
184,825


Homebuilding Houston
23,083


 
22,738


 
35,955


 
39,753


Homebuilding Other
17,189


 
5,438


 
31,092


 
11,989


Lennar Financial Services
44,088


 
39,053


 
59,019


 
54,580


Rialto
(18,086
)
 
6,881


 
(16,476
)
 
9,689


Lennar Multifamily
14,943


 
(8,706
)
 
27,125


 
(14,388
)
Total operating earnings
383,641


 
330,017


 
633,002


 
550,314


Corporate general and administrative expenses
55,802


 
50,207


 
103,470


 
93,861


Earnings before income taxes
$
327,839


 
279,810


 
529,532


 
456,453




(1)
Total revenues were net of sales incentives of $146.1 million ($21,800 per home delivered) and $249.8 million ($21,700 per home delivered) for the three and six months ended May 31, 2016, respectively, compared to $128.8 million ($21,500 per home delivered) and $222.5 million ($21,600 per home delivered) for the three and six months ended May 31, 2015, respectively.
 



9




(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)
2016
 
2015
 
2016
 
2015
Revenues
$
208,636


 
180,790


 
308,362


 
623,747


Costs and expenses
201,370


 
154,139


 
298,570


 
453,018


Other income


 


 


 
2,943


Net earnings of unconsolidated entities
$
7,266


 
26,651


 
9,792


 
173,672


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
$
(9,633
)
 
6,494


 
(6,633
)
 
35,393




For both the three and six months ended May 31, 2016, Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to the Company's share of costs associated with the FivePoint combination. This was partially offset by $6.7 million and $12.7 million, respectively, of equity in earnings from one of the Company's unconsolidated entities for the three and six months ended May 31, 2016 primarily due to sales of 253 homesites and 471 homesites, respectively, to third parties for $52.1 million and $114.1 million, respectively, that resulted in gross profits of $18.3 million and $39.0 million, respectively. For both the three and six months ended May 31, 2016, 312 homesites were sold to Lennar by one of the Company's unconsolidated entities for $92.0 million that resulted in $29.7 million, of gross profit, of which the Company's portion was deferred.
For the three months ended May 31, 2015, Lennar Homebuilding equity in earnings included $11.6 million of equity in earnings from one of the Company's unconsolidated entities primarily due to sales of approximately 60 homesites and a commercial property to third parties for $121.3 million that resulted in $37.6 million of gross profit.
For the six months ended May 31, 2015, Lennar Homebuilding equity in earnings included $43.0 million of equity in earnings from one of the Company's unconsolidated entities primarily due to (1) sales of approximately 660 homesites to third parties for $407.2 million that resulted in $138.4 million of gross profit and (2) sales of 300 homesites to Lennar for $126.4 million that resulted in $44.6 million of gross profit, of which the Company's portion was deferred.
Balance Sheets
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
373,846


 
248,980


Inventories
3,081,630


 
3,059,054


Other assets
921,025


 
465,404


 
$
4,376,501


 
3,773,438


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
283,492


 
288,192


Debt
857,594


 
792,886


Equity
3,235,415


 
2,692,360


 
$
4,376,501


 
3,773,438


On May 2, 2016 (the “Closing Date”), the Company contributed, or obtained the right to contribute, its investment in three strategic joint ventures previously managed by FivePoint Communities in exchange for an investment in a newly formed FivePoint entity. The fair values of the assets contributed to the newly formed FivePoint entity, included within the unconsolidated entities summarized condensed balance sheet presented above, are preliminary and will be adjusted when additional information is obtained during the transaction’s measurement period (a period of up to one year from the Closing Date) that may change the fair value allocation as of the acquisition date. A portion of the assets of one of the three strategic joint ventures was retained by Lennar and its venture partner in a new unconsolidated entity. The transactions did not have a material impact to the Company’s financial position or cash flows. The Company recorded its share of combination costs in equity in loss from unconsolidated entities on the condensed consolidated statement of operations for the three and six months ended May 31, 2016.

10




As of May 31, 2016 and November 30, 2015, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $785.9 million and $741.6 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2016 and November 30, 2015 was $1.2 billion and $839.5 million, respectively. The basis difference is primarily as a result of the Company contributing its investment in three strategic joint ventures with a higher fair value than book value for an investment in the newly formed FivePoint entity, contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value and deferring equity in earnings on land sales.
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 total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments, including Lennar's maximum recourse exposure, were as follows:
(Dollars in thousands)
May 31,

2016
 
November 30,

2015
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
49,606


 
50,411


Non-recourse land seller debt and other debt
323,995


 
324,000


Non-recourse debt with completion guarantees
141,811


 
146,760


Non-recourse debt without completion guarantees
301,331


 
260,734


Non-recourse debt to the Company
816,743


 
781,905


The Company’s maximum recourse exposure (1)
40,851


 
10,981


Total debt
$
857,594


 
792,886


The Company’s maximum recourse exposure as a % of total JV debt
5
%
 
1
%
(1)
The increase in the Company's maximum recourse exposure was primarily related to the Company providing a repayment guarantee on an unconsolidated entity's debt.
In most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Historically, the Company has had repayment guarantees and/or maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. As of both May 31, 2016 and November 30, 2015, the Company did not have any maintenance guarantees or joint and several repayment guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
If the Company is required to make a payment under any guarantee, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes.
As of both May 31, 2016 and November 30, 2015, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2016, 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).



11




(4)
Stockholders' Equity
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2016 and 2015:
 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A

Common Stock
 
Class B

Common Stock
 
Additional

Paid - in Capital
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2015
$
5,950,072


 
18,066


 
3,298


 
2,305,560


 
(107,755
)
 
39


 
3,429,736


 
301,128


Net earnings (including net earnings attributable to noncontrolling interests)
369,490


 


 


 


 


 


 
362,549


 
6,941


Employee stock and directors plans
472


 
4


 


 
1,445


 
(977
)
 


 


 


Conversions and exchanges of convertible senior notes to Class A common stock
67,355


 
804


 


 
66,551


 


 


 


 


Tax benefit from employee stock plans, vesting of restricted stock and conversion of convertible senior notes
33,495


 


 


 
33,495


 


 


 


 


Amortization of restricted stock
22,266


 


 


 
22,266


 


 


 


 


Cash dividends
(17,191
)
 


 


 


 


 


 
(17,191
)
 


Receipts related to noncontrolling interests
167


 


 


 


 


 


 


 
167


Payments related to noncontrolling interests
(73,195
)
 


 


 


 


 


 


 
(73,195
)
Non-cash distributions to noncontrolling interests
(5,033
)
 


 


 


 


 


 


 
(5,033
)
Non-cash consolidations, net
12,478


 


 


 


 


 


 


 
12,478


Non-cash activity related to noncontrolling interests
2,082


 


 


 


 


 


 


 
2,082


Other comprehensive income, net of tax
476


 


 


 


 


 
476


 


 


Balance at May 31, 2016
$
6,362,934


 
18,874


 
3,298


 
2,429,317


 
(108,732
)
 
515


 
3,775,094


 
244,568


 
 
 
Stockholders’ Equity
 
 
(In thousands)
Total
Equity
 
Class A

Common Stock
 
Class B

Common Stock
 
Additional

Paid - in Capital
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
Retained
Earnings
 
Noncontrolling
Interests
Balance at November 30, 2014
$
5,251,302


 
17,424


 
3,298


 
2,239,574


 
(93,440
)
 
130


 
2,660,034


 
424,282


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


 


 


 


 


 


 
297,979


 
3,522


Employee stock and directors plans
9,350


 
5


 


 
1,440


 
7,905


 


 


 


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


 


 


 
113


 


 


 


 


Amortization of restricted stock
20,611


 


 


 
20,611


 


 


 


 


Cash dividends
(16,418
)
 


 


 


 


 


 
(16,418
)
 


Receipts related to noncontrolling interests
1,367


 


 


 


 


 


 


 
1,367


Payments related to noncontrolling interests
(78,937
)
 


 


 


 


 


 


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


 


 


 


 


 


 
(13,253
)
Other comprehensive income, net of tax
83


 


 


 


 


 
83


 


 


Balance at May 31, 2015
$
5,475,719


 
17,429


 
3,298


 
2,261,738


 
(85,535
)
 
213


 
2,941,595


 
336,981








The Company has a stock repurchase program, which originally authorized the purchase of up to 20 million shares of its outstanding common stock. During both the three and six months ended May 31, 2016 and 2015, there were no share

12




repurchases of common stock under the stock repurchase program. As of May 31, 2016, the remaining authorized shares that could be purchased under the stock repurchase program were 6.2 million shares of common stock.
(5)
Income Taxes
The provision for income taxes and effective tax rate were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Provision for income taxes
$
(103,801
)
 
(95,226
)
 
(160,042
)
 
(154,952
)
Effective tax rate (1)
32.21
%
 
34.22
%
 
30.62
%
 
34.21
%
(1)
For the three months ended May 31, 2016, the effective tax rate included tax benefits for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense. For the six months ended May 31, 2016, the effective tax rate included tax benefits for (1) a settlement with the IRS, (2) the domestic production activities deduction, and (3) energy tax credits, offset primarily by state income tax expense. For both the three and six months ended May 31, 2015, the effective tax rate included tax benefits for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense and interest accrued on uncertain tax positions.
As of May 31, 2016 and November 30, 2015, the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $321.3 million and $340.7 million, respectively.
At both May 31, 2016 and November 30, 2015, the Company had $12.3 million of gross unrecognized tax benefits.
At May 31, 2016, the Company had $44.4 million accrued for interest and penalties, of which $1.6 million was accrued during the six months ended May 31, 2016. In addition, during the six months ended May 31, 2016, the Company's accrual for interest and penalties was reduced by $22.3 million due primarily to a settlement with the IRS. At November 30, 2015, the Company had $65.1 million accrued for interest and penalties.


(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.

13




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)
2016
 
2015
 
2016
 
2015
Numerator:
 
 
 
 
 
 
 
Net earnings attributable to Lennar
$
218,469


 
183,016


 
362,549


 
297,979


Less: distributed earnings allocated to nonvested shares
86


 
89


 
175


 
180


Less: undistributed earnings allocated to nonvested shares
2,119


 
1,916


 
3,552


 
3,105


Numerator for basic earnings per share
216,264


 
181,011


 
358,822


 
294,694


Less: net amount attributable to noncontrolling interests in Rialto's Carried Interest Incentive Plan (1)
396


 


 
598


 


Plus: interest on 3.25% convertible senior notes due 2021
1,889


 
1,982


 
3,872


 
3,964


Plus: undistributed earnings allocated to convertible shares
2,119


 
1,916


 
3,552


 
3,105


Less: undistributed earnings reallocated to convertible shares
1,987


 
1,705


 
3,321


 
2,774


Numerator for diluted earnings per share
$
217,889


 
183,204


 
362,327


 
298,989


Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted average common shares outstanding
213,601


 
202,991


 
211,947


 
202,961


Effect of dilutive securities:
 
 
 
 
 
 
 
Share-based payments
4


 
9


 
4


 
10


Convertible senior notes
16,312


 
28,041


 
17,466


 
27,708


Denominator for diluted earnings per share - weighted average common shares outstanding
229,917


 
231,041


 
229,417


 
230,679


Basic earnings per share
$
1.01


 
0.89


 
1.69


 
1.45


Diluted earnings per share
$
0.95


 
0.79


 
1.58


 
1.30


(1)
The amounts presented above relate to Rialto's Carried Interest Incentive Plan adopted in June 2015 (see Note 8) and represents the difference between the advanced tax distributions received by Rialto's subsidiary and the amount Lennar, as the parent company, is assumed to own.
For both the three and six months ended May 31, 2016 and 2015, there were no options to purchase shares of common stock that were outstanding and anti-dilutive.



14




(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
105,596


 
106,777


Restricted cash
13,625


 
13,961


Receivables, net (1)
217,692


 
242,808


Loans held-for-sale (2)
862,289


 
843,252


Loans held-for-investment, net
30,671


 
30,998


Investments held-to-maturity
35,307


 
40,174


Investments available-for-sale (3)
49,083


 
42,827


Goodwill
39,439


 
38,854


Other (4)
69,977


 
66,186


 
$
1,423,679


 
1,425,837


Liabilities:
 
 
 
Notes and other debts payable
$
854,055


 
858,300


Other (5)
225,443


 
225,678


 
$
1,079,498


 
1,083,978


(1)
Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of May 31, 2016 and November 30, 2015, respectively.
(2)
Loans held-for-sale related to unsold loans carried at fair value.
(3)
Investments available-for-sale are carried at fair value with changes in fair value recorded as a component of accumulated other comprehensive income.
(4)
As of May 31, 2016 and November 30, 2015, other assets included mortgage loan commitments carried at fair value of $18.9 million and $13.1 million, respectively, and mortgage servicing rights carried at fair value of $18.2 million and $16.8 million, respectively. In addition, other assets also included forward contracts carried at fair value of $0.5 million as of November 30, 2015.
(5)
As of May 31, 2016 and November 30, 2015, other liabilities included $58.2 million and $65.0 million, respectively, of certain of the Company’s self-insurance reserves related to construction defects, general liability and workers’ compensation. Other liabilities also included forward contracts carried at fair value of $1.6 million as of May 31, 2016.
At May 31, 2016, the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
600,000


364-day warehouse repurchase facility that matures August 2016
300,000


364-day warehouse repurchase facility that matures October 2016 (2)
450,000


Total
$
1,350,000




(1)
Subsequent to May 31, 2016, the warehouse repurchase facility maturity date was extended to June 2017.
(2)
Maximum aggregate commitment includes an uncommitted amount of $250 million.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $854.1 million and $858.3 million at May 31, 2016 and November 30, 2015, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $901.9 million and $916.9 million at May 31, 2016 and November 30, 2015, respectively. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Substantially, all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Over the last several years there has been an industry-wide effort by purchasers to defray their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements.

15




Mortgage investors could seek to have the Company buy back mortgage loans or compensate them for losses incurred on mortgage loans that the Company has sold based on claims that the Company breached its limited representations or warranties. The Company’s mortgage operations have established accruals for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes accruals for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the Company's condensed consolidated balance sheets.
The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Loan origination liabilities, beginning of period
$
20,108


 
12,476


 
19,492


 
11,818


Provision for losses
1,110


 
1,225


 
1,898


 
2,027


Payments/settlements
(224
)
 
(41
)
 
(396
)
 
(185
)
Loan origination liabilities, end of period
$
20,994


 
13,660


 
20,994


 
13,660






(8)
Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
103,622


 
150,219


Restricted cash (1)
8,579


 
15,061


Receivables, net (2)


 
154,948


Loans held-for-sale (3)
199,415


 
316,275


Loans receivable, net
163,805


 
164,826


Real estate owned - held-for-sale
180,547


 
183,052


Real estate owned - held-and-used, net
125,406


 
153,717


Investments in unconsolidated entities
238,740


 
224,869


Investments held-to-maturity
60,076


 
25,625


Other
91,797


 
116,908


 
$
1,171,987


 
1,505,500


Liabilities:
 
 
 
Notes and other debts payable
$
543,310


 
771,728


Other
53,318


 
94,496


 
$
596,628


 
866,224




(1)
Restricted cash primarily consists of upfront deposits and application fees RMF receives before originating loans and is recognized as income once the loan has been originated as well as cash held in escrow by the Company’s loan servicer provider on behalf of customers and lenders and is disbursed in accordance with agreements between the transacting parties.
(2)
Receivables, net primarily relate to loans sold but not settled as of November 30, 2015.
(3)
Loans held-for-sale relate to unsold loans originated by RMF carried at fair value.
Rialto costs and expenses included loan impairments of $4.4 million and $6.7 million for the three and six months ended May 31, 2016, respectively, and $1.6 million and $2.8 million for the three and six months ended May 31, 2015, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). In addition, Rialto operating loss included a net loss attributable to noncontrolling interests of $4.3 million and $4.6 million for the three and six months ended May 31, 2016, respectively, and $0.7 million and $2.5 million for the three and six months ended May 31, 2015, respectively.

16


The following is a detail of Rialto other expense, net:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Realized gains on REO sales, net
$
5,492


 
4,544


 
9,238


 
7,674


Unrealized losses on transfer of loans receivable to REO and impairments, net
(5,396
)
 
(2,212
)
 
(5,549
)
 
(4,768
)
REO and other expenses
(12,123
)
 
(15,167
)
 
(26,958
)
 
(28,409
)
Rental and other income (loss) (1)
(7,558
)
 
11,963


 
2,993


 
24,359


Rialto other expense, net
$
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
(1)
Rental and other income (loss) for both the three and six months ended May 31, 2016, included a $16.0 million write-off of uncollectible receivables related to a hospital, which was acquired through the resolution of one of Rialto's loans from a 2010 portfolio. The hospital is managed by a third-party management company.
Loans Receivable
The following table represents loans receivable, net by type:
(In thousands)
May 31,

2016
 
November 30,

2015
Nonaccrual loans: FDIC and Bank Portfolios
$
68,813


 
88,694


Accrual loans
94,992


 
76,132


Loans receivable, net
$
163,805


 
164,826


The nonaccrual loan portfolios consist primarily of loans acquired at a discount. In 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies ("LLCs") in partnership with the FDIC (“FDIC Portfolios”). The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The Company was determined to be the primary beneficiary because it has the power to direct the activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2016, these consolidated LLCs had total combined assets and liabilities of $280.0 million and $11.3 million, respectively. At November 30, 2015, these consolidated LLCs had total combined assets and liabilities of $355.2 million and $11.3 million, respectively.
In addition in 2010, Rialto acquired 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions.
Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. As of May 31, 2016 and November 30, 2015, management classified all loans receivable within the FDIC Portfolios and Bank Portfolios as nonaccrual loans as forecasted principal and interest cannot be reasonably estimated and accounted for these assets in accordance with ASC 310-10, Receivables.
Accrual loans as of May 31, 2016 included loans originated of which $18.1 million relates to a convertible land loan that matures in July 2016 and $76.9 million relates to floating and fixed rate commercial property loans maturing between October 2017 and October 2025.

17


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, 2016
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
100,848


 
47,375


 
132


 
47,507


Single family homes
24,090


 
4,630


 
3,940


 
8,570


Commercial properties
11,440


 
1,009


 
1,072


 
2,081


Other
59,749


 
272


 
10,383


 
10,655


Loans receivable
$
196,127


 
53,286


 
15,527


 
68,813


November 30, 2015
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
145,417


 
59,740


 
1,165


 
60,905


Single family homes
39,659


 
8,344


 
3,459


 
11,803


Commercial properties
13,458


 
1,368


 
1,085


 
2,453


Other
78,279


 


 
13,533


 
13,533


Loans receivable
$
276,813


 
69,452


 
19,242


 
88,694




The average recorded investment in impaired loans was approximately $79 million and $115 million for the six months ended May 31, 2016 and 2015, respectively.
In order to assess the risk associated with each risk category, management evaluates the forecasted cash flows and the value of the underlying collateral securing the loans receivable on a quarterly basis or when an event occurs that suggests a decline in the collateral’s fair value.
Allowance for Loan Losses
The allowance for loan losses is a valuation reserve established through provisions for loan losses charged against Rialto’s operating earnings. For nonaccrual loans, the risk relates to a decline in the value of the collateral securing the outstanding obligation. If the recorded investment in the nonaccrual loan exceeds its fair value, an impairment is recognized through an allowance for loan losses. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Allowance on nonaccrual loans, beginning of the period
$
30,393


 
51,109


 
35,625


 
58,326


Provision for loan losses
4,382


 
1,585


 
6,721


 
2,809


Charge-offs
(5,589
)
 
(12,101
)
 
(13,160
)
 
(20,542
)
Allowance on nonaccrual loans, end of the period
$
29,186


 
40,593


 
29,186


 
40,593




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

18


The following tables represent the activity in REO:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
REO - held-for-sale, beginning of period
$
177,221


 
185,511


 
183,052


 
190,535


Improvements
708


 
1,591


 
1,595


 
3,295


Sales
(17,441
)
 
(23,213
)
 
(33,951
)
 
(48,138
)
Impairments and unrealized losses
(4,799
)
 
(2,954
)
 
(8,347
)
 
(4,372
)
Transfers from held-and-used, net (1)
24,858


 
34,451


 
38,198


 
54,066


REO - held-for-sale, end of period
$
180,547


 
195,386


 
180,547


 
195,386


 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
REO - held-and-used, net, beginning of period
$
148,900


 
242,569


 
153,717


 
255,795


Additions
2,636


 
5,431


 
11,303


 
14,343


Improvements
(185
)
 
785


 
122


 
1,428


Impairments
(714
)
 


 
(803
)
 
(1,413
)
Depreciation
(373
)
 
(586
)
 
(735
)
 
(1,375
)
Transfers to held-for-sale (1)
(24,858
)
 
(34,451
)
 
(38,198
)
 
(54,066
)
Other


 


 


 
(964
)
REO - held-and-used, net, end of period
$
125,406


 
213,748


 
125,406


 
213,748


(1)
During the three and six months ended May 31, 2016 and 2015, 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, 2016, the Company recorded net (losses) gains of ($0.7) million and $2.1 million, respectively, from acquisitions of REO through foreclosure. For both the three and six months ended May 31, 2015, the Company recorded net gains of $0.2 million from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto other expense, net.
Rialto Mortgage Finance - loans held-for-sale
During the six months ended May 31, 2016, RMF originated loans with a total principal balance of $670.3 million of which $654.0 million were recorded as loans held-for-sale and $16.3 million were recorded as accrual loans within loans receivable, net, and sold $766.4 million of loans into five separate securitizations. During the six months ended May 31, 2015, RMF originated loans with a total principal balance of $1.2 billion and sold $1.0 billion of loans into five separate securitizations. As of November 30, 2015, $151.8 million of the originated loans were sold into a securitization trust but not settled and thus were included as receivables, net.
Notes and Other Debts Payable
In November 2013, the Rialto segment originally issued $250 million aggregate principal amount of the 7.00% senior notes due 2018 ("7.00% Senior Notes"), at a price of 100% in a private placement. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes, at a price of 102.25% of their face value in a private placement. Proceeds from the offerings, after payment of expenses, were approximately $347 million. Rialto used the net proceeds of the 7.00% Senior Notes to provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. In addition, Rialto used $100 million of the net proceeds to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. Interest on the 7.00% Senior Notes is due semi-annually. At May 31, 2016 and November 30, 2015, the carrying amount, net of debt issuance costs, of the 7.00% Senior Notes was $348.3 million and $347.9 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to or enter into transactions with Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. The Company believes Rialto was in compliance with its debt covenants at May 31, 2016.

19


At May 31, 2016, Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
250,000


364-day warehouse repurchase facility that matures October 2016 (one year extension) (1)
400,000


364-day warehouse repurchase facility that matures January 2017 (1)
250,000


Warehouse repurchase facility that matures December 2017 (1)
100,000


Warehouse repurchase facility that matures August 2018 (two - one year extensions) (2)
100,000


Total
$
1,100,000


(1)
RMF uses these facilities to finance its loan origination and securitization activities.
(2)
In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this facility will be held as accrual loans within loans receivable, net. Borrowings under this facility were $53.8 million and $36.3 million as of May 31, 2016 and November 30, 2015, respectively.
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $57.3 million and $317.1 million as of May 31, 2016 and November 30, 2015, respectively and were secured by a 75% interest in the originated commercial loans financed. The facilities require immediate repayment of the 75% interest in the secured commercial loans when the loans are sold in a securitization and the proceeds are collected. These warehouse repurchase facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature.
In 2010, Rialto paid $310 million for the Bank Portfolios and for over 300 REO properties, of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions for which the maturity was subsequently extended. The remaining balance is due in December 2016. As of both May 31, 2016 and November 30, 2015, the outstanding amount related to the 5-year senior unsecured note was $30.3 million.
In May 2014, the Rialto segment issued $73.8 million principal amount of notes through a structured note offering (the “Structured Notes”) collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserve, were $69.1 million. In November 2014, the Rialto segment issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is August 15, 2017. As of May 31, 2016 and November 30, 2015, the outstanding amount, net of debt issuance costs, related to the Structured Notes was $29.0 million and $31.3 million, respectively.
Investments
All of Rialto's investments in funds have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, as amended by ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the assets and liabilities of the funds in which Rialto has investments in are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations and the Company’s share is recorded in Rialto equity in earnings from unconsolidated entities in the Company's statement of operations.

20


The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,

2016
 
May 31,

2016
 
November 30,

2015
(Dollars in thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to Fund by the Company
 
Funds Contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006


 
$
700,006


 
$
75,000


 
$
75,000


 
$
63,182


 
68,570


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


 
1,305,000


 
100,000


 
100,000


 
97,417


 
99,947


Rialto Mezzanine Partners Fund, LP
2013
 
300,000


 
300,000


 
33,799


 
33,799


 
28,206


 
32,344


Rialto Capital CMBS Funds
2014
 
111,753


 
111,753


 
47,057


 
47,057


 
46,712


 
23,233


Rialto Real Estate Fund III
2015
 
818,248


 


 
100,000


 


 
1,685


 


Rialto Credit Partnership, LP
2016
 
220,000


 
8,900


 
19,999


 
809


 
797


 


Other investments
 
 
 
 
 
 
 
 
 
 
741


 
775


 
 
 
 
 
 
 
 
 
 
 
$
238,740


 
224,869




Rialto's share of earnings (loss) from unconsolidated entities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Rialto Real Estate Fund, LP
$
931


 
3,044


 
2,270


 
3,790


Rialto Real Estate Fund II, LP
2,470


 
2,286


 
1,748


 
3,179


Rialto Mezzanine Partners Fund, LP
701


 
451


 
1,425


 
926


Rialto Capital CMBS Funds
1,208


 
1,533


 
1,580


 
2,077


Rialto Real Estate Fund III
1,622


 


 
1,383


 


Rialto Credit Partnership, LP
(12
)
 


 
(12
)
 


Other investments
(56
)
 
14


 
(33
)
 
20


Rialto equity in earnings from unconsolidated entities
$
6,864


 
7,328


 
8,361


 
9,992




During the three and six months ended May 31, 2016, Rialto received $2.5 million and $7.4 million, respectively, of advance distributions with regard to Rialto's carried interests in its real estate funds in order to cover income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds. During the three and six months ended May 31, 2015, Rialto received $4.8 million and $11.3 million of such advanced distributions. These advance distributions are not subject to clawbacks and are included in Rialto's revenues.
During 2015, Rialto adopted a Carried Interest Incentive Plan (the "Plan"), under which participating employees in the aggregate may receive up to 40% of the equity units of a limited liability company (a "Carried Interest Entity") that is entitled to distributions made by a fund or other investment vehicle (a "Fund") managed by a subsidiary of Rialto. As such, those employees receiving equity units in the Carried Interest Entity may benefit from distributions made by a Fund to the extent the Carried Interest Entity makes distributions to its equity holders. The units issued to employees are equity awards and are subject to vesting schedules and forfeiture or repurchase provisions in the case of a termination of employment.

21


Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
122,120


 
188,147


Loans receivable
388,105


 
473,997


Real estate owned
597,915


 
506,609


Investment securities
1,231,257


 
1,092,476


Investments in partnerships
421,272


 
429,979


Other assets
42,889


 
30,340


 
$
2,803,558


 
2,721,548


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
24,702


 
29,462


Notes payable
524,416


 
374,498


Equity
2,254,440


 
2,317,588


 
$
2,803,558


 
2,721,548




Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
51,240


 
39,320


 
95,536


 
81,058


Costs and expenses
20,704


 
25,082


 
41,603


 
48,087


Other income, net (1)
26,710


 
55,477


 
11,548


 
61,351


Net earnings of unconsolidated entities
$
57,246


 
69,715


 
65,481


 
94,322


Rialto equity in earnings from unconsolidated entities
$
6,864


 
7,328


 
8,361


 
9,992




(1)
Other income, net, included realized and unrealized gains (losses) on investments.
At May 31, 2016 and November 30, 2015, the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $60.1 million and $25.6 million, respectively. These securities have discount rates ranging from 39% to 55% with coupon rates ranging from 2.2% to 4.0%, stated and assumed final distribution dates between November 2020 and February 2026, and stated maturity dates between November 2048 and March 2059. The Rialto segment reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its CMBS. Based on the Rialto segment’s assessment, no impairment charges were recorded during either the three and six months ended May 31, 2016 or 2015. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In 2014, the Rialto segment invested $18 million in a private commercial real estate services company. The investment was carried at cost at both May 31, 2016 and November 30, 2015 and is included in Rialto's other assets.



22




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

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
5,067


 
8,041


Land under development
142,921


 
115,982


Consolidated inventory not owned
24,008


 
5,508


Investments in unconsolidated entities
304,171


 
250,876


Other assets
41,922


 
34,945


 
$
518,089


 
415,352


Liabilities:
 
 
 
Accounts payable and other liabilities
$
74,220


 
62,943


Liabilities related to consolidated inventory not owned
15,857


 
4,007


 
$
90,077


 
66,950




The unconsolidated entities in which the Lennar Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Lennar Multifamily unconsolidated entities, the Company (or entities related to them) has been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Additionally, the Company guarantees the construction costs of the project as construction cost over-runs would be paid by the Company. Generally, these payments would be increases to the Company's investment in the entities and would increase its share of funds the entities distribute after the achievement of certain thresholds. As of both May 31, 2016 and November 30, 2015, the fair value of the completion guarantees was immaterial. Additionally, as of May 31, 2016 and November 30, 2015, the Lennar Multifamily segment had $39.5 million and $37.9 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities and deposits on land purchase contracts. These letters of credit outstanding are included in the disclosure in Note 11 related to the Company's performance and financial letters of credit. As of May 31, 2016 and November 30, 2015, Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $578.7 million and $466.7 million, respectively.
In many instances, the Lennar Multifamily segment is appointed as the construction, development and property manager for certain of its Lennar Multifamily unconsolidated entities and receives fees for performing this function. During the three and six months ended May 31, 2016, the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $9.3 million and $17.4 million, respectively. During the three and six months ended May 31, 2015, the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $3.9 million and $8.4 million, respectively.
The Lennar Multifamily segment also provides general contractor services for construction of some of the rental properties owned by unconsolidated entities in which the Company has an investment. During the three and six months ended May 31, 2016, the Lennar Multifamily segment provided general contractor services totaling $53.5 million and $84.9 million, respectively, which were partially offset by costs related to those services of $51.7 million and $82.3 million, respectively. During the three and six months ended May 31, 2015, the Lennar Multifamily segment provided general contractor services totaling $35.1 million and $67.0 million, respectively, which were partially offset by costs related to those services of $33.7 million and $65.1 million, respectively.
In 2015, the Lennar Multifamily segment completed the initial closing of the Lennar Multifamily Venture (the "Venture") for the development, construction and property management of class-A multifamily assets with $1.1 billion of commitments. During the six months ended May 31, 2016, the Venture received an additional $300 million of equity commitments, increasing its total equity commitments to $1.4 billion, including a $504 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. As of May 31, 2016, $500.0 million of the $1.4 billion in equity commitments had been called, of which the Company has contributed $179.5 million representing its pro-rata portion of the called equity, resulting in a remaining equity commitment of $324.5 million. During the six months ended May 31, 2016, $224.6 million in equity commitments was called, of which the Company contributed its portion of $90.1 million. During the six months ended

23




May 31, 2016, the Company received distributions of $43.6 million as a return of capital from the Venture. As of May 31, 2016 and November 30, 2015, the carrying value of the Company's investment in the Venture was $172.5 million and $122.5 million, respectively. Subsequent to May 31, 2016, the Venture received an additional $550 million of equity commitments, increasing its total equity commitments to approximately $2 billion.
Summarized condensed financial information on a combined 100% basis related to Lennar Multifamily's investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
58,962


 
39,579


Operating properties and equipment
1,748,003


 
1,398,244


Other assets
41,778


 
25,925


 
$
1,848,743


 
1,463,748


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
241,079


 
179,551


Notes payable
578,662


 
466,724


Equity
1,029,002


 
817,473


 
$
1,848,743


 
1,463,748




Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
9,649


 
3,075


 
17,963


 
5,169


Costs and expenses
14,058


 
5,081


 
25,730


 
8,075


Other income, net
30,272


 


 
70,394


 


Net earnings (loss) of unconsolidated entities
$
25,863


 
(2,006
)
 
62,627


 
(2,906
)
Lennar Multifamily equity in earnings (loss) from unconsolidated entities (1)
$
14,008


 
(422
)
 
33,694


 
(600
)
(1)
For the three months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $15.4 million share of a gain as a result of the sale of an operating property by one of its unconsolidated entities. For the six months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $35.8 million share of gains as a result of the sale of two operating properties by its unconsolidated entities.


(10)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of May 31, 2016 and November 30, 2015 included $358.6 million and $414.9 million, respectively, of cash held in escrow for approximately three days.



24




(11)
Lennar Homebuilding Senior Notes and Other Debts Payable
(Dollars in thousands)
May 31,

2016
 
November 30,

2015
Unsecured revolving credit facility
$
375,000


 


12.25% senior notes due 2017
397,223


 
396,252


4.75% senior notes due 2017
398,108


 
397,736


6.95% senior notes due 2018
248,050


 
247,632


4.125% senior notes due 2018
273,603


 
273,319


4.500% senior notes due 2019
497,606


 
497,210


4.50% senior notes due 2019
597,048


 
596,622


3.25% convertible senior notes due 2021
331,698


 
398,194


4.750% senior notes due 2021
496,156


 


4.750% senior notes due 2022
567,864


 
567,325


4.875% senior notes due 2023
393,739


 
393,545


4.750% senior notes due 2025
496,004


 
495,784


2.75% convertible senior notes due 2020


 
233,225


6.50% senior notes due 2016


 
249,905


Mortgage notes on land and other debt
244,136


 
278,381


 
$
5,316,235


 
5,025,130




The carrying amounts of the senior notes listed above are net of debt issuance costs of $26.1 million and $26.4 million, as of May 31, 2016 and November 30, 2015, respectively.
At May 31, 2016, the Company had a $1.6 billion Credit Facility, which includes a $163 million accordion feature, subject to additional commitments, with certain financial institutions. The maturity for $1.3 billion of the Credit Facility was in June 2019, with the remainder maturing in June 2018. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to $500 million in commitments may be used for letters of credit. Under the Credit Facility agreement, the Company is required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. The Company believes it was in compliance with its debt covenants at May 31, 2016. In addition, the Company had $320 million letter of credit facilities with different financial institutions.
Subsequent to May 31, 2016, the Company amended the credit agreement governing its Credit Facility to increase the maximum borrowings from $1.6 billion to $1.8 billion, including a $318 million accordion feature, subject to additional commitments, with certain financial institutions. The maturity for $1.3 billion of the Credit Facility was extended from June 2019 to June 2020 with the remaining $160 million maturing in June 2018.
The Company’s performance letters of credit outstanding were $270.8 million and $236.5 million, respectively, at May 31, 2016 and November 30, 2015. The Company’s financial letters of credit outstanding were $216.6 million and $216.7 million, at May 31, 2016 and November 30, 2015, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2016, the Company had outstanding surety bonds of $1.3 billion including performance surety bonds related to site improvements at various projects (including certain projects in the Company’s joint ventures) and financial surety bonds including $223.4 million related to pending litigation. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of May 31, 2016, there were approximately $468.4 million, or 36%, of anticipated future costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds or letters of credit, but if any such draws occur, the Company does not believe they would have a material effect on its financial position, results of operations or cash flows.
In March 2016, the Company issued $500 million aggregate principal amount of 4.750% senior notes due 2021 (the “4.750% Senior Notes”) at a price of 100%. Proceeds from the offering, after payment of expenses, were $496.0 million. The Company used the net proceeds from the sales of the 4.750% Senior Notes to retire its 6.50% senior notes due April 2016 for 100% of the outstanding principal amount, plus accrued and unpaid interest. Interest on the 4.750% Senior Notes is due semi-

25




annually beginning October 1, 2016. The 4.750% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
The 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”) are convertible into shares of Class A common stock at any time prior to maturity or redemption at the initial conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of the 3.25% Convertible Senior Notes or 17,022,200 shares of Class A common stock if all the 3.25% Convertible Senior Notes are converted, which is equivalent to an initial conversion price of approximately $23.50 per share of Class A common stock, subject to anti-dilution adjustments. The shares are included in the calculation of diluted earnings per share. During the six months ended May 31, 2016, holders converted approximately $68 million in aggregate principal amount of the 3.25% Convertible Senior Notes for 2.9 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums. At May 31, 2016 and November 30, 2015, the principal amount of the 3.25% Convertible Senior Notes was $332.5 million and $400.0 million, respectively. The 3.25% Convertible Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
Subsequent to May 31, 2016, holders converted approximately $137 million aggregate principal amount of the 3.25% Convertible Senior Notes for 5.8 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums.
During the six months ended May 31, 2016, all of the $234 million aggregate outstanding principal amount of the 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”) were converted and exchanged by the holders for approximately $234 million in cash and 5.2 million shares of Class A common stock, plus accrued and unpaid interest with respect to the exchanges. The 2.75% Convertible Senior Notes were convertible into cash, shares of Class A common stock or a combination of both, at the Company’s election. However, the Company settled the face value of the 2.75% Convertible Senior Notes in cash. Holders converted the 2.75% Convertible Senior Notes at the initial conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount, which was equivalent to an initial conversion price of approximately $22.13 per share of Class A common stock. For the three and six months ended May 31, 2016, the calculation for diluted earnings per share included 0.1 million shares and 0.8 million shares, respectively, related to the dilutive effect of the 2.75% Convertible Senior Notes prior to the conversions. For the three and six months ended May 31, 2015, the calculation for diluted earnings per share included 11.0 million shares and 10.7 million shares, respectively, related to the dilutive effect of the 2.75% Convertible Senior Notes.
Although the guarantees by substantially all of the Company's 100% owned homebuilding subsidiaries and some of the Company's other subsidiaries are full, unconditional and joint and several while they are in effect, (i) a subsidiary will cease to be a guarantor at any time when it is not directly or indirectly guaranteeing at least $75 million of debt of Lennar Corporation (the parent company), and (ii) a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.


(12)
Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in Lennar Homebuilding other liabilities in the condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Warranty reserve, beginning of period
$
124,733


 
116,271


 
130,853


 
115,927


Warranties issued
24,997


 
20,469


 
42,570


 
33,792


Adjustments to pre-existing warranties from changes in estimates (1)
(115
)
 
1,723


 
(735
)
 
5,384


Payments
(22,456
)
 
(18,853
)
 
(45,529
)
 
(35,493
)
Warranty reserve, end of period
$
127,159


 
119,610


 
127,159


 
119,610




(1)
The adjustments to pre-existing warranties from changes in estimates during both the three and six months ended May 31, 2016 and 2015 primarily related to specific claims related to certain of our homebuilding communities and other adjustments.



26




(13)
Share-Based Payments
During both the three and six months ended May 31, 2016, the Company granted an immaterial number of nonvested shares. During both the three and six months ended May 31, 2015, the Company granted an immaterial number of nonvested shares and stock options. Compensation expense related to the Company’s share-based payment awards was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Nonvested shares
$
11,124


 
10,361


 
22,266


 
20,611


Stock options


 
38


 


 
39


Total compensation expense for share-based awards
$
11,124


 
10,399


 
22,266


 
20,650




(14)
Financial Instruments and Fair Value Disclosures
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at May 31, 2016 and November 30, 2015, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
 
 
 
May 31, 2016
 
November 30, 2015
 
Fair Value
 
Carrying
 
Fair
 
Carrying
 
Fair
(In thousands)
Hierarchy
 
Amount
 
Value
 
Amount
 
Value
ASSETS
 
 
 
 
 
 
 
 
 
Rialto:
 
 
 
 
 
 
 
 
 
Loans receivable, net
Level 3
 
$
163,805


 
166,599


 
164,826


 
169,302


Investments held-to-maturity
Level 3
 
$
60,076


 
59,881


 
25,625


 
25,227


Lennar Financial Services:
 
 
 
 
 
 
 
 
 
Loans held-for-investment, net
Level 3
 
$
30,671


 
29,206


 
30,998


 
29,931


Investments held-to-maturity
Level 2
 
$
35,307


 
35,362


 
40,174


 
40,098


LIABILITIES
 
 
 
 
 
 
 
 
 
Lennar Homebuilding senior notes and other debts payable
Level 2
 
$
5,316,235


 
5,770,652


 
5,025,130


 
5,936,327


Rialto notes and other debts payable
Level 2
 
$
543,310


 
562,888


 
771,728


 
803,013


Lennar Financial Services notes and other debts payable
Level 2
 
$
854,055


 
854,055


 
858,300


 
858,300




The following methods and assumptions are used by the Company in estimating fair values:
Rialto—The fair values for loans receivable, net are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable. The fair value for investments held-to-maturity is based on discounted cash flows. For notes and other debts payable, the fair value is calculated based on discounted cash flows using the Company’s weighted average borrowing rate and for the warehouse repurchase financing agreements fair values approximate their carrying value due to their short-term maturities.
Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information. For notes and other debts payable, the fair values approximate their carrying value due to variable interest pricing terms and short-term nature of the borrowings.
Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates.



27




Fair Value Measurements:
GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:
Level 1: Fair value determined based on quoted prices in active markets for identical assets.
Level 2: Fair value determined using significant other observable inputs.
Level 3: Fair value determined using significant unobservable inputs.
The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
(In thousands)
Fair Value
Hierarchy
 
Fair Value at

May 31,

2016
 
Fair Value at

November 30,

2015
Rialto Financial Assets:
 
 
 
 
 
Loans held-for-sale (1)
Level 3
 
$
199,415


 
316,275


Credit default swaps (2)
Level 2
 
$
3,396


 
6,153


Rialto Financial Liabilities:
 
 
 
 
 
Interest rate swaps and swap futures (3)
Level 1
 
$
105


 
978


Lennar Financial Services Assets (Liabilities):
 
 
 
 
 
Loans held-for-sale (4)
Level 2
 
$
862,289


 
843,252


Investments available-for-sale
Level 1
 
$
49,083


 
42,827


Mortgage loan commitments
Level 2
 
$
18,882


 
13,060


Forward contracts
Level 2
 
$
(1,649
)
 
531


Mortgage servicing rights
Level 3
 
$
18,241


 
16,770




(1)
The aggregate fair value of Rialto loans held-for-sale of $199.4 million at May 31, 2016 is below their aggregate principal balance of $200.0 million by $0.6 million. The aggregate fair value of loans held-for-sale of $316.3 million at November 30, 2015 exceeds their aggregate principal balance of $314.3 million by $2.0 million.
(2)
Rialto credit default swaps are included within Rialto's other assets.
(3)
Rialto interest rate swaps and swap futures are included within Rialto's other liabilities.
(4)
The aggregate fair value of Lennar Financial Services loans held-for-sale of $862.3 million at May 31, 2016 exceeds their aggregate principal balance of $830.4 million by $31.9 million. The aggregate fair value of loans held-for-sale of $843.3 million at November 30, 2015 exceeds their aggregate principal balance of $815.0 million by $28.2 million.
The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values:
Rialto loans held-for-sale- The fair value of loans held-for-sale is calculated from model-based techniques that use discounted cash flow assumptions and the Company’s own estimates of CMBS spreads, market interest rate movements and the underlying loan credit quality. Loan values are calculated by allocating the change in value of an assumed CMBS capital structure to each loan. The value of an assumed CMBS capital structure is calculated, generally, by discounting the cash flows associated with each CMBS class at market interest rates and at the Company’s own estimate of CMBS spreads. The Company estimates CMBS spreads by observing the pricing of recent CMBS offerings, secondary CMBS markets, changes in the CMBX index, and general capital and commercial real estate market conditions. Considerations in estimating CMBS spreads include comparing the Company’s current loan portfolio with comparable CMBS offerings containing loans with similar duration, credit quality and collateral composition. These methods use unobservable inputs in estimating a discount rate that is used to assign a value to each loan. While the cash payments on the loans are contractual, the discount rate used and assumptions regarding the relative size of each class in the CMBS capital structure can significantly impact the valuation. Therefore, the estimates used could differ materially from the fair value determined when the loans are sold to a securitization trust.
Rialto credit default swaps- The fair value of credit default swaps (derivatives) is based on quoted market prices for similar investments traded in active markets.
Rialto interest rate swaps and swap futures- The fair value of interest rate swaps (derivatives) is based on observable values for underlying interest rates and market determined risk premiums. The fair value of interest rate swap futures (derivatives) is based on quoted market prices for identical investments traded in active markets.


Lennar Financial Services loans held-for-sale- Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-

28




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. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of May 31, 2016 and November 30, 2015. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.
Lennar Financial Services investments available-for-sale- The fair value of these investments is based on the quoted market prices for similar financial instruments.
Lennar Financial Services mortgage loan commitments- Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets.
Lennar Financial Services forward contracts- Fair value is based on quoted market prices for similar financial instruments. The fair value of forward contracts is included in the Lennar Financial Services segment's other liabilities as of May 31, 2016. The fair value of forward contracts is included in the Lennar Financial Services segment's other assets as of November 30, 2015.
The Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting the Company’s counterparties to investment banks, federally regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At May 31, 2016, the segment had open commitments amounting to $1.2 billion to sell MBS with varying settlement dates through August 2016.
Lennar Financial Services mortgage servicing rights - Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of May 31, 2016, the key assumptions used in determining the fair value include a 14.8% mortgage prepayment rate, a 12.3% discount rate and a 6.6% delinquency rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.
The changes in fair values for Level 1 and Level 2 financial instruments measured on a recurring basis are shown below by financial instrument and financial statement line item:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Changes in fair value included in Lennar Financial Services revenues:
 
 
 
 
 
 
 
Loans held-for-sale
$
3,121


 
4,181


 
3,634


 
(3,119
)
Mortgage loan commitments
$
(231
)
 
(84
)
 
5,822


 
6,195


Forward contracts
$
7,988


 
210


 
(2,180
)
 
7,731


Investments available-for-sale
$
6


 
23


 
6


 
23


Changes in fair value included in Rialto revenues:
 
 
 
 
 
 
 
Financial Assets:
 
 
 
 
 
 
 
Credit default swaps
$
(3,408
)
 
(332
)
 
23


 
(824
)
Financial Liabilities:
 
 
 
 
 
 
 
Interest rate swaps and swap futures
$
5,879


 
464


 
873


 
431


Changes in fair value included in other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Lennar Financial Services investments available-for-sale
$
919


 
(94
)
 
482


 
106





29




Interest on Lennar Financial Services loans held-for-sale and Rialto loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded as revenues in the Lennar Financial Services’ statement of operations and Rialto's statement of operations, respectively.
The following table represents the reconciliation of the beginning and ending balance for the Level 3 recurring fair value measurements:
 
Three Months Ended May 31,
 
2016
 
2015
 
Lennar Financial Services
 
Rialto
 
Lennar Financial Services
 
Rialto
(In thousands)
Mortgage servicing rights
 
Loans held-for-sale
 
Mortgage servicing rights
 
Loans held-for-sale
Beginning balance
$
15,810


 
243,230


 
16,786


 
360,045


Purchases/loan originations
2,375


 
348,188


 
652


 
683,179


Sales/loan originations sold, including those not settled


 
(386,226
)
 


 
(723,479
)
Disposals/settlements
(943
)
 


 
(1,095
)
 


Changes in fair value (1)
999


 
(5,293
)
 
161


 
(1,547
)
Interest and principal paydowns


 
(484
)
 


 
(161
)
Ending balance
$
18,241


 
199,415


 
16,504


 
318,037


 
Six Months Ended May 31,
 
2016
 
2015
 
Lennar Financial Services
 
Rialto
 
Lennar Financial Services
 
Rialto
(In thousands)
Mortgage servicing rights
 
Loans held-for-sale
 
Mortgage servicing rights
 
Loans held-for-sale
Beginning balance
$
16,770


 
316,275


 
17,353


 
113,596


Purchases/loan originations
3,994


 
653,973


 
996


 
1,248,694


Sales/loan originations sold, including those not settled


 
(767,892
)
 


 
(1,041,583
)
Disposals/settlements
(1,570
)
 


 
(1,874
)
 


Changes in fair value (1)
(953
)
 
(1,209
)
 
29


 
(2,301
)
Interest and principal paydowns


 
(1,732
)
 


 
(369
)
Ending balance
$
18,241


 
199,415


 
16,504


 
318,037


(1)
Changes in fair value for Rialto loans held-for-sale and Lennar Financial Services mortgage servicing rights are included in Rialto's and Lennar Financial Services' revenues, respectively.

30




The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs. The fair values included in the table below represents only those assets whose carrying value were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:
 
 
 
Three Months Ended May 31,
 
 
 
2016
 
2015
(In thousands)
Fair Value
Hierarchy
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans receivable
Level 3
 
$
56,010


 
51,628


 
(4,382
)
 
81,108


 
79,523


 
(1,585
)
Non-financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$


 


 


 
46,339


 
36,736


 
(9,603
)
Land and land under development (2)
Level 3
 
$
1,855


 
1,500


 
(355
)
 


 


 


Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
REO - held-for-sale (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
12,950


 
12,173


 
(777
)
 
8,733


 
8,209


 
(524
)
Upon management periodic valuations
Level 3
 
$
17,892


 
13,870


 
(4,022
)
 
11,258


 
8,828


 
(2,430
)
REO - held-and-used, net (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
2,520


 
2,636


 
116


 
4,689


 
5,431


 
742


Upon management periodic valuations
Level 3
 
$
1,827


 
1,113


 
(714
)
 


 


 


 
 
 
Six Months Ended May 31,
 
 
 
2016
 
2015
(In thousands)
Fair Value
Hierarchy
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
 
Carrying Value
 
Fair Value
 
Total Gains (Losses) (1)
Financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans receivable
Level 3
 
$
63,627


 
56,906


 
(6,721
)
 
103,209


 
100,400


 
(2,809
)
Non-financial assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Finished homes and construction in progress (2)
Level 3
 
$


 


 


 
46,339


 
36,736


 
(9,603
)
Land and land under development (2)
Level 3
 
$
5,682


 
4,925


 
(757
)
 


 


 


Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
REO - held-for-sale (3):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
25,733


 
24,189


 
(1,544
)
 
13,617


 
12,800


 
(817
)
Upon management periodic valuations
Level 3
 
$
34,322


 
27,519


 
(6,803
)
 
16,862


 
13,307


 
(3,555
)
REO - held-and-used, net (4):
 
 
 
 
 
 
 
 
 
 
 
 
 
Upon acquisition/transfer
Level 3
 
$
7,703


 
11,303


 
3,600


 
13,326


 
14,343


 
1,017


Upon management periodic valuations
Level 3
 
$
4,916


 
4,113


 
(803
)
 
2,689


 
1,276


 
(1,413
)
(1)
Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the three and six months ended May 31, 2016 and 2015.
(2)
Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's condensed consolidated statement of operations for the three and six months ended May 31, 2016 and 2015.
(3)
REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of the transfer or acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-for-sale is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO held-for-sale. The losses upon the transfer or acquisition of REO and impairments were included in Rialto other expense, net, in the Company’s condensed consolidated statement of operations for the three and six months ended May 31, 2016 and 2015.



31






(4)
REO held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. In addition, management periodically performs valuations of its REO held-and-used, net. The gains upon acquisition of REO held-and-used, net and impairments were included in Rialto other expense, net, in the Company’s condensed consolidated statement of operations for the three and six months ended May 31, 2016 and 2015.
Finished homes and construction in progress are included within inventories. Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. The Company disclosed its accounting policy related to inventories and its review for indicators of impairments in the Summary of Significant Accounting Policies in its Form 10-K for the year ended November 30, 2015.
The Company estimates the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or assumptions change. For example, changes in market conditions and other specific developments or changes in assumptions may cause the Company to re-evaluate its strategy regarding previously impaired inventory, as well as inventory not currently impaired but for which indicators of impairment may arise if market deterioration occurs, and certain other 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.
On a quarterly basis, the Company reviews its active communities for indicators of potential impairments. As of May 31, 2016 and 2015, there were 689 and 665 active communities, excluding unconsolidated entities, respectively. As of May 31, 2016, the Company identified 20 communities with 652 homesites and a corresponding carrying value of $116.0 million as having potential indicators of impairment. For the six months ended May 31, 2016, the Company recorded no impairments.
As of May 31, 2015, the Company identified 21 communities with 790 homesites and a corresponding carrying value of $160.3 million as having potential indicators of impairment. Of those communities, the Company recorded a valuation adjustment of $9.6 million on 67 homesites in one community with a carrying value of $46.3 million for the six months ended May 31, 2015 related to a strategic decision to move forward on an inactive asset.
The table below summarizes the most significant unobservable inputs used in the Company's discounted cash flow model to determine the fair value of its communities for which the Company recorded valuation adjustments during the six months ended May 31, 2015:
 
Six Months Ended
 
May 31, 2015
Unobservable inputs
 
Average selling price


$1,300,000


Absorption rate per quarter (homes)
9


Discount rate
12
%




(15)
Variable Interest Entities
The Company evaluated the agreements of its joint ventures that were formed or that had reconsideration events during the six months ended May 31, 2016. Based on the Company's evaluation, during the six months ended May 31, 2016, the Company consolidated entities that had total combined assets of $122.1 million and liabilities of $96.4 million. During the six months ended May 31, 2016, there were no VIEs that were deconsolidated.
The Company’s recorded investments in unconsolidated entities were as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Lennar Homebuilding
$
785,883


 
741,551


Rialto
$
238,740


 
224,869


Lennar Multifamily
$
304,171


 
250,876




Consolidated VIEs
As of May 31, 2016, the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $645.1 million and $146.5 million, respectively. As of November 30, 2015, the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $652.3 million and $84.4 million, respectively. Those assets are owned by, and those liabilities are obligations of, the VIEs, not the Company.
A VIE’s assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company’s senior notes and other debts payable. The assets held by a VIE usually are collateral for that VIE’s debt. The Company and other

32




partners do not generally have an obligation to make capital contributions to a VIE unless the Company and/or the other partner(s) have entered into debt guarantees with a VIE’s banks. Other than debt guarantee agreements with a VIE’s banks, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to a VIE. While the Company has option contracts to purchase land from certain of its VIEs, the Company is not required to purchase the assets and could walk away from the contracts.
Unconsolidated VIEs
The Company’s recorded investment in unconsolidated VIEs and its estimated maximum exposure to loss were as follows:
As of May 31, 2016
(In thousands)
Investments in
Unconsolidated VIEs
 
Lennar’s Maximum
Exposure to Loss
Lennar Homebuilding (1)
$
99,026


 
130,137


Rialto (2)
60,076


 
60,076


Lennar Multifamily (3)
227,795


 
586,195


 
$
386,897


 
776,408


As of November 30, 2015
(In thousands)
Investments in
Unconsolidated VIEs
 
Lennar’s Maximum
Exposure to Loss
Lennar Homebuilding (1)
$
102,706


 
111,215


Rialto (2)
25,625


 
25,625


Lennar Multifamily (3)
177,359


 
586,842


 
$
305,690


 
723,682


(1)
At May 31, 2016, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $31.0 million repayment guarantee on an unconsolidated entity's debt. At November 30, 2015, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $8.3 million remaining commitment to fund an unconsolidated entity for further expenses up until the unconsolidated entity obtains permanent financing.
(2)
At both May 31, 2016 and November 30, 2015, the maximum recourse exposure to loss of Rialto’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs. At May 31, 2016 and November 30, 2015, investments in unconsolidated VIEs and Lennar’s maximum exposure to loss included $60.1 million and $25.6 million, respectively, related to Rialto’s investments held-to-maturity.
(3)
As of May 31, 2016 and November 30, 2015, the remaining equity commitment of $324.5 million and $378.3 million, respectively, to fund the Venture for future expenditures related to the construction and development of its projects is included in Lennar's maximum exposure to loss. In addition, at May 31, 2016 and November 30, 2015, the maximum exposure to loss of Lennar Multifamily's investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs, except with regard to $29.1 million and $30.0 million, respectively, of letters of credit outstanding for certain of the unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements.
While these entities are VIEs, the Company has determined that the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance is generally shared and the Company and its partners are not de facto agents. While the Company generally manages the day-to-day operations of the VIEs, each of these VIEs has an executive committee made up of representatives from each partner. The members of the executive committee have equal votes and major decisions require unanimous consent and approval from all members. The Company does not have the unilateral ability to exercise participating voting rights without partner consent.
As of May 31, 2016, the Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for $324.5 million remaining equity commitment to fund the Venture for further expenditures related to the construction and development of its projects and $29.1 million of letters of credit outstanding for certain Lennar Multifamily unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the VIEs, except with regard to $31.0 million repayment guarantee on an unconsolidated entity's debt. Except for the unconsolidated VIEs discussed above, the Company and the other partners did not guarantee any debt of the other unconsolidated VIEs. While the Company has option contracts to purchase land from certain of its unconsolidated VIEs, the Company is not required to purchase the assets and could walk away from the contracts.

33




Option Contracts
The Company has access to land through option contracts, which generally enables it to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company has determined whether to exercise the option.
The Company evaluates all option contracts for land to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, if the Company is deemed to be the primary beneficiary or makes a significant deposit for optioned land, it may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2016, consolidated inventory not owned increased by $75.7 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2016. The increase was primarily related to the consolidation of an option agreement, partially offset by the Company exercising its option to acquire land under previously consolidated contracts. To reflect the purchase price of the inventory consolidated, the Company had a net reclass related to option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2016. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and the Company’s cash deposits.
The Company’s exposure to loss related to its option contracts with third parties and unconsolidated entities consisted of its non-refundable option deposits and pre-acquisition costs totaling $83.4 million and $89.2 million at May 31, 2016 and November 30, 2015, respectively. Additionally, the Company had posted $73.9 million and $70.4 million of letters of credit in lieu of cash deposits under certain land and option contracts as of May 31, 2016 and November 30, 2015, respectively.
(16)
Commitments and Contingent Liabilities
The Company has been engaged in litigation since 2008 in the United States District Court for the District of Maryland regarding whether the Company is required by a contract it entered into in 2005 to purchase a property in Maryland. After entering into the contract, the Company later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In January 2015, the District Court rendered a decision ordering the Company to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. The Company believes the decision is contrary to applicable law and has appealed the decision. The Company does not believe it is probable that a loss has occurred and, therefore, no liability has been recorded with respect to this case.
If the District Court decision is affirmed in its entirety, the Company will purchase the property and record it at fair value, which the Company believes will not result in an impairment. The amount of interest the Company will be required to pay has been the subject of further proceedings before the court. On June 29, 2015, the court ruled that interest will be calculated as simple interest at the rate of 12% per annum from May 27, 2008 until the date the Company purchases the property. Simple interest on $114 million at 12% per annum will accrue at the rate of $13.7 million per year, totaling approximately $109 million as of May 31, 2016. In addition, if the Company is required to purchase the property, it will be obligated to reimburse the seller for real estate taxes, which currently total $1.6 million. The Company has not engaged in discovery regarding the amount of the plaintiffs’ attorneys’ fees. If the District Court decision is totally reversed on appeal, the Company will not have to purchase the property or pay interest, real estate taxes or attorneys’ fees.
In its June 29, 2015 ruling, the District Court determined that the Company will be permitted to stay the judgment during appeal by posting a bond in the amount of $223.4 million related to pending litigation. The District Court calculated this amount by adding 12% per annum simple interest to the $114 million purchase price for the period beginning May 27, 2008 through May 26, 2016, the date the District Court estimated the appeal of the case would be concluded.



34




(17)
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, (“ASU 2014-09”). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s) which include (i) identifying the contract(s) with the customer, (ii) identifying the separate performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the separate performance obligations, and (v) recognizing revenue when each performance obligation is satisfied. In July 2015, the FASB deferred the effective date by one year and permitted early adoption of the standard, but not before the original effective date; therefore, ASU 2014-09 will be effective for the Company’s fiscal year beginning December 1, 2018 and subsequent interim periods. The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this ASU recognized at the date of initial application. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company's condensed consolidated financial statements.
Subsequent to the issuance of ASU 2014-09, the FASB has issued several ASUs such as ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients among others. These ASUs do not change the core principle of the guidance stated in ASU 2014-09, instead these amendments are intended to clarify and improve operability of certain topics included within the revenue standard. These ASUs will have the same effective date and transition requirements as ASU 2014-09. The Company is currently evaluating the method and impact the adoption of these ASUs and ASU 2014-09 will have on the Company's condensed consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. ASU 2015-02 requires management to reevaluate all legal entities under a revised consolidation model specifically (i) modify the evaluation of whether limited partnership and similar legal entities are VIEs, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (iv) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. ASU 2015-02 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customers' Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05”). ASU 2015-05 provides guidance for a customer to determine whether a cloud computing arrangement contains a software license or should be accounted for as a service contract. ASU 2015-05 will be effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. As permitted, the Company has elected early adoption. The adoption of ASU 2015-05 did not have a material effect on the Company’s condensed consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 will be effective for the Company’s fiscal year beginning December 1, 2017 and subsequent interim periods. The adoption of ASU 2015-16 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company’s fiscal year beginning December 1, 2018 and subsequent

35




interim periods. The adoption of ASU 2016-01 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current GAAP. ASU 2016-02 will be effective for the Company’s fiscal year beginning December 1, 2019 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning December 1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company’s fiscal year beginning December 1, 2017 and subsequent interim periods. The Company is currently evaluating the impact that the adoption of ASU 2016-09 will have on the Company's condensed consolidated financial statements.


(18)
Supplemental Financial Information
The indentures governing the Company’s 12.25% senior notes due 2017, 4.75% senior notes due 2017, 6.95% senior notes due 2018, 4.125% senior notes due 2018, 4.500% senior notes due 2019, 4.50% senior notes due 2019, 3.25% convertible senior notes due 2021, 4.750% senior notes due 2021, 4.750% senior notes due 2022, 4.875% senior notes due 2023 and 4.750% senior notes due 2025 require that, if any of the Company’s 100% owned subsidiaries, other than its finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least $75 million principal amount of debt of Lennar Corporation, those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as “guarantors” in the following tables are subsidiaries that are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because at May 31, 2016 they were guaranteeing Lennar Corporation's letter of credit facilities and its Credit Facility, disclosed in Note 11. The guarantees are full, unconditional and joint and several and the guarantor subsidiaries are 100% directly or indirectly owned by Lennar Corporation. A subsidiary's guarantee will be suspended at any time when it is not directly or indirectly guaranteeing at least $75 million principal amount of debt of Lennar Corporation, and a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
For purposes of the condensed consolidating statement of cash flows included in the following supplemental financial information, the Company's accounting policy is to treat cash received by Lennar Corporation (“the Parent”) from its subsidiaries, to the extent of net earnings from such subsidiaries as a dividend and accordingly a return on investment within cash flows from operating activities. Distributions of capital received by the Parent from its subsidiaries are reflected as cash flows from investing activities. The cash outflows associated with the return on investment dividends and distributions of capital received by the Parent are reflected by the Guarantor and Non-Guarantor subsidiaries in the Dividends line item within cash flows from financing activities. All other cash flows between the Parent and its subsidiaries represent the settlement of receivables and payables between such entities in conjunction with the Parent's centralized cash management arrangement with its subsidiaries, which operates with the characteristics of a revolving credit facility, and are accordingly reflected net in the Intercompany line item within cash flows from investing activities for the Parent and net in the Intercompany line item within cash flows from financing activities for the Guarantor and Non-Guarantor subsidiaries.

36

(18) Supplemental Financial Information - (Continued)

Supplemental information for the subsidiaries that were guarantor subsidiaries at May 31, 2016 was as follows:


Condensed Consolidating Balance Sheet
May 31, 2016
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and receivables, net
$
361,522


 
279,672


 
10,711


 


 
651,905


Inventories


 
9,368,371


 
281,332


 


 
9,649,703


Investments in unconsolidated entities


 
768,069


 
17,814


 


 
785,883


Other assets
197,626


 
349,288


 
81,234


 
18,407


 
646,555


Investments in subsidiaries
3,918,687


 
126,179


 


 
(4,044,866
)
 


Intercompany
7,238,368


 


 


 
(7,238,368
)
 


 
11,716,203


 
10,891,579


 
391,091


 
(11,264,827
)
 
11,734,046


Rialto


 


 
1,171,987


 


 
1,171,987


Lennar Financial Services


 
92,606


 
1,335,975


 
(4,902
)
 
1,423,679


Lennar Multifamily


 


 
531,594


 
(13,505
)
 
518,089


Total assets
$
11,716,203


 
10,984,185


 
3,430,647


 
(11,283,234
)
 
14,847,801


LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
525,737


 
693,769


 
67,109


 


 
1,286,615


Liabilities related to consolidated inventory not owned


 
19,390


 
96,424


 


 
115,814


Senior notes and other debts payable
5,072,100


 
233,285


 
10,850


 


 
5,316,235


Intercompany


 
6,397,212


 
841,156


 
(7,238,368
)
 


 
5,597,837


 
7,343,656


 
1,015,539


 
(7,238,368
)
 
6,718,664


Rialto


 


 
596,628


 


 
596,628


Lennar Financial Services


 
33,770


 
1,045,728


 


 
1,079,498


Lennar Multifamily


 


 
90,077


 


 
90,077


Total liabilities
5,597,837


 
7,377,426


 
2,747,972


 
(7,238,368
)
 
8,484,867


Stockholders’ equity
6,118,366


 
3,606,759


 
438,107


 
(4,044,866
)
 
6,118,366


Noncontrolling interests


 


 
244,568


 


 
244,568


Total equity
6,118,366


 
3,606,759


 
682,675


 
(4,044,866
)
 
6,362,934


Total liabilities and equity
$
11,716,203


 
10,984,185


 
3,430,647


 
(11,283,234
)
 
14,847,801





37

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Balance Sheet
November 30, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
ASSETS
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, restricted cash and receivables, net
$
595,921


 
372,146


 
13,384


 


 
981,451


Inventories


 
8,571,769


 
168,827


 


 
8,740,596


Investments in unconsolidated entities


 
692,879


 
48,672


 


 
741,551


Other assets
193,360


 
324,050


 
75,108


 
16,704


 
609,222


Investments in subsidiaries
3,958,687


 
176,660


 


 
(4,135,347
)
 


Intercompany
6,227,193


 


 


 
(6,227,193
)
 


 
10,975,161


 
10,137,504


 
305,991


 
(10,345,836
)
 
11,072,820


Rialto


 


 
1,505,500


 


 
1,505,500


Lennar Financial Services


 
89,532


 
1,341,565


 
(5,260
)
 
1,425,837


Lennar Multifamily


 


 
426,796


 
(11,444
)
 
415,352


Total assets
$
10,975,161


 
10,227,036


 
3,579,852


 
(10,362,540
)
 
14,419,509


LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
Accounts payable and other liabilities
$
579,468


 
710,460


 
85,796


 


 
1,375,724


Liabilities related to consolidated inventory not owned


 
51,431


 


 


 
51,431


Senior notes and other debts payable
4,746,749


 
267,531


 
10,850


 


 
5,025,130


Intercompany


 
5,514,610


 
712,583


 
(6,227,193
)
 


 
5,326,217


 
6,544,032


 
809,229


 
(6,227,193
)
 
6,452,285


Rialto


 


 
866,224


 


 
866,224


Lennar Financial Services


 
36,229


 
1,047,749


 


 
1,083,978


Lennar Multifamily


 


 
66,950


 


 
66,950


Total liabilities
5,326,217


 
6,580,261


 
2,790,152


 
(6,227,193
)
 
8,469,437


Stockholders’ equity
5,648,944


 
3,646,775


 
488,572


 
(4,135,347
)
 
5,648,944


Noncontrolling interests


 


 
301,128


 


 
301,128


Total equity
5,648,944


 
3,646,775


 
789,700


 
(4,135,347
)
 
5,950,072


Total liabilities and equity
$
10,975,161


 
10,227,036


 
3,579,852


 
(10,362,540
)
 
14,419,509







38

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income
Three Months Ended May 31, 2016
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$


 
2,450,885


 


 


 
2,450,885


Lennar Financial Services


 
53,310


 
127,642


 
(5,012
)
 
175,940


Rialto


 


 
44,838


 


 
44,838


Lennar Multifamily


 


 
74,171


 
(19
)
 
74,152


Total revenues


 
2,504,195


 
246,651


 
(5,031
)
 
2,745,815


Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding


 
2,126,412


 
(6,231
)
 
(7,893
)
 
2,112,288


Lennar Financial Services


 
48,204


 
81,255


 
2,393


 
131,852


Rialto


 


 
50,260


 
(57
)
 
50,203


Lennar Multifamily


 


 
73,217


 


 
73,217


Corporate general and administrative
54,282


 
254


 


 
1,266


 
55,802


Total costs and expenses
54,282


 
2,174,870


 
198,501


 
(4,291
)
 
2,423,362


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities


 
(10,860
)
 
1,227


 


 
(9,633
)
Lennar Homebuilding other income (expense), net
729


 
23,816


 
(8,899
)
 
(721
)
 
14,925


Other interest expense
(1,461
)
 
(1,193
)
 


 
1,461


 
(1,193
)
Rialto equity in earnings from unconsolidated entities


 


 
6,864


 


 
6,864


Rialto other expense, net


 


 
(19,585
)
 


 
(19,585
)
Lennar Multifamily equity in earnings from unconsolidated entities


 


 
14,008


 


 
14,008


Earnings (loss) before income taxes
(55,014
)
 
341,088


 
41,765


 


 
327,839


Benefit (provision) for income taxes
18,025


 
(108,653
)
 
(13,173
)
 


 
(103,801
)
Equity in earnings from subsidiaries
255,458


 
15,458


 


 
(270,916
)
 


Net earnings (including net earnings attributable to noncontrolling interests)
218,469


 
247,893


 
28,592


 
(270,916
)
 
224,038


Less: Net earnings attributable to noncontrolling interests


 


 
5,569


 


 
5,569


Net earnings attributable to Lennar
$
218,469


 
247,893


 
23,023


 
(270,916
)
 
218,469


Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Net unrealized gain on securities available-for-sale
$


 


 
919


 


 
919


Reclassification adjustments for gains included in earnings, net of tax


 


 
(6
)
 


 
(6
)
Other comprehensive income attributable to Lennar
$
218,469


 
247,893


 
23,936


 
(270,916
)
 
219,382


Other comprehensive income attributable to noncontrolling interests
$


 


 
5,569


 


 
5,569







39

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income
Three Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$


 
2,115,812


 


 


 
2,115,812


Lennar Financial Services


 
52,822


 
122,075


 
(5,012
)
 
169,885


Rialto


 


 
67,931


 


 
67,931


Lennar Multifamily


 


 
38,981


 
(5
)
 
38,976


Total revenues


 
2,168,634


 
228,987


 
(5,017
)
 
2,392,604


Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding


 
1,807,439


 
19,511


 
(1,468
)
 
1,825,482


Lennar Financial Services


 
49,524


 
84,816


 
(3,508
)
 
130,832


Rialto


 


 
67,506


 


 
67,506


Lennar Multifamily


 


 
47,260


 


 
47,260


Corporate general and administrative
48,941


 


 


 
1,266


 
50,207


Total costs and expenses
48,941


 
1,856,963


 
219,093


 
(3,710
)
 
2,121,287


Lennar Homebuilding equity in earnings from unconsolidated entities


 
3,892


 
2,602


 


 
6,494


Lennar Homebuilding other income (expense), net
163


 
1,277


 
(1,504
)
 
(153
)
 
(217
)
Other interest expense
(1,460
)
 
(3,818
)
 


 
1,460


 
(3,818
)
Rialto equity in earnings from unconsolidated entities


 


 
7,328


 


 
7,328


Rialto other expense, net


 


 
(872
)
 


 
(872
)
Lennar Multifamily equity in loss from unconsolidated entities


 


 
(422
)
 


 
(422
)
Earnings (loss) before income taxes
(50,238
)
 
313,022


 
17,026


 


 
279,810


Benefit (provision) for income taxes
17,196


 
(105,552
)
 
(6,870
)
 


 
(95,226
)
Equity in earnings from subsidiaries
219,792


 
6,236


 


 
(226,028
)
 


Net earnings (including net earnings attributable to noncontrolling interests)
186,750


 
213,706


 
10,156


 
(226,028
)
 
184,584


Less: Net earnings attributable to noncontrolling interests


 


 
1,568


 


 
1,568


Net earnings attributable to Lennar
$
186,750


 
213,706


 
8,588


 
(226,028
)
 
183,016


Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Net unrealized loss on securities available-for-sale
$


 


 
(94
)
 


 
(94
)
Reclassification adjustments for gains included in earnings, net of tax


 


 
(23
)
 


 
(23
)
Other comprehensive income attributable to Lennar
$
186,750


 
213,706


 
8,471


 
(226,028
)
 
182,899


Other comprehensive earnings attributable to noncontrolling interests
$


 


 
1,568


 


 
1,568







40

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income
Six Months Ended May 31, 2016
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$


 
4,237,366


 


 


 
4,237,366


Lennar Financial Services


 
93,920


 
215,984


 
(10,008
)
 
299,896


Rialto


 


 
88,549


 


 
88,549


Lennar Multifamily


 


 
113,700


 
(32
)
 
113,668


Total revenues


 
4,331,286


 
418,233


 
(10,040
)
 
4,739,479


Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding


 
3,682,578


 
8,632


 
(10,717
)
 
3,680,493


Lennar Financial Services


 
90,016


 
151,324


 
(463
)
 
240,877


Rialto


 


 
93,477


 
(367
)
 
93,110


Lennar Multifamily


 


 
120,237


 


 
120,237


Corporate general and administrative
100,430


 
509


 


 
2,531


 
103,470


Total costs and expenses
100,430


 
3,773,103


 
373,670


 
(9,016
)
 
4,238,187


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities


 
(7,011
)
 
378


 


 
(6,633
)
Lennar Homebuilding other income, net
1,899


 
15,300


 
126


 
(1,881
)
 
15,444


Other interest expense
(2,905
)
 
(2,350
)
 


 
2,905


 
(2,350
)
Rialto equity in earnings from unconsolidated entities


 


 
8,361


 


 
8,361


Rialto other expense, net


 


 
(20,276
)
 


 
(20,276
)
Lennar Multifamily equity in earnings from unconsolidated entities


 


 
33,694


 


 
33,694


Earnings (loss) before income taxes
(101,436
)
 
564,122


 
66,846


 


 
529,532


Benefit (provision) for income taxes
31,060


 
(170,363
)
 
(20,739
)
 


 
(160,042
)
Equity in earnings from subsidiaries
432,925


 
19,996


 


 
(452,921
)
 


Net earnings (including net earnings attributable to noncontrolling interests)
362,549


 
413,755


 
46,107


 
(452,921
)
 
369,490


Less: Net earnings attributable to noncontrolling interests


 


 
6,941


 


 
6,941


Net earnings attributable to Lennar
$
362,549


 
413,755


 
39,166


 
(452,921
)
 
362,549


Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Net unrealized gain on securities available-for-sale
$


 




482






 
482


Reclassification adjustments for gains included in earnings, net of tax


 




(6
)




 
(6
)
Other comprehensive income attributable to Lennar
$
362,549


 
413,755




39,642




(452,921
)
 
363,025


Other comprehensive income attributable to noncontrolling interests
$


 


 
6,941


 


 
6,941







41

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income
Six Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding
$


 
3,557,470


 


 


 
3,557,470


Lennar Financial Services


 
90,971


 
213,734


 
(9,993
)
 
294,712


Rialto


 


 
109,128


 


 
109,128


Lennar Multifamily


 


 
75,438


 
(5
)
 
75,433


Total revenues


 
3,648,441


 
398,300


 
(9,998
)
 
4,036,743


Cost and expenses:
 
 
 
 
 
 
 
 
 
Lennar Homebuilding


 
3,076,932


 
20,030


 
(6,305
)
 
3,090,657


Lennar Financial Services


 
87,750


 
156,092


 
(3,710
)
 
240,132


Rialto


 


 
108,287


 


 
108,287


Lennar Multifamily


 


 
89,221


 


 
89,221


Corporate general and administrative
91,330


 


 


 
2,531


 
93,861


Total costs and expenses
91,330


 
3,164,682


 
373,630


 
(7,484
)
 
3,622,158


Lennar Homebuilding equity in earnings from unconsolidated entities


 
26,387


 
9,006


 


 
35,393


Lennar Homebuilding other income (expense), net
394


 
7,601


 
(1,504
)
 
(375
)
 
6,116


Other interest expense
(2,889
)
 
(7,889
)
 


 
2,889


 
(7,889
)
Rialto equity in earnings from unconsolidated entities


 


 
9,992


 


 
9,992


Rialto other expense, net


 


 
(1,144
)
 


 
(1,144
)
Lennar Multifamily equity in loss from unconsolidated entities


 


 
(600
)
 


 
(600
)
Earnings (loss) before income taxes
(93,825
)
 
509,858


 
40,420


 


 
456,453


Benefit (provision) for income taxes
32,098


 
(171,646
)
 
(15,404
)
 


 
(154,952
)
Equity in earnings from subsidiaries
359,706


 
20,086


 


 
(379,792
)
 


Net earnings (including net earnings attributable to noncontrolling interests)
297,979


 
358,298


 
25,016


 
(379,792
)
 
301,501


Less: Net earnings attributable to noncontrolling interests


 


 
3,522


 


 
3,522


Net earnings attributable to Lennar
$
297,979


 
358,298


 
21,494


 
(379,792
)
 
297,979


Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Net unrealized gain on securities available-for-sale
$


 


 
106


 


 
106


Reclassification adjustments for gains included in earnings, net of tax
$


 


 
(23
)
 


 
(23
)
Other comprehensive income attributable to Lennar
$
297,979


 
358,298


 
21,577


 
(379,792
)
 
298,062


Other comprehensive earnings attributable to noncontrolling interests
$


 


 
3,522


 


 
3,522







42

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended May 31, 2016
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net earnings attributable to noncontrolling interests)
$
362,549


 
413,755


 
46,107


 
(452,921
)
 
369,490


Distributions of earnings from guarantor and non-guarantor subsidiaries
432,925


 
19,996


 


 
(452,921
)
 


Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities
(412,335
)
 
(789,132
)
 
203,674


 
452,921


 
(544,872
)
Net cash provided by (used in) operating activities
383,139


 
(355,381
)
 
249,781


 
(452,921
)
 
(175,382
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Investments in and contributions to unconsolidated entities, net of distributions of capital


 
(65,441
)
 
(41,775
)
 


 
(107,216
)
Proceeds from sales of real estate owned


 


 
43,412


 


 
43,412


Receipts of principal payments on loans receivable


 


 
5,484


 


 
5,484


Originations of loans receivable


 


 
(16,864
)
 


 
(16,864
)
Purchases of commercial mortgage-backed securities bonds


 


 
(33,005
)
 


 
(33,005
)
Other
(6,704
)
 
(30,269
)
 
(4,465
)
 


 
(41,438
)
Distributions of capital from guarantor and non-guarantor subsidiaries
40,000


 
40,000


 


 
(80,000
)
 


Intercompany
(1,008,886
)
 


 


 
1,008,886


 


Net cash used in investing activities
(975,590
)
 
(55,710
)
 
(47,213
)
 
928,886


 
(149,627
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net borrowings under unsecured revolving credit facility
375,000


 


 


 


 
375,000


Net repayments under warehouse facilities


 


 
(230,206
)
 


 
(230,206
)
Proceeds from senior notes and debt issuance costs
495,974


 


 
(746
)
 


 
495,228


Redemption of senior notes
(250,000
)
 


 


 


 
(250,000
)
Conversions and exchanges of convertible senior notes
(233,893
)
 


 


 


 
(233,893
)
Principal payments on Rialto notes payable


 


 
(2,999
)
 


 
(2,999
)
Net repayments on other borrowings


 
(87,532
)
 




 


 
(87,532
)
Net payments related to noncontrolling interests


 




 
(73,028
)
 


 
(73,028
)
Excess tax benefits from share-based awards
7,039


 


 


 


 
7,039


Common stock:
 
 
 
 
 
 
 
 


Issuances
594


 


 


 


 
594


Repurchases
(971
)
 


 


 


 
(971
)
Dividends
(17,191
)
 
(453,755
)
 
(79,166
)
 
532,921


 
(17,191
)
Intercompany


 
879,733


 
129,153


 
(1,008,886
)
 


Net cash provided by (used in) financing activities
376,552


 
338,446


 
(256,992
)
 
(475,965
)
 
(17,959
)
Net decrease in cash and cash equivalents
(215,899
)
 
(72,645
)
 
(54,424
)
 


 
(342,968
)
Cash and cash equivalents at beginning of period
575,821


 
336,048


 
246,576


 


 
1,158,445


Cash and cash equivalents at end of period
$
359,922


 
263,403


 
192,152


 


 
815,477







43

(18) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended May 31, 2015
(In thousands)
Lennar
Corporation
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidating Adjustments
 
Total
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net earnings (including net earnings attributable to noncontrolling interests)
$
297,979


 
358,298


 
25,016


 
(379,792
)
 
301,501


Distributions of earnings from guarantor and non-guarantor subsidiaries
359,706


 
20,086


 


 
(379,792
)
 


Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities
(315,966
)
 
(985,129
)
 
(374,731
)
 
379,792


 
(1,296,034
)
Net cash provided by (used in) operating activities
341,719


 
(606,745
)
 
(349,715
)
 
(379,792
)
 
(994,533
)
Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Proceeds from sale of operating properties


 


 
73,732


 


 
73,732


Investments in and contributions to unconsolidated entities, net of distributions of capital


 
(11,716
)
 
(19,786
)
 


 
(31,502
)
Proceeds from sales of real estate owned


 


 
55,812


 


 
55,812


Receipts of principal payments on loans receivable


 


 
13,335


 


 
13,335


Other
(23,345
)
 
(42,038
)
 
(53,330
)
 


 
(118,713
)
Distribution of capital from guarantor and non-guarantor subsidiaries
30,000


 
30,000


 


 
(60,000
)
 


Intercompany
(1,286,061
)
 


 


 
1,286,061


 


Net cash provided by (used in) investing activities
(1,279,406
)
 
(23,754
)
 
69,763


 
1,226,061


 
(7,336
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Net borrowings under unsecured revolving credit facility
450,000


 


 


 


 
450,000


Net borrowings under warehouse facilities


 


 
189,632


 


 
189,632


Proceeds from senior notes and debt issuance costs
744,409


 


 
(294
)
 


 
744,115


Redemption of senior notes
(500,000
)
 


 


 


 
(500,000
)
Principal repayments on Rialto notes payable including structured notes


 


 
(20,940
)
 


 
(20,940
)
Net proceeds (repayments) on other borrowings
20,988


 
(88,647
)
 
(69,501
)
 


 
(137,160
)
Net payments related to noncontrolling interests


 


 
(77,570
)
 


 
(77,570
)
Excess tax benefit from share-based awards
113


 


 


 


 
113


Common stock:
 
 
 
 
 
 
 
 


Issuances
9,412


 


 


 


 
9,412


Repurchases
(972
)
 


 


 


 
(972
)
Dividends
(16,418
)
 
(388,298
)
 
(51,494
)
 
439,792


 
(16,418
)
Intercompany


 
1,089,924


 
196,137


 
(1,286,061
)
 


Net cash provided by financing activities
707,532


 
612,979


 
165,970


 
(846,269
)
 
640,212


Net decrease in cash and cash equivalents
(230,155
)
 
(17,520
)
 
(113,982
)
 


 
(361,657
)
Cash and cash equivalents at beginning of period
633,318


 
255,501


 
392,995


 


 
1,281,814


Cash and cash equivalents at end of period
$
403,163


 
237,981


 
279,013


 


 
920,157







44




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K, for our fiscal year ended November 30, 2015.
Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contained herein may include opinions formed based upon general observations, anecdotal evidence and industry experience, but that are not supported by specific investigation or analysis. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report include statements regarding: our belief regarding the homebuilding market over the next few years, including that the housing market will continue its slow and steady recovery, and that the new home market continues to have significant pent-up demand; our expectation that we will see lower gross margins in 2016; our expectation that we plan to continue to identify and invest in land opportunities that we expect will drive our future growth and profitability; our belief that we are well positioned across all of our platforms for another year of strong profits in fiscal 2016; our belief that our main driver of earnings will continue to be our Homebuilding and Lennar Financial Services operations; our belief that we are currently positioned to deliver between 26,500 and 27,000 homes in fiscal 2016; our expectation regarding the Lennar Multifamily segment’s development pipeline, and plans regarding the Multifamily Venture; our expectation regarding variability in our quarterly results; our expectations regarding the renewal or replacement of our warehouse facilities; our belief regarding draws upon our bonds or letters of credit, and our belief regarding the impact to the Company if there were such a draw; our belief that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity; our belief regarding legal proceedings in which we are involved, and, in particular, our belief that the Court’s decision in the Settlers Crossing case is contrary to applicable law; and our estimates regarding certain tax and accounting matters, including our expectations regarding the result of anticipated settlements with various taxing authorities and our expectations regarding the energy efficient home and solar energy property tax credits.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include, but are not limited to, the following: our ability to acquire land and pursue real estate opportunities at anticipated prices; increases in operating costs, including costs related to real estate taxes, construction materials, labor and insurance, and our ability to manage our cost structure, both in our Homebuilding and Lennar Multifamily businesses; unfavorable outcomes in legal proceedings that substantially exceed our expectations, including an unfavorable outcome in the Settlers Crossing case; a slowdown in the recovery of real estate markets across the nation, or any downturn in such markets; changes in general economic and financial conditions, and demographic trends, in the U.S. leading to decreased demand for our services and homes, lower profit margins and reduced access to credit; the possibility that we will incur nonrecurring costs that may not have a material adverse effect on our business or financial condition, but may have a material adverse effect on our condensed financial statements for a particular reporting period; decreased demand for our Lennar Multifamily rental properties, and our ability to successfully sell our rental properties; the ability of our Financial Services segment to maintain or increase its capture rate and benefit from Lennar home deliveries; our ability to successfully execute our strategies, including strategies related to our soft-pivot and reinvigorating technologies in our business; increased competition for home sales from other sellers of new and resale homes; conditions in the capital, credit and financial markets, including mortgage lending standards, the availability of mortgage financing and mortgage foreclosure rates; changes in interest and unemployment rates, and inflation; a decline in the value of the land and home inventories we maintain or possible future write-downs of the carrying value of our real estate assets; our ability to successfully develop multifamily assets in the Multifamily Venture; our inability to maintain anticipated pricing levels and our inability to predict the effect of interest rates on demand; the ability and willingness of the participants in various joint ventures to honor their commitments; our ability to successfully and timely obtain land-use entitlements and construction financing, and address issues that arise in connection with the use and development of our land; natural disasters and other unforeseen damage for which our insurance may not provide adequate coverage; our inability to successfully grow our ancillary businesses; the inability of Rialto to sell mortgages it originates into securitizations on favorable terms; potential liability under environmental or construction laws, or other laws or regulations affecting our business; regulatory changes that adversely affect the profitability of our businesses; our ability to comply with the terms of our debt instruments, our ability to refinance our debt on terms that are acceptable to us; and our ability to successfully estimate the impact of certain regulatory, accounting and tax matters, including whether we will continue to benefit from the energy efficient home and solar energy property tax credits.

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Please see our Form 10-K, for the fiscal year ended November 30, 2015 and other filings with the SEC for a further discussion of these and other risks and uncertainties which could also affect our future results. We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.
This Management’s Discussion and Analysis and other portions of this Report contain statements of opinion or belief regarding market conditions and similar matters. In many instances those opinions and beliefs are based upon general observations by members of our management, anecdotal evidence and our experience in the conduct of our businesses, without specific investigation or statistical analyses. Therefore, while they reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views that are necessarily shared by all who are involved in those industries or markets.


Outlook
We continue to believe that the low inventory levels in existing and new homes, and the low vacancy rates paired with high rental rates for apartments indicate that we are in short supply of housing inventory nationally. It is important to note that the housing market is composed of a large number of local markets, each with different dynamics, that are grouped together to analyze the national market.
We believe the new home market continues to have significant pent-up demand, and that the housing market is continuing its slow and steady recovery sustained by stronger general economic conditions, low interest rates, modest wage growth, positive consumer confidence and low unemployment levels combined with tight inventory levels. We expect that demand will continue to build and come to the market over the next few years and that it should drive increased production as the deficit in the housing stock ultimately needs to be replenished. Nevertheless, land and labor shortages will continue to be limiting factors and will constrain supply and restrict the ability to quickly respond to growing demand, while the mortgage market and higher rents will continue to constrain that demand. We expect that these conditions will continue to result in a slow and steady, though sometimes erratic, positive homebuilding market.
As this year’s spring selling season improved over last year, our second quarter, net earnings increased 19% on a 15% increase in revenues, compared to the second quarter of 2015. Our second quarter new orders increased 10% to 7,962 homes year-over-year, while our home deliveries and home sales revenue also increased to 6,724 homes and $2.4 billion, respectively. As the recovery has continued to mature, we have remained focused on our strategy of moderating our growth rate in community count and home sales, as well as on our soft pivot land strategy, targeting land acquisitions with a shorter average life.
Our core homebuilding segment continued to produce strong operating results in the second quarter of 2016 as our operating margin was 13.9%, a 10 basis point improvement from the same period last year, notwithstanding a lower gross margin in the quarter, as expected. Our homebuilding divisions continued to benefit from their focus on migrating from traditional to digital marketing, which helped reduce S,G&A as a percentage of home sales revenues to 9.3%, the lowest second quarter percentage in our history. As we continue our strategy of infusing and reinvigorating technologies throughout various aspects of our business, we look forward to additional opportunities that lie ahead.
Complementing our homebuilding segment, we also had strong performances from most of our other business segments during the second quarter of 2016. Our Lennar Financial Services segment reported earnings of $44.1 million in the second quarter of 2016, a 13% increase from the same period last year, primarily due to higher profit per transaction in its mortgage and title operations. For the third consecutive quarter, our Multifamily segment generated positive earnings. During the second quarter of 2016, earnings were $14.9 million primarily due to the sale of one completed rental property by one of its joint ventures and a third-party land sale.
Our Rialto segment continued to grow despite the combination of turmoil in the CMBS markets earlier in the year and a $16.0 million write-off of uncollectible receivables relating to a single asset that was acquired through the resolution of one of Rialto’s loans from a 2010 portfolio. During the second quarter, our investment management platform increased assets under management and profitability, while our Rialto Mortgage Finance (“RMF”) business continued to be a market leader in securitization margins and has seen an increase in its origination volumes, which improved sequentially from the first quarter.
In fiscal 2016, our principal focus in our homebuilding operations will continue to be on generating strong operating margins on the homes we sell by delivering homes from what we believe are favorable land positions and by benefiting from our focus on migrating from traditional to digital marketing. We expect to continue to see lower gross margins in 2016 compared to 2015 due to cost increases outpacing sales price increases, competitive pressures and the start of development of some additional previously inactive land assets. Consistent with our soft-pivot land strategy, we plan to continue to identify and invest in unique and enticing land opportunities that we expect will drive our future growth and profitability.

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We expect that our Company’s main driver of earnings will continue to be our homebuilding and financial services operations as we believe we are currently positioned to deliver between 26,500 and 27,000 homes in fiscal 2016. We believe we are well positioned across all of our platforms for another year of strong profits in fiscal 2016.


(1) Results of Operations
Overview
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and six months ended May 31, 2016 are not necessarily indicative of the results to be expected for the full year. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in the second half of our fiscal year. However, periods of economic downturn in the industry, such as we experienced several years ago, can alter seasonal patterns.
Our net earnings attributable to Lennar were $218.5 million, or $0.95 per diluted share ($1.01 per basic share), in the second quarter of 2016, compared to net earnings attributable to Lennar of $183.0 million, or $0.79 per diluted share ($0.89 per basic share), in the second quarter of 2015. Our net earnings attributable to Lennar were $362.5 million, or $1.58 per diluted share ($1.69 per basic share), in the six months ended May 31, 2016, compared to net earnings attributable to Lennar of $298.0 million, or $1.30 per diluted share ($1.45 per basic share), in the six months ended May 31, 2015.
Financial information relating to our operations was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Lennar Homebuilding revenues:
 
 
 
 
 
 
 
Sales of homes
$
2,429,568


 
2,081,113


 
4,184,259


 
3,484,681


Sales of land
21,317


 
34,699


 
53,107


 
72,789


Total Lennar Homebuilding revenues
2,450,885


 
2,115,812


 
4,237,366


 
3,557,470


Lennar Homebuilding costs and expenses:
 
 
 
 
 
 
 
Costs of homes sold
1,868,045


 
1,585,259


 
3,223,790


 
2,664,055


Costs of land sold
19,468


 
31,204


 
42,080


 
57,229


Selling, general and administrative
224,775


 
209,019


 
414,623


 
369,373


Total Lennar Homebuilding costs and expenses
2,112,288


 
1,825,482


 
3,680,493


 
3,090,657


Lennar Homebuilding operating margins
338,597


 
290,330


 
556,873


 
466,813


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
(9,633
)
 
6,494


 
(6,633
)
 
35,393


Lennar Homebuilding other income (expense), net
14,925


 
(217
)
 
15,444


 
6,116


Other interest expense
(1,193
)
 
(3,818
)
 
(2,350
)
 
(7,889
)
Lennar Homebuilding operating earnings
342,696


 
292,789


 
563,334


 
500,433


Lennar Financial Services revenues
175,940


 
169,885


 
299,896


 
294,712


Lennar Financial Services costs and expenses
131,852


 
130,832


 
240,877


 
240,132


Lennar Financial Services operating earnings
44,088


 
39,053


 
59,019


 
54,580


Rialto revenues
44,838


 
67,931


 
88,549


 
109,128


Rialto costs and expenses
50,203


 
67,506


 
93,110


 
108,287


Rialto equity in earnings from unconsolidated entities
6,864


 
7,328


 
8,361


 
9,992


Rialto other expense, net
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
Rialto operating earnings (loss)
(18,086
)
 
6,881


 
(16,476
)
 
9,689


Lennar Multifamily revenues
74,152


 
38,976


 
113,668


 
75,433


Lennar Multifamily costs and expenses
73,217


 
47,260


 
120,237


 
89,221


Lennar Multifamily equity in earnings (loss) from unconsolidated entities
14,008


 
(422
)
 
33,694


 
(600
)
Lennar Multifamily operating earnings (loss)
14,943


 
(8,706
)
 
27,125


 
(14,388
)
Total operating earnings
383,641


 
330,017


 
633,002


 
550,314


Corporate general and administrative expenses
(55,802
)
 
(50,207
)
 
(103,470
)
 
(93,861
)
Earnings before income taxes
$
327,839


 
279,810


 
529,532


 
456,453



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Three Months Ended May 31, 2016 versus Three Months Ended May 31, 2015
Revenues from home sales increased 17% in the second quarter of 2016 to $2.4 billion from $2.1 billion in the second quarter of 2015. Revenues were higher primarily due to a 12% increase in the number of home deliveries, excluding unconsolidated entities, and a 4% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 6,711 homes in the second quarter of 2016 from 5,989 homes in the second quarter of 2015. There was an increase in home deliveries in all our Homebuilding segments, except in Homebuilding Houston and in Homebuilding Other. This increase in home deliveries was primarily driven by an increase in active communities over the last year. The decrease in home deliveries in Houston was primarily due to less demand driven by volatility in the energy sector. The decrease in home deliveries in Homebuilding Other was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. The average sales price of homes delivered increased to $362,000 in the second quarter of 2016 from $348,000 in the second quarter of 2015, primarily due to product mix (selling at different price points) and increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $21,800 per home delivered in the second quarter of 2016, or 5.7% as a percentage of home sales revenue, compared to $21,500 per home delivered in the second quarter of 2015, or 5.8% as a percentage of home sales revenue, and $21,600 per home delivered in the first quarter of 2016, or 5.6% as a percentage of home sales revenue.
Gross margins on home sales were $561.5 million, or 23.1%, in the second quarter of 2016, compared to $495.9 million, or 23.8%, in the second quarter of 2015. Gross margin percentage on home sales decreased compared to the second quarter of 2015 primarily due to an increase in land costs, partially offset by an increase in the average sales price of homes delivered.
Selling, general and administrative expenses were $224.8 million in the second quarter of 2016, compared to $209.0 million in the second quarter of 2015. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.3% in the second quarter of 2016, from 10.0% in the second quarter of 2015, due to improved operating leverage as a result of an increase in home deliveries and benefits from our focus on digital marketing.
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($9.6) million in the second quarter of 2016, compared to $6.5 million in the second quarter of 2015. In the second quarter of 2016, Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $6.7 million of equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties. In the second quarter of 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $11.6 million of equity in earnings from one of our unconsolidated entities primarily due to the sale of a commercial property and homesites to third parties, partially offset by our share of net operating losses from various unconsolidated entities.
Lennar Homebuilding other income (expense), net, was $14.9 million in the second quarter of 2016, compared to ($0.2) million in the second quarter of 2015. Other income, net, in the second quarter of 2016 was primarily related to a profit participation received by one of Lennar Homebuilding's consolidated joint ventures.
Lennar Homebuilding interest expense was $63.9 million in the second quarter of 2016 ($62.1 million was included in costs of homes sold, $0.6 million in costs of land sold and $1.2 million in other interest expense), compared to $57.7 million in the second quarter of 2015 ($53.2 million was included in costs of homes sold, $0.6 million in costs of land sold and $3.8 million in other interest expense). Interest expense included in costs of homes sold increased primarily due to an increase in our outstanding homebuilding debt and an increase in home deliveries.
Operating earnings for our Lennar Financial Services segment were $44.1 million in the second quarter of 2016, compared to $39.1 million in the second quarter of 2015. The increase in profitability was primarily due to higher profit per transaction in our segment's mortgage and title operations.
Operating loss for our Rialto segment was $13.8 million in the second quarter of 2016 (which included an $18.1 million operating loss and an add back of $4.3 million of net loss attributable to noncontrolling interests). The operating loss in the second quarter included a $16.0 million write-off of uncollectible receivables related to a hospital, which was acquired through the resolution of one of Rialto's loans from a 2010 portfolio. The hospital is managed by a third-party management company. Operating earnings for second quarter of 2015 were $7.6 million (which included $6.9 million of operating earnings and an add back of $0.7 million of net loss attributable to noncontrolling interests).
Rialto revenues were $44.8 million in the second quarter of 2016, compared to $67.9 million in the second quarter of 2015. Revenues decreased primarily due to a decrease in RMF securitization revenues due to lower securitization volume and margins. During the second quarter of 2016 and 2015, Rialto received $2.5 million and $4.8 million, respectively, of advanced distributions with regard to Rialto's carried interests in its real estate funds (the "Funds") in order to cover income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds.
Rialto expenses were $50.2 million in the second quarter of 2016, compared to $67.5 million in the second quarter of 2015. Expenses decreased primarily due to a decrease in general and administrative expenses and a decrease in securitization expenses related to RMF.

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Rialto equity in earnings from unconsolidated entities was $6.9 million and $7.3 million in the second quarter of 2016 and 2015, respectively, related to Rialto's share of earnings from the Funds.
Rialto other expense, net, was $19.6 million in the second quarter of 2016, compared to $0.9 million in the second quarter of 2015. In the second quarter of 2016, Rialto other expense, net, included a $16.0 million write-off of uncollectible receivables related to the hospital.
Operating earnings for our Lennar Multifamily segment were $14.9 million in the second quarter of 2016, compared to an operating loss of $8.7 million in the second quarter of 2015. The increase in profitability was primarily due to the segment's $15.4 million share of a gain as a result of the sale of an operating property by one of Lennar Multifamily's unconsolidated entities and gross profit of $5.2 million on a third-party land sale.
Corporate general and administrative expenses were $55.8 million, or 2.0% as a percentage of total revenues, in the second quarter of 2016, compared to $50.2 million, or 2.1% as a percentage of total revenues, in the second quarter of 2015. As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings attributable to noncontrolling interests were $5.6 million and $1.6 million in the second quarter of 2016 and 2015, respectively. Net earnings attributable to noncontrolling interests during the second quarter of 2016 were primarily attributable to earnings related to Lennar Homebuilding consolidated joint ventures, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC. Net earnings attributable to noncontrolling interests during the second quarter of 2015 were primarily attributable to a strategic transaction by one of Lennar Homebuilding's consolidated joint ventures that impacted noncontrolling interests by $2.3 million, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the second quarter of 2016 and 2015, we had a tax provision of $103.8 million and $95.2 million, respectively. Our overall effective income tax rates were 32.21% and 34.22% in the second quarter of 2016 and 2015, respectively. The effective tax rate for both the second quarter of 2016 and 2015 included tax benefits for the domestic production activities deduction and energy tax credits, offset primarily by state income tax expense. During the first quarter of 2016, tax legislation was passed extending the new energy efficient home credit through 2016, as well as extending the 30% investment tax credit for solar energy property through 2022. Both of these tax credits benefited and we expect will continue to benefit our effective tax rate.
Six Months Ended May 31, 2016 versus Six Months Ended May 31, 2015
Revenues from home sales increased 20% in the six months ended May 31, 2016 to $4.2 billion from $3.5 billion in the six months ended May 31, 2015. Revenues were higher primarily due to a 12% increase in the number of home deliveries, excluding unconsolidated entities, and a 7% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 11,517 homes in the six months ended May 31, 2016 from 10,290 homes in the six months ended May 31, 2015. There was an increase in home deliveries in all of our Homebuilding segments, except in Homebuilding Houston. The decrease in home deliveries in Houston was primarily due to less demand driven by volatility in the energy sector. The average sales price of homes delivered increased to $363,000 in the six months ended May 31, 2016 from $339,000 in the six months ended May 31, 2015, primarily due to increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $21,700 per home delivered in the six months ended May 31, 2016, or 5.6% as a percentage of home sales revenue, compared to $21,600 per home delivered in the six months ended May 31, 2015, or 6.0% as a percentage of home sales revenue.
Gross margins on home sales were $960.5 million, or 23.0%, in the six months ended May 31, 2016, compared to $820.6 million, or 23.5%, in the six months ended May 31, 2015. Gross margin percentage on home sales decreased compared to the six months ended May 31, 2015 primarily due to an increase in land costs, partially offset by an increase in the average sales price of homes delivered.
Selling, general and administrative expenses were $414.6 million in the six months ended May 31, 2016, compared to $369.4 million in the six months ended May 31, 2015. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.9% in the six months ended May 31, 2016, from 10.6% in the six months ended May 31, 2015, due to improved operating leverage as a result of an increase in home deliveries and benefits from our focus on digital marketing.
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($6.6) million in the six months ended May 31, 2016, compared to $35.4 million in the six months ended May 31, 2015. In the six months ended May 31, 2016, Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $12.7 million of equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties. In the six months ended May 31, 2015, Lennar Homebuilding equity in earnings from unconsolidated entities included $43.0 million of equity in earnings from one of our unconsolidated entities

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primarily due to sales of homesites and a commercial property to third parties, partially offset by our share of net operating losses from various unconsolidated entities.
Lennar Homebuilding other income, net, totaled $15.4 million in the six months ended May 31, 2016, compared to $6.1 million in the six months ended May 31, 2015. In the six months ended May 31, 2016, other income, net, included a profit participation received by one of Lennar Homebuilding's consolidated joint ventures. In the six months ended May 31, 2015, other income, net, included a $6.5 million gain on the sale of an operating property.
Lennar Homebuilding interest expense was $109.1 million in the six months ended May 31, 2016 ($105.4 million was included in costs of homes sold, $1.3 million in costs of land sold and $2.4 million in other interest expense), compared to $95.7 million in the six months ended May 31, 2015 ($86.8 million was included in costs of homes sold, $1.0 million in costs of land sold and $7.9 million in other interest expense). Interest expense included in costs of homes sold increased primarily due to an increase in our outstanding homebuilding debt and an increase in home deliveries.
Operating earnings for our Lennar Financial Services segment were $59.0 million in the six months ended May 31, 2016, compared to $54.6 million in the six months ended May 31, 2015. The increase in profitability was primarily due to higher profit per transaction in the segment's mortgage and title operations.
Operating loss for our Rialto segment was $11.8 million in the six months ended May 31, 2016 (which included a $16.5 million operating loss and an add back of $4.6 million of net loss attributable to noncontrolling interests). The operating loss in the six months ended May 31, 2016 included a $16.0 million write-off of uncollectible receivables related to the hospital. Operating earnings in the six months ended May 31, 2015 were $12.2 million (which included $9.7 million of operating earnings and an add back of $2.5 million of net loss attributable to noncontrolling interests).
Rialto revenues were $88.5 million in the six months ended May 31, 2016, compared to $109.1 million in the six months ended May 31, 2015. Revenues decreased primarily due to a decrease in RMF securitization revenues due to lower securitization volume and margins. During the six months ended May 31, 2016 and 2015, Rialto received $7.4 million and $11.3 million, respectively, of advanced distributions with regard to Rialto's carried interests in the Funds in order to cover income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds.
Rialto expenses were $93.1 million in the six months ended May 31, 2016, compared to $108.3 million in the six months ended May 31, 2015. Expenses decreased primarily due to a decrease in general and administrative expenses and a decrease in securitization expenses related to RMF.
Rialto equity in earnings from unconsolidated entities was $8.4 million and $10.0 million in the six months ended May 31, 2016 and 2015, respectively, related to Rialto's share of earnings from the Funds. The decrease in equity in earnings was primarily related to mark downs of certain assets in the Funds and smaller net increases in the fair value of certain assets in the Funds in the six months ended May 31, 2016 than in the same period last year.
Rialto other expense, net, was $20.3 million in the six months ended May 31, 2016, compared to $1.1 million in the six months ended May 31, 2015. In the six months ended May 31, 2016, Rialto other expense, net, included a $16.0 million write-off of uncollectible receivables related to the hospital.
Operating earnings for our Lennar Multifamily segment were $27.1 million in the six months ended May 31, 2016, compared to an operating loss of $14.4 million in the six months ended May 31, 2015. The increase in profitability was primarily related to the segment's $35.8 million share of gains as a result of the sale of two operating properties by Lennar Multifamily's unconsolidated entities and gross profit of $5.2 million on a third-party land sale.
Corporate general and administrative expenses were $103.5 million, or 2.2% as a percentage of total revenues, in the six months ended May 31, 2016, compared to $93.9 million, or 2.3% as a percentage of total revenues, in the six months ended May 31, 2015. As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings attributable to noncontrolling interests were $6.9 million and $3.5 million in the six months ended May 31, 2016 and 2015, respectively. Net earnings attributable to noncontrolling interests during the six months ended May 31, 2016 were primarily attributable to earnings related to Lennar Homebuilding consolidated joint ventures, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC. Net earnings attributable to noncontrolling interests during the six months ended May 31, 2015 were primarily attributable to a strategic transaction by one of Lennar Homebuilding's consolidated joint ventures that impacted noncontrolling interests by $2.3 million and earnings related to consolidated joint ventures.
In the six months ended May 31, 2016 and 2015, we had a tax provision of $160.0 million and $155.0 million, respectively. Our overall effective income tax rates were 30.62% and 34.21% in the six months ended May 31, 2016 and 2015, respectively. The reduction is primarily the result of the reversal of an accrual due to a settlement with the IRS in the six months ended May 31, 2016, which reduced our effective tax rate by 2.12%. We do not anticipate similar settlements during the

50




remainder of fiscal 2016. During the six months ended May 31, 2016, tax legislation was passed extending the new energy efficient home credit through 2016, as well as extending the 30% investment tax credit for solar energy property through 2022. Both of these tax credits benefited and we expect will continue to benefit our effective tax rate.


Homebuilding Segments
We have aggregated our homebuilding activities into four reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West, and Homebuilding Houston, based primarily upon similar economic characteristics, geography and product type. Information about homebuilding activities in states that do not have economic characteristics that are similar to those in other states in the same geographic area is grouped under “Homebuilding Other,” which is not a reportable segment. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.
In the first quarter of 2016, we made the decision to divide the Southeast Florida operating division into two operating segments to maximize operational efficiencies given the continued growth of the division. As a result of this change in management structure, we re-evaluated our reportable segments and determined that neither operating segment met the reportable criteria set forth in Accounting Standards Codification ("ASC") 280, Segment Reporting. We aggregated these operating segments into the Homebuilding East reportable segment as these divisions exhibit similar economic characteristics, geography and product type as the other divisions in Homebuilding East. All prior year segment information has been restated to conform with the 2016 presentation. The change in the reportable segments has no effect on our condensed consolidated financial position, results of operations or cash flows for the periods presented.
At May 31, 2016, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions located in:
East: Florida, Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(1) 
West: California and Nevada
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

51




The following tables set forth selected financial and operational information related to our homebuilding operations for the periods indicated:
Selected Financial and Operational Data
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Homebuilding revenues:
 
 
 
 
 
 
 
East:
 
 
 
 
 
 
 
Sales of homes
$
953,350


 
831,449


 
1,600,137


 
1,418,497


Sales of land
948


 
6,786


 
13,215


 
30,421


Total East
954,298


 
838,235


 
1,613,352


 
1,448,918


Central:
 
 
 
 
 
 
 
Sales of homes
409,028


 
301,338


 
679,072


 
506,078


Sales of land
10,283


 
1,171


 
15,458


 
6,939


Total Central
419,311


 
302,509


 
694,530


 
513,017


West:
 
 
 
 
 
 
 
Sales of homes
718,029


 
608,301


 
1,264,458


 
990,961


Sales of land
30


 
19,060


 
4,940


 
19,173


Total West
718,059


 
627,361


 
1,269,398


 
1,010,134


Houston:
 
 
 
 
 
 
 
Sales of homes
182,328


 
182,633


 
312,721


 
307,563


Sales of land
7,348


 
7,014


 
15,576


 
13,341


Total Houston
189,676


 
189,647


 
328,297


 
320,904


Other:
 
 
 
 
 
 
 
Sales of homes
166,833


 
157,391


 
327,871


 
261,581


Sales of land
2,708


 
669


 
3,918


 
2,916


Total Other
169,541


 
158,060


 
331,789


 
264,497


Total homebuilding revenues
$
2,450,885


 
2,115,812


 
4,237,366


 
3,557,470



52




 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Operating earnings:
 
 
 
 
 
 
 
East:
 
 
 
 
 
 
 
Sales of homes
$
139,432


 
134,754


 
217,937


 
217,228


Sales of land
(152
)
 
665


 
6,089


 
7,991


Equity in earnings (loss) from unconsolidated entities
(154
)
 
263


 
(124
)
 
202


Other income (expense), net (1)
4,583


 
(2,894
)
 
5,264


 
(4,019
)
Other interest expense
(771
)
 
(1,222
)
 
(1,522
)
 
(3,303
)
Total East
142,938


 
131,566


 
227,644


 
218,099


Central:
 
 
 
 
 
 
 
Sales of homes
46,617


 
30,485


 
67,722


 
46,234


Sales of land
(89
)
 
214


 
(107
)
 
1,611


Equity in earnings from unconsolidated entities


 
16


 
42


 
55


Other income (expense), net
(708
)
 
660


 
(1,377
)
 
(904
)
Other interest expense
(141
)
 
(660
)
 
(278
)
 
(1,229
)
Total Central
45,679


 
30,715


 
66,002


 
45,767


West:
 
 
 
 
 
 
 
Sales of homes
114,452


 
95,129


 
199,080


 
142,912


Sales of land
(41
)
 
620


 
946


 
312


Equity in earnings (loss) from unconsolidated entities (2)
(9,733
)
 
6,121


 
(6,862
)
 
34,947


Other income, net
9,410


 
1,863


 
10,027


 
9,069


Other interest expense
(281
)
 
(1,401
)
 
(550
)
 
(2,415
)
Total West
113,807


 
102,332


 
202,641


 
184,825


Houston:
 
 
 
 
 
 
 
Sales of homes
21,006


 
21,080


 
32,647


 
34,826


Sales of land
1,485


 
2,074


 
3,022


 
4,017


Equity in earnings (loss) from unconsolidated entities
1


 
(2
)
 
2


 
10


Other income (expense), net
591


 
(225
)
 
284


 
1,224


Other interest expense


 
(189
)
 


 
(324
)
Total Houston
23,083


 
22,738


 
35,955


 
39,753


Other:
 
 
 
 
 
 
 
Sales of homes
15,241


 
5,387


 
28,460


 
10,053


Sales of land
646


 
(78
)
 
1,077


 
1,629


Equity in earnings from unconsolidated entities
253


 
96


 
309


 
179


Other income, net
1,049


 
379


 
1,246


 
746


Other interest expense


 
(346
)
 


 
(618
)
Total Other
17,189


 
5,438


 
31,092


 
11,989


Total homebuilding operating earnings
$
342,696


 
292,789


 
563,334


 
500,433


(1)
Other expense, net for the three and six months ended May 31, 2015 primarily related to a loss on a strategic sale of an operating property from one of our consolidated joint ventures, partially offset by noncontrolling interests.
(2)
Lennar Homebuilding equity in loss for the three and six months ended May 31, 2016 was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $6.7 million and $12.7 million, respectively, of equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties. Lennar Homebuilding equity in earnings from unconsolidated entities for the three and six months ended May 31, 2015, included $11.6 million and $43.0 million, respectively, of equity in earnings from one of our unconsolidated entities primarily due to the sale of a commercial property and homesites to third parties, partially offset by our share of net operating losses from various unconsolidated entities.

53




Summary of Homebuilding Data
Deliveries:
 
Three Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
3,032


 
2,708


 
$
953,671


 
833,146


 
$
315,000


 
308,000


Central
1,217


 
951


 
409,027


 
301,339


 
336,000


 
317,000


West
1,503


 
1,353


 
727,384


 
624,042


 
484,000


 
461,000


Houston
613


 
636


 
182,328


 
182,633


 
297,000


 
287,000


Other
359


 
367


 
166,833


 
157,391


 
465,000


 
429,000


Total
6,724


 
6,015


 
$
2,439,243


 
2,098,551


 
$
363,000


 
349,000


Of the total homes delivered listed above, 13 homes with a dollar value of $9.7 million and an average sales price of $744,000 represent home deliveries from unconsolidated entities for the three months ended May 31, 2016, compared to 26 home deliveries with a dollar value of $17.4 million and an average sales price of $671,000 for the three months ended May 31, 2015.
 
Six Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
5,096


 
4,694


 
$
1,601,426


 
1,420,464


 
$
314,000


 
303,000


Central
2,041


 
1,632


 
679,072


 
506,079


 
333,000


 
310,000


West
2,671


 
2,279


 
1,286,918


 
1,006,702


 
482,000


 
442,000


Houston
1,070


 
1,097


 
312,721


 
307,563


 
292,000


 
280,000


Other
678


 
615


 
327,870


 
261,581


 
484,000


 
425,000


Total
11,556




10,317


 
$
4,208,007


 
3,502,389


 
$
364,000


 
339,000


Of the total homes delivered listed above, 39 homes with a dollar value of $23.7 million and an average sales price of $609,000 represent home deliveries from unconsolidated entities for the six months ended May 31, 2016, compared to 27 home deliveries with a dollar value of $17.7 million and an average sales price of $656,000 for the six months ended May 31, 2015.

54




Sales Incentives (1):
 
Three Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
$
67,305


 
62,041


 
$
22,200


 
23,000


 
6.6
%
 
6.9
%
Central
25,121


 
21,772


 
20,600


 
22,900


 
5.8
%
 
6.7
%
West
25,518


 
20,405


 
17,100


 
15,300


 
3.4
%
 
3.2
%
Houston
21,482


 
17,023


 
35,000


 
26,800


 
10.5
%
 
8.5
%
Other
6,722


 
7,606


 
18,700


 
20,700


 
3.9
%
 
4.6
%
Total
$
146,148


 
128,847


 
$
21,800


 
21,500


 
5.7
%
 
5.8
%
 
Six Months Ended
 
Sales Incentives
(In thousands)
 
Average Sales Incentives Per
Home Delivered
 
Sales Incentives
as a % of Revenue
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
$
111,353


 
109,108


 
$
21,900


 
23,300


 
6.5
%
 
7.1
%
Central
43,704


 
38,073


 
21,400


 
23,300


 
6.0
%
 
7.0
%
West
43,986


 
36,061


 
16,700


 
16,000


 
3.4
%
 
3.5
%
Houston
36,907


 
27,360


 
34,500


 
24,900


 
10.6
%
 
8.2
%
Other
13,888


 
11,885


 
20,500


 
19,300


 
4.1
%
 
4.3
%
Total
$
249,838


 
222,487


 
$
21,700


 
21,600


 
5.6
%
 
6.0
%
(1)
Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.
New Orders (2):
 
Three Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
3,568


 
3,179


 
$
1,109,894


 
982,831


 
$
311,000


 
309,000


Central
1,489


 
1,217


 
516,765


 
398,694


 
347,000


 
328,000


West
1,781


 
1,756


 
834,570


 
818,981


 
469,000


 
466,000


Houston (3)
651


 
684


 
199,262


 
203,386


 
306,000


 
297,000


Other
473


 
435


 
221,393


 
185,542


 
468,000


 
427,000


Total
7,962


 
7,271


 
$
2,881,884


 
2,589,434


 
$
362,000


 
356,000


Of the total new orders listed above, 9 homes with a dollar value of $5.4 million and an average sales price of $597,000 represent new orders from unconsolidated entities for the three months ended May 31, 2016, compared to 24 new orders with a dollar value of $17.7 million and an average sales price of $737,000 for the three months ended May 31, 2015.
 
Six Months Ended
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East
6,096


 
5,509


 
$
1,907,942


 
1,708,851


 
$
313,000


 
310,000


Central
2,617


 
2,129


 
901,450


 
685,369


 
344,000


 
322,000


West
3,071


 
2,946


 
1,458,418


 
1,346,565


 
475,000


 
457,000


Houston (3)
1,153


 
1,204


 
344,748


 
349,109


 
299,000


 
290,000


Other
819


 
770


 
377,195


 
328,321


 
461,000


 
426,000


Total
13,756


 
12,558


 
$
4,989,753


 
4,418,215


 
$
363,000


 
352,000


Of the total new orders listed above, 24 homes with a dollar value of $14.1 million and an average sales price of $588,000 represent new orders from unconsolidated entities for the six months ended May 31, 2016, compared to 50 new orders with a dollar value of $30.0 million and an average sales price of $600,000 for the six months ended May 31, 2015.

55




(2)
New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three and six months ended May 31, 2016 and 2015.
(3)
The decrease in new orders in Homebuilding Houston was primarily due to less demand driven by volatility in the energy sector during both the three and six months ended May 31, 2016 and 2015.
Backlog:
 
Homes
 
Dollar Value (In thousands)
 
Average Sales Price
 
May 31,
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
East (4)
3,963


 
3,603


 
$
1,287,728


 
1,173,900


 
$
325,000


 
326,000


Central
1,946


 
1,458


 
699,991


 
490,007


 
360,000


 
336,000


West
1,754


 
1,658


 
843,871


 
777,451


 
481,000


 
469,000


Houston
781


 
937


 
240,079


 
267,415


 
307,000


 
285,000


Other (5)
570


 
417


 
264,101


 
180,390


 
463,000


 
433,000


Total
9,014


 
8,073


 
$
3,335,770


 
2,889,163


 
$
370,000


 
358,000


Of the total homes in backlog listed above, 74 homes with a backlog dollar value of $52.8 million and an average sales price of $713,000 represent the backlog from unconsolidated entities at May 31, 2016, compared to 90 homes with a backlog dollar value of $52.1 million and an average sales price of $579,000 at May 31, 2015.
(4)
During the six months ended May 31, 2016, we acquired 111 homes in backlog.
(5)
During the six months ended May 31, 2016, we acquired 57 homes in backlog.
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.
We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
 
2016
 
2015
 
2016
 
2015
East
12
%
 
15
%
 
13
%
 
15
%
Central
16
%
 
18
%
 
16
%
 
17
%
West
13
%
 
11
%
 
13
%
 
12
%
Houston (1)
21
%
 
24
%
 
22
%
 
25
%
Other
8
%
 
10
%
 
9
%
 
11
%
Total
14
%
 
15
%
 
14
%
 
16
%
(1)
The cancellation rate in Homebuilding Houston remained higher than historical cancellation rates due to volatility in the energy sector.
Active Communities:
 
May 31,
 
2016
 
2015
East
293


 
291


Central
136


 
130


West
128


 
117


Houston
81


 
74


Other
54


 
55


Total
692


 
667


Of the total active communities listed above, three communities and two communities represent active communities being developed by unconsolidated entities as of May 31, 2016 and 2015, respectively.

56




The following table details our gross margins on home sales for the three and six months ended May 31, 2016 and 2015 for each of our reportable homebuilding segments and Homebuilding Other:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
East:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
$
953,350


 
 
 
831,449


 
 
 
1,600,137


 
 
 
1,418,497


 
 
Costs of homes sold
721,121


 
 
 
612,011


 
 
 
1,214,516


 
 
 
1,049,315


 
 
Gross margins on home sales
232,229


 
24.4%
 
219,438


 
26.4%
 
385,621


 
24.1
%
 
369,182


 
26.0
%
Central:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
409,028


 
 
 
301,338


 
 
 
679,072


 
 
 
506,078


 
 
Costs of homes sold
326,478


 
 
 
238,388


 
 
 
544,772


 
 
 
403,215


 
 
Gross margins on home sales
82,550


 
20.2%
 
62,950


 
20.9%
 
134,300


 
19.8
%
 
102,863


 
20.3
%
West:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
718,029


 
 
 
608,301


 
 
 
1,264,458


 
 
 
990,961


 
 
Costs of homes sold
546,428


 
 
 
459,781


 
 
 
959,254


 
 
 
754,267


 
 
Gross margins on home sales
171,601


 
23.9%
 
148,520


 
24.4%
 
305,204


 
24.1
%
 
236,694


 
23.9
%
Houston:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
182,328


 
 
 
182,633


 
 
 
312,721


 
 
 
307,563


 
 
Costs of homes sold
142,032


 
 
 
141,822


 
 
 
245,900


 
 
 
238,749


 
 
Gross margins on home sales
40,296


 
22.1%
 
40,811


 
22.3%
 
66,821


 
21.4
%
 
68,814


 
22.4
%
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales of homes
166,833


 
 
 
157,391


 
 
 
327,871


 
 
 
261,581


 
 
Costs of homes sold
131,986


 
 
 
133,256


 
 
 
259,348


 
 
 
218,508


 
 
Gross margins on home sales
34,847


 
20.9%
 
24,135


 
15.3%
 
68,523


 
20.9
%
 
43,073


 
16.5
%
Total gross margins on home sales
$
561,523


 
23.1%
 
495,854


 
23.8%
 
960,469


 
23.0
%
 
820,626


 
23.5
%
Three Months Ended May 31, 2016 versus Three Months Ended May 31, 2015
Homebuilding East: Revenues from home sales increased for the three months ended May 31, 2016 compared to the three months ended May 31, 2015, primarily due to an increase in the number of home deliveries in all the states in the segment. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. Gross margin percentage on home sales for the three months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land and direct construction costs per home, partially offset by an increase in average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Central: Revenues from home sales increased for the three months ended May 31, 2016 compared to the three months ended May 31, 2015, primarily due to an increase in the number of home deliveries in all the states in the segment and an increase in the average sales price of homes delivered in all the states in the segment, except for Texas, excluding Houston. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to a change in product mix and because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. The decrease in the average sales price in Texas, excluding Houston, was primarily due to a change in product mix resulting from the timing of deliveries in certain communities. Gross margin percentage on home sales for the three months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home, partially offset by an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding West: Revenues from home sales increased for the three months ended May 31, 2016 compared to the three months ended May 31, 2015, primarily due to an increase in the average sales price of homes delivered in all the states in the segment and an increase in the number of home deliveries in California, partially offset by a decrease in the number of home deliveries in Nevada. The increase in the average sales price of homes delivered was primarily due to a change in product mix and because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. The increase in the number of home deliveries in California was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased.

57




The decrease in the number of deliveries in Nevada was primarily due to less demand in higher-end communities as the number of home deliveries per active community decreased over the last year. Gross margin percentage on home sales for the three months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Houston: Revenues from home sales remained consistent for the three months ended May 31, 2016 compared to the three months ended May 31, 2015, as the increase in the average sales price of homes delivered was offset by a decrease in the number of home deliveries. The increase in the average sales price of homes delivered was primarily due to a change in product mix as a result of the timing of deliveries in the segment's higher-end homes in certain communities. The decrease in the number of home deliveries was primarily due to less demand as the number of home deliveries per active community decreased driven by the volatility in the energy sector. Gross margin percentage on home sales for the three months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Other: Revenues from home sales increased for the three months ended May 31, 2016 compared to the three months ended May 31, 2015, primarily due to an increase in the average sales price of homes delivered in all the states in Homebuilding Other. The increase in the average sales price of homes delivered was primarily due to a change in product mix. Gross margin percentage on home sales for the three months ended May 31, 2016 increased compared to the same period last year primarily due to a decrease in land costs per home (prior year's land costs per home included a valuation adjustment of $9.6 million in our Northeast Urban operations), an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Six Months Ended May 31, 2016 versus Six Months Ended May 31, 2015
Homebuilding East: Revenues from home sales increased for the six months ended May 31, 2016 compared to the six months ended May 31, 2015, primarily due to an increase in the number of home deliveries in all the states in the segment and an increase in the average sales price of homes delivered in all the states in the segment, except Florida. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. The decrease in the average sales price of homes delivered in Florida was primarily due a change in product mix due to the timing of deliveries in certain communities. Gross margin percentage on home sales for the six months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land and direct construction costs per home, partially offset by an increase in average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding Central: Revenues from home sales increased for the six months ended May 31, 2016 compared to the six months ended May 31, 2015, primarily due to an increase in the number of home deliveries and average sales price of homes delivered in all the states in the segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to a change in product mix and because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home, partially offset by an increase in the average sales price of homes delivered and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding West: Revenues from home sales increased for the six months ended May 31, 2016 compared to the six months ended May 31, 2015, primarily due to an increase in the number of home deliveries and average sales price of homes delivered in all the states in the segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and/or driven by higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to a change in product mix and because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2016 increased compared to the same period last year primarily due to an increase in the average sales price of homes delivered and a decrease in construction costs per home, partially offset by an increase in land costs per home.
Homebuilding Houston: Revenues from home sales increased for the six months ended May 31, 2016 compared to the six months ended May 31, 2015, primarily due to an increase in the average sales price of homes delivered, partially offset by a decrease in the number of home deliveries. The increase in the average sales price of homes delivered was due to a change in product mix due to the timing of deliveries in the segment's high-end homes in certain communities. The decrease in the number of home deliveries was primarily due to less demand as the number of home deliveries per active community decreased

58




driven by the volatility in the energy sector. Gross margin percentage on home sales for the six months ended May 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Other: Revenues from home sales increased for the six months ended May 31, 2016 compared to the six months ended May 31, 2015, primarily due to an increase in the average sales price of homes delivered in all the states in Homebuilding Other and an increase in the number of home deliveries in all the states in Homebuilding Other, except Minnesota. The increase in the average sales price of homes delivered was primarily due to a change in product mix. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. The decrease in home deliveries in Minnesota was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. Gross margin percentage on home sales for the six months ended May 31, 2016 increased compared to the same period last year primarily due to an increase in the average sales price of homes delivered, a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales and prior year included a valuation adjustment of $9.6 million in our Northeast Urban operations.
Lennar Financial Services Segment
Our Lennar Financial Services reportable segment provides mortgage financing, title insurance and closing services for both buyers of our homes and others. Our 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, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements.
The following table sets forth selected financial and operational information related to our Lennar Financial Services segment:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
175,940


 
169,885


 
299,896


 
294,712


Costs and expenses
131,852


 
130,832


 
240,877


 
240,132


Operating earnings
$
44,088


 
39,053


 
59,019


 
54,580


Dollar value of mortgages originated
$
2,355,000


 
2,402,000


 
4,019,000


 
4,030,000


Number of mortgages originated
8,500


 
8,800


 
14,600


 
15,000


Mortgage capture rate of Lennar homebuyers
83
%
 
82
%
 
82
%
 
81
%
Number of title and closing service transactions
29,400


 
30,700


 
51,800


 
53,400


Number of title policies issued
71,300


 
62,600


 
132,600


 
119,500


Rialto Segment
Our Rialto reportable segment is a commercial real estate investment, investment management, and finance company focused on raising, investing and managing third-party capital, originating and selling into securitizations commercial mortgage loans as well as investing our own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and securities as well as providing strategic real estate capital. Rialto's primary focus is to manage third-party capital and to originate and sell into securitizations commercial mortgage loans. Rialto has commenced the workout and/or oversight of billions of dollars of real estate assets across the United States, including commercial and residential real estate loans and properties as well as mortgage backed securities with the objective of generating superior, risk-adjusted returns. To date, many of the investment and management opportunities have arisen from the dislocation in the United States real estate markets and the restructuring and recapitalization of those markets.

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Rialto's operating earnings (loss) were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
44,838


 
67,931


 
88,549


 
109,128


Costs and expenses (1)
50,203


 
67,506


 
93,110


 
108,287


Rialto equity in earnings from unconsolidated entities
6,864


 
7,328


 
8,361


 
9,992


Rialto other expense, net
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
Operating earnings (loss) (2)
$
(18,086
)
 
6,881


 
(16,476
)
 
9,689


(1)
Costs and expenses included loan impairments of $4.4 million and $6.7 million for the three and six months ended May 31, 2016, respectively, and $1.6 million and $2.8 million for the three and six months ended May 31, 2015, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating loss for the three and six months ended May 31, 2016 included net loss attributable to noncontrolling interests of $4.3 million and $4.6 million, respectively. Operating earnings for the three and six months ended May 31, 2015 included net loss attributable to noncontrolling interests of $0.7 million and $2.5 million, respectively.
The following is a detail of Rialto other expense, net:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Realized gains on REO sales, net
$
5,492


 
4,544


 
9,238


 
7,674


Unrealized losses on transfer of loans receivable to REO and impairments, net
(5,396
)
 
(2,212
)
 
(5,549
)
 
(4,768
)
REO and other expenses
(12,123
)
 
(15,167
)
 
(26,958
)
 
(28,409
)
Rental and other income (loss) (1)
(7,558
)
 
11,963


 
2,993


 
24,359


Rialto other expense, net
$
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
(1)
Rental and other income (loss) for both the three and six months ended May 31, 2016, included a $16.0 million write-off of uncollectible receivables related to a hospital, which was acquired through the resolution of one of Rialto's loans from a 2010 portfolio. The hospital is managed by a third-party management company.
Rialto Mortgage Finance
RMF originates and sells into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million, which are secured by income producing properties. This business has become a significant contributor to Rialto's revenues.
During the six months ended May 31, 2016, RMF originated loans with a total principal balance of $670.3 million of which $654.0 million were recorded as loans held-for-sale and $16.3 million as accrual loans within loans receivable, net, and sold $766.4 million of loans into five separate securitizations. During the six months ended May 31, 2015, RMF originated loans with a total principal balance of $1.2 billion and sold $1.0 billion of loans into five separate securitizations.
Loans Receivable
In 2010, our Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”) in partnership with the FDIC, which retained 60% equity interests in the LLCs, for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs held performing and non-performing loans formerly owned by 22 failed financial institutions and when our Rialto segment acquired its interests in the LLCs, the two portfolios consisted of approximately 5,500 distressed residential and commercial real estate loans. If the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, our equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As these thresholds have not been met, distributions continue being shared 60%/40% with the FDIC. During the six months ended May 31, 2016 and 2015, the LLCs distributed $66.6 million and $94.0 million, respectively, of which $40.0 million and $56.4 million, respectively, was distributed to the FDIC and $26.6 million and $37.6 million, respectively, was distributed to Rialto, the parent company.
The LLCs met the accounting definition of variable interest entities (“VIEs”) and since we were determined to be the primary beneficiary, we consolidated the LLCs. We were determined to be the primary beneficiary because we have the power to direct the activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2016, these consolidated LLCs had total combined assets and liabilities of $280.0 million and

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$11.3 million, respectively. At November 30, 2015, these consolidated LLCs had total combined assets and liabilities of $355.2 million and $11.3 million, respectively.
Also, in 2010, our Rialto segment acquired approximately 400 distressed residential and commercial real estate loans and over 300 REO properties from three financial institutions. We 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 for which the maturity was subsequently extended. The remaining balance is due in December 2016. As of both May 31, 2016 and November 30, 2015, the outstanding amount related to the 5-year unsecured note was $30.3 million.
Investments
Rialto is the sponsor of and an investor in private equity vehicles that invest in and manage real estate related assets and other related investments. This includes:
Private Equity Vehicle
Inception Year
Commitment
Rialto Real Estate Fund, LP
2010
$700 million (including $75 million by us)
Rialto Real Estate Fund II, LP
2012
$1.3 billion (including $100 million by us)
Rialto Mezzanine Partners Fund, LP
2013
$300 million (including $34 million by us)
Rialto Capital CMBS Funds
2014
$112 million (including $47 million by us)
Rialto Real Estate Fund III
2015
$818 million (including $100 million by us)
Rialto Credit Partnership, LP
2016
$220 million (including $20 million by us)
Rialto also earns fees for its role as a manager of these vehicles and for providing asset management and other services to those vehicles and other third parties.
At May 31, 2016 and November 30, 2015, the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $60.1 million and $25.6 million, respectively. These securities have discount rates ranging from 39% to 55% with coupon rates ranging from 2.2% to 4.0%, stated and assumed final distribution dates between November 2020 and February 2026, and stated maturity dates between November 2048 and March 2059. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In 2014, the Rialto segment invested $18 million in a private commercial real estate services company. The investment was carried at cost at both May 31, 2016 and November 30, 2015 and is included in Rialto's other assets.
Lennar Multifamily Segment
We have been actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. Our Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
As of May 31, 2016 and November 30, 2015, our balance sheet had $518.1 million and $415.4 million, respectively, of assets related to our Lennar Multifamily segment, which included investments in unconsolidated entities of $304.2 million and $250.9 million, respectively. Our net investment in the Lennar Multifamily segment as of May 31, 2016 and November 30, 2015 was $428.0 million and $348.4 million, respectively. During the three and six months ended May 31, 2016, our Lennar Multifamily segment sold one and two operating properties, respectively, through its unconsolidated entities resulting in the segment's $15.4 million and $35.8 million share of gains, respectively. In addition, during both the three and six months ended May 31, 2016, our Lennar Multifamily segment sold land to a third-party generating gross profit of $5.2 million.
Our Lennar Multifamily segment had equity investments in 31 and 29 unconsolidated entities (including the Lennar Multifamily Venture, the "Venture"), as of May 31, 2016 and November 30, 2015, respectively. As of May 31, 2016, our Lennar Multifamily segment had interests in 46 communities with development costs of $3.7 billion, of which eight communities were completed and operating, five communities were partially completed and leasing, 27 communities were under construction and the remaining communities were owned. As of May 31, 2016, our Lennar Multifamily segment also had a pipeline of potential future projects totaling $4.1 billion in assets across a number of states that would be developed primarily by future unconsolidated entities.
In 2015, the Lennar Multifamily segment completed the first closing of the Venture for the development, construction and property management of class-A multifamily assets. As of May 31, 2016, the Venture has approximately $1.4 billion of equity commitments, including a $504 million co-investment commitment by us, comprised of cash, undeveloped land and preacquisition costs. Subsequent to May 31, 2016, the Lennar Multifamily Venture received an additional $550 million of equity commitments, increasing its total equity commitments to approximately $2 billion.

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(2) Financial Condition and Capital Resources
At May 31, 2016, we had cash and cash equivalents related to our homebuilding, financial services, Rialto and multifamily operations of $815.5 million, compared to $1.2 billion at November 30, 2015 and $920.2 million at May 31, 2015.
We finance all of our activities, including homebuilding, financial services, Rialto, multifamily and general operating needs, primarily with cash generated from our operations, debt issuances and equity offerings, as well as cash borrowed under our warehouse lines of credit and our credit facility.
Operating Cash Flow Activities
During the six months ended May 31, 2016 and 2015, cash used in operating activities totaled $175.4 million and $994.5 million, respectively. During the six months ended May 31, 2016, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases, land development and construction costs and a decrease in accounts payable and other liabilities, partially offset by our net earnings, a decrease in receivables and a net decrease in loans held-for-sale primarily related to RMF. For the six months ended May 31, 2016, distribution of earnings from unconsolidated entities were (1) $1.1 million from Lennar Homebuilding unconsolidated entities, (2) $7.8 million from Rialto unconsolidated entities, and (3) $34.8 million from Lennar Multifamily unconsolidated entities.
During the six months ended May 31, 2015, cash used in operating activities was impacted by an increase in inventories due to strategic land purchases and land development costs, an increase of $206.7 million in Rialto loans held-for-sale related to RMF and an increase of $53.9 million in Lennar Financial Services loans held-for-sale, partially offset by our net earnings, an increase in accounts payable and other liabilities and an increase in distribution of earnings from unconsolidated entities. For the six months ended May 31, 2015, distributions of earnings from unconsolidated were (1) $26.3 million from Lennar Homebuilding unconsolidated entities and (2) $8.4 million from Rialto unconsolidated entities.
Investing Cash Flow Activities
During the six months ended May 31, 2016 and 2015, cash used in investing activities totaled $149.6 million and $7.3 million, respectively. During the six months ended May 31, 2016, our cash used in investing activities was primarily impacted by cash contributions of (1) $91.2 million to Lennar Homebuilding unconsolidated entities primarily for working capital, (2) $24.1 million contributed primarily to Rialto's CMBS Funds, and (3) $94.9 million to Lennar Multifamily unconsolidated entities primarily for working capital. In addition, cash used in investing activities was impacted by purchases of commercial mortgage backed bonds and originations of loans receivable by our Rialto segment. This was partially offset by the receipt of $43.4 million of proceeds from the sales of REO and distributions of capital of (1) $25.7 million from Lennar Homebuilding unconsolidated entities, (2) $66.3 million from Lennar Multifamily unconsolidated entities, of which $43.6 million was distributed by the Venture and (3) $11.0 million from Rialto unconsolidated entities comprised of $4.3 million distributed by Fund II, $5.5 million distributed by the Mezzanine Fund and $1.2 million distributed by the CMBS Funds.
During the six months ended May 31, 2015, cash used in investing activities was primarily impacted by cash contributions of (1) $27.0 million to Lennar Homebuilding unconsolidated entities primarily for working capital, (2) $23.9 million to Rialto unconsolidated entities comprised of $18.4 million contributed to Fund II, $3.5 million contributed to the Mezzanine Fund and $2.0 million contributed to the CMBS Funds, and (3) $15.7 million to Lennar Multifamily unconsolidated entities primarily for working capital. In addition, cash used in investing activities was impacted by purchases of Lennar Homebuilding investments available-for-sale, purchase of an investment carried at cost and additions of operating properties. This was partially offset by the receipt of $73.7 million of proceeds from the sale of a Lennar Homebuilding operating property, $55.8 million of proceeds from the sales of REO and by distributions of capital of (1) $17.8 million from Lennar Homebuilding unconsolidated entities, (2) $11.3 million from Lennar Multifamily unconsolidated entities, and (3) $6.0 million from Rialto unconsolidated entities comprised of $2.7 million distributed by Fund II, $1.2 million distributed by Mezzanine Fund and $2.1 million distributed by the CMBS Funds.
Financing Cash Flow Activities
During the six months ended May 31, 2016 and 2015, our cash (used in) provided by financing activities totaled ($18.0) million and $640.2 million, respectively. During the six months ended May 31, 2016, our cash used in financing activities was primarily impacted by $230.2 million of repayments under our Lennar Financial Services' and Rialto's warehouse repurchase facilities, $233.9 million of exchanges and conversions of our 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”), the redemption of $250 million aggregate principal amount of our 6.50% senior notes due April 2016, $103.2 million of principal payments on other borrowings and $73.2 million of payments related to noncontrolling interests. The cash used in financing activities was partially offset by the receipt of proceeds of the sale of $500 million aggregate principal amount of 4.750% senior notes due 2021 ("4.750% Senior Notes") and $375.0 million of net borrowings under our unsecured revolving credit facility (the “Credit Facility”).

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During the six months ended May 31, 2015, our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the sale of (1) an additional $250 million aggregate principal amount of 4.50% senior notes due 2019, and (2) $500 million aggregate principal amount of 4.750% senior notes due 2025; net borrowings of $450 million under our Credit Facility; and net borrowings of $189.6 million under our Lennar Financial Services' and Rialto's warehouse repurchase facilities. The cash provided by financing activities was partially offset by $500 million redemption of our 5.60% senior notes due May 2015, $206.9 million of principal payments on other borrowings and $78.9 million of payments related to noncontrolling interests.
Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Lennar Homebuilding operations. Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital are calculated as follows:
(Dollars in thousands)
May 31,

2016
 
November 30,

2015
 
May 31,

2015
Lennar Homebuilding debt
$
5,316,235


 
5,025,130


 
5,263,221


Stockholders’ equity
6,118,366


 
5,648,944


 
5,138,738


Total capital
$
11,434,601


 
10,674,074


 
10,401,959


Lennar Homebuilding debt to total capital
46.5
%


47.1
%
 
50.6
%
Lennar Homebuilding debt
$
5,316,235


 
5,025,130


 
5,263,221


Less: Lennar Homebuilding cash and cash equivalents
601,192


 
893,408


 
638,992


Net Lennar Homebuilding debt
$
4,715,043


 
4,131,722


 
4,624,229


Net Lennar Homebuilding debt to total capital (1)
43.5
%
 
42.2
%
 
47.4
%
(1)
Net Lennar Homebuilding debt to total capital is a non-GAAP financial measure defined as net Lennar Homebuilding debt (Lennar Homebuilding debt less Lennar Homebuilding cash and cash equivalents) divided by total capital (net Lennar Homebuilding debt plus stockholders' equity). We believe the ratio of net Lennar Homebuilding debt to total capital is a relevant and a useful financial measure to investors in understanding the leverage employed in our Lennar Homebuilding operations. However, because net Lennar Homebuilding debt to total capital is not calculated in accordance with GAAP, this financial measure should not be considered in isolation or as an alternative to financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results.
At May 31, 2016, Lennar Homebuilding debt to total capital was lower compared to May 31, 2015, primarily as a result of an increase in stockholder’s equity primarily related to our net earnings, partially offset by a net increase in Lennar Homebuilding debt due to borrowings under our Credit Facility and the issuance of senior notes.
We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues and earnings. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness for cash or equity, the acquisition of homebuilders and other companies, the purchase or sale of assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or pursuing other financing alternatives. In connection with some of our more recently formed businesses, such as Rialto and Lennar Multifamily, we may also consider other types of transactions such as restructurings, joint ventures, spin-offs or initial public offerings. If any of these transactions are implemented, they could materially impact the amount and composition of our indebtedness outstanding, increase our interest expense, dilute our existing stockholders and/or affect the net book value of our assets. At May 31, 2016, we had no other agreements or understandings regarding any significant transactions that have not been previously disclosed.
Our Lennar Homebuilding average debt outstanding was $5.3 billion with an average rate for interest incurred of 5.0% for the six months ended May 31, 2016, compared to $5.1 billion with an average rate for interest incurred of 5.1% for the six months ended May 31, 2015. Interest incurred related to Lennar Homebuilding debt for the six months ended May 31, 2016 was $143.4 million, compared to $146.5 million in the same period last year.
At May 31, 2016, we had a $1.6 billion Credit Facility, which includes a $163 million accordion feature, subject to additional commitments, with certain financial institutions. The maturity for $1.3 billion of the Credit Facility was in June 2019, with the remainder maturing in June 2018. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to $500 million in commitments may be used for letters of credit. As of May 31, 2016, we had $375 million of outstanding borrowings under the Credit Facility. As of November 30, 2015, we had no outstanding borrowings under the Credit Facility. We may from time to time, borrow and repay amounts under the Credit Facility. Consequently, the amount outstanding under the Credit Facility at the end of a period may not be reflective of the total amounts outstanding during the period. We believe that we were in compliance with our debt covenants at May 31, 2016. In addition, we had $320 million of letter of credit facilities with different financial institutions.

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Under the amended Credit Facility agreement executed in April 2015 (the “Credit Agreement”), as of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately $1.5 billion plus the sum of 50% of the cumulative consolidated net income from February 29, 2012, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 29, 2012. We are required to maintain a leverage ratio that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar quarters. The leverage ratio will have a floor of 60%. If our interest coverage ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar quarters, the leverage ratio we will be required to maintain will be increased by 2.5% per quarter to a maximum of 65%. As of the end of each fiscal quarter, we are also required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio equal to or greater than 1.50:1.00 for the last twelve months then ended.
The following summarizes our required debt covenants and our actual levels or ratios with respect to those covenants as calculated per the Credit Agreement as of May 31, 2016:
(Dollars in thousands)
Covenant Level
 
Level Achieved as of May 31, 2016
Minimum net worth test
$
2,770,824


 
4,947,459


Maximum leverage ratio
65.0
%
 
47.0
%
Liquidity test (1)
1.00


 
2.22


(1)
We are only required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended. Although we are in compliance with our debt covenants for both calculations, we have only disclosed our liquidity test.
The terms minimum net worth test, maximum leverage ratio, liquidity test and interest coverage ratio used in the Credit Agreement are specifically calculated per the Credit Agreement and differ in specified ways from comparable GAAP or common usage terms.
Subsequent to May 31, 2016, we amended the credit agreement governing our Credit Facility to increase the maximum borrowings from $1.6 billion to $1.8 billion, including a $318 million accordion feature, subject to additional commitments, with certain financial institutions. The maturity for $1.3 billion of the Credit Facility was extended from June 2019 to June 2020 with the remaining $160 million maturing in June 2018.
Our performance letters of credit outstanding were $270.8 million and $236.5 million at May 31, 2016 and November 30, 2015, respectively. Our financial letters of credit outstanding were $216.6 million and $216.7 million at May 31, 2016 and November 30, 2015, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2016, we had outstanding surety bonds of $1.3 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds including $223.4 million related to pending litigation.
In March 2016, we issued $500 million aggregate principal amount of 4.750% Senior Notes at a price of 100%. Proceeds from the offering, after payment of expenses, were $496.0 million. We used the net proceeds from the sales of the 4.750% Senior Notes to retire our 6.50% senior notes due April 2016 for 100% of the outstanding principal amount, plus accrued and unpaid interest. Interest on the 4.750% Senior Notes is due semi-annually beginning October 1, 2016. The 4.750% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries.
During the six months ended May 31, 2016, all of the $234 million aggregate outstanding principal amount of the 2.75% Convertible Senior Notes were converted and exchanged by the holders for approximately $234 million in cash and 5.2 million shares of Class A common stock, plus accrued and unpaid interest with respect to the exchanges.
During the six months ended May 31, 2016, holders converted approximately $68 million in aggregate principal amount of the 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”) for 2.9 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums. Subsequent to May 31, 2016, holders converted approximately $137 million aggregate principal amount of the 3.25% Convertible Senior Notes for 5.8 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums.
Currently, substantially all of our 100% owned homebuilding subsidiaries and some of our other subsidiaries are guaranteeing all our senior notes (the “Guaranteed Notes”). The guarantees are full and unconditional. The principal reason our 100% owned homebuilding subsidiaries are guaranteeing the Guaranteed Notes is so holders of the Guaranteed Notes will have rights at least as great with regard to our subsidiaries as any other holders of a material amount of our unsecured debt. Therefore, the guarantees of the Guaranteed Notes will remain in effect with regard to a guarantor subsidiary only while it

64




guarantees a material amount of the debt of Lennar Corporation, as a separate entity, to others. At any time when a guarantor subsidiary is no longer guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes, either directly or by guaranteeing other subsidiaries’ obligations as guarantors of Lennar Corporation’s debt, the guarantor subsidiary’s guarantee of the Guaranteed Notes will be suspended. Therefore, if the guarantor subsidiaries cease guaranteeing Lennar Corporation’s obligations under our Credit Facility and our letter of credit facilities and are not guarantors of any new debt, the guarantor subsidiaries’ guarantees of the Guaranteed Notes will be suspended until such time, if any, as they again are guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes.
If our guarantor subsidiaries are guaranteeing revolving credit lines totaling at least $75 million, we will treat the guarantees of the Guaranteed Notes as remaining in effect even during periods when Lennar Corporation’s borrowings under the revolving credit lines are less than $75 million. A subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
Our Lennar Financial Services segment warehouse facilities at May 31, 2016 were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
600,000


364-day warehouse repurchase facility that matures August 2016
300,000


364-day warehouse repurchase facility that matures October 2016 (2)
450,000


Total
$
1,350,000


(1)
Subsequent to May 31, 2016, the warehouse repurchase facility maturity date was extended to June 2017.
(2)
Maximum aggregate commitment includes an uncommitted amount of $250 million.
Our Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $854.1 million and $858.3 million at May 31, 2016 and November 30, 2015, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $901.9 million and $916.9 million, at May 31, 2016 and November 30, 2015, respectively. Without the facilities, our Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities. Since our Lennar Financial Services segment’s borrowings under the warehouse repurchase facilities are generally repaid with the proceeds from the sale of mortgage loans and receivables on loans that secure those borrowings, the facilities are not likely to be a call on our current cash or future cash resources. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling mortgage loans held-for-sale and by collecting on receivables on loans sold to investors but not yet paid.
At May 31, 2016, Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
250,000


364-day warehouse repurchase facility that matures October 2016 (one year extension) (1)
400,000


364-day warehouse repurchase facility that matures January 2017 (1)
250,000


Warehouse repurchase facility that matures December 2017 (1)
100,000


Warehouse repurchase facility that matures August 2018 (two - one year extensions) (2)
100,000


Total
$
1,100,000


(1)
RMF uses these facilities to finance its loan origination and securitization activities.
(2)
In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this new facility will be held as accrual loans within loans receivable, net. Borrowings under this facility were $53.8 million and $36.3 million as of May 31, 2016 and November 30, 2015, respectively.
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $57.3 million and $317.1 million as of May 31, 2016 and November 30, 2015, respectively and were secured by a 75% interest in the originated commercial loans financed. The facilities require immediate repayment of the 75% interest in the secured commercial loans when the loans are sold in a securitization and the proceeds are collected. These warehouse repurchase facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature.
As of May 31, 2016 and November 30, 2015, the carrying amount, net of debt issuance costs, of Rialto's 7.00% senior notes due 2018 was $348.3 million and $347.9 million, respectively.

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As of May 31, 2016 and November 30, 2015, the outstanding amount, net of debt issuance costs, related to structured note offerings was $29.0 million and $31.3 million, respectively.
As of both May 31, 2016 and November 30, 2015, the outstanding amount related to the 5-year senior unsecured note was $30.3 million.
Changes in Capital Structure
We have a stock repurchase program adopted in 2001, which originally authorized us to purchase up to 20 million shares of our outstanding common stock. During both the three and six months ended May 31, 2016 and 2015, there were no share repurchases of common stock under the stock repurchase program. As of May 31, 2016, the remaining authorized shares that could be purchased under the stock repurchase program were 6.2 million shares of common stock.
On May 11, 2016, we paid cash dividends of $0.04 per share for both our Class A and Class B common stock to holders of record at the close of business on April 27, 2016, as declared by our Board of Directors on April 13, 2016. On June 23, 2016, our Board of Directors declared a quarterly cash dividend of $0.04 per share on both our Class A and Class B common stock, payable July 22, 2016 to holders of record at the close of business on July 8, 2016.
Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.
Off-Balance Sheet Arrangements
Lennar Homebuilding: Investments in Unconsolidated Entities
At May 31, 2016, we had equity investments in 36 homebuilding and land unconsolidated entities (of which 3 had recourse debt, 7 had non-recourse debt and 26 had no debt), compared to 34 homebuilding and land unconsolidated entities at November 30, 2015. Historically, we have invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we have primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, has enabled us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners.
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 and Selected Information
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
208,636


 
180,790


 
308,362


 
623,747


Costs and expenses
201,370


 
154,139


 
298,570


 
453,018


Other income


 


 


 
2,943


Net earnings of unconsolidated entities
$
7,266


 
26,651


 
9,792


 
173,672


Our share of net earnings (loss) (1)
$
(3,278
)
 
6,433


 
(3,302
)
 
45,930


Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (2)
$
(9,633
)
 
6,494


 
(6,633
)
 
35,393


Our cumulative share of net earnings - deferred at May 31, 2016 and 2015, respectively
 
 
 
 
$
46,842


 
23,173


Our investments in unconsolidated entities
 
 
 
 
$
785,883


 
688,467


Equity of the unconsolidated entities
 
 
 
 
$
3,235,415


 
2,371,233


Our investment % in the unconsolidated entities (3)
 
 
 
 
24
%
 
29
%
(1)
For the three and six months ended May 31, 2016, our share of net loss is primarily due to deferred equity in earnings related to sales of homesites by one unconsolidated entity to us.

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(2)
For the three and six months ended May 31, 2016, equity in loss was primarily attributable to our share of costs associated with the FivePoint combination.
(3)
Our share of profit and cash distributions from the sales of land could be higher compared to our ownership interest in unconsolidated entities if certain specified internal rate of return or cash flow milestones are achieved.
For both the three and six months ended May 31, 2016, Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $6.7 million and $12.7 million, respectively, of equity in earnings from one of our unconsolidated entities for the three and six months ended May 31, 2016 primarily due to sales of 253 homesites and 471 homesites, respectively, to third parties for $52.1 million and $114.1 million, respectively, that resulted in gross profits of $18.3 million and $39.0 million, respectively. For both the three and six months ended May 31, 2016, 312 homesites were sold to us by one of our unconsolidated entities for $92.0 million that resulted in $29.7 million, of gross profit, of which our portion was deferred.
For the three months ended May 31, 2015, Lennar Homebuilding equity in earnings included $11.6 million of equity in earnings from one of our unconsolidated entities primarily due to sales of approximately 60 homesites and a commercial property to third parties for $121.3 million that resulted in $37.6 million of gross profit.
For the six months ended May 31, 2015, Lennar Homebuilding equity in earnings included $43.0 million of equity in earnings from one of our unconsolidated entities primarily due to (1) sales of approximately 660 homesites to third parties for $407.2 million that resulted in $138.4 million of gross profit and (2) sales of 300 homesites to us for $126.4 million that resulted in $44.6 million of gross profit, of which our portion was deferred.
Balance Sheets
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
373,846


 
248,980


Inventories
3,081,630


 
3,059,054


Other assets
921,025


 
465,404


 
$
4,376,501


 
3,773,438


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
283,492


 
288,192


Debt
857,594


 
792,886


Equity
3,235,415


 
2,692,360


 
$
4,376,501


 
3,773,438


On May 2, 2016 (the “Closing Date”), we contributed, or obtained the right to contribute, our investment in three strategic joint ventures previously managed by FivePoint Communities in exchange for an investment in a newly formed FivePoint entity. The fair values of the assets contributed to the newly formed FivePoint entity, included within the unconsolidated entities summarized condensed balance sheet presented above, are preliminary and will be adjusted when additional information is obtained during the transaction’s measurement period (a period of up to one year from the Closing Date) that may change the fair value allocation as of the acquisition date. A portion of the assets of one of the three strategic joint ventures was retained by us and our venture partner in a new unconsolidated entity. The transactions did not have a material impact to our financial position or cash flows. We recorded our share of combination costs in equity in loss from unconsolidated entities on our condensed consolidated statement of operations for the three and six months ended May 31, 2016.
As of May 31, 2016 and November 30, 2015, our recorded investments in Lennar Homebuilding unconsolidated entities were $785.9 million and $741.6 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of May 31, 2016 and November 30, 2015 was $1.2 billion and $839.5 million, respectively. The basis difference is primarily as a result of us contributing our investment in three strategic joint ventures with a higher fair value than book value for an investment in the newly formed FivePoint entity, contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value and deferring equity in earnings on land sales.
The Lennar Homebuilding unconsolidated entities in which we have investments usually finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities.

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Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:
(Dollars in thousands)
May 31,

2016
 
November 30,

2015
Debt
$
857,594


 
792,886


Equity
3,235,415


 
2,692,360


Total capital
$
4,093,009


 
3,485,246


Debt to total capital of our unconsolidated entities
21.0
%
 
22.7
%
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Land development
$
743,895


 
691,850


Homebuilding
41,988


 
49,701


Total investments
$
785,883


 
741,551


Indebtedness of an unconsolidated entity is secured by its own assets. Some unconsolidated entities own multiple properties and other assets. There is no cross collateralization of debt of different unconsolidated entities. We also do not use our investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among Lennar Homebuilding unconsolidated entities.
In connection with loans to a Lennar Homebuilding unconsolidated entity, we and our partners often guarantee to a lender, either jointly and severally or on a several basis, any or all of the following: (i) the completion of the development, in whole or in part, (ii) indemnification of the lender from environmental issues, (iii) indemnification of the lender from “bad boy acts” of the unconsolidated entity (or full recourse liability in the event of an unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan to cost will not exceed a certain percentage (maintenance or remargining guarantee) or that a percentage of the outstanding loan will be repaid (repayment guarantee).
In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we sometimes have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the joint and several guarantee.
The total debt of Lennar Homebuilding unconsolidated entities in which we have investments, including Lennar's maximum recourse exposure, were as follows:
(Dollars in thousands)
May 31,

2016
 
November 30,

2015
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
49,606


 
50,411


Non-recourse land seller debt and other debt
323,995


 
324,000


Non-recourse debt with completion guarantees
141,811


 
146,760


Non-recourse debt without completion guarantees
301,331


 
260,734


Non-recourse debt to Lennar
816,743


 
781,905


Lennar's maximum recourse exposure (1)
40,851


 
10,981


Total debt
$
857,594


 
792,886


Lennar’s maximum recourse exposure as a % of total JV debt
5
%
 
1
%
(1)
The increase in our maximum recourse exposure was primarily related to us providing a repayment guarantee on an unconsolidated entity's debt.
The recourse debt exposure in the previous table represents our maximum 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 debt or to reimburse us for any payments on our guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of the Lennar Homebuilding unconsolidated

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entities with recourse debt were as follows:
(In thousands)
May 31,

2016
 
November 30,

2015
Assets
$
429,785


 
139,389


Liabilities
$
357,774


 
45,214


Equity
$
72,011


 
94,175


In addition, in most instances in which we have guaranteed debt of a Lennar Homebuilding unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. Historically, we have had repayment guarantees and maintenance guarantees. In a repayment guarantee, we and our venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if our venture partner does not have adequate financial resources to meet its obligation under our reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. As of both May 31, 2016 and November 30, 2015, we did not have any maintenance guarantees or joint and several repayment guarantees related to our Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, we and our joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. If we are required to make a payment under any guarantee, the payment would generally constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes.
As of both May 31, 2016 and November 30, 2015, the fair values of the repayment and completion guarantees were not material. We believe that as of May 31, 2016, in the event we become 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 we and our partners would contribute additional capital into the venture. In certain instances, we have placed performance letters of credit and surety bonds with municipalities for our joint ventures. (See Note 11 of the notes to our condensed consolidated financial statements).
In view of credit market conditions during the past several years, it is not uncommon for lenders and/or real estate developers, including joint ventures in which we have interests, to assert non-monetary defaults (such as failure to meet construction completion deadlines or declines in the market value of collateral below required amounts) or technical monetary defaults against the real estate developers. In most instances, those asserted defaults are resolved by modifications of the loan terms, additional equity investments or other concessions by the borrowers. In addition, in some instances, real estate developers, including joint ventures in which we have interests, are forced to request temporary waivers of covenants in loan documents or modifications of loan terms, which are often, but not always obtained. However, in some instances developers, including joint ventures in which we have interests, are not able to meet their monetary obligations to lenders, and are thus declared in default. Because we sometimes guarantee all or portions of the obligations to lenders of joint ventures in which we have interests, when these joint ventures default on their obligations, lenders may or may not have claims against us. Normally, we do not make payments with regard to guarantees of joint venture obligations while the joint ventures are contesting assertions regarding sums due to their lenders. When it is determined that a joint venture is obligated to make a payment that we have guaranteed and the joint venture will not be able to make that payment, we accrue the amounts probable to be paid by us as a liability. Although we generally fulfill our guarantee obligations within a reasonable time after we determine that we are obligated with regard to them, at any point in time it is likely that we will have some balance of unpaid guarantee liability. At both May 31, 2016 and November 30, 2015, we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our condensed consolidated balance sheets.

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The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities (“JVs”) debt as per current debt arrangements as of May 31, 2016 and does not represent estimates of future cash payments that will be made to reduce debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.
 
Principal Maturities of Unconsolidated JVs by Period
(In thousands)
Total JV Debt
 
2016
 
2017
 
2018
 
Thereafter
 
Other Debt (1)
Maximum recourse debt exposure to Lennar
$
40,851


 
829


 
9,015


 


 
31,007


 


Debt without recourse to Lennar
816,743


 
7,979


 
73,968


 
145,826


 
264,975


 
323,995


Total
$
857,594


 
8,808


 
82,983


 
145,826


 
295,982


 
323,995


(1)
Represents land seller debt and other debt of which $320 million is due in December 2016.
The table below indicates the assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of May 31, 2016:
(Dollars in thousands)
Lennar’s
Investment
 
Total JV
Assets
 
Maximum
Recourse
Debt
Exposure
to Lennar
 
Total
Debt
Without
Recourse
to
Lennar
 
Total JV
Debt
 
Total JV
Equity
 
JV
Debt to
Total
Capital
Ratio
Top Ten JVs (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
FivePoint (2)
$
255,481


 
1,123,148


 


 
65,352


 
65,352


 
959,272


 
6
%
Heritage Fields El Toro
146,091


 
1,515,721


 


 
9,887


 
9,887


 
1,377,934


 
1
%
Heritage Hills Irvine
56,838


 
486,920


 


 


 


 
158,947


 


Runkle Canyon
47,963


 
140,568


 


 
43,586


 
43,586


 
95,926


 
31
%
Treasure Island Community Development
42,559


 
118,039


 


 
25,744


 
25,744


 
85,149


 
23
%
Ballpark Village
34,215


 
102,738


 


 
25,235


 
25,235


 
70,430


 
26
%
Krome Groves Land Trust
21,404


 
89,619


 
9,015


 
19,240


 
28,255


 
59,126


 
32
%
Willow Springs Properties
18,998


 
34,176


 


 


 


 
32,264


 


MS Rialto Residential Holdings
18,819


 
76,153


 


 


 


 
73,953


 


LS Terracina
17,412


 
35,161


 


 


 


 
34,824


 


10 largest JV investments
659,780


 
3,722,243


 
9,015


 
189,044


 
198,059


 
2,947,825


 
6
%
Other JVs
126,103


 
654,258


 
31,836


 
303,704


 
335,540


 
287,590


 
54
%
Total
$
785,883


 
4,376,501


 
40,851


 
492,748


 
533,599


 
3,235,415


 
14
%
Land seller debt and other debt (3)
 
 
 
 


 
323,995


 
323,995


 
 
 
 
Total JV debt
 
 
 
 
$
40,851


 
816,743


 
857,594


 
 
 
 
(1)
The 10 largest joint ventures presented above represent the majority of total JVs assets, debt and equity. In addition, all of the joint ventures presented in the table above operate in our Homebuilding West segment except for Krome Groves Land Trust, which operates in our Homebuilding East segment and Willow Springs Properties, which operates in our Homebuilding Central segment.
(2)
The amounts presented above for the newly formed FivePoint entity are preliminary and will be adjusted when additional information is obtained once this new entity completes its accounting for the business combination and up to the measurement period (a period of up to one year from the FivePoint combination).
(3)
The Heritage Hills Irvine JV has a $320 million non-recourse note payable to Heritage Fields El Toro, which is included in land seller debt and other debt line item in the table.

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Rialto: Investments in Unconsolidated Entities
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,

2016
 
May 31,

2016
 
November 30,

2015
(In thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to Fund by the Company
 
Funds Contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006


 
$
700,006


 
$
75,000


 
$
75,000


 
$
63,182


 
68,570


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


 
1,305,000


 
100,000


 
100,000


 
97,417


 
99,947


Rialto Mezzanine Partners Fund, LP
2013
 
300,000


 
300,000


 
33,799


 
33,799


 
28,206


 
32,344


Rialto Capital CMBS Funds
2014
 
111,753


 
111,753


 
47,057


 
47,057


 
46,712


 
23,233


Rialto Real Estate Fund III
2015
 
818,248


 


 
100,000


 


 
1,685


 


Rialto Credit Partnership, LP
2016
 
220,000


 
8,900


 
19,999


 
809


 
797


 


Other investments


 
 
 
 
 
 
 
 
 
741


 
775


 
 
 
 
 
 
 
 
 
 
 
$
238,740


 
224,869


During the three and six months ended May 31, 2016, Rialto's share of earnings from unconsolidated entities was $6.9 million and $8.4 million, respectively. During the three and six months ended May 31, 2015, Rialto's share of earnings from unconsolidated entities was $7.3 million and $10.0 million, respectively.
As manager of real estate funds, we are entitled to receive additional revenue through carried interest if the funds meet certain performance thresholds. The amounts presented in the table below are advance distributions received related to Rialto's carried interests in order to cover income tax obligations resulting from allocations of taxable income to its carried interests in its real estate funds. These advance distributions are not subject to clawbacks but will reduce future carried interest payments to which Rialto becomes entitled from the applicable funds and have been recorded as revenues. Advance distributions received in the three and six months ended May 31, 2016 and 2015 were as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Rialto Real Estate Fund, LP
$
1,540


 
2,520


 
6,093


 
$
5,964


Rialto Real Estate Fund II, LP
85


 
2,244


 
85


 
5,291


Rialto Mezzanine Partners Fund, LP
225


 


 
300


 


Rialto Capital CMBS Funds
634


 


 
951


 


 
$
2,484


 
4,764


 
7,429


 
$
11,255


The following table represents amounts Rialto would have received had the funds ceased operations and hypothetically liquidated all their investments at their estimated fair values on May 31, 2016, both gross and net of amounts already received as advanced tax distributions. The actual amounts Rialto may receive could be materially different from amounts presented in the table below.
(In thousands)
Hypothetical Carried Interest
 
Paid as Advanced Tax Distribution
 
Hypothetical Carried Interest, Net
Rialto Real Estate Fund, LP
$
163,925


 
50,373


 
113,552


Rialto Real Estate Fund II, LP (1)
33,987


 
9,469


 
24,518


 
$
197,912


 
59,842


 
138,070


(1)
Net of interests of participating employees (refer to paragraph below).
During 2015, Rialto adopted a Carried Interest Incentive Plan (the "Plan"), under which participating employees in the aggregate may receive up to 40% of the equity units of a limited liability company (a "Carried Interest Entity") that is entitled to distributions made by a fund or other investment vehicle (a "Fund") managed by a subsidiary of Rialto. As such, those employees receiving equity units in the Carried Interest Entity may benefit from distributions made by a Fund to the extent the Carried Interest Entity makes distributions to its equity holders. The units issued to employees are equity awards and are subject to vesting schedules and forfeiture or repurchase provisions in the case of termination of employment.



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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,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
122,120


 
188,147


Loans receivable
388,105


 
473,997


Real estate owned
597,915


 
506,609


Investment securities
1,231,257


 
1,092,476


Investments in partnerships
421,272


 
429,979


Other assets
42,889


 
30,340


 
$
2,803,558


 
2,721,548


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
24,702


 
29,462


Notes payable
524,416


 
374,498


Equity
2,254,440


 
2,317,588


 
$
2,803,558


 
2,721,548


Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
51,240


 
39,320


 
95,536


 
81,058


Costs and expenses
20,704


 
25,082


 
41,603


 
48,087


Other income, net (1)
26,710


 
55,477


 
11,548


 
61,351


Net earnings of unconsolidated entities
$
57,246


 
69,715


 
65,481


 
94,322


Rialto equity in earnings from unconsolidated entities
$
6,864


 
7,328


 
8,361


 
9,992


Rialto's investments in unconsolidated entities
 
 
 
 
$
238,740


 
195,135


Equity of the unconsolidated entities
 
 
 
 
$
2,254,440


 
1,995,022


Rialto's investment % in the unconsolidated entities
 
 
 
 
11
%
 
10
%
(1)
Other income, net, included realized and unrealized gains (losses) on investments.
Lennar Multifamily: Investments in Unconsolidated Entities
At May 31, 2016, Lennar Multifamily had equity investments in 31 unconsolidated entities that are engaged in multifamily residential developments (of which 21 had non-recourse debt and 10 had no debt), compared to 29 unconsolidated entities at November 30, 2015. We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners’ capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners.
In 2015, the Lennar Multifamily segment completed the initial closing of the Venture for the development, construction and property management of class-A multifamily assets with $1.1 billion of commitments. During the six months ended May 31, 2016, the Venture received an additional $300 million of equity commitments, increasing its total equity commitments to $1.4 billion, including a $504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. The Venture is currently seeded with 22 undeveloped multifamily assets that were previously purchased or under contract by the Lennar Multifamily segment totaling approximately 6,700 apartments with projected project costs of $2.1 billion as of May 31, 2016. During the six months ended May 31, 2016, $224.6 million in equity commitments were called, of which we contributed our portion of $90.1 million. During the six months ended May 31, 2016, we received distributions of $43.6 million as a return of capital from the Venture. As of May 31, 2016, $500.0 million of the $1.4 billion in equity commitments had been called, of which we have contributed our portion of $179.5 million representing our pro-rata portion of the called equity, resulting in a remaining equity commitment by us of $324.5 million. As of May 31, 2016 and November 30,

72




2015, the carrying value of our investment in the Venture was $172.5 million and $122.5 million, respectively. Subsequent to May 31, 2016, the Venture received an additional $550 million of equity commitments, increasing its total equity commitments to approximately $2 billion.
The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint ventures except for cost over-runs relating to the construction of the project. In all cases, we have been required to provide guarantees of completion and cost over-runs to the lenders and partners. These completion guarantees may require us to complete the improvements for which the financing was obtained. Therefore, our risk is limited to our equity contribution, draws on letters of credit and potential future payments under the guarantees of completion and cost over-runs. In certain instances, payments made under the cost over-run guarantees are considered capital contributions.
Additionally, the joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of the rental projects. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, the joint venture debt does not have repayment or maintenance guarantees. Neither we nor the other equity partners are a party to the debt instruments. In some cases, we agree to provide credit support in the form of a letter of credit provided to the bank.
We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants at May 31, 2016.
As described above, the liquidity needs of joint ventures in which we have investments vary on an entity-by-entity basis depending on each entity’s purpose and the stage in its life cycle. During formation and development activities, the entities generally require cash, which is provided through a combination of equity contributions and debt financing, to fund acquisition, development and construction of multifamily rental properties. As the properties are completed and sold, cash generated will be available to repay debt and for distribution to the joint venture’s members. Thus, the amount of cash available for a joint venture to distribute at any given time is primarily a function of the scope of the joint venture’s activities and the stage in the joint venture’s life cycle.
Summarized financial information on a combined 100% basis related to Lennar Multifamily’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,

2016
 
November 30,

2015
Assets:
 
 
 
Cash and cash equivalents
$
58,962


 
39,579


Operating properties and equipment
1,748,003


 
1,398,244


Other assets
41,778


 
25,925


 
$
1,848,743


 
1,463,748


Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
241,079


 
179,551


Notes payable
578,662


 
466,724


Equity
1,029,002


 
817,473


 
$
1,848,743


 
1,463,748



73




Statements of Operations and Selected Information
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(Dollars in thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
9,649


 
3,075


 
17,963


 
5,169


Costs and expenses
14,058


 
5,081


 
25,730


 
8,075


Other income, net
30,272


 


 
70,394


 


Net earnings (loss) of unconsolidated entities
$
25,863


 
(2,006
)
 
62,627


 
(2,906
)
Lennar Multifamily equity in earnings (loss) from unconsolidated entities (1)
$
14,008


 
(422
)
 
$
33,694


 
(600
)
Lennar Multifamily's investments in unconsolidated entities
 
 
 
 
$
304,171


 
129,818


Equity of the unconsolidated entities
 
 
 
 
$
1,029,002


 
528,408


Lennar Multifamily's investment % in the unconsolidated entities (2)
 
 




 
30
%
 
25
%
(1)
For the three months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $15.4 million share of a gain as a result of the sale of an operating property by one of its unconsolidated entities. For the six months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $35.8 million share of gains as a result of the sale of two operating properties by its unconsolidated entities.
(2)
Our share of profit and cash distributions from sales of operating properties could be higher compared to our ownership interest in unconsolidated entities if certain specified internal rate of return milestones are achieved.
Option Contracts
We often obtain access to land through option contracts, which generally enable us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the options.
The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties (“optioned”) or unconsolidated JVs (i.e., controlled homesites) at May 31, 2016 and 2015:
 
Controlled Homesites
 
 
 
 
May 31, 2016
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
17,819


 
470


 
18,289


 
55,271


 
73,560


Central
5,632


 
1,135


 
6,767


 
19,822


 
26,589


West
2,383


 
4,466


 
6,849


 
37,531


 
44,380


Houston
1,272


 


 
1,272


 
11,498


 
12,770


Other
1,572


 


 
1,572


 
6,662


 
8,234


Total homesites
28,678


 
6,071


 
34,749


 
130,784


 
165,533


 
Controlled Homesites
 
 
 
 
May 31, 2015
Optioned
 
JVs
 
Total
 
Owned
Homesites
 
Total
Homesites
East
17,830


 
503


 
18,333


 
53,798


 
72,131


Central
4,951


 
1,135


 
6,086


 
21,039


 
27,125


West
1,803


 
4,829


 
6,632


 
39,254


 
45,886


Houston
2,166


 


 
2,166


 
12,161


 
14,327


Other
1,611


 


 
1,611


 
6,845


 
8,456


Total homesites
28,361


 
6,467


 
34,828


 
133,097


 
167,925


We evaluate all option contracts for land to determine whether they are VIEs and, if so, whether we are the primary beneficiary of certain of these option contracts. Although we do not have legal title to the optioned land, if we are deemed to be the primary beneficiary or make a significant deposit for optioned land, we may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2016, consolidated inventory not owned increased by $75.7 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2016. The increase was primarily related to the consolidation of an option agreement, partially offset by us exercising our option to acquire land under previously consolidated contracts. To reflect the purchase price of the

74




inventory consolidated, we had a net reclass related to option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2016. The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and our cash deposits.
Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our non-refundable option deposits and pre-acquisition costs totaling $83.4 million and $89.2 million at May 31, 2016 and November 30, 2015, respectively. Additionally, we had posted $73.9 million and $70.4 million of letters of credit in lieu of cash deposits under certain land and option contracts as of May 31, 2016 and November 30, 2015, respectively.


Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments have not changed materially from those reported in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended November 30, 2015, except for:
In March 2016, we issued $500 million aggregate principal amount of 4.750% Senior Notes. We used the net proceeds from the sales of the 4.750% Senior Notes to retire our 6.50% senior notes due April 2016 for 100% of the outstanding principal amount, plus accrued and unpaid interest.
During the six months ended May 31, 2016, all of the $234 million aggregate outstanding principal amount of the 2.75% Convertible Senior Notes were converted and exchanged by the holders.
During the six months ended May 31, 2016, holders converted approximately $68 million in aggregate principal amount of the 3.25% Convertible Senior Notes.
As of May 31, 2016, we had $375 million of outstanding borrowings under the Credit Facility. The maturity for $1.3 billion of the Credit Facility was in June 2019, with the remainder maturing in June 2018.
As of May 31, 2016, borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities were $111.1 million and $854.1 million, respectively.
The following summarizes our contractual obligations of our long-term debt and interest commitments as of May 31, 2016:
 
Payments Due by Period
(In thousands)
Total
 
Six Months ending November 30, 2016
 
December 1, 2016 through November 30, 2017
 
December 1, 2017 through November 30, 2019
 
December 1, 2019 through November 30, 2021
 
Thereafter
Lennar Homebuilding - Senior notes and other debts payable (1)
$
5,350,841


 
46,818


 
519,273


 
2,411,003


 
855,201


 
1,518,546


Lennar Financial Services - Notes and other debts payable
854,055


 
854,055


 


 


 


 


Rialto - Notes and other debts payable (2)
546,265


 
151,945


 
41,771


 
352,549


 


 


Interest commitments under interest bearing debt (3)
1,149,106


 
150,698


 
266,862


 
374,409


 
199,249


 
157,888


(1)
Some of the senior notes and other debts payable are convertible senior notes, which have been included in this table based on maturity dates, but they are putable to, or callable by, us at earlier dates than the maturity dates disclosed in this table. The amounts presented in the table above exclude debt issuance costs and any discounts/premiums.
(2)
Amount includes notes payable and other debts payable of $351.3 million related to Rialto's 7.00% Senior Notes, $30.3 million related to Rialto's 5-year senior unsecured note, $111.1 million related to the Rialto warehouse repurchase financing agreements and $29.0 million related to Rialto's structured note offerings with an estimated final payment date of August 15, 2017. These amounts exclude debt issuance costs.
(3)
Interest commitments on variable interest-bearing debt are determined based on the interest rates as of May 31, 2016.
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether to exercise our options. This reduces our financial risk associated with land holdings. At May 31, 2016, we had access to 34,749 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At May 31, 2016, we had $83.4 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $73.9 million of letters of credit in lieu of cash deposits under certain option contracts.

75




At May 31, 2016, we had letters of credit outstanding in the amount of $487.4 million (which included $73.9 million of letters of credit discussed above). These letters of credit are generally posted either with regulatory bodies to guarantee our performance of certain development and construction activities, or in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2016, we had outstanding surety bonds of $1.3 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds including $223.4 million related to pending litigation. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all of the development and construction activities are completed. As of May 31, 2016, there were approximately $468.4 million, or 36%, of anticipated future costs to complete related to these site improvements. We do not presently anticipate any draws upon these bonds or letters of credit, but if any such draws occur, we do not believe they would have a material effect on our financial position, results of operations or cash flows.
Our Lennar Financial Services segment had a pipeline of loan applications in process of $2.6 billion at May 31, 2016. Loans in process for which interest rates were committed to the borrowers totaled approximately $713.5 million as of May 31, 2016. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or because borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements.
Our Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts, future contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts, future contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At May 31, 2016, we had open commitments amounting to $1.2 billion to sell MBS with varying settlement dates through August 2016 and open future contracts in the amount of $444 million with settlement dates through March 2023.


(3) New Accounting Pronouncements
See Note 17 of our condensed consolidated financial statements included under Item 1 of this Report for a discussion of new accounting pronouncements applicable to our Company.


(4) Critical Accounting Policies
We believe that there have been no significant changes to our critical accounting policies during the six months ended May 31, 2016 as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended November 30, 2015.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on our investments, debt obligations, loans held-for-sale and loans held-for-investment. We utilize forward commitments and option contracts to mitigate the risks associated with our mortgage loan portfolio.
In March 2016, we issued $500 million aggregate principal amount of 4.750% senior notes due 2021. We used the net proceeds from the sales of the 4.750% senior notes due 2021 to retire our 6.50% senior notes due April 2016 for 100% of the outstanding principal amount, plus accrued and unpaid interest.
During the six months ended May 31, 2016, all of the $234 million aggregate outstanding principal amount of the 2.75% convertible senior notes due 2020 were converted and exchanged by the holders.
During the six months ended May 31, 2016, holders converted approximately $68 million in aggregate principal amount of the 3.25% convertible senior notes due 2021.
As of May 31, 2016, we had $375 million of outstanding borrowings under our unsecured revolving credit facility. As of May 31, 2016, borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities were $111.1 million and $854.1 million, respectively.
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
May 31, 2016
 
Six Months Ending November 30,
 
Years Ending November 30,
 
 
 
 
 
Fair Value at May 31,
(Dollars in millions)
2016
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
 
2016
LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lennar Homebuilding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
29.3


 
435.2


 
657.0


 
1,377.9


 
2.8


 
840.7


 
1,518.5


 
4,861.4


 
5,297.5


Average interest rate
3.9
%
 
11.4
%
 
5.6
%
 
4.4
%
 
3.7
%
 
4.2
%
 
4.8
%
 
5.3
%
 


Variable rate
$
17.5


 
84.1


 
42.3


 
333.8


 
0.6


 
11.1


 


 
489.4


 
507.8


Average interest rate
3.5
%
 
3.2
%
 
2.3
%
 
2.3
%
 
4.5
%
 
7.2
%
 


 
2.7
%
 


Rialto:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
$
40.8


 
11.5


 
1.3


 
351.3


 


 


 


 
404.9


 
424.5


Average interest rate
4.6
%
 
0.6
%
 
5.9
%
 
7.0
%
 


 


 


 
6.6
%
 


Variable rate
$
111.1


 
30.3


 


 


 


 


 


 
141.4


 
141.3


Average interest rate
5.1
%
 
4.5
%
 


 


 


 


 


 
4.9
%
 


Lennar Financial Services:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes and other debts payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate
$
854.1


 


 


 


 


 


 


 
854.1


 
854.1


Average interest rate
2.7
%
 


 


 


 


 


 


 
2.7
%
 


For additional information regarding our market risk refer to Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended November 30, 2015.



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Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of May 31, 2016 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2016. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Part II. Other Information


Item 1. Legal Proceedings
We have been engaged in litigation since 2008 in the United States District Court for the District of Maryland (U.S. Home Corporation v. Settlers Crossing, LLC, et al., Civil Action No. DKC 08-1863) regarding whether we are required by a contract we entered into in 2005 to purchase a property in Maryland. After entering into the contract, we later renegotiated the purchase price, reducing it from $200 million to $134 million, $20 million of which has been paid and subsequently written off, leaving a balance of $114 million. In January 2015, the District Court rendered a decision ordering us to purchase the property for the $114 million balance of the contract price, to pay interest at the rate of 12% per annum from May 27, 2008, and to reimburse the seller for real estate taxes and attorneys’ fees. We believe the decision is contrary to applicable law and have appealed the decision. We do not believe it is probable that a loss has occurred and, therefore, no liability has been recorded with respect to this case.
On June 29, 2015, the court ruled that interest will be calculated as simple interest at the rate of 12% per annum from May 27, 2008 until the date we purchase the property. Simple interest on $114 million at 12% per annum will accrue at the rate of $13.7 million per year, totaling approximately $109 million as of May 31, 2016. In addition, if we are required to purchase the property, we will be obligated to reimburse the seller for real estate taxes, which currently total $1.6 million. We have not engaged in discovery regarding the amount of the plaintiffs’ attorneys’ fees. If the District Court decision is totally reversed on appeal, we will not have to purchase the property or pay interest, real estate taxes or attorneys’ fees.
In its June 29, 2015 ruling, the District Court determined that we will be permitted to stay the judgment during appeal by posting a bond in the amount of $223.4 million related to pending litigation. The District Court calculated this amount by adding 12% per annum simple interest to the $114 million purchase price for the period beginning May 27, 2008 through May 26, 2016, the date the District Court estimated the appeal of the case would be concluded.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended November 30, 2015.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about our repurchases of common stock during the three months ended May 31, 2016:
Period:
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Number of Shares that may yet be Purchased under the Plans or Programs (2)
March 1 to March 31, 2016
13,238


 
$
43.63


 


 
6,218,968


April 1 to April 30, 2016
3,864


 
$
45.31


 


 
6,218,968


May 1 to May 31, 2016


 
$


 


 
6,218,968


(1)
Represents shares of Class A common stock withheld by us to cover withholding taxes due, at the election of certain holders of nonvested shares, with market value approximating the amount of withholding taxes due.
(2)
In June 2001, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to 20 million shares of our outstanding Class A common stock or Class B common stock. This repurchase authorization has no expiration date.
On May 18, 2016, we settled conversion requests relating to approximately $65 million aggregate principal amount of 2.75% convertible senior notes due 2020 (the “2.75% Convertible Senior Notes”) by issuing 1.5 million shares of Class A common stock and paying approximately $65 million in cash, representing the face amount of the 2.75% Convertible Senior Notes. As a result, during the three months ended May 31, 2016, approximately $67 million aggregate outstanding principal amount of the 2.75% Convertible Senior Notes were converted or exchanged by the holders for approximately $67 million in cash and 1.6 million shares of Class A common stock, plus accrued and unpaid interest with respect to the exchanges. The 2.75% Convertible Senior Notes were convertible at a conversion rate of 45.1794 shares of Class A common stock per $1,000 principal amount. We issued the Class A common stock in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, contained in Section 3(a)(9) of that Act.
During the three months ended May 31, 2016, holders converted approximately $68 million in aggregate principal amount of the 3.25% convertible senior notes due 2021 (the “3.25% Convertible Senior Notes”) for 2.9 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums. The 3.25% Convertible Senior Notes are convertible into shares of Class A common stock at a conversion rate of 42.5555 shares of Class A common stock per $1,000 principal amount of 3.25% Convertible Senior Notes. We issued the Class A common stock upon conversion of the 3.25% Convertible Senior Notes in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, contained in Section 3(a)(9) of that Act.


Item 3 - 5. Not Applicable

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Item 6. Exhibits
31.1.
Rule 13a-14(a) certification by Stuart A. Miller, Chief Executive Officer.
31.2.
Rule 13a-14(a) certification by Bruce Gross, Vice President and Chief Financial Officer.
32.
Section 1350 certifications by Stuart A. Miller, Chief Executive Officer, and Bruce Gross, Vice President and Chief Financial Officer.
101.
The following financial statements from Lennar Corporation Quarterly Report on Form 10-Q for the quarter ended May 31, 2016, filed on July 1, 2016, were formatted in XBRL (Extensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial Statements.



80




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Lennar Corporation
 
 
(Registrant)
 
 
 
7/1/2016
 
/s/    Bruce Gross        
 
 
Bruce Gross
 
 
Vice President and Chief Financial Officer
 
 
 
7/1/2016
 
/s/    David M. Collins        
 
 
David M. Collins
 
 
Controller



81