LEN 10-Q Quarterly Report Aug. 31, 2016 | Alphaminr
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LEN 10-Q Quarter ended Aug. 31, 2016

Balance Sheet
Cash Flow
Income Statement
Debt
LENNAR CORP /NEW/
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
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DEF 14A
 		Filed on March 3, 2011
DEF 14A
 		Filed on March 4, 2010
Document
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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 August 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 August 31, 2016 :
Class A 196,500,243
Class B 31,303,195




Part I. Financial Information
Item 1. Financial Statements

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except shares and per share amounts)
(unaudited)
August 31,
November 30,
2016 (1)
2015 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents
$
567,708

893,408

Restricted cash
5,452

13,505

Receivables, net
78,986

74,538

Inventories:
Finished homes and construction in progress
4,335,302

3,957,167

Land and land under development
5,193,420

4,724,578

Consolidated inventory not owned
127,024

58,851

Total inventories
9,655,746

8,740,596

Investments in unconsolidated entities
796,499

741,551

Other assets
637,546

609,222

11,741,937

11,072,820

Rialto
1,196,653

1,505,500

Lennar Financial Services
1,527,556

1,425,837

Lennar Multifamily
532,574

415,352

Total assets
$
14,998,720

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 August 31, 2016 , total assets include $ 596.6 million related to consolidated VIEs of which $ 9.7 million is included in Lennar Homebuilding cash and cash equivalents, $ 0.1 million in Lennar Homebuilding receivables, net, $ 46.9 million in Lennar Homebuilding finished homes and construction in progress, $ 113.8 million in Lennar Homebuilding land and land under development, $ 127.0 million in Lennar Homebuilding consolidated inventory not owned, $ 4.6 million in Lennar Homebuilding investments in unconsolidated entities, $ 16.5 million in Lennar Homebuilding other assets, $ 251.5 million in Rialto assets and $ 26.6 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)

August 31,
November 30,
2016 (2)
2015 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable
$
459,183

475,909

Liabilities related to consolidated inventory not owned
108,443

51,431

Senior notes and other debts payable
4,920,848

5,025,130

Other liabilities
867,367

899,815

6,355,841

6,452,285

Rialto
632,562

866,224

Lennar Financial Services
1,140,215

1,083,978

Lennar Multifamily
107,196

66,950

Total liabilities
8,235,814

8,469,437

Stockholders’ equity:
Preferred stock
—

—

Class A common stock of $0.10 par value; Authorized: August 31, 2016 and November 30, 2015
- 300,000,000 shares; Issued: August 31, 2016 - 197,412,050 shares and November 30, 2015
- 180,658,550 shares
19,741

18,066

Class B common stock of $0.10 par value; Authorized: August 31, 2016 and November 30, 2015
- 90,000,000 shares; Issued: August 31, 2016 - 32,982,815 shares and November 30, 2015
- 32,982,815 shares
3,298

3,298

Additional paid-in capital
2,628,398

2,305,560

Retained earnings
4,001,905

3,429,736

Treasury stock, at cost; August 31, 2016 - 911,807 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
( 108,930
)
( 107,755
)
Accumulated other comprehensive income
1,123

39

Total stockholders’ equity
6,545,535

5,648,944

Noncontrolling interests
217,371

301,128

Total equity
6,762,906

5,950,072

Total liabilities and equity
$
14,998,720

14,419,509

(2)
As of August 31, 2016 , total liabilities include $ 136.8 million related to consolidated VIEs as to which there was no recourse against the Company, of which $ 2.7 million is included in Lennar Homebuilding accounts payable, $ 108.4 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $ 1.7 million in Lennar Homebuilding other liabilities, $ 12.1 million in Rialto liabilities and $ 11.9 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 (Loss)
(Dollars in thousands, except per share amounts)
(unaudited)


Three Months Ended
Nine Months Ended
August 31,
August 31,
2016
2015
2016
2015
Revenues:
Lennar Homebuilding
$
2,496,969

2,232,318

6,734,335

5,789,788

Lennar Financial Services
191,444

168,748

491,340

463,460

Rialto
63,885

51,554

152,434

160,682

Lennar Multifamily
81,596

39,078

195,264

114,511

Total revenues
2,833,894

2,491,698

7,573,373

6,528,441

Costs and expenses:
Lennar Homebuilding
2,164,027

1,913,283

5,844,520

5,003,940

Lennar Financial Services
138,196

129,311

379,073

369,443

Rialto
62,306

53,323

155,416

161,610

Lennar Multifamily
84,007

47,072

204,244

136,293

Corporate general and administrative
61,164

56,494

164,634

150,355

Total costs and expenses
2,509,700

2,199,483

6,747,887

5,821,641

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
( 18,034
)
13,300

( 24,667
)
48,693

Lennar Homebuilding other income, net
30,947

4,189

46,391

10,305

Other interest expense
( 973
)
( 2,812
)
( 3,323
)
( 10,701
)
Rialto equity in earnings from unconsolidated entities
5,976

7,590

14,337

17,582

Rialto other income (expense), net
( 7,612
)
1,172

( 27,888
)
28

Lennar Multifamily equity in earnings from unconsolidated entities
5,060

5,004

38,754

4,404

Earnings before income taxes
339,558

320,658

869,090

777,111

Provision for income taxes
( 106,427
)
( 95,621
)
( 266,469
)
( 250,573
)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
233,131

225,037

602,621

526,538

Less: Net earnings (loss) attributable to noncontrolling interests
( 2,711
)
1,725

4,230

5,247

Net earnings attributable to Lennar
$
235,842

223,312

598,391

521,291

Other comprehensive income, net of tax:
Net unrealized gain (loss) on securities available-for-sale
639

( 400
)
1,121

( 294
)
Reclassification adjustments for gains included in earnings, net of tax
( 31
)
—

( 37
)
( 23
)
Other comprehensive income attributable to Lennar
$
236,450

222,912

599,475

520,974

Other comprehensive income (loss) attributable to noncontrolling interests
$
( 2,711
)
1,725

4,230

5,247

Basic earnings per share
$
1.04

1.07

2.74

2.53

Diluted earnings per share
$
1.01

0.96

2.59

2.25

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

0.04

0.12

0.12




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


Nine Months Ended
August 31,
2016
2015
Cash flows from operating activities:
Net earnings (including net earnings attributable to noncontrolling interests)
$
602,621

526,538

Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization
35,785

30,450

Amortization of discount/premium and accretion on debt, net
11,901

15,107

Equity in earnings from unconsolidated entities
( 28,424
)
( 70,679
)
Distributions of earnings from unconsolidated entities
52,787

43,343

Share-based compensation expense
34,628

32,199

Excess tax benefits from share-based awards
( 7,039
)
( 113
)
Deferred income tax expense (benefit)
53,833

( 3,890
)
Loss on retirement of debt and notes payable
1,569

3,206

Gain on sale of operating properties and equipment
( 12,559
)
( 5,945
)
Unrealized and realized gains on real estate owned
( 17,251
)
( 14,879
)
Impairments of loans receivable and real estate owned
26,893

16,225

Valuation adjustments and write-offs of option deposits and pre-acquisition costs and other assets
9,817

17,664

Changes in assets and liabilities:
Decrease in restricted cash
16,820

21,405

Decrease in receivables
40,108

44,145

Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
( 892,208
)
( 1,284,106
)
Increase in other assets
( 34,753
)
( 40,747
)
Decrease (increase) in loans held-for-sale
126,484

( 467,925
)
(Decrease) increase in accounts payable and other liabilities
( 24,092
)
49,588

Net cash used in operating activities
( 3,080
)
( 1,088,414
)
Cash flows from investing activities:
Increase in restricted cash related to LOCs
—

717

Net additions of operating properties and equipment
( 54,847
)
( 60,924
)
Proceeds from the sale of operating properties and equipment
17,450

73,732

Investments in and contributions to unconsolidated entities
( 320,047
)
( 116,739
)
Distributions of capital from unconsolidated entities
209,820

80,177

Proceeds from sales of real estate owned
66,638

88,565

Improvements to real estate owned
( 2,998
)
( 6,055
)
Receipts of principal payments on loans receivable and other
57,733

14,225

Purchases of loans receivable and real estate owned
( 249
)
—

Originations/purchases of loans receivable
( 56,507
)
( 22,545
)
Purchase of investment carried at cost
—

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

Acquisition, net of cash acquired
( 725
)
—

Purchases of Lennar Homebuilding investments available-for-sale
—

( 28,093
)
Decrease (increase) in Lennar Financial Services loans held-for-investment, net
2,086

( 4,421
)
Purchases of Lennar Financial Services investment securities
( 20,936
)
( 33,702
)
Proceeds from maturities/sales of Lennar Financial Services investments securities
18,912

17,382

Net cash used in investing activities
$
( 116,675
)
( 15,681
)




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


Nine Months Ended
August 31,
2016
2015
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility
$
125,000

575,000

Net (repayments) borrowings under warehouse facilities
( 137,325
)
294,015

Proceeds from senior notes
499,024

750,625

Debt issuance costs
( 3,981
)
( 7,210
)
Redemption of senior notes
( 250,000
)
( 500,000
)
Conversions and exchanges on convertible senior notes
( 233,893
)
( 168,854
)
Principal payments on Rialto notes payable including structured notes
( 4,121
)
( 28,247
)
Proceeds from other borrowings
34,095

87,905

Principal payments on other borrowings
( 133,899
)
( 232,925
)
Receipts related to noncontrolling interests
266

1,475

Payments related to noncontrolling interests
( 98,178
)
( 105,830
)
Excess tax benefits from share-based awards
7,039

113

Common stock:
Issuances
19,471

9,406

Repurchases
( 19,871
)
( 23,133
)
Dividends
( 26,222
)
( 24,765
)
Net cash (used in) provided by financing activities
( 222,595
)
627,575

Net decrease in cash and cash equivalents
( 342,350
)
( 476,520
)
Cash and cash equivalents at beginning of period
1,158,445

1,281,814

Cash and cash equivalents at end of period
$
816,095

805,294

Summary of cash and cash equivalents:
Lennar Homebuilding
$
567,708

595,719

Rialto
133,103

106,731

Lennar Financial Services
110,164

99,305

Lennar Multifamily
5,120

3,539

$
816,095

805,294

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
$
243,009

—

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

28,093

Inventory acquired in partner buyout
$
—

64,440

Non-cash sale of operating properties and equipment
$
—

( 59,397
)
Purchases of inventories and other assets financed by sellers
$
92,368

46,521

Non-cash contributions to unconsolidated entities
$
59,262

126,411

Rialto:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
7,842

14,683

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 nine months ended August 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)
August 31,
2016
November 30,
2015
Assets:
Homebuilding East
$
3,621,564

3,140,604

Homebuilding Central
1,494,703

1,421,195

Homebuilding West
4,527,360

4,157,616

Homebuilding Houston
495,216

481,386

Homebuilding Other
825,798

858,000

Rialto
1,196,653

1,505,500

Lennar Financial Services
1,527,556

1,425,837

Lennar Multifamily
532,574

415,352

Corporate and unallocated
777,296

1,014,019

Total assets
$
14,998,720

14,419,509


Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Revenues:
Homebuilding East
$
1,002,584

913,184

2,615,936

2,362,102

Homebuilding Central
422,504

322,242

1,117,034

835,259

Homebuilding West
671,122

639,593

1,940,520

1,649,727

Homebuilding Houston
199,800

204,948

528,097

525,852

Homebuilding Other
200,959

152,351

532,748

416,848

Lennar Financial Services
191,444

168,748

491,340

463,460

Rialto
63,885

51,554

152,434

160,682

Lennar Multifamily
81,596

39,078

195,264

114,511

Total revenues (1)
$
2,833,894

2,491,698

7,573,373

6,528,441

Operating earnings (loss):
Homebuilding East (2)
$
161,789

147,055

389,433

365,154

Homebuilding Central
44,627

32,152

110,629

77,919

Homebuilding West (3)
92,308

114,499

294,949

299,324

Homebuilding Houston
23,132

26,665

59,087

66,418

Homebuilding Other
23,026

13,341

54,118

25,330

Lennar Financial Services
53,248

39,437

112,267

94,017

Rialto
( 57
)
6,993

( 16,533
)
16,682

Lennar Multifamily
2,649

( 2,990
)
29,774

( 17,378
)
Total operating earnings
400,722

377,152

1,033,724

927,466

Corporate general and administrative expenses
61,164

56,494

164,634

150,355

Earnings before income taxes
$
339,558

320,658

869,090

777,111


(1)
Total revenues were net of sales incentives of $ 152.3 million ( $ 22,500 per home delivered) and $ 402.2 million ( $ 22,000 per home delivered) for the three and nine months ended August 31, 2016 , respectively, compared to $ 130.6 million ( $ 20,700 per home delivered) and $ 353.1 million ( $ 21,300 per home delivered) for the three and nine months ended August 31, 2015 , respectively.
(2)
For both the three and nine months ended August 31, 2016 , operating earnings included a gain of $ 8.7 million on the sale of a clubhouse.
(3)
For the three and nine months ended August 31, 2016 , operating earnings included the Company's share of costs associated with the FivePoint combination and the Company's share of net operating losses associated with the new FivePoint unconsolidated entity, partially offset by $ 17.4 million of management fee income related to a Lennar Homebuilding strategic joint venture for the three months ended August 31, 2016 and $ 30.1 million of management fee income and a profit participation related to Lennar Homebuilding's strategic joint ventures for the nine months ended August 31, 2016 . For the three and nine months ended August 31, 2015 , operating earnings included $ 21.5 million and $ 64.5 million , respectively, of equity in earnings from one of the Company's unconsolidated entities. For additional details refer to Note 3.


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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Revenues
$
43,889

141,599

352,251

765,346

Costs and expenses
110,649

127,678

409,219

580,696

Other income
—

46,400

—

49,343

Net earnings (loss) of unconsolidated entities
$
( 66,760
)
60,321

( 56,968
)
233,993

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
$
( 18,034
)
13,300

( 24,667
)
48,693


For both the three and nine months ended August 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 and the Company’s share of net operating losses associated with the new FivePoint unconsolidated entity. For the nine months ended August 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was partially offset by equity in earnings from one of the Company's unconsolidated entities primarily due to sales of homesites to third parties.
For the three months ended August 31, 2015 , Lennar Homebuilding equity in earnings included $ 21.5 million of equity in earnings from one of the Company's unconsolidated entities primarily due to a gain on debt extinguishment and sales of approximately 40 homesites to third parties. For the nine months ended August 31, 2015 , Lennar Homebuilding equity in earnings included $ 64.5 million of equity in earnings from one of the Company's unconsolidated entities primarily due to sales of approximately 700 homesites and a commercial property to third parties and a gain on debt extinguishment. In addition, for the nine months ended August 31, 2015 , net earnings of unconsolidated entities included sales of 300 homesites to Lennar by one of the Company’s unconsolidated entities that resulted in $ 49.3 million of gross profit, of which the Company's portion was deferred.
Balance Sheets
(In thousands)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
369,203

248,980

Inventories
3,798,070

3,059,054

Other assets
1,354,826

465,404

$
5,522,099

3,773,438

Liabilities and equity:
Accounts payable and other liabilities
$
854,568

288,192

Debt
865,496

792,886

Equity
3,802,035

2,692,360

$
5,522,099

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 nine months ended August 31, 2016 .


10


As of August 31, 2016 and November 30, 2015 , the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $ 796.5 million and $ 741.6 million , respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 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 to the Company.
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)
August 31,
2016
November 30,
2015
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
48,792

50,411

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

324,000

Non-recourse debt with completion guarantees
137,152

146,760

Non-recourse debt without completion guarantees
306,929

260,734

Non-recourse debt to the Company
816,868

781,905

The Company’s maximum recourse exposure (1)
48,628

10,981

Total debt
$
865,496

792,886

The Company’s maximum recourse exposure as a % of total JV debt
6
%
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. 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 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 August 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 August 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, the collateral is expected to 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 nine months ended August 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)
602,621

—

—

—

—

—

598,391

4,230

Employee stock and directors plans
501

124

—

1,552

( 1,175
)
—

—

—

Conversions and exchanges of convertible senior notes to Class A common stock
242,406

1,551

—

240,855

—

—

—

—

Tax benefit from employee stock plans, vesting of restricted stock and conversions of convertible senior notes
45,803

—

—

45,803

—

—

—

—

Amortization of restricted stock
34,628

—

—

34,628

—

—

—

—

Cash dividends
( 26,222
)
—

—

—

—

—

( 26,222
)
—

Receipts related to noncontrolling interests
266

—

—

—

—

—

—

266

Payments related to noncontrolling interests
( 98,178
)
—

—

—

—

—

—

( 98,178
)
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
2,480

—

—

—

—

—

—

2,480

Other comprehensive income, net of tax
1,084

—

—

—

—

1,084

—

—

Balance at August 31, 2016
$
6,762,906

19,741

3,298

2,628,398

( 108,930
)
1,123

4,001,905

217,371


12


Stockholders’ Equity
(In thousands)
Total
Equity
Class A
Common Stock
Class B
Common Stock
Additional
Paid - in Capital
Treasury
Stock
Accumulated Other Comprehensive Income (loss)
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)
526,538

—

—

—

—

—

521,291

5,247

Employee stock and directors plans
( 12,727
)
121

—

1,411

( 14,259
)
—

—

—

Conversions and exchanges of convertible senior notes to Class A common stock
—

415

—

( 415
)
—

—

—

—

Tax benefit from employee stock plans, vesting of restricted stock and conversions of convertible senior notes
17,419

—

—

17,419

—

—

—

—

Amortization of restricted stock
32,095

—

—

32,095

—

—

—

—

Cash dividends
( 24,765
)
—

—

—

—

—

( 24,765
)
—

Receipts related to noncontrolling interests
1,475

—

—

—

—

—

—

1,475

Payments related to noncontrolling interests
( 105,830
)
—

—

—

—

—

—

( 105,830
)
Non-cash deconsolidations, net
( 13,253
)
—

—

—

—

—

—

( 13,253
)
Non-cash activity related to noncontrolling interests
2,760

—

—

—

—

—

—

2,760

Other comprehensive loss, net of tax
( 317
)
—

—

—

—

( 317
)
—

—

Balance at August 31, 2015
$
5,674,697

17,960

3,298

2,290,084

( 107,699
)
( 187
)
3,156,560

314,681



(5)
Income Taxes
The provision for income taxes and effective tax rate were as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
Provision for income taxes
$
( 106,427
)
( 95,621
)
( 266,469
)
( 250,573
)
Effective tax rate (1)
31.09
%
29.98
%
30.81
%
32.46
%
(1)
For the three months ended August 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 nine months ended August 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 nine months ended August 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 August 31, 2016 and November 30, 2015 , the Company's deferred tax assets, net included in the condensed consolidated balance sheets were $ 320.1 million and $ 340.7 million , respectively.
At both August 31, 2016 and November 30, 2015 , the Company had $ 12.3 million of gross unrecognized tax benefits.
At August 31, 2016 , the Company had $ 45.2 million accrued for interest and penalties, of which $ 2.4 million was accrued during the nine months ended August 31, 2016 . In addition, during the nine months ended August 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.


13


(6)
Earnings Per Share
Basic earnings per share is computed by dividing net earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
All outstanding nonvested shares that contain non-forfeitable rights to dividends or dividend equivalents that participate in undistributed earnings with common stock are considered participating securities and are included in computing earnings per share pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and participation rights in undistributed earnings. The Company’s restricted common stock (“nonvested shares”) are considered participating securities.
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands, except per share amounts)
2016
2015
2016
2015
Numerator:
Net earnings attributable to Lennar
$
235,842

223,312

598,391

521,291

Less: distributed earnings allocated to nonvested shares
81

91

256

271

Less: undistributed earnings allocated to nonvested shares
2,232

2,313

5,798

5,431

Numerator for basic earnings per share
233,529

220,908

592,337

515,589

Less: net amount attributable to noncontrolling interests in Rialto's Carried Interest Incentive Plan (1)
258

1,044

864

2,842

Plus: interest on 3.25% convertible senior notes due 2021
964

1,982

4,836

5,946

Plus: undistributed earnings allocated to convertible shares
2,232

2,313

5,797

5,430

Less: undistributed earnings reallocated to convertible shares
2,162

2,093

5,484

4,870

Numerator for diluted earnings per share
$
234,305

222,066

596,622

519,253

Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding
223,549

206,439

215,814

204,120

Effect of dilutive securities:
Share-based payments
3

7

4

9

Convertible senior notes
8,266

24,102

14,399

26,506

Denominator for diluted earnings per share - weighted average common shares outstanding
231,818

230,548

230,217

230,635

Basic earnings per share
$
1.04

1.07

2.74

2.53

Diluted earnings per share
$
1.01

0.96

2.59

2.25


(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 nine months ended August 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)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
110,164

106,777

Restricted cash
13,910

13,961

Receivables, net (1)
374,769

242,808

Loans held-for-sale (2)
800,139

843,252

Loans held-for-investment, net
29,704

30,998

Investments held-to-maturity
34,746

40,174

Investments available-for-sale (3)
51,535

42,827

Goodwill
39,838

38,854

Other (4)
72,751

66,186

$
1,527,556

1,425,837

Liabilities:
Notes and other debts payable
$
913,040

858,300

Other (5)
227,175

225,678

$
1,140,215

1,083,978

(1)
Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of August 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 August 31, 2016 and November 30, 2015 , other assets included mortgage loan commitments carried at fair value of $ 20.7 million and $ 13.1 million , respectively, and mortgage servicing rights carried at fair value of $ 18.4 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 August 31, 2016 and November 30, 2015 , other liabilities included $ 58.4 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 $ 2.0 million as of August 31, 2016 .
At August 31, 2016 , the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2016 (1)
$
300,000

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

364-day warehouse repurchase facility that matures June 2017
600,000

Total
$
1,350,000


(1)
Subsequent to August 31, 2016 , the warehouse repurchase facility maturity date was extended to September 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 $ 912.7 million and $ 858.3 million at August 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 $ 960.4 million and $ 916.9 million at August 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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Loan origination liabilities, beginning of period
$
20,994

13,660

19,492

11,818

Provision for losses
1,288

1,147

3,186

3,174

Adjustments to pre-existing provisions for losses from changes in estimates
1,224

—

1,224

—

Payments/settlements
( 17
)
—

( 413
)
( 185
)
Loan origination liabilities, end of period
$
23,489

14,807

23,489

14,807



(8)
Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
133,103

150,219

Restricted cash (1)
6,499

15,061

Receivables, net (2)
—

154,948

Loans held-for-sale (3)
228,931

316,275

Loans receivable, net
145,813

164,826

Real estate owned - held-for-sale
170,524

183,052

Real estate owned - held-and-used, net
111,619

153,717

Investments in unconsolidated entities
241,680

224,869

Investments held-to-maturity
60,928

25,625

Other
97,556

116,908

$
1,196,653

1,505,500

Liabilities:
Notes and other debts payable
$
576,448

771,728

Other
56,114

94,496

$
632,562

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 $ 4.3 million and $ 11.1 million for the three and nine months ended August 31, 2016 , respectively, and $ 4.5 million and $ 7.3 million for the three and nine months ended August 31, 2015 , respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). For the three and nine months ended August 31, 2016 Rialto operating loss included a net loss attributable to noncontrolling interests of $ 6.0 million and $ 10.6 million , respectively. For the three and nine months ended August 31, 2015 , Rialto operating earnings included a net loss attributable to the noncontrolling interests of $ 2.0 million and $ 4.5 million , respectively.

16

The following is a detail of Rialto other income (expense), net:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Realized gains on REO sales, net
$
4,337

6,178

13,575

13,852

Unrealized losses on transfer of loans receivable to REO and impairments, net
( 6,617
)
( 3,124
)
( 12,166
)
( 7,892
)
REO and other expenses
( 13,006
)
( 14,714
)
( 39,964
)
( 43,123
)
Rental and other income (1)
7,674

12,832

10,667

37,191

Rialto other income (expense), net
$
( 7,612
)
1,172

( 27,888
)
28

(1)
Rental and other income for the nine months ended August 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)
August 31,
2016
November 30,
2015
Nonaccrual loans: FDIC and Bank Portfolios
$
62,092

88,694

Accrual loans
83,721

76,132

Loans receivable, net
$
145,813

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 August 31, 2016 , these consolidated LLCs had total combined assets and liabilities of $ 251.5 million and $ 12.1 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 August 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 therefore, accounts for these assets in accordance with ASC 310-10, Receivables .
As of August 31, 2016 , accrual loans included $ 83.7 million of floating and fixed rate commercial property loans maturing between October 2017 and August 2018.

17

The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
August 31, 2016
Recorded Investment
(In thousands)
Unpaid
Principal Balance
With
Allowance
Without
Allowance
Total  Recorded
Investment
Land
$
96,220

44,752

124

44,876

Single family homes
18,283

2,166

4,984

7,150

Commercial properties
11,448

1,372

508

1,880

Other
56,443

278

7,908

8,186

Loans receivable
$
182,394

48,568

13,524

62,092

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 $ 75 million and $ 112 million for the nine months ended August 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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Allowance on nonaccrual loans, beginning of the period
$
29,186

40,593

35,625

58,326

Provision for loan losses
4,330

4,497

11,051

7,306

Charge-offs
( 6,924
)
( 6,707
)
( 20,084
)
( 27,249
)
Allowance on nonaccrual loans, end of the period
$
26,592

38,383

26,592

38,383


For accrual loans an allowance is calculated based on a review of individual loans considered impaired. The analysis of impaired losses may be based on the present value of expected future cash flows discounted at the effective loan rate, an observable market price or the fair value of the underlying collateral on collateral dependent loans. In determining the collectability of certain loans, management also considers the fair value of any underlying collateral. Based on Rialto's segment assessment, no allowance for loan losses were recorded for its accrual loans as of August 31, 2016 and November 30, 2015 .

18

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.
The following tables represent the activity in REO :
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
REO - held-for-sale, beginning of period
$
180,547

195,386

183,052

190,535

Improvements
575

1,023

2,170

4,318

Sales
( 18,889
)
( 26,575
)
( 52,840
)
( 74,713
)
Impairments and unrealized losses
( 6,669
)
( 3,127
)
( 15,016
)
( 7,499
)
Transfers from held-and-used, net (1)
14,960

19,031

53,158

73,097

REO - held-for-sale, end of period
$
170,524

185,738

170,524

185,738

Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
REO - held-and-used, net, beginning of period
$
125,406

213,748

153,717

255,795

Additions
1,013

1,367

12,316

15,710

Improvements
706

309

828

1,737

Impairments
( 23
)
( 7
)
( 826
)
( 1,420
)
Depreciation
( 523
)
( 520
)
( 1,258
)
( 1,895
)
Transfers to held-for-sale (1)
( 14,960
)
( 19,031
)
( 53,158
)
( 73,097
)
Other
—

—

—

( 964
)
REO - held-and-used, net, end of period
$
111,619

195,866

111,619

195,866

(1)
During the three and nine months ended August 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 nine months ended August 31, 2016 , the Company recorded net gains (losses) of ($ 0.4 ) million and $ 1.6 million , respectively, from acquisitions of REO through foreclosure. For the three and nine months ended August 31, 2015 , the Company recorded net losses of $ 0.3 million and $ 0.1 million , respectively, from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto other income (expense), net.
Rialto Mortgage Finance - loans held-for-sale
During the nine months ended August 31, 2016 , RMF originated loans with a total principal balance of $ 1.2 billion of which $ 1.2 billion were recorded as loans held-for-sale and $ 55.7 million were recorded as accrual loans within loans receivable, net, and sold $ 1.3 billion of loans into seven separate securitizations. During the nine months ended August 31, 2015 , RMF originated loans with a total principal balance of $ 2.0 billion and sold $ 1.6 billion of loans into eight 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
The Rialto segment has $ 350 million aggregate principal amount of 7.00 % senior notes due 2018 ("7.00% Senior Notes"). Interest on the 7.00 % Senior Notes is due semi-annually. At August 31, 2016 and November 30, 2015 , the carrying amount, net of debt issuance costs, of the 7.00 % Senior Notes was $ 348.5 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 cove nants at August 31, 2016 .

19

At August 31, 2016 , Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2016 (one year extension) (1) (2)
$
400,000

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

Warehouse repurchase facility that matures December 2017 (1) (3)
100,000

Warehouse repurchase facility that matures August 2018 (two - one year extensions) (4)
100,000

Total
$
850,000

(1)
RMF uses these facilities to finance its loan origination and securitization activities.
(2)
Subsequent to August 31, 2016 , the warehouse repurchase facility maturity date was extended to April 2017, with the option for an additional six month extension, and the maximum aggregate commitment was increased to $ 500 million .
(3)
Subsequent to August 31, 2016 , the warehouse repurchase facility was amended and the maximum aggregate commitment was increased to $ 200 million .
(4)
In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this facility are held as accrual loans within loans receivable, net. As of both August 31, 2016 and November 30, 2015 , borrowings under this facility were $ 36.3 million .
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $ 106.6 million and $ 317.1 million as of August 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 August 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 November 15, 2017 . As of August 31, 2016 and November 30, 2015 , the outstanding amount, net of debt issuance costs, related to the Structured Notes was $ 27.9 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:
August 31,
2016
August 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

$
62,659

68,570

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

1,305,000

100,000

100,000

96,863

99,947

Rialto Mezzanine Partners Fund, LP
2013
300,000

300,000

33,799

33,799

26,310

32,344

Rialto Capital CMBS Funds
2014
111,753

111,753

47,057

47,057

47,270

23,233

Rialto Real Estate Fund III
2015
949,578

—

100,000

—

1,559

—

Rialto Credit Partnership, LP
2016
220,000

51,150

19,999

4,650

4,637

—

Other investments
2,382

775

$
241,680

224,869


Rialto's share of earnings (loss) from unconsolidated entities was as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Rialto Real Estate Fund, LP
$
1,127

4,158

3,397

7,948

Rialto Real Estate Fund II, LP
2,672

2,354

4,420

5,533

Rialto Mezzanine Partners Fund, LP
703

637

2,128

1,563

Rialto Capital CMBS Funds
1,471

429

3,051

2,506

Rialto Real Estate Fund III
4

—

1,387

—

Rialto Credit Partnership, LP
( 1
)
—

( 13
)
—

Other investments
—

12

( 33
)
32

Rialto equity in earnings from unconsolidated entities
$
5,976

7,590

14,337

17,582


During the three and nine months ended August 31, 2016 , Rialto received $ 2.1 million and $ 9.5 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 nine months ended August 31, 2015 , Rialto received $ 5.0 million and $ 16.2 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:
Bal ance Sheets
(In thousands)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
159,683

188,147

Loans receivable
396,543

473,997

Real estate owned
566,012

506,609

Investment securities
1,284,583

1,092,476

Investments in partnerships
413,836

429,979

Other assets
41,282

30,340

$
2,861,939

2,721,548

Liabilities and equity:
Accounts payable and other liabilities
$
27,605

29,462

Notes payable
562,935

374,498

Equity
2,271,399

2,317,588

$
2,861,939

2,721,548

Statements of Operations
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Revenues
$
51,485

41,278

147,021

122,336

Costs and expenses
24,472

24,937

66,075

73,024

Other income, net (1)
28,947

60,106

40,495

121,457

Net earnings of unconsolidated entities
$
55,960

76,447

121,441

170,769

Rialto equity in earnings from unconsolidated entities
$
5,976

7,590

14,337

17,582

(1)
Other income, net, included realized and unrealized gains (losses) on investments.
At August 31, 2016 and November 30, 2015 , the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $ 60.9 million and $ 25.6 million , respectively. These securities were purchased at 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 March 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 nine months ended August 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 December 2014, the Rialto segment invested $ 18 million in a private commercial real estate services company. The investment was carried at cost at both August 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)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
5,120

8,041

Land under development
148,241

115,982

Consolidated inventory not owned
18,500

5,508

Investments in unconsolidated entities
304,032

250,876

Other assets
56,681

34,945

$
532,574

415,352

Liabilities:
Accounts payable and other liabilities
$
95,346

62,943

Liabilities related to consolidated inventory not owned
11,850

4,007

$
107,196

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 August 31, 2016 and November 30, 2015 , the fair value of the completion guarantees was immaterial. Additionally, as of August 31, 2016 and November 30, 2015 , the Lennar Multifamily segment had $ 36.8 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 August 31, 2016 and November 30, 2015 , Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $ 628.2 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 nine months ended August 31, 2016 , the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $ 10.0 million and $ 27.4 million , respectively. During the three and nine months ended August 31, 2015 , the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $ 4.6 million and $ 13.0 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 nine months ended August 31, 2016 , the Lennar Multifamily segment provided general contractor services totaling $ 71.6 million and $ 156.5 million , respectively, which were partially offset by costs related to those services of $ 69.1 million and $ 151.4 million , resp ectively. During the three and nine months ended August 31, 2015 , the Lennar Multifamily segment provided general contractor services totaling $ 34.5 million and $ 101.6 million , respectively, which were partially offset by costs related to those services of $ 33.9 million and $ 99.0 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 nine months ended August 31, 2016 , the Venture received an additional $ 850 million of equity commitments, increasing its total equity commitments to approximately $ 2 billion , including a $ 504 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. During the nine months ended August 31, 2016 , $ 432.4 million in equity commitments were called, of which the Company contributed its portion of $ 147.6 million . During the nine months ended August 31, 2016 , the Company received net distributions of $ 90.5 million as a return of capital from the Venture. As of August 31, 2016 , $ 707.9 million of the approximately $ 2 billion in equity commitments had been called, of which the

23


Company has contributed $ 182.8 million representing its pro-rata portion of the called equity, resulting in a remaining equity commitment of $ 321.2 million . As of August 31, 2016 and November 30, 2015 , the carrying value of the Company's investment in the Venture was $ 170.9 million and $ 122.5 million , respectively. Subsequent to August 31, 2016 , the Venture received an additional $ 250 million of equity commitments, increasing its total equity commitments to $ 2.2 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)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
106,007

39,579

Operating properties and equipment
2,007,129

1,398,244

Other assets
49,728

25,925

$
2,162,864

1,463,748

Liabilities and equity:
Accounts payable and other liabilities
$
187,715

179,551

Notes payable
628,237

466,724

Equity
1,346,912

817,473

$
2,162,864

1,463,748


Statements of Operations
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Revenues
$
13,796

4,067

31,759

9,236

Costs and expenses
24,611

7,174

50,341

15,249

Other income, net
20,335

13,330

90,729

13,330

Net earnings of unconsolidated entities
$
9,520

10,223

72,147

7,317

Lennar Multifamily equity in earnings from unconsolidated entities (1)
$
5,060

5,004

38,754

4,404

(1)
For the three and nine months ended August 31, 2016 , Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $ 8.0 million and $ 43.8 million , respectively, share of gains as a result of the sale of one and three operating properties, respectively, by its unconsolidated entities. For both the three and nine months ended August 31, 2015 , Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $ 5.7 million share of a gain as a result of the sale of an operating property by one of its unconsolidated entities.

(10)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of August 31, 2016 and November 30, 2015 included $ 275.5 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)
August 31,
2016
November 30,
2015
Unsecured revolving credit facility
$
125,000

—

12.25% senior notes due 2017
398,046

396,252

4.75% senior notes due 2017
398,293

397,736

6.95% senior notes due 2018
248,355

247,632

4.125% senior notes due 2018
273,746

273,319

4.500% senior notes due 2019
497,780

497,210

4.50% senior notes due 2019
597,294

596,622

3.25% convertible senior notes due 2021
156,823

398,194

4.750% senior notes due 2021
496,352

—

4.750% senior notes due 2022
568,025

567,325

4.875% senior notes due 2023
394,073

393,545

4.750% senior notes due 2025
496,116

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
270,945

278,381

$
4,920,848

5,025,130


The carrying amounts of the senior notes listed above are net of debt issuance costs of $ 23.9 million and $ 26.4 million , as of August 31, 2016 and November 30, 2015 , respectively.
In June 2016, the Company amended the credit agreement governing its unsecured revolving credit facility (the "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 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 August 31, 2016 . In addition, the Company had $ 320 million letter of credit facilities with different financial institutions.
The Company’s performance letters of credit outstanding were $ 261.8 million and $ 236.5 million , respectively, at August 31, 2016 and November 30, 2015 . The Company’s financial letters of credit outstanding were $ 214.0 million and $ 216.7 million , at August 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 August 31, 2016 , the Company had outstanding surety bonds of $ 1.4 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 August 31, 2016 , there were approximately $ 497.8 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-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.

25


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 6,680,405 remaining shares of Class A common stock if all the 3.25 % Convertible Senior Notes outstanding principal amount is 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. For the three and nine months ended August 31, 2016 , 8.3 million shares and 13.8 million shares, respectively, are included in the calculation of diluted earnings per share. For both the three and nine months ended August 31, 2015 , 17.0 million shares were included in the calculation of diluted earnings per share. During the nine months ended August 31, 2016 , holders converted approximately $ 243 million aggregate principal amount of the 3.25 % Convertible Senior Notes for 10.3 million shares of Class A common stock, plus accrued and unpaid interest through the date of the conversions and small cash premiums. At August 31, 2016 and November 30, 2015 , the principal amount of the 3.25 % Convertible Senior Notes was $ 157.0 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.
During the nine months ended August 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 nine months ended August 31, 2016 , the calculation for diluted earnings per share included 0.6 million shares related to the dilutive effect of the 2.75 % Convertible Senior Notes prior to the conversions. For the three and nine months ended August 31, 2015 , the calculation for diluted earnings per share included 7.1 million shares and 9.5 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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Warranty reserve, beginning of period
$
127,159

119,610

130,853

115,927

Warranties issued
25,382

21,873

67,952

55,665

Adjustments to pre-existing warranties from changes in estimates (1)
4,982

( 111
)
4,247

5,273

Payments
( 23,984
)
( 21,676
)
( 69,513
)
( 57,169
)
Warranty reserve, end of period
$
133,539

119,696

133,539

119,696


(1)
The adjustments to pre-existing warranties from changes in estimates during both the three and nine months ended August 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 nine months ended August 31, 2016 and 2015 , the Company granted 1.2 million nonvested shares. Compensation expense related to the Company’s share-based payment awards was as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Nonvested shares
$
12,362

11,484

34,628

32,095

Stock options
—

65

—

104

Total compensation expense for share-based awards
$
12,362

11,549

34,628

32,199



(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 August 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.
August 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
$
145,813

148,756

164,826

169,302

Investments held-to-maturity
Level 3
$
60,928

60,226

25,625

25,227

Lennar Financial Services:
Loans held-for-investment, net
Level 3
$
29,704

28,603

30,998

29,931

Investments held-to-maturity
Level 2
$
34,746

34,868

40,174

40,098

LIABILITIES
Lennar Homebuilding senior notes and other debts payable
Level 2
$
4,920,848

5,323,307

5,025,130

5,936,327

Rialto notes and other debts payable
Level 2
$
576,448

596,020

771,728

803,013

Lennar Financial Services notes and other debts payable
Level 2
$
913,040

913,040

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 primarily 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
August 31,
2016
Fair Value at
November 30,
2015
Rialto Financial Assets:
Loans held-for-sale (1)
Level 3
$
228,931

316,275

Credit default swaps (2)
Level 2
$
4,448

6,153

Rialto Financial Liabilities:
Interest rate swaps and swap futures (3)
Level 1
$
238

978

Lennar Financial Services Assets (Liabilities):
Loans held-for-sale (4)
Level 2
$
800,139

843,252

Investments available-for-sale
Level 1
$
51,535

42,827

Mortgage loan commitments
Level 2
$
20,663

13,060

Forward contracts
Level 2
$
( 2,011
)
531

Mortgage servicing rights
Level 3
$
18,369

16,770


(1)
The aggregate fair value of Rialto loans held-for-sale of $ 228.9 million at August 31, 2016 exceeds their aggregate principal balance of $ 228.8 million by $ 0.1 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 $ 800.1 million at August 31, 2016 exceeds their aggregate principal balance of $ 771.1 million by $ 29.1 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.

28


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-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 August 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 August 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 August 31, 2016 , the segment had open commitments amounting to $ 1.3 billion to sell MBS with varying settlement dates through November 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 August 31, 2016 , the key assumptions used in determining the fair value include a 16.6 % mortgage prepayment rate, a 12.3 % discount rate and a 7.6 % delinquency rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.

29


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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Changes in fair value included in Lennar Financial Services revenues:
Loans held-for-sale
$
( 2,808
)
2,836

826

( 283
)
Mortgage loan commitments
$
1,781

( 384
)
7,603

5,811

Forward contracts
$
( 362
)
( 3,493
)
( 2,542
)
4,238

Investments available-for-sale
$
31

—

37

23

Changes in fair value included in Rialto revenues:
Financial Assets:
Credit default swaps
$
( 1,570
)
3,466

( 1,547
)
2,641

Financial Liabilities:
Interest rate swaps and swap futures
$
( 133
)
( 4,740
)
740

( 4,308
)
Changes in fair value included in other comprehensive income (loss), net of tax:
Lennar Financial Services investments available-for-sale
$
639

( 400
)
1,121

( 294
)

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 August 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
$
18,241

199,415

16,504

318,037

Purchases/loan originations
2,275

520,510

844

719,998

Sales/loan originations sold, including those not settled
—

( 491,428
)
—

( 528,518
)
Disposals/settlements
( 1,311
)
—

( 974
)
—

Changes in fair value (1)
( 836
)
522

66

679

Interest and principal paydowns
—

( 88
)
—

( 63
)
Ending balance
$
18,369

228,931

16,440

510,133

Nine Months Ended August 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
6,269

1,174,483

1,840

1,968,692

Sales/loan originations sold, including those not settled
—

( 1,259,320
)
—

( 1,570,101
)
Disposals/settlements
( 2,881
)
—

( 2,848
)
—

Changes in fair value (1)
( 1,789
)
( 687
)
95

( 1,622
)
Interest and principal paydowns
—

( 1,820
)
—

( 432
)
Ending balance
$
18,369

228,931

16,440

510,133

(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 August 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
$
52,460

48,130

( 4,330
)
76,138

71,641

( 4,497
)
Non-financial assets
Lennar Homebuilding:
Finished homes and construction in progress (2)
Level 3
$
—

—

—

5,754

4,607

( 1,147
)
Land and land under development (2)
Level 3
$
23,736

18,000

( 5,736
)
16,482

11,811

( 4,671
)
Rialto:
REO - held-for-sale (3):
Upon acquisition/transfer
Level 3
$
8,283

7,786

( 497
)
4,767

4,481

( 286
)
Upon management periodic valuations
Level 3
$
28,850

22,678

( 6,172
)
9,146

6,305

( 2,841
)
REO - held-and-used, net (4):
Upon acquisition/transfer
Level 3
$
937

1,013

76

1,357

1,367

10

Upon management periodic valuations
Level 3
$
60

37

( 23
)
14

7

( 7
)

Nine Months Ended August 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
$
72,375

61,324

( 11,051
)
248,250

240,944

( 7,306
)
Non-financial assets
Lennar Homebuilding:
Finished homes and construction in progress (2)
Level 3
$
—

—

—

52,093

41,343

( 10,750
)
Land and land under development (2)
Level 3
$
29,418

22,925

( 6,493
)
16,482

11,811

( 4,671
)
Rialto:
REO - held-for-sale (3):
Upon acquisition/transfer
Level 3
$
34,017

31,976

( 2,041
)
18,383

17,280

( 1,103
)
Upon management periodic valuations
Level 3
$
63,172

50,197

( 12,975
)
26,008

19,612

( 6,396
)
REO - held-and-used, net (4):
Upon acquisition/transfer
Level 3
$
8,640

12,316

3,676

14,683

15,710

1,027

Upon management periodic valuations
Level 3
$
4,976

4,150

( 826
)
2,703

1,283

( 1,420
)
(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 nine months ended August 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 nine months ended August 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 income (expense), net, in the Company’s condensed consolidated statement of operations for the three and nine months ended August 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 (losses) upon acquisition of REO held-and-used, net and impairments were included in Rialto other income (expense), net, in the Company’s condensed consolidated statement of operations for the three and nine months ended August 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 August 31, 2016 and 2015 , there were 691 and 670 active communities, excluding unconsolidated entities, respectively. As of August 31, 2016 , the Company identified 16 communities with 444 homesites and a corresponding carrying value of $ 134.7 million as having potential indicators of impairment. For the nine months ended August 31, 2016 , the Company recorded no impairments.
As of August 31, 2015 , the Company identified 15 communities with 453 homesites and a corresponding carrying value of $ 74.0 million as having potential indicators of impairment. For the nine months ended August 31, 2015 , the Company recorded a valuation adjustment of $ 15.4 million on 138 homesites in two communities with a carrying value of $ 68.6 million .
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 nine months ended August 31, 2015 :
Nine Months Ended
August 31, 2015
Unobservable inputs
Range
Average selling price
$ 486,000
-
$ 1,300,000
Absorption rate per quarter (homes)
9
-
14
Discount rate
12 %
-
20 %


(15)
Variable Interest Entities
The Company evaluated the agreements of its joint ventures that were formed or that had reconsideration events during the nine months ended August 31, 2016 . Based on the Company's evaluation, during the nine months ended August 31, 2016 , the Company consolidated entities that had total combined assets of $ 122.1 million and liabilities of $ 96.4 million . During the nine months ended August 31, 2016 , there were no VIEs that were deconsolidated.
The Company’s recorded investments in unconsolidated entities were as follows:
(In thousands)
August 31,
2016
November 30,
2015
Lennar Homebuilding
$
796,499

741,551

Rialto
$
241,680

224,869

Lennar Multifamily
$
304,032

250,876


Consolidated VIEs
As of August 31, 2016 , the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $ 596.6 million and $ 136.8 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.

32


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 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 August 31, 2016
(In thousands)
Investments in
Unconsolidated VIEs
Lennar’s Maximum
Exposure to Loss
Lennar Homebuilding (1)
$
100,452

140,228

Rialto (2)
60,928

60,928

Lennar Multifamily (3)
224,574

574,114

$
385,954

775,270

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 August 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 a $ 39.6 million repayment guarantee of 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 obtained permanent financing.
(2)
At both August 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 August 31, 2016 and November 30, 2015 , investments in unconsolidated VIEs and Lennar’s maximum exposure to loss included $ 60.9 million and $ 25.6 million , respectively, related to Rialto’s investments held-to-maturity.
(3)
As of August 31, 2016 and November 30, 2015 , the remaining equity commitment of $ 321.2 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 August 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 $ 27.3 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 August 31, 2016 , the Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for $ 321.2 million remaining equity commitment to fund the Venture for further expenditures related to the construction and development of its projects and $ 27.3 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 a $ 39.6 million repayment guarantee of 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 nine months ended August 31, 2016 , consolidated inventory not owned increased by $ 68.2 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 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 August 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 $ 85.7 million and $ 89.2 million at August 31, 2016 and November 30, 2015 , respectively. Additionally, the Company had posted $ 53.1 million and $ 70.4 million of letters of credit in lieu of cash deposits under certain land and option contracts as of August 31, 2016 and November 30, 2015 , respectively.

(16)
Commitments and Contingent Liabilities
The Company is party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on the Company’s condensed consolidated financial statements. The Company is also a party to various lawsuits involving purchases and sales of real property. These lawsuits include claims regarding representations and warranties made in connection with the transfer of properties and disputes regarding the obligation to purchase or sell properties.
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 $ 113 million as of August 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 would 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)
Subsequent Event
On September 22, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WCI Communities, Inc. (“WCI”), under which the Company will acquire WCI through a merger for a combination of the Company’s Class A common stock and cash totaling $ 23.50 per share of WCI common stock. It is currently anticipated that the merger consideration payable to WCI stockholders will be $ 11.75 in cash and $ 11.75 in Class A common stock, with the Class A common stock valued at the average of its volume weighted average price on the New York Stock Exchange (“NYSE”) on each of the 10 NYSE trading days before closing. However, the Company has the right to reduce the portion of the merger consideration that will be Class A common stock and increase the portion that will be cash, including the right to make the entire merger consideration cash. The Merger Agreement provides that until October 26, 2016, WCI may actively solicit proposals from persons other than the Company. WCI can terminate the Merger Agreement to engage in a transaction that its Board of Directors deems to be more favorable to its stockholders than the transaction with the Company, unless the Company will match the deemed more favorable transaction. However, if WCI terminates the Merger Agreement to engage in another transaction, it will have to pay the Company a termination fee of $ 22.5 million , or $ 11.3 million if the more favorable transaction was proposed on or before October 26, 2016. The Merger Agreement contains customary representations and warranties by the parties, and is subject to closing conditions, including the need for approval by the holders of WCI’s common stock. It is anticipated that a meeting of WCI stockholders to vote on the transaction will be held in December 2016 or January 2017, and, if the transaction is approved by the WCI stockholders, it will close promptly after the stockholder vote.

(18)
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.


35


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 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 potential impact of ASU 2016-09 but the Company does not expect it to have a material impact on the Company's condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's fiscal year beginning December 1, 2020 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on the Company's condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in ASC 230, Statement of Cash Flows , including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. ASU 2016-15 will be effective for the Company’s fiscal year beginning December 1, 2018 and subsequent interim periods. The

36


adoption of ASU 2016-15 will modify the Company's current disclosures and reclassifications within the condensed consolidated statement of cash flows but is not expected to have a material effect on the Company’s condensed consolidated financial statements.
(19)
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 August 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.

37
(19) Supplemental Financial Information - (Continued)

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

Condensed Consolidating Balance Sheet
August 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
$
365,177

270,020

16,949

—

652,146

Inventories
—

9,378,652

277,094

—

9,655,746

Investments in unconsolidated entities
—

778,532

17,967

—

796,499

Other assets
211,279

334,483

80,635

11,149

637,546

Investments in subsidiaries
3,918,687

126,787

—

( 4,045,474
)
—

Intercompany
7,187,710

—

—

( 7,187,710
)
—

11,682,853

10,888,474

392,645

( 11,222,035
)
11,741,937

Rialto
—

—

1,196,653

—

1,196,653

Lennar Financial Services
—

98,716

1,432,641

( 3,801
)
1,527,556

Lennar Multifamily
—

—

549,148

( 16,574
)
532,574

Total assets
$
11,682,853

10,987,190

3,571,087

( 11,242,410
)
14,998,720

LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable and other liabilities
$
487,415

769,239

79,122

( 9,226
)
1,326,550

Liabilities related to consolidated inventory not owned
—

12,019

96,424

—

108,443

Senior notes and other debts payable
4,649,903

260,095

10,850

—

4,920,848

Intercompany
—

6,303,367

884,343

( 7,187,710
)
—

5,137,318

7,344,720

1,070,739

( 7,196,936
)
6,355,841

Rialto
—

—

632,562

—

632,562

Lennar Financial Services
—

35,732

1,104,483

—

1,140,215

Lennar Multifamily
—

—

107,196

—

107,196

Total liabilities
5,137,318

7,380,452

2,914,980

( 7,196,936
)
8,235,814

Stockholders’ equity
6,545,535

3,606,738

438,736

( 4,045,474
)
6,545,535

Noncontrolling interests
—

—

217,371

—

217,371

Total equity
6,545,535

3,606,738

656,107

( 4,045,474
)
6,762,906

Total liabilities and equity
$
11,682,853

10,987,190

3,571,087

( 11,242,410
)
14,998,720



38
(19) 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




39
(19) Supplemental Financial Information - (Continued)

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

2,492,189

4,780

—

2,496,969

Lennar Financial Services
—

60,518

135,939

( 5,013
)
191,444

Rialto
—

—

63,885

—

63,885

Lennar Multifamily
—

—

81,620

( 24
)
81,596

Total revenues
—

2,552,707

286,224

( 5,037
)
2,833,894

Cost and expenses:
Lennar Homebuilding
—

2,157,506

7,309

( 788
)
2,164,027

Lennar Financial Services
—

50,602

92,431

( 4,837
)
138,196

Rialto
—

—

62,721

( 415
)
62,306

Lennar Multifamily
—

—

84,007

—

84,007

Corporate general and administrative
59,644

255

—

1,265

61,164

Total costs and expenses
59,644

2,208,363

246,468

( 4,775
)
2,509,700

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
—

( 18,127
)
93

—

( 18,034
)
Lennar Homebuilding other income, net
1,209

29,823

1,113

( 1,198
)
30,947

Other interest expense
( 1,460
)
( 973
)
—

1,460

( 973
)
Rialto equity in earnings from unconsolidated entities
—

—

5,976

—

5,976

Rialto other expense, net
—

—

( 7,612
)
—

( 7,612
)
Lennar Multifamily equity in earnings from unconsolidated entities
—

—

5,060

—

5,060

Earnings (loss) before income taxes
( 59,895
)
355,067

44,386

—

339,558

Benefit (provision) for income taxes
18,646

( 106,867
)
( 18,206
)
—

( 106,427
)
Equity in earnings from subsidiaries
277,091

22,301

—

( 299,392
)
—

Net earnings (including net loss attributable to noncontrolling interests)
235,842

270,501

26,180

( 299,392
)
233,131

Less: Net loss attributable to noncontrolling interests
—

—

( 2,711
)
—

( 2,711
)
Net earnings attributable to Lennar
$
235,842

270,501

28,891

( 299,392
)
235,842

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

—

639

—

639

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

—

( 31
)
—

( 31
)
Other comprehensive income attributable to Lennar
$
235,842

270,501

29,499

( 299,392
)
236,450

Other comprehensive loss attributable to noncontrolling interests
$
—

—

( 2,711
)
—

( 2,711
)



40
(19) Supplemental Financial Information - (Continued)

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

2,232,318

—

—

2,232,318

Lennar Financial Services
—

54,415

119,345

( 5,012
)
168,748

Rialto
—

—

51,554

—

51,554

Lennar Multifamily
—

—

39,091

( 13
)
39,078

Total revenues
—

2,286,733

209,990

( 5,025
)
2,491,698

Cost and expenses:
Lennar Homebuilding
—

1,897,755

21,080

( 5,552
)
1,913,283

Lennar Financial Services
—

47,514

81,762

35

129,311

Rialto
—

—

53,732

( 409
)
53,323

Lennar Multifamily
—

—

47,072

—

47,072

Corporate general and administrative
55,229

—

—

1,265

56,494

Total costs and expenses
55,229

1,945,269

203,646

( 4,661
)
2,199,483

Lennar Homebuilding equity in earnings from unconsolidated entities
—

8,633

4,667

—

13,300

Lennar Homebuilding other income (expense), net
1,674

( 12,495
)
16,106

( 1,096
)
4,189

Other interest expense
( 1,460
)
( 2,812
)
—

1,460

( 2,812
)
Rialto equity in earnings from unconsolidated entities
—

—

7,590

—

7,590

Rialto other income, net
—

—

1,172

—

1,172

Lennar Multifamily equity in earnings from unconsolidated entities
—

—

5,004

—

5,004

Earnings (loss) before income taxes
( 55,015
)
334,790

40,883

—

320,658

Benefit (provision) for income taxes
16,215

( 96,069
)
( 15,767
)
—

( 95,621
)
Equity in earnings from subsidiaries
262,112

17,947

—

( 280,059
)
—

Net earnings (including net earnings attributable to noncontrolling interests)
223,312

256,668

25,116

( 280,059
)
225,037

Less: Net earnings attributable to noncontrolling interests
—

—

1,725

—

1,725

Net earnings attributable to Lennar
$
223,312

256,668

23,391

( 280,059
)
223,312

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

—

( 400
)
—

( 400
)
Other comprehensive income attributable to Lennar
$
223,312

256,668

22,991

( 280,059
)
222,912

Other comprehensive earnings attributable to noncontrolling interests
$
—

—

1,725

—

1,725




41
(19) Supplemental Financial Information - (Continued)

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

6,729,555

4,780

—

6,734,335

Lennar Financial Services
—

154,438

351,923

( 15,021
)
491,340

Rialto
—

—

152,434

—

152,434

Lennar Multifamily
—

—

195,320

( 56
)
195,264

Total revenues
—

6,883,993

704,457

( 15,077
)
7,573,373

Cost and expenses:
Lennar Homebuilding
—

5,840,084

15,941

( 11,505
)
5,844,520

Lennar Financial Services
—

140,618

243,755

( 5,300
)
379,073

Rialto
—

—

156,198

( 782
)
155,416

Lennar Multifamily
—

—

204,244

—

204,244

Corporate general and administrative
160,074

764

—

3,796

164,634

Total costs and expenses
160,074

5,981,466

620,138

( 13,791
)
6,747,887

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
—

( 25,138
)
471

—

( 24,667
)
Lennar Homebuilding other income, net
3,108

45,123

1,239

( 3,079
)
46,391

Other interest expense
( 4,365
)
( 3,323
)
—

4,365

( 3,323
)
Rialto equity in earnings from unconsolidated entities
—

—

14,337

—

14,337

Rialto other expense, net
—

—

( 27,888
)
—

( 27,888
)
Lennar Multifamily equity in earnings from unconsolidated entities
—

—

38,754

—

38,754

Earnings (loss) before income taxes
( 161,331
)
919,189

111,232

—

869,090

Benefit (provision) for income taxes
49,706

( 277,230
)
( 38,945
)
—

( 266,469
)
Equity in earnings from subsidiaries
710,016

42,297

—

( 752,313
)
—

Net earnings (including net earnings attributable to noncontrolling interests)
598,391

684,256

72,287

( 752,313
)
602,621

Less: Net earnings attributable to noncontrolling interests
—

—

4,230

—

4,230

Net earnings attributable to Lennar
$
598,391

684,256

68,057

( 752,313
)
598,391

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

—


1,121


—

1,121

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

—


( 37
)

—

( 37
)
Other comprehensive income attributable to Lennar
$
598,391

684,256


69,141


( 752,313
)
599,475

Other comprehensive income attributable to noncontrolling interests
$
—

—

4,230

—

4,230




42
(19) Supplemental Financial Information - (Continued)

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

5,789,788

—

—

5,789,788

Lennar Financial Services
—

145,386

333,079

( 15,005
)
463,460

Rialto
—

—

160,682

—

160,682

Lennar Multifamily
—

—

114,529

( 18
)
114,511

Total revenues
—

5,935,174

608,290

( 15,023
)
6,528,441

Cost and expenses:
Lennar Homebuilding
—

4,974,687

41,110

( 11,857
)
5,003,940

Lennar Financial Services
—

135,264

237,854

( 3,675
)
369,443

Rialto
—

—

162,019

( 409
)
161,610

Lennar Multifamily
—

—

136,293

—

136,293

Corporate general and administrative
146,559

—

—

3,796

150,355

Total costs and expenses
146,559

5,109,951

577,276

( 12,145
)
5,821,641

Lennar Homebuilding equity in earnings from unconsolidated entities
—

35,020

13,673

—

48,693

Lennar Homebuilding other income (expense), net
2,068

( 4,894
)
14,602

( 1,471
)
10,305

Other interest expense
( 4,349
)
( 10,701
)
—

4,349

( 10,701
)
Rialto equity in earnings from unconsolidated entities
—

—

17,582

—

17,582

Rialto other income, net
—

—

28

—

28

Lennar Multifamily equity in earnings from unconsolidated entities
—

—

4,404

—

4,404

Earnings (loss) before income taxes
( 148,840
)
844,648

81,303

—

777,111

Benefit (provision) for income taxes
48,313

( 267,715
)
( 31,171
)
—

( 250,573
)
Equity in earnings from subsidiaries
621,818

38,033

—

( 659,851
)
—

Net earnings (including net earnings attributable to noncontrolling interests)
521,291

614,966

50,132

( 659,851
)
526,538

Less: Net earnings attributable to noncontrolling interests
—

—

5,247

—

5,247

Net earnings attributable to Lennar
$
521,291

614,966

44,885

( 659,851
)
521,291

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

—

( 294
)
—

( 294
)
Reclassification adjustments for gains included in earnings, net of tax
$
—

—

( 23
)
—

( 23
)
Other comprehensive income attributable to Lennar
$
521,291

614,966

44,568

( 659,851
)
520,974

Other comprehensive earnings attributable to noncontrolling interests
$
—

—

5,247

—

5,247




43
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended August 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)
$
598,391

684,256

72,287

( 752,313
)
602,621

Distributions of earnings from guarantor and non-guarantor subsidiaries
710,016

42,297

—

( 752,313
)
—

Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities
( 712,476
)
( 707,332
)
61,794

752,313

( 605,701
)
Net cash provided by (used in) operating activities
595,931

19,221

134,081

( 752,313
)
( 3,080
)
Cash flows from investing activities:
Proceeds from the sale of operating properties and equipment
—

17,450

—

—

17,450

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

( 100,475
)
( 9,752
)
—

( 110,227
)
Proceeds from sales of real estate owned
—

—

66,638

—

66,638

Receipts of principal payments on loans receivable and other
—

—

57,733

—

57,733

Originations/purchases of loans receivable
—

—

( 56,507
)
—

( 56,507
)
Purchases of commercial mortgage-backed securities bonds
—

—

( 33,005
)
—

( 33,005
)
Other
( 8,836
)
( 41,120
)
( 8,801
)
—

( 58,757
)
Distributions of capital from guarantor and non-guarantor subsidiaries
40,000

40,000

—

( 80,000
)
—

Intercompany
( 956,734
)
—

—

956,734

—

Net cash provided by (used in) investing activities
( 925,570
)
( 84,145
)
16,306

876,734

( 116,675
)
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility
125,000

—

—

—

125,000

Net (repayments) borrowings under warehouse facilities
—

141

( 137,466
)
—

( 137,325
)
Proceeds from senior notes and debt issuance costs
495,974

—

( 931
)
—

495,043

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 including structured notes
—

—

( 4,121
)
—

( 4,121
)
Net payments on other borrowings
—

( 99,804
)


—

( 99,804
)
Net payments related to noncontrolling interests
—



( 97,912
)
—

( 97,912
)
Excess tax benefits from share-based awards
7,039

—

—

—

7,039

Common stock:

Issuances
19,471

—

—

—

19,471

Repurchases
( 19,871
)
—

—

—

( 19,871
)
Dividends
( 26,222
)
( 724,256
)
( 108,057
)
832,313

( 26,222
)
Intercompany
—

782,877

173,857

( 956,734
)
—

Net cash provided by (used in) financing activities
117,498

( 41,042
)
( 174,630
)
( 124,421
)
( 222,595
)
Net decrease in cash and cash equivalents
( 212,141
)
( 105,966
)
( 24,243
)
—

( 342,350
)
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
$
363,680

230,082

222,333

—

816,095




44
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Nine Months Ended August 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)
$
521,291

614,966

50,132

( 659,851
)
526,538

Distributions of earnings from guarantor and non-guarantor subsidiaries
621,818

38,033

—

( 659,851
)
—

Other adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities
( 594,735
)
( 1,090,481
)
( 589,587
)
659,851

( 1,614,952
)
Net cash provided by (used in) operating activities
548,374

( 437,482
)
( 539,455
)
( 659,851
)
( 1,088,414
)
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
—

( 17,833
)
( 18,729
)
—

( 36,562
)
Proceeds from sales of real estate owned
—

—

88,565

—

88,565

Receipts of principal payments on loans receivable and other
—

—

14,225

—

14,225

Other
( 26,189
)
( 47,141
)
( 82,311
)
—

( 155,641
)
Distributions of capital from guarantor and non-guarantor subsidiaries
75,000

75,050

—

( 150,050
)
—

Intercompany
( 1,470,225
)
—

—

1,470,225

—

Net cash provided by (used in) investing activities
( 1,421,414
)
10,076

75,482

1,320,175

( 15,681
)
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility
575,000

—

—

—

575,000

Net borrowings under warehouse facilities
—

—

294,015

—

294,015

Proceeds from senior notes and debt issuance costs
744,409

—

( 994
)
—

743,415

Redemption of senior notes
( 500,000
)
—

—

—

( 500,000
)
Conversions and exchanges of convertible senior notes
( 168,854
)
—

—

—

( 168,854
)
Principal payments on Rialto notes payable including structured notes
—

—

( 28,247
)
—

( 28,247
)
Net proceeds (payments) on other borrowings
20,746

( 96,265
)
( 69,501
)
—

( 145,020
)
Net payments related to noncontrolling interests
—

—

( 104,355
)
—

( 104,355
)
Excess tax benefit from share-based awards
113

—

—

—

113

Common stock:

Issuances
9,406

—

—

—

9,406

Repurchases
( 23,133
)
—

—

—

( 23,133
)
Dividends
( 24,765
)
( 689,966
)
( 119,935
)
809,901

( 24,765
)
Intercompany
—

1,169,960

300,265

( 1,470,225
)
—

Net cash provided by financing activities
632,922

383,729

271,248

( 660,324
)
627,575

Net decrease in cash and cash equivalents
( 240,118
)
( 43,677
)
( 192,725
)
—

( 476,520
)
Cash and cash equivalents at beginning of period
633,318

252,914

395,582

—

1,281,814

Cash and cash equivalents at end of period
$
393,200

209,237

202,857

—

805,294




45


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 that the housing market is continuing its slow and steady recovery, and the drivers behind such recovery; our expectation that demand will continue to build and come to the market over the next few years and that it should drive increased production; our expectation that we will see lower gross margins in the fourth quarter of 2016 compared to the fourth quarter of 2015; 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 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; our expectations regarding the WCI transaction, including our expectation that a meeting of the WCI stockholders to vote on the transaction will be held in December 2016 or January 2017, and, if the transaction is approved by the WCI stockholders, will close promptly after the stockholder vote; 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; with respect to the WCI transaction, that WCI terminates the Merger Agreement to accept what its Board deems to be a superior proposal or that the WCI transaction is not approved by WCI’s stockholders; 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

46


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.
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 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 limit that demand due to potential homebuyers having less disposable income and limited ability to finance a new home purchase. We expect that these conditions will continue to result in a slow and steady, though sometimes erratic, positive homebuilding market.
Our core homebuilding business continued to produce solid operating results in the third quarter of 2016 as our operating margin was 13.2%, notwithstanding a lower gross margin in the quarter, as expected. Our third quarter new orders and home deliveries increased 8% and 7% year-over-year, respectively, to 7,018 homes and 6,779 homes, respectively.
As the recovery has continued to mature, we have remained focused on three components of our core homebuilding strategy. First, we have implemented a soft-pivot land strategy targeting land acquisitions with a shorter average life. Second, we have moderated our top line growth targets to achieve a growth rate in the 7% to 10% range, as we have redirected our management efforts towards maximizing our net operating margin. Third, we have intensified management focus driving faster bottom line growth and cash flow by maximizing pricing power and using innovative strategies to drive our S,G&A down. We continue to see benefits stemming from our focus on S,G&A generally, and digital marketing in particular, which helped to reduce S,G&A as a percentage of home sales revenues to 9.3%.
Complementing our homebuilding segment, we had strong performances from most of our other business segments during the third quarter of 2016. Our Lennar Financial Services segment reported earnings of $53.2 million in the third quarter of 2016, a 35% increase from the same period last year, primarily due to an increase in refinance volume and higher profit per transaction in its mortgage and title operations. For the fourth consecutive quarter, our Multifamily segment generated positive earnings. During the third quarter of 2016, earnings were $2.6 million primarily due to the sale of one completed rental property by one of its joint ventures.
Our Rialto segment continued to grow despite the turmoil in the CMBS markets earlier in the year. During the third quarter, our investment management platform increased assets under management, 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 and margins, which improved sequentially from the first and second quarters.
In the fourth quarter of 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 somewhat lower gross margins in the fourth quarter of 2016 compared to the fourth quarter of 2015 due to cost increases outpacing sales price increases and competitive pressures. 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, including ramping up our first-time homebuyer land positions as that segment of the market continues to improve. 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.

47


(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 nine months ended August 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 $235.8 million , or $1.01 per diluted share ( $1.04 per basic share), in the third quarter of 2016 , compared to net earnings attributable to Lennar of $223.3 million , or $0.96 per diluted share ( $1.07 per basic share), in the third quarter of 2015 . Our net earnings attributable to Lennar were $598.4 million , or $2.59 per diluted share ( $2.74 per basic share), in the nine months ended August 31, 2016 , compared to net earnings attributable to Lennar of $521.3 million , or $2.25 per diluted share ( $2.53 per basic share), in the nine months ended August 31, 2015 .
Financial information relating to our operations was as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Lennar Homebuilding revenues:
Sales of homes
$
2,443,337

2,209,010

6,627,596

5,693,691

Sales of land
53,632

23,308

106,739

96,097

Total Lennar Homebuilding revenues
2,496,969

2,232,318

6,734,335

5,789,788

Lennar Homebuilding costs and expenses:
Costs of homes sold
1,891,661

1,677,648

5,115,451

4,341,703

Costs of land sold
44,239

16,636

86,319

73,865

Selling, general and administrative
228,127

218,999

642,750

588,372

Total Lennar Homebuilding costs and expenses
2,164,027

1,913,283

5,844,520

5,003,940

Lennar Homebuilding operating margins
332,942

319,035

889,815

785,848

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
(18,034
)
13,300

(24,667
)
48,693

Lennar Homebuilding other income, net
30,947

4,189

46,391

10,305

Other interest expense
(973
)
(2,812
)
(3,323
)
(10,701
)
Lennar Homebuilding operating earnings
344,882

333,712

908,216

834,145

Lennar Financial Services revenues
191,444

168,748

491,340

463,460

Lennar Financial Services costs and expenses
138,196

129,311

379,073

369,443

Lennar Financial Services operating earnings
53,248

39,437

112,267

94,017

Rialto revenues
63,885

51,554

152,434

160,682

Rialto costs and expenses
62,306

53,323

155,416

161,610

Rialto equity in earnings from unconsolidated entities
5,976

7,590

14,337

17,582

Rialto other income (expense), net
(7,612
)
1,172

(27,888
)
28

Rialto operating earnings (loss)
(57
)
6,993

(16,533
)
16,682

Lennar Multifamily revenues
81,596

39,078

195,264

114,511

Lennar Multifamily costs and expenses
84,007

47,072

204,244

136,293

Lennar Multifamily equity in earnings from unconsolidated entities
5,060

5,004

38,754

4,404

Lennar Multifamily operating earnings (loss)
2,649

(2,990
)
29,774

(17,378
)
Total operating earnings
400,722

377,152

1,033,724

927,466

Corporate general and administrative expenses
(61,164
)
(56,494
)
(164,634
)
(150,355
)
Earnings before income taxes
$
339,558

320,658

869,090

777,111


48


Three Months Ended August 31, 2016 versus Three Months Ended August 31, 2015
Revenues from home sales increased 11% in the third quarter of 2016 to $2.4 billion from $2.2 billion in the third quarter of 2015 . Revenues were higher primarily due to a 7% increase in the number of home deliveries, excluding unconsolidated entities, and a 3% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 6,758 homes in the third quarter of 2016 from 6,314 homes in the third quarter of 2015 . There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other, except in Homebuilding Houston. 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 in the higher-priced communities driven by volatility in the energy sector. The average sales price of homes delivered increased to $362,000 in the third quarter of 2016 from $350,000 in the third 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 $22,500 per home delivered in the third quarter of 2016 , or 5.9% as a percentage of home sales revenue, compared to $20,700 per home delivered in the third quarter of 2015 , or 5.6% as a percentage of home sales revenue, and $21,800 per home delivered in the second quarter of 2016, or 5.7% as a percentage of home sales revenue.
Gross margins on home sales were $551.7 million , or 22.6% , in the third quarter of 2016 , compared to $531.4 million , or 24.1% , in the third quarter of 2015 . Gross margin percentage on home sales decreased compared to the third 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 $228.1 million in the third quarter of 2016 , compared to $219.0 million in the third quarter of 2015 . As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.3% in the third quarter of 2016 , from 9.9% in the third 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 ($18.0) million in the third quarter of 2016 , compared to $13.3 million in the third quarter of 2015 . In the third quarter of 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination and our share of net operating losses associated with the new FivePoint unconsolidated entity. In the third quarter of 2015 , Lennar Homebuilding equity in earnings from unconsolidated entities included $21.5 million of equity in earnings from one of our unconsolidated entities primarily due to a gain on debt extinguishment and sales of homesites to third parties.
Lennar Homebuilding other income, net, was $30.9 million in the third quarter of 2016 , compared to $4.2 million in the third quarter of 2015 . Other income, net, in the third quarter of 2016 was primarily related to $17.4 million of management fee income related to one of Lennar Homebuilding's strategic joint ventures and a gain of $8.7 million on the sale of a clubhouse.
Lennar Homebuilding interest expense was $62.7 million in the third quarter of 2016 ( $60.3 million was included in costs of homes sold, $1.4 million in costs of land sold and $1.0 million in other interest expense), compared to $58.9 million in the third quarter of 2015 ( $55.5 million was included in costs of homes sold, $0.6 million in costs of land sold and $2.8 million in other interest expense). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries.
Operating earnings for our Lennar Financial Services segment were $53.2 million in the third quarter of 2016 , compared to $39.4 million in the third quarter of 2015 . The increase in profitability was primarily due to an increase in refinance volume and higher profit per transaction in the segment's mortgage and title operations.
Operating earnings for our Rialto segment were $5.9 million in the third quarter of 2016 (which included a $0.1 million operating loss and an add back of $6.0 million of net loss attributable to noncontrolling interests). Operating earnings for the third quarter of 2015 were $9.0 million (which included $7.0 million of operating earnings and an add back of $2.0 million of net loss attributable to noncontrolling interests).
Rialto revenues were $63.9 million in the third quarter of 2016 , compared to $51.6 million in the third quarter of 2015 . Revenues increased primarily due to an increase in Rialto Mortgage Finance ("RMF") securitization revenues due to improved pricing. Rialto expenses were $62.3 million in the third quarter of 2016 , compared to $53.3 million in the third quarter of 2015 . Expenses increased primarily due to an increase in general and administrative expenses and an increase in securitization expenses related to RMF.
Rialto equity in earnings from unconsolidated entities was $6.0 million and $7.6 million in the third quarter of 2016 and 2015 , respectively, related to Rialto's share of earnings from its real estate funds (the "Funds").
Rialto other income (expense), net, was ($7.6) million in the third quarter of 2016 , compared to $1.2 million in the third quarter of 2015 . The decrease in other income (expense), net, was primarily attributable to an increase in real estate owned ("REO") impairments and a decrease in net realized gains on the sale of REO and in rental and other income.

49


Operating earnings for our Lennar Multifamily segment were $2.6 million in the third quarter of 2016 , primarily due to the segment's $8.0 million share of a gain related to the sale of an operating property by one of Lennar Multifamily's unconsolidated entities and management fee income, partially offset by general and administrative expenses. In the third quarter of 2015 , our Lennar Multifamily segment had an operating loss of $3.0 million primarily due to general and administrative expenses, partially offset by management fee income and by the segment's $5.7 million share of a gain related to the sale of an operating property by one of Lennar Multifamily's unconsolidated entities.
Corporate general and administrative expenses were $61.2 million , or 2.2% as a percentage of total revenues, in the third quarter of 2016 , compared to $56.5 million , or 2.3% as a percentage of total revenues, in the third quarter of 2015 . As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings (loss) attributable to noncontrolling interests were ($2.7) million and $1.7 million in the third quarter of 2016 and 2015 , respectively. Net loss attributable to noncontrolling interests during the third quarter of 2016 was primarily attributable to a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC, partially offset by net earnings related to our Lennar Homebuilding consolidated joint ventures. Net earnings attributable to noncontrolling interests during the third quarter of 2015 were primarily attributable to earnings related to our Lennar Homebuilding consolidated joint ventures, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans.
In the third quarter of 2016 and 2015 , we had a tax provision of $106.4 million and $95.6 million , respectively. Our overall effective income tax rates were 31.09% and 29.98% in the third quarter of 2016 and 2015 , respectively. The effective tax rate for both the third 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.
Nine Months Ended August 31, 2016 versus Nine Months Ended August 31, 2015
Revenues from home sales increased 16% in the nine months ended August 31, 2016 to $6.6 billion from $5.7 billion in the nine months ended August 31, 2015 . Revenues were higher primarily due to a 10% increase in the number of home deliveries, excluding unconsolidated entities, and a 6% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 18,275 homes in the nine months ended August 31, 2016 from 16,604 homes in the nine months ended August 31, 2015 . There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other, except in Homebuilding Houston. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year and by higher demand as the number of deliveries per active community increased. The decrease in home deliveries in Houston was primarily due to less demand in the higher-priced communities driven by volatility in the energy sector. The average sales price of homes delivered increased to $363,000 in the nine months ended August 31, 2016 from $343,000 in the nine months ended August 31, 2015 , primarily due to product mix and increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $22,000 per home delivered in the nine months ended August 31, 2016 , or 5.7% as a percentage of home sales revenue, compared to $21,300 per home delivered in the nine months ended August 31, 2015 , or 5.8% as a percentage of home sales revenue.
Gross margins on home sales were $1.5 billion , or 22.8% , in the nine months ended August 31, 2016 , compared to $1.4 billion , or 23.7% , in the nine months ended August 31, 2015 . Gross margin percentage on home sales decreased compared to the nine months ended August 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 $642.8 million in the nine months ended August 31, 2016 , compared to $588.4 million in the nine months ended August 31, 2015 . As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.7% in the nine months ended August 31, 2016 , from 10.3% in the nine months ended August 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 ($24.7) million in the nine months ended August 31, 2016 , compared to $48.7 million in the nine months ended August 31, 2015 . In the nine months ended August 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination and our share of net operating losses associated with the new FivePoint unconsolidated entity. This was partially offset by equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties. In the nine months ended August 31, 2015 , Lennar Homebuilding equity in earnings from unconsolidated entities included $64.5 million of equity in earnings from one of our unconsolidated entities primarily due to

50


sales of homesites and a commercial property to third parties and a gain on debt extinguishment, partially offset by our share of net operating losses from various Lennar Homebuilding unconsolidated entities.
Lennar Homebuilding other income, net, totaled $46.4 million in the nine months ended August 31, 2016 , compared to $10.3 million in the nine months ended August 31, 2015 . In the nine months ended August 31, 2016 , other income, net, included management fee income and a profit participation related to Lennar Homebuilding's strategic joint ventures and a gain on the sale of a clubhouse. In the nine months ended August 31, 2015 , other income, net, included a $6.5 million gain on the sale of an operating property.
Lennar Homebuilding interest expense was $171.8 million in the nine months ended August 31, 2016 ( $165.8 million was included in costs of homes sold, $2.7 million in costs of land sold and $3.3 million in other interest expense), compared to $154.6 million in the nine months ended August 31, 2015 ( $142.3 million was included in costs of homes sold, $1.7 million in costs of land sold and $10.7 million in other interest expense). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries.
Operating earnings for our Lennar Financial Services segment were $112.3 million in the nine months ended August 31, 2016 , compared to $94.0 million in the nine months ended August 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 $5.9 million in the nine months ended August 31, 2016 (which included a $16.5 million operating loss and an add back of $10.6 million of net loss attributable to noncontrolling interests). Operating earnings in the nine months ended August 31, 2015 were $21.2 million (which included $16.7 million of operating earnings and an add back of $4.5 million of net loss attributable to noncontrolling interests).
Rialto revenues were $152.4 million in the nine months ended August 31, 2016 , compared to $160.7 million in the nine months ended August 31, 2015 . Revenues decreased primarily due to a decrease in RMF securitization revenues due to lower securitization volume in early 2016. Rialto expenses were $155.4 million in the nine months ended August 31, 2016 , compared to $161.6 million in the nine months ended August 31, 2015 . Expenses decreased primarily due to a decrease in general and administrative expenses.
Rialto equity in earnings from unconsolidated entities was $14.3 million and $17.6 million in the nine months ended August 31, 2016 and 2015 , respectively, related to Rialto's share of earnings from the Funds.
Rialto other income (expense), net, was ($27.9) million in the nine months ended August 31, 2016 , compared to $28 thousand in the nine months ended August 31, 2015 . The decrease in other income (expense), net, was primarily attributable to 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, and an increase in REO impairments and other expenses. The hospital is managed by a third-party management company.
Operating earnings for our Lennar Multifamily segment were $29.8 million in the nine months ended August 31, 2016 , primarily due to the segment's $43.8 million share of gains related to the sales of three operating properties by Lennar Multifamily's unconsolidated entities, a gross profit of $5.2 million on a third-party land sale and management fee income, partially offset by general and administrative expenses. In the nine months ended August 31, 2015 , our Lennar Multifamily segment had an operating loss of $17.4 million primarily due to general and administrative expenses, partially offset by management fee income, general contractor income, net, and by the segment's $5.7 million share of a gain related to the sale of an operating property by one of Lennar Multifamily's unconsolidated entities.
Corporate general and administrative expenses were $164.6 million , or 2.2% as a percentage of total revenues, in the nine months ended August 31, 2016 , compared to $150.4 million , or 2.3% as a percentage of total revenues, in the nine months ended August 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 $4.2 million and $5.2 million in the nine months ended August 31, 2016 and 2015 , respectively, which were both 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.
In the nine months ended August 31, 2016 and 2015 , we had a tax provision of $266.5 million and $250.6 million , respectively. Our overall effective income tax rates were 30.81% and 32.46% in the nine months ended August 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 nine months ended August 31, 2016 , which reduced our effective tax rate by 1.56%. We do not anticipate similar settlements during the remainder of fiscal 2016. During the nine months ended August 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.

51


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 August 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 .
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
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Homebuilding revenues:
East:
Sales of homes
$
970,746

906,894

2,570,883

2,325,391

Sales of land
31,838

6,290

45,053

36,711

Total East
1,002,584

913,184

2,615,936

2,362,102

Central:
Sales of homes
419,813

316,925

1,098,885

823,003

Sales of land
2,691

5,317

18,149

12,256

Total Central
422,504

322,242

1,117,034

835,259

West:
Sales of homes
663,184

636,750

1,927,642

1,627,711

Sales of land
7,938

2,843

12,878

22,016

Total West
671,122

639,593

1,940,520

1,649,727

Houston:
Sales of homes
190,722

196,471

503,443

504,034

Sales of land
9,078

8,477

24,654

21,818

Total Houston
199,800

204,948

528,097

525,852

Other:
Sales of homes
198,872

151,971

526,743

413,552

Sales of land
2,087

380

6,005

3,296

Total Other
200,959

152,351

532,748

416,848

Total homebuilding revenues
$
2,496,969

2,232,318

6,734,335

5,789,788


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Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Operating earnings:
East:
Sales of homes
$
140,017

148,611

357,954

365,839

Sales of land
12,156

1,854

18,245

9,845

Equity in earnings (loss) from unconsolidated entities
(146
)
(141
)
(270
)
61

Other income (expense), net (1)
10,708

(1,637
)
15,972

(5,656
)
Other interest expense
(946
)
(1,632
)
(2,468
)
(4,935
)
Total East
161,789

147,055

389,433

365,154

Central:
Sales of homes
51,024

33,106

118,746

79,340

Sales of land (2)
(5,423
)
210

(5,530
)
1,821

Equity in earnings from unconsolidated entities
2

3

44

58

Other expense, net
(1,191
)
(843
)
(2,568
)
(1,747
)
Other interest expense
215

(324
)
(63
)
(1,553
)
Total Central
44,627

32,152

110,629

77,919

West:
Sales of homes
89,635

94,104

288,715

237,016

Sales of land
588

1,693

1,534

2,005

Equity in earnings (loss) from unconsolidated entities (3)
(17,951
)
13,412

(24,813
)
48,359

Other income, net (4)
20,278

5,920

30,305

14,989

Other interest expense
(242
)
(630
)
(792
)
(3,045
)
Total West
92,308

114,499

294,949

299,324

Houston:
Sales of homes
22,098

24,176

54,745

59,002

Sales of land
1,383

3,045

4,405

7,062

Equity in earnings from unconsolidated entities
1

7

3

17

Other income (expense), net
(350
)
(505
)
(66
)
719

Other interest expense
—

(58
)
—

(382
)
Total Houston
23,132

26,665

59,087

66,418

Other:
Sales of homes
20,775

12,366

49,235

22,419

Sales of land
689

(130
)
1,766

1,499

Equity in earnings from unconsolidated entities
60

19

369

198

Other income, net
1,502

1,254

2,748

2,000

Other interest expense
—

(168
)
—

(786
)
Total Other
23,026

13,341

54,118

25,330

Total homebuilding operating earnings
$
344,882

333,712

908,216

834,145

(1)
Other income, net, for both the three and nine months ended August 31, 2016 , included a gain of $8.7 million on the sale of a clubhouse. Other expense, net, for the nine months ended August 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)
Sales of land for the three and nine months ended August 31, 2016 included $5.7 million and $6.0 million, respectively, of valuation adjustments to land the Company intends to sell or has sold to third parties.
(3)
Lennar Homebuilding equity in loss from unconsolidated entities for the three and nine months ended August 31, 2016 was primarily attributable to the Company's share of costs associated with the FivePoint combination and our share of net operating losses associated with the new FivePoint unconsolidated entity. Lennar Homebuilding equity in earnings from unconsolidated entities for the three and nine months ended August 31, 2015 , included $21.5 million and $64.5 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 and a gain on debt extinguishment.
(4)
Other income, net, for the three months ended August 31, 2016 included $17.4 million of management fee income related to a Lennar Homebuilding strategic joint venture and for the nine months ended August 31, 2016 included $30.1 million of management fee income

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and a profit participation related to Lennar Homebuilding's strategic joint ventures. Other income, net, for the nine months ended August 31, 2015 , included a $6.5 million gain on the sale of an operating property.
Summary of Homebuilding Data
Deliveries:
Three Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
3,127

2,883

$
971,636

906,894

$
311,000

315,000

Central
1,195

987

419,813

316,924

351,000

321,000

West
1,423

1,411

678,289

638,168

477,000

452,000

Houston (1)
617

685

190,722

196,471

309,000

287,000

Other
417

352

198,873

151,971

477,000

432,000

Total
6,779

6,318

$
2,459,333

2,210,428

$
363,000

350,000

Of the total homes delivered listed above, 21 homes with a dollar value of $16.0 million and an average sales price of $762,000 represent home deliveries from unconsolidated entities for the three months ended August 31, 2016 , compared to 4 home deliveries with a dollar value of $1.4 million and an average sales price of $354,000 for the three months ended August 31, 2015 .
Nine Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
8,223

7,577

$
2,573,062

2,327,358

$
313,000

307,000

Central
3,236

2,619

1,098,885

823,003

340,000

314,000

West
4,094

3,690

1,965,207

1,644,870

480,000

446,000

Houston (1)
1,687

1,782

503,443

504,034

298,000

283,000

Other
1,095

967

526,743

413,552

481,000

428,000

Total
18,335


16,635

$
6,667,340

5,712,817

$
364,000

343,000

Of the total homes delivered listed above, 60 homes with a dollar value of $39.7 million and an average sales price of $662,000 represent home deliveries from unconsolidated entities for the nine months ended August 31, 2016 , compared to 31 home deliveries with a dollar value of $19.1 million and an average sales price of $617,000 for the nine months ended August 31, 2015 .
(1)
The decrease in deliveries in Homebuilding Houston during the three months ended August 31, 2016 was primarily due to less demand in the higher-priced communities driven by volatility in the energy sector and our focus on reducing completed home inventory. During the nine months ended August 31, 2016 , the decrease in deliveries in Homebuilding Houston was primarily due to less demand in the higher-priced communities driven by volatility in the energy sector.

54


Sales Incentives (2):
Three Months Ended
Sales Incentives
(In thousands)
Average Sales Incentives Per
Home Delivered
Sales Incentives
as a % of Revenue
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
$
69,346

62,391

$
22,200

21,600

6.7
%
6.4
%
Central
26,526

21,949

22,200

22,200

5.9
%
6.5
%
West
23,575

20,741

16,800

14,700

3.4
%
3.2
%
Houston
24,176

19,106

39,200

27,900

11.3
%
8.9
%
Other
8,696

6,397

20,900

18,200

4.2
%
4.0
%
Total
$
152,319

130,584

$
22,500

20,700

5.9
%
5.6
%
Nine Months Ended
Sales Incentives
(In thousands)
Average Sales Incentives Per
Home Delivered
Sales Incentives
as a % of Revenue
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
$
180,699

171,499

$
22,000

22,700

6.6
%
6.9
%
Central
70,230

60,022

21,700

22,900

6.0
%
6.8
%
West
67,561

56,802

16,700

15,500

3.4
%
3.4
%
Houston
61,083

46,466

36,200

26,100

10.8
%
8.4
%
Other
22,584

18,282

20,600

18,900

4.1
%
4.2
%
Total
$
402,157

353,071

$
22,000

21,300

5.7
%
5.8
%
(2)
Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.
New Orders (3):
Three Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
3,376

3,070

$
1,055,043

939,002

$
313,000

306,000

Central
1,193

1,029

413,057

350,012

346,000

340,000

West
1,497

1,411

722,888

683,352

483,000

484,000

Houston (4)
521

606

164,996

184,075

317,000

304,000

Other
431

379

211,767

180,875

491,000

477,000

Total
7,018

6,495

$
2,567,751

2,337,316

$
366,000

360,000

Of the total new orders listed above, 4 homes with a dollar value of $1.6 million and an average sales price of $396,000 represent new orders from unconsolidated entities for the three months ended August 31, 2016 , compared to 29 new orders with a dollar value of $18.0 million and an average sales price of $621,000 for the three months ended August 31, 2015 .
Nine Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East
9,472

8,579

$
2,962,985

2,647,853

$
313,000

309,000

Central
3,810

3,158

1,314,507

1,035,381

345,000

328,000

West
4,568

4,357

2,181,306

2,029,917

478,000

466,000

Houston (4)
1,674

1,810

509,744

533,184

305,000

295,000

Other
1,250

1,149

588,962

509,196

471,000

443,000

Total
20,774

19,053

$
7,557,504

6,755,531

$
364,000

355,000

Of the total new orders listed above, 28 homes with a dollar value of $15.7 million and an average sales price of $561,000 represent new orders from unconsolidated entities for the nine months ended August 31, 2016 , compared to 79 new orders with a dollar value of $48.0 million and an average sales price of $608,000 for the nine months ended August 31, 2015 .

55


(3)
New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three and nine months ended August 31, 2016 and 2015 .
(4)
The decrease in new orders in Homebuilding Houston during both the three and nine months ended August 31, 2016 was primarily due to less demand in the higher-priced communities driven by volatility in the energy sector.
Backlog:
Homes
Dollar Value (In thousands)
Average Sales Price
August 31,
August 31,
August 31,
2016
2015
2016
2015
2016
2015
East (5)
4,211

3,790

$
1,370,469

1,205,679

$
325,000

318,000

Central
1,944

1,500

693,395

523,098

357,000

349,000

West
1,828

1,658

888,590

822,611

486,000

496,000

Houston
685

858

214,466

255,016

313,000

297,000

Other (6)
585

444

277,323

209,285

474,000

471,000

Total
9,253

8,250

$
3,444,243

3,015,689

$
372,000

366,000

Of the total homes in backlog listed above, 57 homes with a backlog dollar value of $38.3 million and an average sales price of $673,000 represent the backlog from unconsolidated entities at August 31, 2016 , compared to 115 homes with a backlog dollar value of $68.7 million and an average sales price of $598,000 at August 31, 2015 .
(5)
During the nine months ended August 31, 2016 , we acquired 110 homes in backlog.
(6)
During the nine months ended August 31, 2016 , we acquired 58 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
Nine Months Ended
August 31,
August 31,
2016
2015
2016
2015
East
14
%
15
%
14
%
15
%
Central
20
%
19
%
17
%
18
%
West
15
%
14
%
14
%
13
%
Houston (1)
27
%
27
%
24
%
26
%
Other
11
%
12
%
10
%
11
%
Total
16
%
17
%
15
%
16
%
(1)
The cancellation rate in Homebuilding Houston remained higher than historical cancellation rates due to volatility in the energy sector.
Active Communities:
August 31,
2016
2015
East
296

296

Central
138

129

West
127

120

Houston
75

73

Other
58

55

Total
694

673

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

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The following table details our gross margins on home sales for the three and nine months ended August 31, 2016 and 2015 for each of our reportable homebuilding segments and Homebuilding Other:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
East:
Sales of homes
$
970,746

906,894

2,570,883

2,325,391

Costs of homes sold
736,605

668,427

1,951,121

1,717,742

Gross margins on home sales
234,141

24.1%
238,467

26.3%
619,762

24.1
%
607,649

26.1
%
Central:
Sales of homes
419,813

316,925

1,098,885

823,003

Costs of homes sold
330,622

250,223

875,394

653,438

Gross margins on home sales
89,191

21.2%
66,702

21.0%
223,491

20.3
%
169,565

20.6
%
West:
Sales of homes
663,184

636,750

1,927,642

1,627,711

Costs of homes sold
519,711

488,024

1,478,965

1,242,291

Gross margins on home sales
143,473

21.6%
148,726

23.4%
448,677

23.3
%
385,420

23.7
%
Houston:
Sales of homes
190,722

196,471

503,443

504,034

Costs of homes sold
147,526

149,951

393,426

388,700

Gross margins on home sales
43,196

22.6%
46,520

23.7%
110,017

21.9
%
115,334

22.9
%
Other:
Sales of homes
198,872

151,971

526,743

413,552

Costs of homes sold
157,197

121,024

416,545

339,532

Gross margins on home sales
41,675

21.0%
30,947

20.4%
110,198

20.9
%
74,020

17.9
%
Total gross margins on home sales
$
551,676

22.6%
531,362

24.1%
1,512,145

22.8
%
1,351,988

23.7
%
Three Months Ended August 31, 2016 versus Three Months Ended August 31, 2015
Homebuilding East: Revenues from home sales increased for the three months ended August 31, 2016 compared to the three months ended August 31, 2015 , primarily due to an increase in the number of home deliveries in all the states in the segment, except in New Jersey. 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 the number of home deliveries in New Jersey 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 three months ended August 31, 2016 decreased compared to the same period last year primarily due to an increase in land and direct construction costs per home and an increase 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 August 31, 2016 compared to the three months ended August 31, 2015 , primarily due to an increase in the number of home deliveries and in the 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 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 three months ended August 31, 2016 was consistent with same period last year.
Homebuilding West: Revenues from home sales increased for the three months ended August 31, 2016 compared to the three months ended August 31, 2015 , primarily due to 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 number of home deliveries in California was primarily driven by higher demand as the number of deliveries per active community increased. The decrease in the number of deliveries in Nevada was primarily due to a change in product mix from the same period last year. Gross margin percentage on home sales for the three months ended August 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home in Nevada.
Homebuilding Houston: Revenues from home sales decreased for the three months ended August 31, 2016 compared to the three months ended August 31, 2015 , primarily due to a decrease in the number of home deliveries due to less demand in the higher-priced communities as the number of home deliveries per active community decreased driven by the volatility in the

57


energy sector. This was partially offset by an increase in the average sales price of homes delivered because our product mix included higher-priced homes as some of our lower-priced communities closed-out and we focused on reducing completed home inventory for the three months ended August 31, 2016 . Gross margin percentage on home sales for the three months ended August 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.
Homebuilding Other: Revenues from home sales increased for the three months ended August 31, 2016 compared to the three months ended August 31, 2015 , primarily due to an increase in the number of home deliveries in Minnesota primarily driven by an increase in active communities over the last year and by higher demand as the number of deliveries per active community increased, partially offset by a decrease in the average sales price of homes delivered in Minnesota due to change in product mix. The average sales price of homes delivered also increased in the remainder of the states in Homebuilding Other primarily due to a change in product mix and/or 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 three months ended August 31, 2016 increased compared to the same period last year primarily due to an increase in the average sales price of homes delivered, partially offset by an increase in land costs per home and an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Nine Months Ended August 31, 2016 versus Nine Months Ended August 31, 2015
Homebuilding East: Revenues from home sales increased for the nine months ended August 31, 2016 compared to the nine months ended August 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 due to a change in product mix and/or 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 to a change in product mix due to the timing of deliveries in certain communities. Gross margin percentage on home sales for the nine months ended August 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 nine months ended August 31, 2016 compared to the nine months ended August 31, 2015 , primarily due to an increase in the number of home deliveries and in the 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 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 nine months ended August 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 nine months ended August 31, 2016 compared to the nine months ended August 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 deliveries in California was primarily driven by higher demand as the number of deliveries per active community increased. The decrease in the number of deliveries in Nevada was primarily due to a change in product mix from the same period last year. Gross margin percentage on home sales for the nine months ended August 31, 2016 decreased compared to the same period last year primarily due to an increase in land costs per home in Nevada, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Houston: Revenues from home sales remained consistent for the nine months ended August 31, 2016 compared to the nine months ended August 31, 2015 , as the decrease in the number of home deliveries was offset by an increase in the average sales price of homes delivered. The decrease in the number of home deliveries was primarily due to less demand in the higher-priced communities as the number of home deliveries per active community decreased driven by the volatility in the energy sector. The increase in the average sales price of homes delivered was because our product mix included higher-priced homes as some of our lower-priced communities closed-out for the nine months ended August 31, 2015 . Gross margin percentage on home sales for the nine months ended August 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.

58


Homebuilding Other: Revenues from home sales increased for the nine months ended August 31, 2016 compared to the nine months ended August 31, 2015 , primarily due to an increase in the average sales price of homes delivered and in the number of home deliveries 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 and/or 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 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. Gross margin percentage on home sales for the nine months ended August 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 construction and land costs per home (prior year's land costs per home included a valuation adjustment of $9.6 million in our Northeast Urban operations) and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
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
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
Revenues
$
191,444

168,748

491,340

463,460

Costs and expenses
138,196

129,311

379,073

369,443

Operating earnings
$
53,248

39,437

112,267

94,017

Dollar value of mortgages originated
$
2,611,000

2,430,000

6,630,000

6,460,000

Number of mortgages originated
9,300

8,900

23,900

23,800

Mortgage capture rate of Lennar homebuyers
82
%
82
%
82
%
81
%
Number of title and closing service transactions
31,800

29,200

83,600

82,500

Number of title policies issued
81,700

69,900

214,300

189,400

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.

Rialto's operating earnings (loss) were as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Revenues
$
63,885

51,554

152,434

160,682

Costs and expenses (1)
62,306

53,323

155,416

161,610

Rialto equity in earnings from unconsolidated entities
5,976

7,590

14,337

17,582

Rialto other income (expense), net
(7,612
)
1,172

(27,888
)
28

Operating earnings (loss) (2)
$
(57
)
6,993

(16,533
)
16,682


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(1)
Costs and expenses included loan impairments of $4.3 million and $11.1 million for the three and nine months ended August 31, 2016 , respectively, and $4.5 million and $7.3 million for the three and nine months ended August 31, 2015 , respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Operating loss for the three and nine months ended August 31, 2016 included net loss attributable to noncontrolling interests of $6.0 million and $10.6 million , respectively. Operating earnings for the three and nine months ended August 31, 2015 included net loss attributable to noncontrolling interests of $2.0 million and $4.5 million , respectively.
The following is a detail of Rialto other income (expense), net:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Realized gains on REO sales, net
$
4,337

6,178

13,575

13,852

Unrealized losses on transfer of loans receivable to REO and impairments, net
(6,617
)
(3,124
)
(12,166
)
(7,892
)
REO and other expenses
(13,006
)
(14,714
)
(39,964
)
(43,123
)
Rental and other income (1)
7,674

12,832

10,667

37,191

Rialto other income (expense), net
$
(7,612
)
1,172

(27,888
)
28

(1)
Rental and other income for the nine months ended August 31, 2016 , included a $16.0 million write-off of uncollectible receivables related to the hospital.
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 nine months ended August 31, 2016 , RMF originated loans with a total principal balance of $1.2 billion of which $1.2 billion were recorded as loans held-for-sale and $55.7 million as accrual loans within loans receivable, net, and sold $1.3 billion of loans into seven separate securitizations. During the nine months ended August 31, 2015 , RMF originated loans with a total principal balance of $2.0 billion and sold $1.6 billion of loans into eight 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 returns 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 nine months ended August 31, 2016 and 2015 , the LLCs distributed $85.9 million and $121.5 million , respectively, of which $51.5 million and $72.9 million , respectively, was distributed to the FDIC and $34.4 million and $48.6 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 August 31, 2016 , these consolidated LLCs had total combined assets and liabilities of $251.5 million and $12.1 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 August 31, 2016 and November 30, 2015 , the outstanding amount related to the 5 -year unsecured note was $30.3 million .

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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
$950 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 August 31, 2016 and November 30, 2015 , the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $60.9 million and $25.6 million , respectively. These securities were purchased at 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 March 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 August 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 August 31, 2016 and November 30, 2015 , our balance sheet had $532.6 million and $415.4 million , respectively, of assets related to our Lennar Multifamily segment, which included investments in unconsolidated entities of $304.0 million and $250.9 million , respectively. Our net investment in the Lennar Multifamily segment as of August 31, 2016 and November 30, 2015 was $425.4 million and $348.4 million , respectively. During the three and nine months ended August 31, 2016 , our Lennar Multifamily segment sold one and three operating properties, respectively, through its unconsolidated entities resulting in the segment's $8.0 million and $43.8 million share of gains, respectively. In addition, during the nine months ended August 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 32 and 29 unconsolidated entities (including the Lennar Multifamily Venture (the "Venture") as of August 31, 2016 and November 30, 2015 , respectively. As of August 31, 2016 , our Lennar Multifamily segment had interests in 53 communities with development costs of $4.5 billion, of which eight communities were completed and operating, ten communities were partially completed and leasing, 27 communities were under construction and the remaining communities were either owned or under contract. As of August 31, 2016 , our Lennar Multifamily segment also had a pipeline of potential future projects totaling $2.8 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 August 31, 2016 , the Venture has approximately $2 billion of equity commitments, including a $504 million co-investment commitment by us, comprised of cash, undeveloped land and preacquisition costs. Subsequent to August 31, 2016 , the Venture received an additional $250 million of equity commitments, increasing its total equity commitments to $2.2 billion .

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(2) Financial Condition and Capital Resources
At August 31, 2016 , we had cash and cash equivalents related to our homebuilding, financial services, Rialto and multifamily operations of $816.1 million , compared to $1.2 billion at November 30, 2015 and $805.3 million at August 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 nine months ended August 31, 2016 and 2015 , cash used in operating activities totaled $3.1 million and $1,088.4 million , respectively. During the nine months ended August 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 loans held-for-sale of which $84.7 million related to RMF and $41.8 million related to Lennar Financial Services, and a decrease in receivables. For the nine months ended August 31, 2016 , distribution of earnings from unconsolidated entities were (1) $1.2 million from Lennar Homebuilding unconsolidated entities, (2) $9.6 million from Rialto unconsolidated entities, and (3) $42.0 million from Lennar Multifamily unconsolidated entities.
During the nine months ended August 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 in loans held-for-sale of which $408.0 million related to RMF and $59.9 million related to Lennar Financial Services, partially offset by our net earnings and an increase in accounts payable and other liabilities. For the nine months ended August 31, 2015 , distributions of earnings from unconsolidated were (1) $26.3 million from Lennar Homebuilding unconsolidated entities, (2) $11.6 million from Rialto unconsolidated entities, and (3) $5.4 million from Lennar Multifamily unconsolidated entities.
Investing Cash Flow Activities
During the nine months ended August 31, 2016 and 2015 , cash used in investing activities totaled $116.7 million and $15.7 million , respectively. During the nine months ended August 31, 2016 , our cash used in investing activities was primarily impacted by cash contributions of (1) $133.0 million to Lennar Homebuilding unconsolidated entities primarily for working capital, (2) $29.6 million to Rialto unconsolidated entities comprised of $23.3 million contributed to the CMBS Funds, $4.6 million contributed to Rialto Credit Partnership Fund and $1.7 million contributed to other investments, and (3) $157.4 million to Lennar Multifamily unconsolidated entities primarily for working capital, of which $142.8 million was contributed to the Venture. 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 $66.6 million of proceeds from the sales of REO, $17.5 million of proceeds from the sale of an operating property and by distributions of capital of (1) $32.4 million from Lennar Homebuilding unconsolidated entities, (2) $159.6 million from Lennar Multifamily unconsolidated entities, of which $122.3 million was distributed by the Venture and (3) $17.8 million from Rialto unconsolidated entities comprised of $7.5 million distributed by Fund II, $8.2 million distributed by the Mezzanine Fund and $2.1 million distributed by the CMBS Funds.
During the nine months ended August 31, 2015 , cash used in investing activities was primarily impacted by cash contributions of (1) $50.6 million to Lennar Homebuilding unconsolidated entities primarily for working capital, (2) $42.3 million to Rialto unconsolidated entities comprised of $29.9 million contributed to Fund II, $10.4 million contributed to the Mezzanine Fund and $2.0 million contributed to the CMBS Funds, and (3) $23.8 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, $88.6 million of proceeds from the sales of REO and by distributions of capital of (1) $35.3 million from Lennar Homebuilding unconsolidated entities, (2) $32.8 million from Lennar Multifamily unconsolidated entities, of which $19.8 million was distributed by the Venture and (3) $12.1 million from Rialto unconsolidated entities comprised of $7.9 million distributed by Fund II, $1.8 million distributed by Mezzanine Fund and $2.4 million distributed by the CMBS Funds.
Financing Cash Flow Activities
During the nine months ended August 31, 2016 and 2015 , our cash (used in) provided by financing activities totaled ($222.6) million and $627.6 million , respectively. During the nine months ended August 31, 2016 , our cash used in financing activities was primarily impacted by (1) the redemption of $250 million aggregate principal amount of our 6.50% senior notes due April 2016, (2) $233.9 million of cash payments in connection with exchanges and conversions of our 2.75% convertible senior notes due 2020 (the “ 2.75% Convertible Senior Notes”), (3) $191.9 million of net repayments under our Rialto's warehouse repurchase facilities, (4) $133.9 million of principal payments on other borrowings, and (5) $98.2 million of

62


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"), $125.0 million of net borrowings under our unsecured revolving credit facility (the “Credit Facility”) and $54.6 million of net borrowings under our Lennar Financial Services' warehouse repurchase facilities.
During the nine months ended August 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 $575 million under our Credit Facility; and net borrowings of $294.0 million under our Lennar Financial Services' and Rialto's warehouse repurchase facilities. The cash provided by financing activities was partially offset by the redemption of $500 million aggregate principal amount of our 5.60% senior notes due May 2015, $168.9 million of cash payments in connection with exchanges and conversions of our 2.75% Convertible Senior Notes, $232.9 million of principal payments on other borrowings and $105.8 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)
August 31,
2016
November 30,
2015
August 31,
2015
Lennar Homebuilding debt
$
4,920,848

5,025,130

5,236,502

Stockholders’ equity
6,545,535

5,648,944

5,360,016

Total capital
$
11,466,383

10,674,074

10,596,518

Lennar Homebuilding debt to total capital
42.9
%

47.1
%
49.4
%
Lennar Homebuilding debt
$
4,920,848

5,025,130

5,236,502

Less: Lennar Homebuilding cash and cash equivalents
567,708

893,408

595,719

Net Lennar Homebuilding debt
$
4,353,140

4,131,722

4,640,783

Net Lennar Homebuilding debt to total capital (1)
39.9
%
42.2
%
46.4
%
(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 August 31, 2016 , Lennar Homebuilding debt to total capital was lower compared to August 31, 2015 , primarily as a result of an increase in stockholder’s equity primarily related to our net earnings and the early conversion of some of our 3.25% convertible senior notes due 2021 to stockholder's equity and a decrease in Lennar Homebuilding debt.
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.
On September 22, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WCI Communities, Inc. (“WCI”), under which we will acquire WCI through a merger for a combination of our Class A common stock and cash. The Merger Agreement provides that until October 26, 2016, WCI may actively solicit proposals from persons other than us. WCI can terminate the Merger Agreement to engage in a transaction that its Board of Directors deems to be more favorable to its stockholders than the transaction with us, unless we match the deemed more favorable transaction. However, if WCI terminates the Merger Agreement to engage in another transaction, it will have to pay us a termination fee. The transaction is subject to approval by WCI's stockholders. It is anticipated that a meeting of WCI stockholders to vote on the transaction will be held in December 2016 or January 2017, and, if the transaction is approved by the WCI stockholders, it will close promptly after the stockholder vote. At August 31, 2016 , we had no other agreements or understandings regarding any significant transactions that have not been previously disclosed.

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Our Lennar Homebuilding average debt outstanding was $5.2 billion with an average rate for interest incurred of 5.1% for the nine months ended August 31, 2016 , compared to $5.2 billion with an average rate for interest incurred of 4.9% for the nine months ended August 31, 2015 . Interest incurred related to Lennar Homebuilding debt for the nine months ended August 31, 2016 was $213.5 million , compared to $217.2 million in the same period last year.
In June 2016, we amended 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 our Credit Facility was extended from June 2019 to June 2020, with the remaining $160 million maturing in June 2018. The proceeds available under our 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 August 31, 2016 , we had $125 million of outstanding borrowings under our Credit Facility. As of November 30, 2015 , we had no outstanding borrowings under our Credit Facility. We may from time to time, borrow and repay amounts under our Credit Facility. Consequently, the amount outstanding under our 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 August 31, 2016 . In addition, we had $320 million of letter of credit facilities with different financial institutions.
Under the amended Credit Facility agreement executed in June 2016 (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 minus the lesser of 50% of the amount paid after June 24, 2016 to repurchase common stock and $100 million. 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 August 31, 2016 :
(Dollars in thousands)
Covenant Level
Level Achieved as of August 31, 2016
Minimum net worth test
$
2,873,260

5,337,043

Maximum leverage ratio
65.0
%
43.6
%
Liquidity test (1)
1.00

2.12

(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.
Our performance letters of credit outstanding were $261.8 million and $236.5 million at August 31, 2016 and November 30, 2015 , respectively. Our financial letters of credit outstanding were $214.0 million and $216.7 million at August 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 August 31, 2016 , we had outstanding surety bonds of $1.4 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.

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During the nine months ended August 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 nine months ended August 31, 2016 , holders converted approximately $243 million aggregate principal amount of the 3.25% convertible senior notes due 2021 (the “ 3.25% Convertible Senior Notes”) for 10.3 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 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 August 31, 2016 were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2016 (1)
$
300,000

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

364-day warehouse repurchase facility that matures June 2017
600,000

Total
$
1,350,000

(1)
Subsequent to August 31, 2016 , the warehouse repurchase facility maturity date was extended to September 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 $912.7 million and $858.3 million at August 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 $960.4 million and $916.9 million , at August 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.



65


At August 31, 2016 , Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2016 (one year extension) (1) (2)
$
400,000

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

Warehouse repurchase facility that matures December 2017 (1) (3)
100,000

Warehouse repurchase facility that matures August 2018 (two - one year extensions) (4)
100,000

Total
$
850,000

(1)
RMF uses these facilities to finance its loan origination and securitization activities.
(2)
Subsequent to August 31, 2016 , the warehouse repurchase facility maturity date was extended to April 2017, with the option for an additional six month extension, and the maximum aggregate commitment was increased to $500 million .
(3)
Subsequent to August 31, 2016 , the warehouse repurchase facility was amended and the maximum aggregate commitment was increased to $200 million .
(4)
In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this new facility are held as accrual loans within loans receivable, net. As of both August 31, 2016 and November 30, 2015 , borrowings under this facility were $36.3 million .
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $106.6 million and $317.1 million as of August 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 August 31, 2016 and November 30, 2015 , the carrying amount, net of debt issuance costs, of Rialto's 7.00% senior notes due 2018 was $348.5 million and $347.9 million , respectively.
As of August 31, 2016 and November 30, 2015 , the outstanding amount, net of debt issuance costs, related to Rialto's structured note offerings was $27.9 million and $31.3 million , respectively.
As of both August 31, 2016 and November 30, 2015 , the outstanding amount related to Rialto's 5 -year senior unsecured note was $30.3 million .
Changes in Capital Structure
On July 22, 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 July 8, 2016, as declared by our Board of Directors on June 23, 2016. On September 21, 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 October 20, 2016 to holders of record at the close of business on October 5, 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.

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Off-Balance Sheet Arrangements
Lennar Homebuilding: Investments in Unconsolidated Entities
At August 31, 2016 , we had equity investments in 38 homebuilding and land unconsolidated entities (of which 2 had recourse debt, 7 had non-recourse debt and 29 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
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
Revenues
$
43,889

141,599

352,251

765,346

Costs and expenses
110,649

127,678

409,219

580,696

Other income
—

46,400

—

49,343

Net earnings (loss) of unconsolidated entities
$
(66,760
)
60,321

(56,968
)
233,993

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities
$
(18,034
)
13,300

(24,667
)
48,693

Lennar Homebuilding cumulative share of net earnings - deferred at August 31, 2016 and 2015, respectively
$
44,699

22,218

Lennar Homebuilding investments in unconsolidated entities
$
796,499

640,908

Equity of the unconsolidated entities
$
3,802,035

2,404,720

Lennar Homebuilding investment % in the unconsolidated entities (1)
21
%
27
%
(1)
Our share of profit and cash distributions 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 nine months ended August 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination and our share of net operating losses associated with the new FivePoint unconsolidated entity. For the nine months ended August 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was partially offset by equity in earnings from one of our unconsolidated entities primarily due to sales of approximately 470 homesites to third parties.
For the three months ended August 31, 2015 , Lennar Homebuilding equity in earnings included $21.5 million of equity in earnings from one of our unconsolidated entities primarily due to a gain on debt extinguishment and sales of approximately 40 homesites to third parties. For the nine months ended August 31, 2015 , Lennar Homebuilding equity in earnings included $64.5 million of equity in earnings from one of our unconsolidated entities primarily due to sales of approximately 700 homesites and a commercial property to third parties and a gain on debt extinguishment. In addition, for the nine months ended August 31, 2015 , net earnings of unconsolidated entities included sales of 300 homesites to Lennar by one of our unconsolidated entities that resulted in $49.3 million of gross profit, of which our portion was deferred.

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Balance Sheets
(In thousands)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
369,203

248,980

Inventories
3,798,070

3,059,054

Other assets
1,354,826

465,404

$
5,522,099

3,773,438

Liabilities and equity:
Accounts payable and other liabilities
$
854,568

288,192

Debt
865,496

792,886

Equity
3,802,035

2,692,360

$
5,522,099

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 nine months ended August 31, 2016 .
As of August 31, 2016 and November 30, 2015 , our recorded investments in Lennar Homebuilding unconsolidated entities were $796.5 million and $741.6 million , respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of August 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 to us.
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.
Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:
(Dollars in thousands)
August 31,
2016
November 30,
2015
Debt
$
865,496

792,886

Equity
3,802,035

2,692,360

Total capital
$
4,667,531

3,485,246

Debt to total capital of our unconsolidated entities
18.5
%
22.7
%
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
(In thousands)
August 31,
2016
November 30,
2015
Land development
$
750,034

691,850

Homebuilding
46,465

49,701

Total investments
$
796,499

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.

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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)
August 31,
2016
November 30,
2015
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
48,792

50,411

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

324,000

Non-recourse debt with completion guarantees
137,152

146,760

Non-recourse debt without completion guarantees
306,929

260,734

Non-recourse debt to Lennar
816,868

781,905

Lennar's maximum recourse exposure (1)
48,628

10,981

Total debt
$
865,496

792,886

Lennar’s maximum recourse exposure as a % of total JV debt
6
%
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.
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. 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 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 August 31, 2016 and November 30, 2015 , the fair values of the repayment and completion guarantees were not material. We believe that as of August 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, the collateral is expected to 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

69


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 August 31, 2016 and November 30, 2015 , we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our condensed consolidated balance sheets.
The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities (“JVs”) debt as per current debt arrangements as of August 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
$
48,628

—

9,015

—

39,613

—

Debt without recourse to Lennar
816,868

—

74,002

144,674

274,197

323,995

Total
$
865,496

—

83,017

144,674

313,810

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 August 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)
$
254,089

2,241,326

—

65,130

65,130

1,562,819

4
%
Heritage Fields El Toro
146,091

1,515,721

—

9,887

9,887

1,377,934

1
%
Heritage Hills Irvine (3)
60,108

498,830

—

—

—

165,486

—

Runkle Canyon
46,164

136,560

—

42,657

42,657

93,433

31
%
Treasure Island Community Development
42,454

137,077

—

46,367

46,367

84,939

35
%
Ballpark Village
34,169

112,253

—

25,235

25,235

70,339

26
%
Krome Groves Land Trust
21,305

89,711

9,015

19,240

28,255

58,829

32
%
Willow Springs Properties
19,008

34,193

—

—

—

32,282

—

MS Rialto Residential Holdings
18,556

74,128

—

—

—

71,875

—

LS Terracina
18,482

37,164

—

—

—

36,964

—

10 largest JV investments
660,426

4,876,963

9,015

208,516

217,531

3,554,900

6
%
Other JVs
136,073

645,136

39,613

284,357

323,970

247,135

57
%
Total
$
796,499

5,522,099

48,628

492,873

541,501

3,802,035

12
%
Land seller debt and other debt (3)
—

323,995

323,995

Total JV debt
$
48,628

816,868

865,496

(1)
The 10 largest joint ventures presented above represent the majority of total JVs assets and equity and 19% of total JV maximum recourse debt exposure to Lennar and 42% of total JV debt without recourse to Lennar. 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:
August 31,
2016
August 31,
2016
November 30,
2015
(In thousands)
Inception Year
Equity Commitments
Equity Commitments Called
Commitment to Fund by Lennar
Funds Contributed by Lennar
Investment
Rialto Real Estate Fund, LP
2010
$
700,006

$
700,006

$
75,000

$
75,000

$
62,659

68,570

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

1,305,000

100,000

100,000

96,863

99,947

Rialto Mezzanine Partners Fund, LP
2013
300,000

300,000

33,799

33,799

26,310

32,344

Rialto Capital CMBS Funds
2014
111,753

111,753

47,057

47,057

47,270

23,233

Rialto Real Estate Fund III
2015
949,578

—

100,000

—

1,559

—

Rialto Credit Partnership, LP
2016
220,000

51,150

19,999

4,650

4,637

—

Other investments

2,382

775

$
241,680

224,869

During the three and nine months ended August 31, 2016 , Rialto's share of earnings from unconsolidated entities was $6.0 million and $14.3 million , respectively. During the three and nine months ended August 31, 2015 , Rialto's share of earnings from unconsolidated entities was $7.6 million and $17.6 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 during the three and nine months ended August 31, 2016 and 2015 were as follows:
Three Months Ended
Nine Months Ended
August 31,
August 31,
(In thousands)
2016
2015
2016
2015
Rialto Real Estate Fund, LP
$
1,540

3,545

7,633

9,509

Rialto Real Estate Fund II, LP
15

1,051

100

6,342

Rialto Mezzanine Partners Fund, LP
225

387

525

387

Rialto Capital CMBS Funds
318

—

1,269

—

$
2,098

4,983

9,527

16,238

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 August 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.
August 31, 2016
(In thousands)
Hypothetical Carried Interest
Paid as Advanced Tax Distribution
Hypothetical Carried Interest, Net
Rialto Real Estate Fund, LP
$
166,072

51,913

114,159

Rialto Real Estate Fund II, LP (1)
36,483

9,484

26,999

$
202,555

61,397

141,158

(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)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
159,683

188,147

Loans receivable
396,543

473,997

Real estate owned
566,012

506,609

Investment securities
1,284,583

1,092,476

Investments in partnerships
413,836

429,979

Other assets
41,282

30,340

$
2,861,939

2,721,548

Liabilities and equity:
Accounts payable and other liabilities
$
27,605

29,462

Notes payable
562,935

374,498

Equity
2,271,399

2,317,588

$
2,861,939

2,721,548

Statements of Operations
Three Months Ended
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
Revenues
$
51,485

41,278

147,021

122,336

Costs and expenses
24,472

24,937

66,075

73,024

Other income, net (1)
28,947

60,106

40,495

121,457

Net earnings of unconsolidated entities
$
55,960

76,447

121,441

170,769

Rialto equity in earnings from unconsolidated entities
$
5,976

7,590

14,337

17,582

Rialto's investments in unconsolidated entities
$
241,680

211,906

Equity of the unconsolidated entities
$
2,271,399

2,223,911

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 August 31, 2016 , Lennar Multifamily had equity investments in 32 unconsolidated entities that are engaged in multifamily residential developments (of which 21 had non-recourse debt and 11 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 nine months ended August 31, 2016 , the Venture received an additional $850 million of equity commitments, increasing its total equity commitments to approximately $2 billion , including a $504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. The Venture is currently seeded with 29 undeveloped multifamily assets that were previously purchased or under contract by the Lennar Multifamily segment totaling approximately 8,700 apartments with projected project costs of $2.8 billion as of August 31, 2016 . During the nine months ended August 31, 2016 , $432.4 million in equity commitments were called, of which we contributed our portion of $147.6 million . During the nine months ended August 31, 2016 , we received net distributions of $90.5 million as a return of capital from the Venture. As of August 31, 2016 , $707.9 million of the approximately $2 billion in equity commitments had been called, of which we have contributed our portion of $182.8 million representing our pro-rata portion of the called equity, resulting in a remaining equity commitment by us of

72


$321.2 million . As of August 31, 2016 and November 30, 2015 , the carrying value of our investment in the Venture was $170.9 million and $122.5 million , respectively. Subsequent to August 31, 2016 , the Venture received an additional $250 million of equity commitments, increasing its total equity commitments to approximately $2.2 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 August 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)
August 31,
2016
November 30,
2015
Assets:
Cash and cash equivalents
$
106,007

39,579

Operating properties and equipment
2,007,129

1,398,244

Other assets
49,728

25,925

$
2,162,864

1,463,748

Liabilities and equity:
Accounts payable and other liabilities
$
187,715

179,551

Notes payable
628,237

466,724

Equity
1,346,912

817,473

$
2,162,864

1,463,748


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Statements of Operations and Selected Information
Three Months Ended
Nine Months Ended
August 31,
August 31,
(Dollars in thousands)
2016
2015
2016
2015
Revenues
$
13,796

4,067

31,759

9,236

Costs and expenses
24,611

7,174

50,341

15,249

Other income, net
20,335

13,330

90,729

13,330

Net earnings of unconsolidated entities
$
9,520

10,223

72,147

7,317

Lennar Multifamily equity in earnings from unconsolidated entities (1)
$
5,060

5,004

38,754

4,404

Lennar Multifamily's investments in unconsolidated entities
$
304,032

211,503

Equity of the unconsolidated entities
$
1,346,912

707,375

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


23
%
30
%
(1)
For the three and nine months ended August 31, 2016 , Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $8.0 million and $43.8 million , respectively, share of gains as a result of the sales of one and three operating properties, respectively, by its unconsolidated entities. For both the three and nine months ended August 31, 2015 , Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $5.7 million share of a gain as a result of the sale of an operating property by one of 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 August 31, 2016 and 2015 :
Controlled Homesites
August 31, 2016
Optioned
JVs
Total
Owned
Homesites
Total
Homesites
East
15,122

446

15,568

53,255

68,823

Central
3,429

1,135

4,564

21,434

25,998

West
2,678

4,931

7,609

36,487

44,096

Houston
1,231

—

1,231

10,939

12,170

Other
1,484

—

1,484

6,551

8,035

Total homesites
23,944

6,512

30,456

128,666

159,122

Controlled Homesites
August 31, 2015
Optioned
JVs
Total
Owned
Homesites
Total
Homesites
East
19,949

494

20,443

53,177

73,620

Central
4,880

1,135

6,015

20,926

26,941

West
3,092

4,829

7,921

38,915

46,836

Houston
2,329

—

2,329

11,913

14,242

Other
1,494

—

1,494

6,668

8,162

Total homesites
31,744

6,458

38,202

131,599

169,801

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 nine months ended August 31, 2016 , consolidated inventory not owned increased by $68.2 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 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 August 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 $85.7 million and $89.2 million at August 31, 2016 and November 30, 2015 , respectively. Additionally, we had posted $53.1 million and $70.4 million of letters of credit in lieu of cash deposits under certain land and option contracts as of August 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 nine months ended August 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 nine months ended August 31, 2016 , holders converted approximately $243 million in aggregate principal amount of the 3.25% Convertible Senior Notes.
•
As of August 31, 2016 , we had $125 million of outstanding borrowings under the Credit Facility. The maturity for $1.3 billion of the Credit Facility is June 2020, with the remaining $160 million maturing in June 2018.
•
As of August 31, 2016 , borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities were $142.9 million and $912.7 million , respectively.
The following summarizes our contractual obligations with regard to our long-term debt and interest commitments as of August 31, 2016 :
Payments Due by Period
(In thousands)
Total
Three 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)
$
4,952,176

51,721

512,499

2,069,934

792,776

1,525,246

Lennar Financial Services - Notes and other debts payable
913,040

912,744

104

192

—

—

Rialto - Notes and other debts payable (2)
579,102

182,069

44,330

352,703

—

—

Interest commitments under interest bearing debt (3)
1,028,637

65,678

255,554

356,370

190,272

160,763

(1)
The 3.25% Convertible Senior Notes have been included in this table based on their maturity date, but the 3.25% Convertible Senior Notes are putable to, or callable by, us at the earlier date than the maturity date 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 $351.2 million related to Rialto's 7.00% Senior Notes, $30.3 million related to Rialto's 5 -year senior unsecured note, $142.9 million related to the Rialto warehouse repurchase facilities and $27.9 million related to Rialto's structured note offerings with an estimated final payment date of November 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 August 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 August 31, 2016 , we had access to 30,456 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At August 31, 2016 , we had $85.7 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $53.1 million of letters of credit in lieu of cash deposits under certain option contracts.

75


At August 31, 2016 , we had letters of credit outstanding in the amount of $475.8 million (which included $53.1 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 August 31, 2016 , we had outstanding surety bonds of $1.4 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 August 31, 2016 , there were approximately $497.8 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 $2.7 billion at August 31, 2016 . Loans in process for which interest rates were committed to the borrowers totaled approximately $810.5 million as of August 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 August 31, 2016 , we had open commitments amounting to $1.3 billion to sell MBS with varying settlement dates through November 2016 and open future contracts in the amount of $392 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 nine months ended August 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 .

76


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 nine months ended August 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 nine months ended August 31, 2016 , holders converted approximately $243 million in aggregate principal amount of the 3.25% convertible senior notes due 2021.
As of August 31, 2016 , we had $125 million of outstanding borrowings under our unsecured revolving credit facility. As of August 31, 2016 , borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities were $142.9 million and $912.7 million , respectively.
Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
August 31, 2016
Three Months Ending November 30,
Years Ending November 30,
Fair Value at August 31,
(Dollars in millions)
2016
2017
2018
2019
2020
2021
Thereafter
Total
2016
LIABILITIES:
Lennar Homebuilding:
Senior notes and other debts payable:
Fixed rate
$
18.6

446.5

676.5

1,378.8

3.8

665.8

1,525.2

4,715.2

5,108.9

Average interest rate
4.7
%
11.2
%
5.5
%
4.4
%
3.9
%
4.4
%
4.8
%
5.3
%
—

Variable rate
$
33.1

66.0

14.1

0.6

112.1

11.1

—

237.0

245.7

Average interest rate
3.2
%
3.3
%
2.6
%
2.5
%
2.4
%
2.5
%
—

2.8
%
—

Rialto:
Notes and other debts payable:
Fixed rate
$
39.2

14.0

1.6

351.1

—

—

—

405.9

425.5

Average interest rate
4.2
%
5.1
%
5.9
%
7.0
%
—

—

—

6.7
%
—

Variable rate
$
142.9

30.3

—

—

—

—

—

173.2

173.2

Average interest rate
4.7
%
4.5
%
—

—

—

—

—

4.7
%
—

Lennar Financial Services:
Notes and other debts payable:
Variable rate
$
912.7

0.1

0.1

0.1

—

—

—

913.0

913.0

Average interest rate
2.7
%
4.0
%
4.0
%
4.0
%
—

—

—

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.


77


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 August 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 August 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 are party to various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, the disposition of these matters will not have a material adverse effect on our condensed consolidated financial statements. We are also a party to various lawsuits involving purchases and sales of real property. These lawsuits include claims regarding representations and warranties made in connection with the transfer of properties and disputes regarding the obligation to purchase or sell properties.
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 $113 million as of August 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 would 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.
In June 2016, we received Notices of Violation from the United States Environmental Protection Agency related to stormwater compliance at certain of our Tampa and Southwest Florida community sites. If it were determined that the violations occurred, this matter could result in monetary sanctions to us which we do not currently expect would be material.
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 .

78


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 August 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)
June 1 to June 30, 2016
—

$
—

—

6,218,968

July 1 to July 31, 2016
406,058

$
46.42

—

6,218,968

August 1 to August 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.
During the three months ended August 31, 2016 , holders converted approximately $175 million aggregate principal amount of the 3.25% Convertible Senior Notes for 7.5 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 August 31, 2016, filed on October 4, 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)
Date:
10/4/2016
/s/    Bruce Gross
Bruce Gross
Vice President and Chief Financial Officer
Date:
10/4/2016
/s/    David M. Collins
David M. Collins
Controller


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TABLE OF CONTENTS