LEN 10-Q Quarterly Report May 31, 2017 | Alphaminr
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LEN 10-Q Quarter ended May 31, 2017

Balance Sheet
Cash Flow
Income Statement
Debt
LENNAR CORP /NEW/
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PROXIES
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 Feb. 26, 2020
DEF 14A
 		Filed on Feb. 28, 2019
DEF 14A
 		Filed on Feb. 28, 2018
DEF 14A
 		Filed on March 7, 2017
DEF 14A
 		Filed on March 2, 2016
DEF 14A
 		Filed on Feb. 24, 2015
DEF 14A
 		Filed on Feb. 27, 2014
DEF 14A
 		Filed on March 1, 2013
DEF 14A
 		Filed on March 2, 2012
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 May 31, 2017
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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ¨ NO ý
Common stock outstanding as of May 31, 2017 :
Class A 203,191,983
Class B 31,303,195



Part I. Financial Information
Item 1. Financial Statements

Lennar Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands, except shares and per share amounts)
(unaudited)
May 31,
November 30,
2017 (1)
2016 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents
$
747,652

1,050,138

Restricted cash
6,397

5,977

Receivables, net
82,640

106,976

Inventories:
Finished homes and construction in progress
4,670,827

3,951,716

Land and land under development
5,623,727

5,106,191

Consolidated inventory not owned
138,620

121,019

Total inventories
10,433,174

9,178,926

Investments in unconsolidated entities
995,400

811,723

Goodwill
136,633

—

Other assets
890,665

651,028

13,292,561

11,804,768

Rialto
1,364,421

1,276,210

Lennar Financial Services
1,444,294

1,754,672

Lennar Multifamily
653,229

526,131

Total assets
$
16,754,505

15,361,781

(1)
Under certain provisions of Accounting Standards Codification ("ASC") Topic 810, Consolidations , ("ASC 810") the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities ("VIEs") and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.
As of May 31, 2017 , total assets include $ 575.7 million related to consolidated VIEs of which $ 9.4 million is included in Lennar Homebuilding cash and cash equivalents, $ 0.2 million in Lennar Homebuilding receivables, net, $ 77.8 million in Lennar Homebuilding finished homes and construction in progress, $ 173.1 million in Lennar Homebuilding land and land under development, $ 138.6 million in Lennar Homebuilding consolidated inventory not owned, $ 4.6 million in Lennar Homebuilding investments in unconsolidated entities, $ 12.9 million in Lennar Homebuilding other assets, $ 117.5 million in Rialto assets and $ 41.6 million in Lennar Multifamily assets.
As of November 30, 2016 , total assets include $ 536.3 million related to consolidated VIEs of which $ 13.3 million is included in Lennar Homebuilding cash and cash equivalents, $ 0.2 million in Lennar Homebuilding receivables, net, $ 54.2 million in Lennar Homebuilding finished homes and construction in progress, $ 106.3 million in Lennar Homebuilding land and land under development, $ 121.0 million in Lennar Homebuilding consolidated inventory not owned, $ 4.6 million in Lennar Homebuilding investments in unconsolidated entities, $ 13.9 million in Lennar Homebuilding other assets, $ 213.8 million in Rialto assets and $ 8.8 million in Lennar Multifamily assets.

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

May 31,
November 30,
2017 (2)
2016 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable
$
492,734

478,546

Liabilities related to consolidated inventory not owned
133,554

110,006

Senior notes and other debts payable
5,767,689

4,575,977

Other liabilities
902,081

841,449

7,296,058

6,005,978

Rialto
860,612

707,980

Lennar Financial Services
1,037,663

1,318,283

Lennar Multifamily
123,166

117,973

Total liabilities
9,317,499

8,150,214

Stockholders’ equity:
Preferred stock
—

—

Class A common stock of $0.10 par value; Authorized: May 31, 2017 and November 30, 2016
- 300,000,000 shares; Issued: May 31, 2017 - 204,147,354 shares and November 30, 2016
- 204,089,447 shares
20,415

20,409

Class B common stock of $0.10 par value; Authorized: May 31, 2017 and November 30, 2016
- 90,000,000 shares; Issued: May 31, 2017 - 32,982,815 shares and November 30, 2016
- 32,982,815 shares
3,298

3,298

Additional paid-in capital
2,867,618

2,805,349

Retained earnings
4,539,203

4,306,256

Treasury stock, at cost; May 31, 2017 - 955,371 shares of Class A common stock and
1,679,620 shares of Class B common stock; November 30, 2016 - 917,447 shares of
Class A common stock and 1,679,620 shares of Class B common stock
( 109,049
)
( 108,961
)
Accumulated other comprehensive income (loss)
1,086

( 309
)
Total stockholders’ equity
7,322,571

7,026,042

Noncontrolling interests
114,435

185,525

Total equity
7,437,006

7,211,567

Total liabilities and equity
$
16,754,505

15,361,781

(2)
As of May 31, 2017 , total liabilities include $ 144.1 million related to consolidated VIEs as to which there was no recourse against the Company, of which $ 4.7 million is included in Lennar Homebuilding accounts payable, $ 133.6 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $ 1.1 million in Lennar Homebuilding other liabilities and $ 4.7 million in Rialto liabilities.
As of November 30, 2016 , total liabilities include $ 126.4 million related to consolidated VIEs as to which there was no recourse against the Company, of which $ 3.6 million is included in Lennar Homebuilding accounts payable, $ 110.0 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $ 2.5 million in Lennar Homebuilding other liabilities and $ 10.3 million in Rialto 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
Six Months Ended
May 31,
May 31,
2017
2016
2017
2016
Revenues:
Lennar Homebuilding
$
2,885,741

2,450,885

4,904,435

4,237,366

Lennar Financial Services
208,363

175,940

356,406

299,896

Rialto
67,988

44,838

149,994

88,549

Lennar Multifamily
99,800

74,152

188,485

113,668

Total revenues
3,261,892

2,745,815

5,599,320

4,739,479

Costs and expenses:
Lennar Homebuilding
2,535,483

2,112,288

4,337,044

3,680,493

Lennar Financial Services
164,636

131,852

292,015

240,877

Rialto
59,076

50,203

125,989

93,110

Lennar Multifamily
102,698

73,217

195,347

120,237

Corporate general and administrative
66,774

55,802

127,473

103,470

Total costs and expenses
2,928,667

2,423,362

5,077,868

4,238,187

Lennar Homebuilding equity in loss from unconsolidated entities
( 21,506
)
( 9,633
)
( 33,040
)
( 6,633
)
Lennar Homebuilding other income, net
3,828

13,732

9,567

13,094

Lennar Homebuilding loss due to litigation
—

—

( 140,000
)
—

Rialto equity in earnings from unconsolidated entities
5,730

6,864

6,452

8,361

Rialto other expense, net
( 21,104
)
( 19,585
)
( 37,762
)
( 20,276
)
Lennar Multifamily equity in earnings from unconsolidated entities
9,427

14,008

32,574

33,694

Earnings before income taxes
309,600

327,839

359,243

529,532

Provision for income taxes
( 108,892
)
( 103,801
)
( 128,861
)
( 160,042
)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
200,708

224,038

230,382

369,490

Less: Net earnings (loss) attributable to noncontrolling interests
( 12,937
)
5,569

( 21,343
)
6,941

Net earnings attributable to Lennar
$
213,645

218,469

251,725

362,549

Other comprehensive income, net of tax:
Net unrealized gains on securities available-for-sale
419

919

1,391

482

Reclassification adjustments for (gains) loss included in earnings, net of tax
4

( 6
)
4

( 6
)
Other comprehensive income attributable to Lennar
$
214,068

219,382

253,120

363,025

Other comprehensive income (loss) attributable to noncontrolling interests
$
( 12,937
)
5,569

( 21,343
)
6,941

Basic earnings per share
$
0.91

1.01

1.07

1.69

Diluted earnings per share
$
0.91

0.95

1.07

1.58

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

0.04

0.08

0.08




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


Six Months Ended
May 31,
2017
2016
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)
$
230,382

369,490

Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization
29,418

22,752

Amortization of discount/premium and accretion on debt, net
5,059

8,054

Equity in earnings from unconsolidated entities
( 5,986
)
( 35,422
)
Distributions of earnings from unconsolidated entities
44,412

43,740

Share-based compensation expense
24,817

22,266

Excess tax benefits from share-based awards
( 1,980
)
( 7,039
)
Deferred income tax expense
13,197

45,538

Loss on retirement of debt and notes payable
—

415

Unrealized and realized gains on real estate owned
( 3,374
)
( 12,838
)
Impairments of loans receivable, loans held-for-sale and real estate owned
45,803

15,871

Valuation adjustments and write-offs of option deposits and pre-acquisition costs
12,343

2,699

Changes in assets and liabilities:
Decrease in restricted cash
13,968

14,764

Decrease in receivables
16,817

236,084

Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs
( 655,183
)
( 868,779
)
Increase in other assets
( 13,502
)
( 28,014
)
Decrease in loans held-for-sale
140,372

93,690

Decrease in accounts payable and other liabilities
( 56,322
)
( 98,653
)
Net cash used in operating activities
( 159,759
)
( 175,382
)
Cash flows from investing activities:
Net additions of operating properties and equipment
( 47,043
)
( 39,216
)
Investments in and contributions to unconsolidated entities
( 315,755
)
( 210,225
)
Distributions of capital from unconsolidated entities
96,499

103,009

Proceeds from sales of real estate owned
55,521

43,412

Improvements to real estate owned
( 392
)
( 1,717
)
Purchases of real estate owned
( 148
)
—

Receipts of principal payments on loans receivable and other
19,487

5,484

Originations of loans receivable
( 14,055
)
( 16,864
)
Purchases of commercial mortgage-backed securities bonds
( 40,357
)
( 33,005
)
Acquisition, net of cash acquired
( 611,103
)
( 600
)
(Increase) decrease in Lennar Financial Services loans held-for-investment, net
( 2,719
)
1,060

Purchases of Lennar Financial Services investment securities
( 26,811
)
( 11,646
)
Proceeds from maturities/sales of Lennar Financial Services investments securities
13,340

10,681

Net cash used in investing activities
$
( 873,536
)
( 149,627
)




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


Six Months Ended
May 31,
2017
2016
Cash flows from financing activities:
Net borrowings under unsecured revolving credit facility
$
—

375,000

Net repayments under warehouse facilities
( 144,265
)
( 230,206
)
Proceeds from senior notes
1,250,000

499,024

Debt issuance costs
( 14,060
)
( 3,796
)
Redemption of senior notes
( 400,000
)
( 250,000
)
Conversions and exchanges on convertible senior notes
—

( 233,893
)
Proceeds from Rialto notes payable
35,460

—

Principal payments on Rialto notes payable
( 10,120
)
( 2,999
)
Proceeds from other borrowings
65,096

15,657

Principal payments on other borrowings
( 30,600
)
( 103,189
)
Receipts related to noncontrolling interests
320

167

Payments related to noncontrolling interests
( 47,909
)
( 73,195
)
Excess tax benefits from share-based awards
1,980

7,039

Common stock:
Issuances
693

594

Repurchases
( 83
)
( 971
)
Dividends
( 18,778
)
( 17,191
)
Net cash provided by (used in) financing activities
687,734

( 17,959
)
Net decrease in cash and cash equivalents
( 345,561
)
( 342,968
)
Cash and cash equivalents at beginning of period
1,329,529

1,158,445

Cash and cash equivalents at end of period
$
983,968

815,477

Summary of cash and cash equivalents:
Lennar Homebuilding
$
747,652

601,192

Rialto
119,592

103,622

Lennar Financial Services
107,436

105,596

Lennar Multifamily
9,288

5,067

$
983,968

815,477

Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding and Lennar Multifamily:
Non-cash contributions to unconsolidated entities
$
63,014

25,420

Non-cash distributions from unconsolidated entities
$
—

16,331

Conversion of convertible senior notes to equity
$
—

67,535

Purchases of inventories and other assets financed by sellers
$
78,948

53,287

Rialto:
Real estate owned acquired in satisfaction/partial satisfaction of loans receivable
$
272

7,703

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

111,347

Investments in unconsolidated entities
$
—

( 2,445
)
Liabilities related to consolidated inventory not owned
$
—

( 96,424
)
Noncontrolling interests
$
—

( 12,478
)

See accompanying notes to condensed consolidated financial statements.
6


Lennar Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1)
Basis of Presentation
Basis of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 16) in which Lennar Corporation is deemed to be the primary beneficiary (the "Company"). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2016 . In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.
The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and six months ended May 31, 2017 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 during fiscal year 2016, the Company restated certain prior year amounts in the condensed consolidated financial statements to conform with the 2017 presentation (see Note 3). In addition, certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2017 presentation. These reclassifications had no impact on the Company's condensed consolidated financial statements.


7


(2)
Business Acquisition
On February 10, 2017, the Company acquired WCI Communities, Inc. ("WCI") a homebuilder of luxury single and multifamily homes, including a small percentage of luxury high-rise tower units, with operations in Florida. WCI stockholders received $ 642.6 million in cash. The cash consideration was funded primarily from working capital and from proceeds from the issuance of 4.125 % senior notes due 2022 (see Note 12).
Based on an evaluation of the provisions of ASC Topic 805, Business Combinations , ("ASC 805"), Lennar Corporation was determined to be the acquirer for accounting purposes. The following table summarizes the provisional purchase price allocation based on the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition, which are subject to change within a measurement period of up to one year from the acquisition date pursuant to ASC 805. The purchase price allocation is provisional pending completion of the fair value analysis of acquired assets and liabilities assumed:
(In thousands)
Assets:
Cash and cash equivalents, restricted cash and receivables, net
$
42,079

Inventories
619,458

Intangible assets (1)
59,283

Goodwill (2)
156,633

Deferred tax assets, net
81,752

Other assets
66,173

Total assets
1,025,378

Liabilities:
Accounts payable
26,735

Senior notes and other debts payable
282,793

Other liabilities
73,228

Total liabilities
382,756

Total purchase price
$
642,622

(1)
Intangible assets include non-compete agreements and a trade name. The amortization period for these intangible assets is six months for the non-compete agreements and 20 years for the trade name.
(2)
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, and it is not deductible for income tax purposes. As of the merger date, goodwill consisted primarily of purchasing and other synergies resulting from the merger, expected production, savings in corporate and division overhead costs and expected expanded opportunities for growth through a higher-end more luxurious product, greater presence in the state of Florida and customer diversity. The provisional amount of goodwill allocated to the Company's Homebuilding East segment was $ 136.6 million and to the Lennar Financial Services segment was $ 20.0 million . These provisional amounts were based on the relative fair value of each acquired reporting unit in accordance with ASC 350, Intangibles-Goodwill and Other.
Lennar Homebuilding revenue and net earnings attributable to Lennar for the three and six months ended May 31, 2017 included $ 182.8 million and $ 202.3 million , respectively, of home sales revenue and $ 21.9 million and $ 13.2 million , respectively, of pre-tax earnings from WCI since the date of acquisition, which included transaction-related expenses of $ 8.0 million and $ 19.0 million , respectively, comprised mainly of severance costs, general and administrative expenses, and amortization expense related to non-compete agreements and trade name since the date of acquisition. These transaction expenses were included primarily within Lennar Homebuilding selling, general and administrative expenses in the accompanying condensed consolidated statement of operations for the three and six months ended May 31, 2017 . The pro-forma effect of the acquisition on the results of operations is not presented as this acquisition was not considered material.

8


(3)
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) Lennar Financial Services
(5) Rialto
(6) Lennar Multifamily
Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under "Homebuilding Other," which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, selling, general and administrative expenses incurred by the segment and loss due to litigation.
The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately have homebuilding divisions located in:
East: Florida (1) , Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas
West: California and Nevada
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1)
Florida includes information related to WCI from the date of acquisition (February 10, 2017) to May 31, 2017.
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. It also includes a real estate brokerage business acquired as part of the WCI transaction. 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, closing services and real estate brokerage, 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, 2016 . 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.

9


Financial information relating to the Company’s operations was as follows:
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Homebuilding East (1)
$
4,764,611

3,512,990

Homebuilding Central
2,032,627

1,993,403

Homebuilding West
4,684,956

4,318,924

Homebuilding Other
903,137

907,523

Rialto
1,364,421

1,276,210

Lennar Financial Services
1,444,294

1,754,672

Lennar Multifamily
653,229

526,131

Corporate and unallocated
907,230

1,071,928

Total assets
$
16,754,505

15,361,781

Lennar Homebuilding goodwill (2)
$
136,633

—

Rialto goodwill
$
5,396

5,396

Lennar Financial Services goodwill (2)
$
59,838

39,838


(1)
Homebuilding East segment includes the provisional fair values of homebuilding assets acquired as part of the WCI acquisition.
(2)
In connection with the WCI acquisition, the Company allocated $ 136.6 million of goodwill to the Lennar Homebuilding East reportable segment and $ 20.0 million to the Lennar Financial Services segment. These amounts are provisional pending completion of the fair value analysis of acquired assets and liabilities.
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues:
Homebuilding East
$
1,194,890

954,298

1,962,616

1,613,352

Homebuilding Central
682,342

608,987

1,198,523

1,022,827

Homebuilding West
770,194

718,059

1,322,992

1,269,398

Homebuilding Other
238,315

169,541

420,304

331,789

Lennar Financial Services
208,363

175,940

356,406

299,896

Rialto
67,988

44,838

149,994

88,549

Lennar Multifamily
99,800

74,152

188,485

113,668

Total revenues (1)
$
3,261,892

2,745,815

5,599,320

4,739,479

Operating earnings (loss):
Homebuilding East (2)
$
153,707

142,938

97,998

227,644

Homebuilding Central
75,944

68,762

128,802

101,957

Homebuilding West
71,224

113,807

124,584

202,641

Homebuilding Other
31,705

17,189

52,534

31,092

Lennar Financial Services
43,727

44,088

64,391

59,019

Rialto
( 6,462
)
( 18,086
)
( 7,305
)
( 16,476
)
Lennar Multifamily
6,529

14,943

25,712

27,125

Total operating earnings
376,374

383,641

486,716

633,002

Corporate general and administrative expenses
66,774

55,802

127,473

103,470

Earnings before income taxes
$
309,600

327,839

359,243

529,532

(1)
Total revenues were net of sales incentives of $ 174.5 million ( $ 22,700 per home delivered) and $ 298.1 million ( $ 22,700 per home delivered) for the three and six months ended May 31, 2017 , respectively, compared to $ 146.1 million ( $ 21,800 per home delivered) and $ 249.8 million ( $ 21,700 per home delivered) for the three and six months ended May 31, 2016 , respectively.
(2)
Homebuilding East operating earnings for the six months ended May 31, 2017 included a $ 140 million loss due to litigation (see Note 17).


10


(4)
Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues
$
132,587

208,636

178,723

308,362

Costs and expenses
190,845

201,370

269,911

298,570

Other income
6,117

—

6,117

—

Net earnings (loss) of unconsolidated entities
$
( 52,141
)
7,266

( 85,071
)
9,792

Lennar Homebuilding equity in loss from unconsolidated entities
$
( 21,506
)
( 9,633
)
( 33,040
)
( 6,633
)

For the three and six months ended May 31, 2017 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to the Company’s share of net operating losses from its unconsolidated entities. The operating losses from the Company's unconsolidated entities were primarily driven by general and administrative expenses as there were no significant home and land sale transactions to offset those expenses during the three and six months ended May 31, 2017 .
For the both the three and six months ended May 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to the Company's share of costs associated with the FivePoint combination. This was partially offset by $ 6.7 million and $ 12.7 million , respectively, of equity in earnings from one of the Company's unconsolidated entities primarily due to sales to third parties of 253 and 471 homesites, respectively, for the three and six months ended May 31, 2016 . For both the three and six months ended May 31, 2016 , 312 homesites were sold to Lennar by one of the Company's unconsolidated entities for $ 92.0 million that resulted in $ 29.7 million of gross profit, of which the Company's portion was deferred.
Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
393,507

221,334

Inventories
3,979,975

3,889,795

Other assets
961,126

1,334,116

$
5,334,608

5,445,245

Liabilities and equity:
Accounts payable and other liabilities
$
651,791

791,245

Debt (1)
783,339

888,664

Equity
3,899,478

3,765,336

$
5,334,608

5,445,245

(1)
Debt presented above is net of debt issuance costs of $ 5.7 million and $ 4.2 million , as of May 31, 2017 and November 30, 2016 , respectively.
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 FivePoint entity. The fair values of the assets contributed to this FivePoint entity are included within the unconsolidated entities summarized condensed balance sheet presented above. A portion of the assets of one of the three strategic joint ventures transferred to a new unconsolidated entity was retained by Lennar and its venture partner. The transactions did not have a material impact to the Company’s financial position or cash flows for the year ended November 30, 2016 . For the year ended November 30, 2016 , the Company recorded $ 42.6 million of its share of combination costs and operational net losses in equity in loss from unconsolidated entities on the consolidated statement of operations.
In May 2017, FivePoint completed its initial public offering ("IPO"). Concurrent with the IPO, the Company invested $ 100 million in FivePoint. As of May 31, 2017 , the Company owns approximately 40 % of FivePoint and the carrying amount of the Company's investment is $ 356.4 million .

11


As of May 31, 2017 and November 30, 2016 , the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $ 995.4 million and $ 811.7 million , respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of both May 31, 2017 and November 30, 2016 was $ 1.2 billion . 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 FivePoint entity 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)
May 31,
2017
November 30,
2016
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
73,239

48,945

Non-recourse land seller debt and other debt (1)
1,997

323,995

Non-recourse debt with completion guarantees
305,420

147,100

Non-recourse debt without completion guarantees
327,877

320,372

Non-recourse debt to the Company
708,533

840,412

The Company’s maximum recourse exposure (2)
80,468

52,438

Debt issuance costs
( 5,662
)
( 4,186
)
Total debt
$
783,339

888,664

The Company’s maximum recourse exposure as a % of total JV debt
10
%
6
%

(1)
Non-recourse land seller debt and other debt as of November 30, 2016 included a $ 320 million non-recourse note related to a transaction between one of the Company's unconsolidated entities and another unconsolidated joint venture, which was settled in December 2016.
(2)
As of May 31, 2017 and November 30, 2016 , the Company's maximum recourse exposure was primarily related to the Company providing repayment guarantees on three unconsolidated entities' debt and one unconsolidated entity's debt, respectively.
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 May 31, 2017 and November 30, 2016 , the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of May 31, 2017 , 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 would 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 with regard to obligations of its joint ventures (see Note 12).


12


(5)
Stockholders' Equity
The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the six months ended May 31, 2017 and 2016 :
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, 2016
$
7,211,567

20,409

3,298

2,805,349

( 108,961
)
( 309
)
4,306,256

185,525

Net earnings (including net loss attributable to noncontrolling interests)
230,382

—

—

—

—

—

251,725

( 21,343
)
Employee stock and directors plans
1,828

6

—

1,910

( 88
)
—

—

—

Tax benefit from employee stock plans, vesting of restricted stock and conversions of convertible senior notes
35,542

—

—

35,542

—

—

—

—

Amortization of restricted stock
24,817

—

—

24,817

—

—

—

—

Cash dividends
( 18,778
)
—

—

—

—

—

( 18,778
)
—

Receipts related to noncontrolling interests
320

—

—

—

—

—

—

320

Payments related to noncontrolling interests
( 47,909
)
—

—

—

—

—

—

( 47,909
)
Non-cash activity related to noncontrolling interests
( 2,158
)
—

—

—

—

—

—

( 2,158
)
Other comprehensive income, net of tax
1,395

—

—

—

—

1,395

—

—

Balance at May 31, 2017
$
7,437,006

20,415

3,298

2,867,618

( 109,049
)
1,086

4,539,203

114,435

Stockholders’ Equity
(In thousands)
Total
Equity
Class A
Common Stock
Class B
Common Stock
Additional
Paid - in Capital
Treasury
Stock
Accumulated Other Comprehensive Income
Retained
Earnings
Noncontrolling
Interests
Balance at November 30, 2015
$
5,950,072

18,066

3,298

2,305,560

( 107,755
)
39

3,429,736

301,128

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

—

—

—

—

—

362,549

6,941

Employee stock and directors plans
472

4

—

1,445

( 977
)
—

—

—

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

804

—

66,551

—

—

—

—

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

—

—

33,495

—

—

—

—

Amortization of restricted stock
22,266

—

—

22,266

—

—

—

—

Cash dividends
( 17,191
)
—

—

—

—

—

( 17,191
)
—

Receipts related to noncontrolling interests
167

—

—

—

—

—

—

167

Payments related to noncontrolling interests
( 73,195
)
—

—

—

—

—

—

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

—

—

—

—

—

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

12,478

Non-cash activity related to noncontrolling interests
2,082

—

—

—

—

—

—

2,082

Other comprehensive income, net of tax
476

—

—

—

—

476

—

—

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

18,874

3,298

2,429,317

( 108,732
)
515

3,775,094

244,568



13


(6)
Income Taxes
The provision for income taxes and effective tax rate were as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(Dollars in thousands)
2017
2016
2017
2016
Provision for income taxes
$
( 108,892
)
( 103,801
)
( 128,861
)
( 160,042
)
Effective tax rate (1)
33.76
%
32.21
%
33.86
%
30.62
%
(1)
For the three and six months ended May 31, 2017 and 2016 , the effective tax rate included tax benefits for (1) settlements with the IRS, (2) the domestic production activities deduction, and (3) energy tax credits, offset primarily by state income tax expense.
As of May 31, 2017 and November 30, 2016 , the Company's deferred tax assets, net, included in the condensed consolidated balance sheets were $ 369.0 million and $ 277.4 million , respectively.
At both May 31, 2017 and November 30, 2016 , the Company had $ 12.3 million of gross unrecognized tax benefits.
At May 31, 2017 , the Company had $ 47.8 million accrued for interest and penalties, of which $ 2.2 million was accrued during the six months ended May 31, 2017 . During the six months ended May 31, 2017 , the accrual for interest and penalties was reduced by $ 0.4 million , primarily as a result of interest payments. At November 30, 2016 , the Company had $ 46.0 million accrued for interest and penalties.

(7)
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.

14


Basic and diluted earnings per share were calculated as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands, except per share amounts)
2017
2016
2017
2016
Numerator:
Net earnings attributable to Lennar
$
213,645

218,469

251,725

362,549

Less: distributed earnings allocated to nonvested shares
91

86

203

175

Less: undistributed earnings allocated to nonvested shares
1,972

2,119

2,254

3,552

Numerator for basic earnings per share
211,582

216,264

249,268

358,822

Less: net amount attributable to noncontrolling interests in Rialto's Carried Interest Incentive Plan (1)
214

396

552

598

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

1,889

—

3,872

Plus: undistributed earnings allocated to convertible shares
—

2,119

—

3,552

Less: undistributed earnings reallocated to convertible shares
—

1,987

—

3,321

Numerator for diluted earnings per share
$
211,368

217,889

248,716

362,327

Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding
232,217

213,601

232,205

211,947

Effect of dilutive securities:
Share-based payments
2

4

2

4

Convertible senior notes
—

16,312

—

17,466

Denominator for diluted earnings per share - weighted average common shares outstanding
232,219

229,917

232,207

229,417

Basic earnings per share
$
0.91

1.01

1.07

1.69

Diluted earnings per share
$
0.91

0.95

1.07

1.58


(1)
The amounts presented relate to Rialto's Carried Interest Incentive Plan adopted in June 2015 (see Note 9) 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 the three and six months ended May 31, 2017 and 2016 , there were no options to purchase shares of common stock that were outstanding and anti-dilutive.


15


(8)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
107,436

123,964

Restricted cash
13,311

17,053

Receivables, net (1)
213,550

409,528

Loans held-for-sale (2)
820,443

939,405

Loans held-for-investment, net
32,691

30,004

Investments held-to-maturity
54,824

41,991

Investments available-for-sale (3)
56,005

53,570

Goodwill (4)
59,838

39,838

Other (5)
86,196

99,319

$
1,444,294

1,754,672

Liabilities:
Notes and other debts payable
$
792,623

1,077,228

Other (6)
245,040

241,055

$
1,037,663

1,318,283

(1)
Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of May 31, 2017 and November 30, 2016 , 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 (loss).
(4)
As of May 31, 2017 , goodwill included $ 20.0 million of goodwill related to the WCI acquisition. The amount provided herein is provisional, pending completion of the fair value analysis of WCI's acquired assets and liabilities assumed (see Note 2).
(5)
As of May 31, 2017 and November 30, 2016 , other assets included mortgage loan commitments carried at fair value of $ 18.4 million and $ 7.4 million , respectively, and mortgage servicing rights carried at fair value of $ 27.4 million and $ 23.9 million , respectively. In addition, other assets also included forward contracts carried at fair value of $ 26.5 million as of November 30, 2016 .
(6)
As of May 31, 2017 and November 30, 2016 , other liabilities included $ 58.4 million and $ 57.4 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 $ 6.8 million as of May 31, 2017 .
At May 31, 2017 , the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures June 2017 (1)
$
600,000

364-day warehouse repurchase facility that matures September 2017
300,000

364-day warehouse repurchase facility that matures December 2017 (2)
400,000

364-day warehouse repurchase facility that matures March 2018 (3)
150,000

Total
$
1,450,000


(1)
Subsequent to May 31, 2017 , the warehouse repurchase facility maturity date was extended to June 2018.
(2)
Maximum aggregate commitment includes an uncommitted amount of $ 250 million .
(3)
Maximum aggregate commitment includes an uncommitted amount of $ 75 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 $ 792.4 million and $ 1.1 billion at May 31, 2017 and November 30, 2016 , respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $ 824.1 million and $ 1.1 billion at May 31, 2017 and November 30, 2016 , 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 for. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

16


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. Mortgage investors could seek to have the Company buy back mortgage loans or compensate them for losses incurred on mortgage loans that the Company has sold based on claims that the Company breached its limited representations or warranties. The Company’s mortgage operations have established accruals for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes accruals for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the Company's condensed consolidated balance sheets.
The activity in the Company’s loan origination liabilities was as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Loan origination liabilities, beginning of period
$
25,003

20,108

24,905

19,492

Provision for losses
1,066

1,110

1,944

1,898

Payments/settlements
( 157
)
( 224
)
( 937
)
( 396
)
Loan origination liabilities, end of period
$
25,912

20,994

25,912

20,994



(9)
Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
119,592

148,827

Restricted cash (1)
6,026

9,935

Receivables, net (2)
415,285

204,518

Loans held-for-sale (3)
106,615

126,947

Loans receivable, net
65,326

111,608

Real estate owned, net
160,452

243,703

Investments in unconsolidated entities
244,301

245,741

Investments held-to-maturity
112,452

71,260

Other
134,372

113,671

$
1,364,421

1,276,210

Liabilities:
Notes and other debts payable (4)
$
781,845

622,335

Other
78,767

85,645

$
860,612

707,980


(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 related to loans sold but not settled as of May 31, 2017 and November 30, 2016 , respectively.
(3)
Loans held-for-sale related to unsold loans originated by RMF carried at fair value and loans in the FDIC Portfolios carried at lower of cost or market.
(4)
As of May 31, 2017 and November 30, 2016 , notes and other debts payable primarily included $ 349.0 million and $ 348.7 million , respectively, related to Rialto's 7.00 % senior notes due 2018, and $ 363.6 million and $ 223.5 million , respectively, related to Rialto's warehouse repurchase facilities.

17

Rialto Mortgage Finance - loans held-for-sale
During the six months ended May 31, 2017 , RMF originated loans with a total principal balance of $ 837.7 million of which $ 823.7 million were recorded as loans held-for-sale and $ 14.1 million were recorded as accrual loans within loans receivable, net, and sold $ 870.4 million of loans into five separate securitizations. During the six months ended May 31, 2016 , RMF originated loans with a total principal balance of $ 670.3 million of which $ 654.0 million were recorded as loans held-for-sale and $ 16.3 million as accrual loans within loans receivable, net, and sold $ 766.4 million of loans into five separate securitizations. As of May 31, 2017 and November 30, 2016 , originated loans with an unpaid principal balance of $ 392.7 million and $ 199.8 million , respectively, were sold into a securitization trust but not settled and thus were included as receivables, net.
FDIC Portfolios
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.
In February 2017, the FDIC exercised its “clean-up call rights” under the Amended and Restated Limited Liability Company Agreement. As a result, Rialto has until July 10, 2017 to liquidate and sell the assets in the FDIC Portfolios. After July 10, 2017, the FDIC can, at its discretion, sell any remaining assets. At May 31, 2017 , the consolidated LLCs had total combined assets of $ 117.5 million , which primarily included $ 80.3 million of real estate owned, net and $ 23.8 million of loans held-for-sale.
Warehouse Facilities
At May 31, 2017 , Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2017
$
500,000

Warehouse repurchase facility that matures December 2017
200,000

364-day warehouse repurchase facility that matures January 2018
250,000

Total - Loan origination and securitization business (RMF)
$
950,000

Warehouse repurchase facility that matures August 2018 (two - one year extensions) (1)
100,000

Total
$
1,050,000

(1)
Rialto uses this warehouse repurchase facility to finance the origination of floating rate accrual loans, which are reported as accrual loans within loans receivable, net. Borrowings under this facility were $ 43.3 million as of both May 31, 2017 and November 30, 2016 .
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $ 320.3 million and $ 180.2 million as of May 31, 2017 and November 30, 2016 , 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. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the loans held-for-sale to investors and by collecting on receivables on loans sold, but not yet paid for. Without the facilities, the Rialto segment would have to use cash from operations and other funding sources to finance its lending activities.
Investments in Unconsolidated Entities
Generally, 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.

18

The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
May 31,
2017
May 31,
2017
November 30,
2016
(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

$
48,519

58,116

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

1,305,000

100,000

100,000

84,862

96,192

Rialto Mezzanine Partners Fund, LP
2013
300,000

300,000

33,799

33,799

21,188

23,643

Rialto Capital CMBS Funds
2014
119,174

119,174

52,474

52,474

50,948

50,519

Rialto Real Estate Fund III
2015
1,887,000

362,242

140,000

25,318

25,520

9,093

Rialto Credit Partnership, LP
2016
220,000

121,225

19,999

11,020

11,182

5,794

Other investments
2,082

2,384

$
244,301

245,741


During the three and six months ended May 31, 2017 , Rialto received $ 2.2 million and $ 3.1 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. In addition, during the three and six months ended May 31, 2017 , Rialto received $ 8.8 million and $ 18.8 million , respectively, of distributions with regard to its carried interest in Rialto Real Estate Fund, LP. During the three and six months ended May 31, 2016 , Rialto received $ 2.5 million and $ 7.4 million , respectively, of such advanced distributions.
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 carried interest 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 a 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.
Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
77,047

230,229

Loans receivable
434,771

406,812

Real estate owned
360,337

439,191

Investment securities
1,543,517

1,379,155

Investments in partnerships
415,316

398,535

Other assets
190,885

29,036

$
3,021,873

2,882,958

Liabilities and equity:
Accounts payable and other liabilities
$
44,989

36,131

Notes payable (1)
617,587

532,264

Equity
2,359,297

2,314,563

$
3,021,873

2,882,958

(1)
Notes payable are net of debt issuance costs of $ 4.1 million and $ 2.9 million , as of May 31, 2017 and November 30, 2016 , respectively.

19

Statements of Operations
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues
$
61,030

51,240

118,186

95,536

Costs and expenses
29,000

20,704

57,001

41,603

Other income, net (1)
9,321

26,710

9,648

11,548

Net earnings of unconsolidated entities
$
41,351

57,246

70,833

65,481

Rialto equity in earnings from unconsolidated entities
$
5,730

6,864

6,452

8,361

(1)
Other income, net, included realized and unrealized gains (losses) on investments.
Investments held-to-maturity
At May 31, 2017 and November 30, 2016 , the carrying value of Rialto's commercial mortgage-backed securities ("CMBS") was $ 112.5 million and $ 71.3 million , respectively. These securities were purchased at discounts ranging from 9 % to 78 % with coupon rates ranging from 1.3 % to 4.4 % , stated and assumed final distribution dates between November 2020 and February 2027 , and stated maturity dates between November 2043 and March 2059 . The Rialto segment reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its CMBS. Based on the Rialto segment’s assessment, no impairment charges were recorded during either the three and six months ended May 31, 2017 or May 31, 2016 . The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.

(10 )
Lennar Multifamily Segment
The Company is actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. The Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
The assets and liabilities related to the Lennar Multifamily segment were as follows:
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
9,288

6,600

Receivables (1)
64,740

58,929

Land under development
171,066

139,713

Investments in unconsolidated entities
377,265

318,559

Other assets
30,870

2,330

$
653,229

526,131

Liabilities:
Accounts payable and other liabilities
$
123,166

117,973

(1)
Receivables primarily related to general contractor services and management fee income receivables due from unconsolidated entities as of May 31, 2017 and November 30, 2016 , respectively.
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. Additionally, the Company guarantees the construction costs of the project as construction cost over-runs would be paid by the Company. Generally, these payments would be increases to the Company's investment in the entities and would increase its share of funds the entities distribute after the achievement of certain thresholds. As of both May 31, 2017 and November 30, 2016 , the fair value of the completion guarantees was immaterial. Additionally, as of May 31, 2017 and November 30, 2016 , the Lennar Multifamily segment had $ 15.2 million and $ 32.0 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 12 related to the Company's performance and financial letters of credit. As of May 31, 2017 and November 30, 2016 , Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $ 744.2 million and $ 589.4 million , respectively.

20


In many instances, the Lennar Multifamily segment is appointed as the construction, development and property manager for certain of its Lennar Multifamily unconsolidated entities and receives fees for performing this function. During the three and six months ended May 31, 2017 , the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $ 15.2 million and $ 28.1 million , respectively. During the three and six months ended May 31, 2016 , the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $ 9.3 million and $ 17.4 million , respectively.
The Lennar Multifamily segment also provides general contractor services for construction of some of the rental properties owned by unconsolidated entities in which the Company has an investment. During the three and six months ended May 31, 2017 , the Lennar Multifamily segment provided general contractor services totaling $ 84.6 million and $ 160.4 million , respectively, which were partially offset by costs related to those services of $ 83.3 million and $ 157.0 million , respectively. During the three and six months ended May 31, 2016 , the Lennar Multifamily segment provided general contractor services totaling $ 53.5 million and $ 84.9 million , respectively, which were partially offset by costs related to those services of $ 51.7 million and $ 82.3 million , respectively.
The Lennar Multifamily Venture (the "Venture") is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with $ 2.2 billion in equity commitments, including a $ 504 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. During the six months ended May 31, 2017 , $ 334.5 million in equity commitments were called, of which the Company contributed $ 76.0 million representing the Company's pro-rata portion of the called equity. During the six months ended May 31, 2017 , the Company received no distributions as a return of capital from the Venture, except for distributions of capital related to land contributions to the Venture. As of May 31, 2017 , $ 1.3 billion of the $ 2.2 billion in equity commitments had been called, of which the Company had contributed $ 291.9 million , representing its pro-rata portion of the called equity, resulting in a remaining equity commitment for the Company of $ 212.1 million . As of May 31, 2017 and November 30, 2016 , the carrying value of the Company's investment in the Venture was $ 268.1 million and $ 198.2 million , respectively.
Summarized condensed financial information on a combined 100% basis related to Lennar Multifamily's investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
44,765

43,658

Operating properties and equipment
2,658,080

2,210,627

Other assets
38,160

33,703

$
2,741,005

2,287,988

Liabilities and equity:
Accounts payable and other liabilities
$
223,061

196,617

Notes payable (1)
727,070

577,085

Equity
1,790,874

1,514,286

$
2,741,005

2,287,988

(1)
Notes payable are net of debt issuance costs of $ 17.1 million and $ 12.3 million , as of May 31, 2017 and November 30, 2016 , respectively.

21


Statements of Operations
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues
$
13,975

9,649

25,592

17,963

Costs and expenses
24,477

14,058

46,823

25,730

Other income, net
28,190

30,272

78,729

70,394

Net earnings of unconsolidated entities
$
17,688

25,863

57,498

62,627

Lennar Multifamily equity in earnings from unconsolidated entities (1)
$
9,427

14,008

32,574

33,694

(1)
During three and six months ended May 31, 2017 , the Lennar Multifamily segment sold one and three operating properties, respectively, through its unconsolidated entities resulting in the segment's $ 11.4 million and $ 37.4 million share of gains, respectively. During the three and six months ended May 31, 2016 , the Lennar Multifamily segment sold one and two operating properties, respectively, through its unconsolidated entities resulting in the segment's $ 15.4 million and $ 35.8 million share of gains, respectively.

(11)
Lennar Homebuilding Cash and Cash Equivalents
Cash and cash equivalents as of May 31, 2017 and November 30, 2016 included $ 274.8 million and $ 460.5 million , respectively, of cash held in escrow for approximately 3 days.

(12)
Lennar Homebuilding Senior Notes and Other Debts Payable
(Dollars in thousands)
May 31,
2017
November 30,
2016
4.75% senior notes due December 2017
398,851

398,479

6.95% senior notes due 2018
248,905

248,474

4.125% senior notes due December 2018
274,174

273,889

4.500% senior notes due 2019
498,397

498,002

4.50% senior notes due 2019
597,899

597,474

4.750% senior notes due 2021
496,938

496,547

6.875% senior notes due 2021 (1)
260,157

—

4.125% senior notes due 2022
595,514

—

4.750% senior notes due 2022
568,944

568,404

4.875% senior notes due December 2023
394,567

394,170

4.500% senior notes due 2024
645,113

—

4.750% senior notes due 2025
496,449

496,226

12.25% senior notes due 2017
—

398,232

Mortgage notes on land and other debt
291,781

206,080

$
5,767,689

4,575,977


(1)
The Company became a co-borrower with regard to the 6.875 % senior notes due 2021 (the " 6.875 % Senior Notes") as a result of the WCI acquisition. The 6.875 % Senior Notes were recorded at fair value with a principal outstanding amount of $ 249.8 million and are callable at declining premiums until maturity.
The carrying amounts of the senior notes listed above are net of debt issuance costs of $ 28.1 million and $ 22.1 million , as of May 31, 2017 and November 30, 2016 , respectively.
In May 2017, the Company amended the credit agreement governing its unsecured revolving credit facility (the "Credit Facility") to increase the maximum borrowings from $ 1.8 billion to $ 2.0 billion and extend the maturity on $ 1.4 billion of the Credit Facility from June 2020 to June 2022, with $ 160 million maturing in June 2018 and the remaining $ 50 million maturing in June 2020. As of May 31, 2017 , the Credit Facility included a $ 403 million accordion feature, subject to additional commitments. The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to $ 500 million in commitments may be used for letters of credit. Under the Credit Facility agreement, the Company is required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. The Company believes it was in compliance with its debt covenants at May 31, 2017 . In addition, the Company had $ 330 million of letter of credit facilities with different financial institutions.

22


The Company’s performance letters of credit outstanding were $ 318.7 million and $ 270.8 million , respectively, at May 31, 2017 and November 30, 2016 . The Company’s financial letters of credit outstanding were $ 144.3 million and $ 210.3 million , at May 31, 2017 and November 30, 2016 , respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2017 , the Company had outstanding surety bonds of $ 1.2 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. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of May 31, 2017 , there were approximately $ 575.4 million , or 48 % , 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 January 2017, the Company issued $ 600 million aggregate principal amount of 4.125 % senior notes due 2022 (the " 4.125 % Senior Notes") at a price of 100 % . Proceeds from the offering, after payment of expenses, were $ 595.2 million . The Company used the net proceeds from the sales of the 4.125 % Senior Notes to fund a portion of the cash consideration for the Company's acquisition of WCI and to pay for costs and expenses related to this acquisition as well as for general corporate purposes. Interest on the 4.125 % Senior Notes is due semi-annually beginning July 15, 2017. The 4.125 % Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
In April 2017, the Company issued $ 650 million aggregate principal amount of 4.50 % senior notes due 2024 (the " 4.50 % Senior Notes") at a price of 100 % . Proceeds from the offering, after payment of expenses, were $ 645.0 million . The Company used a portion of the net proceeds from the sales of the 4.50 % Senior Notes for the retirement of its 12.25 % senior notes due 2017 for 100% of the $ 400 million outstanding principal amount, plus accrued and unpaid interest. The Company intends to use the balance of the net proceeds together with cash on hand for general corporate purposes, which may include the redemption of its 6.875 % senior notes due 2021. Interest on the 4.50 % Senior Notes is due semi-annually beginning October 30, 2017. The 4.50 % Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries.
The Company's senior notes are guaranteed by substantially all of the Company's 100% owned homebuilding subsidiaries and some of the Company's other subsidiaries. Although the guarantees 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.


23


(13)
Product Warranty
Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in Lennar Homebuilding other liabilities in the condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Warranty reserve, beginning of period
$
138,987

124,733

135,403

130,853

Warranties issued
29,430

24,997

50,150

42,570

Adjustments to pre-existing warranties from changes in estimates (1)
7,987

( 115
)
10,333

( 735
)
Warranties assumed related to the WCI acquisition
—

—

6,345

—

Payments
( 24,571
)
( 22,456
)
( 50,398
)
( 45,529
)
Warranty reserve, end of period
$
151,833

127,159

151,833

127,159


(1)
The adjustments to pre-existing warranties from changes in estimates during the three and six months ended May 31, 2017 and 2016 primarily related to specific claims related to certain of the Company's homebuilding communities and other adjustments.

(14)
Share-Based Payments
During the three and six months ended May 31, 2017 and 2016 , the Company granted employees an immaterial number of nonvested shares. Compensation expense related to the Company’s nonvested shares for the three and six months ended May 31, 2017 was $ 12.3 million and $ 24.8 million , respectively. Compensation expense related to the Company’s nonvested shares for the three and six months ended May 31, 2016 was $ 11.1 million and $ 22.3 million , respectively.

24


(15)
Financial Instruments and Fair Value Disclosures
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at May 31, 2017 and November 30, 2016 , using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
May 31, 2017
November 30, 2016
Fair Value
Carrying
Fair
Carrying
Fair
(In thousands)
Hierarchy
Amount
Value
Amount
Value
ASSETS
Rialto:
Loans receivable, net
Level 3
$
65,326

65,326

111,608

113,747

Investments held-to-maturity
Level 3
$
112,452

112,747

71,260

69,992

Lennar Financial Services:
Loans held-for-investment, net
Level 3
$
32,691

31,211

30,004

31,233

Investments held-to-maturity
Level 2
$
54,824

54,857

41,991

42,058

LIABILITIES
Lennar Homebuilding senior notes and other debts payable
Level 2
$
5,767,689

5,964,645

4,575,977

4,669,643

Rialto notes and other debts payable
Level 2
$
781,845

803,943

622,335

646,366

Lennar Financial Services notes and other debts payable
Level 2
$
792,623

792,623

1,077,228

1,077,228


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 the 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.
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.

25


The Company’s financial instruments measured at fair value on a recurring basis are summarized below:
(In thousands)
Fair Value
Hierarchy
Fair Value at
May 31,
2017
Fair Value at
November 30,
2016
Rialto Financial Assets:
RMF loans held-for-sale (1)
Level 3
$
82,803

126,947

Credit default swaps (2)
Level 2
$
2,046

2,863

Rialto Financial Liabilities:
Interest rate swaps and swap futures (3)
Level 2
$
906

6

Lennar Financial Services Assets (Liabilities):
Loans held-for-sale (4)
Level 2
$
820,443

939,405

Investments available-for-sale
Level 1
$
56,005

53,570

Mortgage loan commitments
Level 2
$
18,372

7,437

Forward contracts
Level 2
$
( 6,796
)
26,467

Mortgage servicing rights
Level 3
$
27,370

23,930


(1)
The aggregate fair value of RMF loans held-for-sale of $ 82.8 million at May 31, 2017 exceeds their aggregate principal balance of $ 80.4 million by $ 2.4 million . The aggregate fair value of loans held-for-sale of $ 126.9 million at November 30, 2016 was below their aggregate principal balance of $ 127.8 million by $ 0.9 million .
(2)
Rialto's credit default swaps are included within Rialto's other assets.
(3)
Rialto's 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 $ 820.4 million at May 31, 2017 exceeds their aggregate principal balance of $ 788.0 million by $ 32.4 million . The aggregate fair value of Lennar Financial Services loans held-for-sale of $ 939.4 million at November 30, 2016 exceeded their aggregate principal balance of $ 931.0 million by $ 8.4 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 similar investments traded in active markets.
Lennar Financial Services loans held-for-sale - Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of May 31, 2017 and November 30, 2016 . Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.

26


Lennar Financial Services investments available-for-sale - The fair value of these investments is based on the quoted market prices for similar financial instruments.
Lennar Financial Services mortgage loan commitments - Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets.
Lennar Financial Services forward contracts - Fair value is based on quoted market prices for similar financial instruments. The fair value of forward contracts is included in the Lennar Financial Services segment's other liabilities as of May 31, 2017 . The fair value of forward contracts is included in the Lennar Financial Services segment's other assets as of November 30, 2016 .
The Lennar Financial Services segment uses mandatory mortgage-backed securities ("MBS") forward commitments, option contracts and investor commitments to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting the Company’s counterparties to investment banks, federally regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At May 31, 2017 , the segment had open commitments amounting to $ 1.2 billion to sell MBS with varying settlement dates through August 2017.
Lennar Financial Services mortgage servicing rights - Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of May 31, 2017 , the key assumptions used in determining the fair value include a 14.1 % mortgage prepayment rate, a 12.3 % discount rate and a 6.1 % delinquency rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.
The changes in fair values for Level 1 and Level 2 financial instruments measured on a recurring basis are shown below by financial instrument and financial statement line item:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Changes in fair value included in Lennar Financial Services revenues:
Loans held-for-sale
$
10,737

3,121

24,037

3,634

Mortgage loan commitments
$
4,715

( 231
)
10,935

5,822

Forward contracts
$
( 5,049
)
7,988

( 33,263
)
( 2,180
)
Investments available-for-sale
$
( 4
)
6

( 4
)
6

Changes in fair value included in Rialto revenues:
Financial Assets:
Credit default swaps
$
( 885
)
( 3,408
)
( 1,316
)
23

Financial Liabilities:
Interest rate swaps and swap futures
$
( 787
)
5,879

( 900
)
873

Changes in fair value included in other comprehensive income (loss), net of tax:
Lennar Financial Services investments available-for-sale
$
419

919

1,391

482


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.

27


The following table represents the reconciliation of the beginning and ending balance for the Level 3 recurring fair value measurements:
Three Months Ended May 31,
2017
2016
Lennar Financial Services
Rialto
Lennar Financial Services
Rialto
(In thousands)
Mortgage servicing rights
RMF loans held-for-sale
Mortgage servicing rights
RMF loans held-for-sale
Beginning balance
$
26,497

44,939

15,810

243,230

Purchases/loan originations
2,866

429,320

2,375

348,188

Sales/loan originations sold, including those not settled
—

( 392,678
)
—

( 386,226
)
Disposals/settlements
( 904
)
—

( 943
)
—

Changes in fair value (1)
( 1,089
)
1,078

999

( 5,293
)
Interest and principal paydowns
—

144

—

( 484
)
Ending balance
$
27,370

82,803

18,241

199,415

Six Months Ended May 31,
2017
2016
Lennar Financial Services
Rialto
Lennar Financial Services
Rialto
(In thousands)
Mortgage servicing rights
RMF loans held-for-sale
Mortgage servicing rights
RMF loans held-for-sale
Beginning balance
$
23,930

126,947

16,770

316,275

Purchases/loan originations
5,712

823,660

3,994

653,973

Sales/loan originations sold, including those not settled
—

( 870,394
)
—

( 767,892
)
Disposals/settlements
( 1,795
)
—

( 1,570
)
—

Changes in fair value (1)
( 477
)
2,498

( 953
)
( 1,209
)
Interest and principal paydowns
—

92

—

( 1,732
)
Ending balance
$
27,370

82,803

18,241

199,415


(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.
The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs. The fair values included in the table below represents only those assets whose carrying value were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:
Three Months Ended May 31,
2017
2016
(In thousands)
Fair Value
Hierarchy
Carrying Value
Fair Value
Total Losses, Net (1)
Carrying Value
Fair Value
Total Losses, Net (1)
Financial assets
Rialto:
Impaired loans receivable
Level 3
$
4

—

( 4
)
56,010

51,628

( 4,382
)
FDIC Portfolios loans held-for-sale
Level 3
$
29,030

23,812

( 5,218
)
—

—

—

Non-financial assets
Lennar Homebuilding:
Finished homes and construction in progress (2)
Level 3
$
6,659

2,745

( 3,914
)
—

—

—

Land and land under development (2)
Level 3
$
6,771

3,094

( 3,677
)
1,855

1,500

( 355
)
Rialto:
REO, net (3):
Upon acquisition/transfer
Level 3
$
21,429

20,271

( 1,158
)
15,470

14,809

( 661
)
Upon management periodic valuations
Level 3
$
50,075

36,250

( 13,825
)
19,719

14,983

( 4,736
)


28


Six Months Ended May 31,
2017
2016
(In thousands)
Fair Value
Hierarchy
Carrying Value
Fair Value
Total Losses, Net (1)
Carrying Value
Fair Value
Total Gains (Losses), Net (1)
Financial assets
Rialto:
Impaired loans receivable
Level 3
$
31,554

18,885

( 12,669
)
63,627

56,906

( 6,721
)
FDIC Portfolios loans held-for-sale
Level 3
$
29,030

23,812

( 5,218
)
—

—

—

Non-financial assets
Lennar Homebuilding:
Finished homes and construction in progress (2)
Level 3
$
6,659

2,745

( 3,914
)
—

—

—

Land and land under development (2)
Level 3
$
6,771

3,094

( 3,677
)
5,682

4,925

( 757
)
Rialto:
REO, net (3):
Upon acquisition/transfer
Level 3
$
30,303

28,690

( 1,613
)
33,436

35,492

2,056

Upon management periodic valuations
Level 3
$
84,330

58,176

( 26,154
)
39,238

31,632

( 7,606
)
(1)
Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the three and six months ended May 31, 2017 and 2016 .
(2)
Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's condensed consolidated statement of operations for the three and six months ended May 31, 2017 and 2016 .
(3)
The fair value of REO, net is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO. The losses, net upon the transfer or acquisition of REO and impairments were included in Rialto other expense, net, in the Company’s condensed consolidated statement of operations for the three and six months ended May 31, 2017 and 2016 .
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 impairment in the Summary of Significant Accounting Policies in its Form 10-K for the year ended November 30, 2016 .
The Company estimates the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or assumptions change. For example, changes in market conditions and other specific developments or changes in assumptions may cause the Company to re-evaluate its strategy regarding previously impaired inventory, as well as inventory not currently impaired but for which indicators of impairment may arise if market deterioration occurs, and certain other assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.
On a quarterly basis, the Company reviews its active communities for indicators of potential impairments. As of May 31, 2017 and 2016 , there were 732 and 689 active communities, excluding unconsolidated entities, respectively. As of May 31, 2017 , the Company identified 16 communities with 677 homesites and a corresponding carrying value of $ 70.0 million as having potential indicators of impairment. Of those communities, the Company recorded a valuation adjustment of $ 7.5 million on 469 homesites in six communities with a carrying value of $ 12.0 million .
As of May 31, 2016 , the Company identified 20 communities with 652 homesites and a corresponding carrying value of $ 116.0 million as having potential indicators of impairment. For the six months ended May 31, 2016 , the Company recorded no impairments.
The table below summarizes the most significant unobservable inputs used in the Company's discounted cash flow model to determine the fair value of its communities for which the Company recorded valuation adjustments during the six months ended May 31, 2017 :
Six Months Ended
May 31, 2017
Unobservable inputs
Range
Average selling price
$
125,000

-
$ 567,000
Absorption rate per quarter (homes)
4

-
10
Discount rate
20 %


29


(16)
Variable Interest Entities
The Company evaluated the agreements of its joint ventures that were formed or that had reconsideration events during the six months ended May 31, 2017 . Based on the Company's evaluation, during the six months ended May 31, 2017 , there were no VIEs that were consolidated or deconsolidated.
The Company’s recorded investments in unconsolidated entities were as follows:
(In thousands)
May 31,
2017
November 30,
2016
Lennar Homebuilding
$
995,400

811,723

Rialto
$
244,301

245,741

Lennar Multifamily
$
377,265

318,559


Consolidated VIEs
As of May 31, 2017 , the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $ 575.7 million and $ 144.1 million , respectively. As of November 30, 2016 , the carrying amounts of the VIEs’ assets and non-recourse liabilities that consolidated were $ 536.3 million and $ 126.4 million , respectively. Those assets are owned by, and those liabilities are obligations of, the VIEs, not the Company.
A VIE’s assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company’s senior notes and other debts payable. The assets held by a VIE usually are collateral for that VIE’s debt. The Company and other 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 investments in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:
As of May 31, 2017
(In thousands)
Investments in
Unconsolidated VIEs
Lennar’s Maximum
Exposure to Loss
Lennar Homebuilding (1)
$
214,608

290,705

Rialto (2)
112,452

112,452

Lennar Multifamily (3)
309,198

537,997

$
636,258

941,154

As of November 30, 2016
(In thousands)
Investments in
Unconsolidated VIEs
Lennar’s Maximum
Exposure to Loss
Lennar Homebuilding (1)
$
120,940

164,804

Rialto (2)
71,260

71,260

Lennar Multifamily (3)
240,928

549,093

$
433,128

785,157

(1)
At both May 31, 2017 and November 30, 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 repayment guarantees of unconsolidated entities' debt of $ 72.9 million and $ 43.4 million , respectively.
(2)
At both May 31, 2017 and November 30, 2016 , the maximum recourse exposure to loss of Rialto’s investments in unconsolidated VIEs was limited to its investments in the unconsolidated VIEs. At May 31, 2017 and November 30, 2016 , investments in unconsolidated VIEs and Lennar’s maximum exposure to loss included $ 112.5 million and $ 71.3 million , respectively, related to Rialto’s investments held-to-maturity.
(3)
As of May 31, 2017 and November 30, 2016 , the remaining equity commitment of $ 212.1 million and $ 288.2 million , respectively, to fund the Venture for future expenditures related to the construction and development of its projects is included in Lennar's maximum exposure to loss. In addition, at May 31, 2017 and November 30, 2016 , 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 $ 15.1 million and $ 19.7 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.

30


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. While the Company generally manages the day-to-day operations of the VIEs, each of these VIEs has an executive committee made up of representatives from each partner. The members of the executive committee have equal votes and major decisions require unanimous consent and approval from all members. The Company does not have the unilateral ability to exercise participating voting rights without partner consent.
As of May 31, 2017 , the Company and other partners did not have an obligation to make capital contributions to the VIEs, except for $ 212.1 million remaining equity commitment to fund the Venture for future expenditures related to the construction and development of the projects and $ 15.1 million of letters of credit outstanding for certain Lennar Multifamily unconsolidated VIEs that could be drawn upon in the event of default under their debt agreements. In addition, there are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to the VIEs, except with regard to $ 72.9 million repayment guarantees of two unconsolidated entities' 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.
Option Contracts
The Company has access to land through option contracts, which generally enables it to control portions of properties owned by third parties (including land funds) and unconsolidated entities until the Company has determined whether to exercise the option.
The Company evaluates all option contracts for land to determine whether they are VIEs and, if so, whether the Company is the primary beneficiary of certain of these option contracts. Although the Company does not have legal title to the optioned land, if the Company is deemed to be the primary beneficiary or makes a significant deposit for optioned land, it may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2017 , consolidated inventory not owned increased by $ 17.6 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2017 . The increase was primarily related to the consolidation of an option agreement, partially offset by the Company exercising its option to acquire land under previously consolidated contracts. To reflect the purchase price of the inventory consolidated, the Company had a net reclass related to option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2017 . 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 $ 91.1 million and $ 85.0 million at May 31, 2017 and November 30, 2016 , respectively. Additionally, the Company had posted $ 41.1 million and $ 45.1 million of letters of credit in lieu of cash deposits under certain land and option contracts as of May 31, 2017 and November 30, 2016 , respectively.

(17)
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 during the downturn, 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 believed the decision was contrary to applicable law and appealed the decision.

31


On March 23, 2017, the United States Court of Appeals for the Fourth Circuit held oral argument in the appeal. Following oral argument, the Company concluded that it was appropriate to establish an accrual of $ 140 million for the litigation. The accrual represented the high end of the range of expected liability associated with the litigation, and did not include the Company’s estimate of the fair value of the property. On April 12, 2017, the United States Court of Appeals for the Fourth Circuit issued a decision upholding the lower court’s decision. The Company subsequently purchased the property for $ 114 million , which approximates the Company's estimate of the fair value of the property, and paid approximately $ 124 million in interest and other closing costs. The Company previously accrued for the amount we expect to pay as reimbursement for attorney’s fees.
(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 continuing to evaluate the method and impact the adoption of ASU 2014-09 will have on its 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) , 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 continuing to evaluate the method and impact the adoption of these ASUs and ASU 2014-09 will have on its 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 was effective for the Company’s fiscal year beginning December 1, 2016 and subsequent interim periods. The adoption of ASU 2015-02 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

32


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 its 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 its 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 its 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. Early adoption is permitted, including adoption in an interim period. The 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.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"). ASU 2016-18 clarifies certain existing principles in ASC 230, Statement of Cash Flows , including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. ASU 2016-18 will be effective for the Company’s fiscal year beginning December 1, 2018 and subsequent interim periods. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-18 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.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets, held directly or in a subsidiary, should be accounted for as acquisitions or disposals of nonfinancial assets or of businesses. ASU 2017-01 will be effective for the Company’s fiscal year beginning December 1, 2018 and subsequent interim periods. Early adoption is permitted for transactions, including acquisitions or dispositions, which occurred before the issuance date or effective date of the standard if the transactions were not reported in financial statements that have been issued or made available for issuance. The adoption of ASU 2017-01 is not expected to have a material effect on the Company’s condensed consolidated financial statements.

33


In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Accounting for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for the Company’s fiscal year beginning December 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its condensed consolidated financial statements.

(19)
Supplemental Financial Information
The indentures governing the Company’s 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, 4.750 % senior notes due 2021, 6.875 % senior notes due 2021, 4.125 % senior notes due 2022, 4.750 % senior notes due 2022, 4.875 % senior notes due 2023, 4.50 % senior notes due 2024 and 4.750 % senior notes due 2025 require that, if any of the Company’s 100% owned subsidiaries, other than its finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least $ 75 million principal amount of debt of Lennar Corporation, those subsidiaries must also guarantee Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as "guarantors" in the following tables are subsidiaries that are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because at May 31, 2017 they were guaranteeing Lennar Corporation's letter of credit facilities and its Credit Facility, disclosed in Note 12. In addition, effective February 10, 2017, in connection with the acquisition of WCI, the Company agreed to become a co-issuer of the 6.875 % senior notes due 2021 that were issued by WCI and guaranteed by several of its wholly-owned subsidiaries. Because WCI and those subsidiaries are in effect guarantors of the Company’s obligations as a co-issuer of the 6.875 % senior notes due 2021, most of those subsidiaries must also guarantee the Company’s obligations with regard to its senior notes. As such, WCI and its subsidiaries are included in the subsidiaries that are referred to as “Guarantor Subsidiaries” in the following tables. The separate assets and liabilities of WCI and its subsidiaries are set forth in Note 2. 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.

34
(19) Supplemental Financial Information - (Continued)

Supplemental information for the subsidiaries that were guarantor subsidiaries at May 31, 2017 was as follows:

Condensed Consolidating Balance Sheet
May 31, 2017
(In thousands)
Lennar
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating Adjustments
Total
ASSETS
Lennar Homebuilding:
Cash and cash equivalents, restricted cash and receivables, net
$
554,381

265,539

16,769

—

836,689

Inventories
—

10,157,196

275,978

—

10,433,174

Investments in unconsolidated entities
—

978,629

16,771

—

995,400

Goodwill
—

136,633

—

—

136,633

Other assets
224,770

579,538

99,507

( 13,150
)
890,665

Investments in subsidiaries
4,501,309

72,290

—

( 4,573,599
)
—

Intercompany
7,670,891

—

—

( 7,670,891
)
—

12,951,351

12,189,825

409,025

( 12,257,640
)
13,292,561

Rialto
—

—

1,364,421

—

1,364,421

Lennar Financial Services
—

123,529

1,323,623

( 2,858
)
1,444,294

Lennar Multifamily
—

—

653,229

—

653,229

Total assets
$
12,951,351

12,313,354

3,750,298

( 12,260,498
)
16,754,505

LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable and other liabilities
$
413,029

866,959

130,835

( 16,008
)
1,394,815

Liabilities related to consolidated inventory not owned
—

120,054

13,500

—

133,554

Senior notes and other debts payable
5,215,751

534,593

17,345

—

5,767,689

Intercompany
—

6,573,012

1,097,879

( 7,670,891
)
—

5,628,780

8,094,618

1,259,559

( 7,686,899
)
7,296,058

Rialto
—

—

860,612

—

860,612

Lennar Financial Services
—

38,100

999,563

—

1,037,663

Lennar Multifamily
—

—

123,166

—

123,166

Total liabilities
5,628,780

8,132,718

3,242,900

( 7,686,899
)
9,317,499

Stockholders’ equity
7,322,571

4,180,636

392,963

( 4,573,599
)
7,322,571

Noncontrolling interests
—

—

114,435

—

114,435

Total equity
7,322,571

4,180,636

507,398

( 4,573,599
)
7,437,006

Total liabilities and equity
$
12,951,351

12,313,354

3,750,298

( 12,260,498
)
16,754,505



35
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Balance Sheet
November 30, 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
$
705,126

436,090

21,875

—

1,163,091

Inventories
—

8,901,874

277,052

—

9,178,926

Investments in unconsolidated entities
—

793,840

17,883

—

811,723

Other assets
227,267

346,865

84,224

( 7,328
)
651,028

Investments in subsidiaries
3,918,687

130,878

—

( 4,049,565
)
—

Intercompany
7,017,962

—

—

( 7,017,962
)
—

11,869,042

10,609,547

401,034

( 11,074,855
)
11,804,768

Rialto
—

—

1,276,210

—

1,276,210

Lennar Financial Services loans held-for-sale
—

—

939,405

—

939,405

Lennar Financial Services all other assets
—

103,000

715,758

( 3,491
)
815,267

Lennar Multifamily
—

—

526,131

—

526,131

Total assets
$
11,869,042

10,712,547

3,858,538

( 11,078,346
)

15,361,781

LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable and other liabilities
$
473,103

778,249

79,462

( 10,819
)
1,319,995

Liabilities related to consolidated inventory not owned
—

13,582

96,424

—

110,006

Senior notes and other debts payable
4,369,897

203,572

2,508

—

4,575,977

Intercompany
—

6,071,778

946,184

( 7,017,962
)
—

4,843,000

7,067,181

1,124,578

( 7,028,781
)
6,005,978

Rialto
—

—

707,980

—

707,980

Lennar Financial Services
—

38,530

1,279,753

—

1,318,283

Lennar Multifamily
—

—

117,973

—

117,973

Total liabilities
4,843,000

7,105,711

3,230,284

( 7,028,781
)
8,150,214

Stockholders’ equity
7,026,042

3,606,836

442,729

( 4,049,565
)
7,026,042

Noncontrolling interests
—

—

185,525

—

185,525

Total equity
7,026,042

3,606,836

628,254

( 4,049,565
)
7,211,567

Total liabilities and equity
$
11,869,042

10,712,547

3,858,538

( 11,078,346
)
15,361,781




36
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Three Months Ended May 31, 2017
(In thousands)
Lennar
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating Adjustments
Total
Revenues:
Lennar Homebuilding
$
—

2,875,612

10,129

—

2,885,741

Lennar Financial Services
—

86,596

126,767

( 5,000
)
208,363

Rialto
—

—

67,988

—

67,988

Lennar Multifamily
—

—

99,835

( 35
)
99,800

Total revenues
—

2,962,208

304,719

( 5,035
)
3,261,892

Cost and expenses:
Lennar Homebuilding
—

2,525,007

10,718

( 242
)
2,535,483

Lennar Financial Services
—

77,742

92,673

( 5,779
)
164,636

Rialto
—

—

59,166

( 90
)
59,076

Lennar Multifamily
—

—

102,698

—

102,698

Corporate general and administrative
65,217

291

—

1,266

66,774

Total costs and expenses
65,217


2,603,040


265,255


( 4,845
)

2,928,667

Lennar Homebuilding equity in loss from unconsolidated entities
—

( 21,468
)
( 38
)
—

( 21,506
)
Lennar Homebuilding other income (expense), net
( 180
)
1,880

1,938

190

3,828

Rialto equity in earnings from unconsolidated entities
—

—

5,730

—

5,730

Rialto other expense, net
—

—

( 21,104
)
—

( 21,104
)
Lennar Multifamily equity in earnings from unconsolidated entities
—

—

9,427

—

9,427

Earnings (loss) before income taxes
( 65,397
)
339,580

35,417

—

309,600

Benefit (provision) for income taxes
21,822

( 112,372
)
( 18,342
)
—

( 108,892
)
Equity in earnings from subsidiaries
257,220

21,415

—

( 278,635
)
—

Net earnings (including net loss attributable to noncontrolling interests)
213,645

248,623

17,075

( 278,635
)
200,708

Less: Net loss attributable to noncontrolling interests
—

—

( 12,937
)
—

( 12,937
)
Net earnings attributable to Lennar
$
213,645

248,623

30,012

( 278,635
)
213,645

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

—

419

—

419

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

—

4

—

4

Other comprehensive income attributable to Lennar
$
213,645

248,623

30,435

( 278,635
)
214,068

Other comprehensive loss attributable to noncontrolling interests
$
—

—

( 12,937
)
—

( 12,937
)



37
(19) Supplemental Financial Information - (Continued)

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

2,450,885

—

—

2,450,885

Lennar Financial Services
—

53,310

127,642

( 5,012
)
175,940

Rialto
—

—

44,838

—

44,838

Lennar Multifamily
—

—

74,171

( 19
)
74,152

Total revenues
—

2,504,195

246,651

( 5,031
)
2,745,815

Cost and expenses:
Lennar Homebuilding
—

2,126,412

( 6,231
)
( 7,893
)
2,112,288

Lennar Financial Services
—

48,204

81,255

2,393

131,852

Rialto
—

—

50,260

( 57
)
50,203

Lennar Multifamily
—

—

73,217

—

73,217

Corporate general and administrative
54,282

254

—

1,266

55,802

Total costs and expenses
54,282

2,174,870

198,501

( 4,291
)
2,423,362

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

( 10,860
)
1,227

—

( 9,633
)
Lennar Homebuilding other income (expense), net
( 732
)
22,623

( 8,899
)
740

13,732

Rialto equity in earnings from unconsolidated entities
—

—

6,864

—

6,864

Rialto other expense, net
—

—

( 19,585
)
—

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

—

14,008

—

14,008

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

41,765

—

327,839

Benefit (provision) for income taxes
18,025

( 108,653
)
( 13,173
)
—

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

15,458

—

( 270,916
)
—

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

247,893

28,592

( 270,916
)
224,038

Less: Net earnings attributable to noncontrolling interests
—

—

5,569

—

5,569

Net earnings attributable to Lennar
$
218,469

247,893

23,023

( 270,916
)
218,469

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

—

919

—

919

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

—

( 6
)
—

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

247,893

23,936

( 270,916
)
219,382

Other comprehensive income attributable to noncontrolling interests
$
—

—

5,569

—

5,569




38
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)
Six Months Ended May 31, 2017
(In thousands)
Lennar
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating Adjustments
Total
Revenues:
Lennar Homebuilding
$
—

4,888,494

15,941

—

4,904,435

Lennar Financial Services
—

137,105

229,299

( 9,998
)
356,406

Rialto
—

—

149,994

—

149,994

Lennar Multifamily
—

—

188,552

( 67
)
188,485

Total revenues
—

5,025,599

583,786

( 10,065
)
5,599,320

Cost and expenses:
Lennar Homebuilding
—

4,319,017

18,586

( 559
)
4,337,044

Lennar Financial Services
—

126,798

176,661

( 11,444
)
292,015

Rialto
—

—

126,131

( 142
)
125,989

Lennar Multifamily
—

—

195,347

—

195,347

Corporate general and administrative
124,396

546

—

2,531

127,473

Total costs and expenses
124,396

4,446,361

516,725

( 9,614
)
5,077,868

Lennar Homebuilding equity in loss from unconsolidated entities
—

( 33,028
)
( 12
)
—

( 33,040
)
Lennar Homebuilding other income (expense), net
( 431
)
6,653

2,894

451

9,567

Lennar Homebuilding loss due to litigation
—

( 140,000
)
—

—

( 140,000
)
Rialto equity in earnings from unconsolidated entities
—

—

6,452

—

6,452

Rialto other expense, net
—

—

( 37,762
)
—

( 37,762
)
Lennar Multifamily equity in earnings from unconsolidated entities
—

—

32,574

—

32,574

Earnings (loss) before income taxes
( 124,827
)
412,863

71,207

—

359,243

Benefit (provision) for income taxes
42,266

( 135,716
)
( 35,411
)
—

( 128,861
)
Equity in earnings from subsidiaries
334,286

28,308

—

( 362,594
)
—

Net earnings (including net loss attributable to noncontrolling interests)
251,725

305,455

35,796

( 362,594
)
230,382

Less: Net loss attributable to noncontrolling interests
—

—

( 21,343
)
—

( 21,343
)
Net earnings attributable to Lennar
$
251,725

305,455

57,139

( 362,594
)
251,725

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

—


1,391


—

1,391

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

—


4


—

4

Other comprehensive income attributable to Lennar
$
251,725

305,455

58,534

( 362,594
)
253,120

Other comprehensive loss attributable to noncontrolling interests
$
—

—

( 21,343
)
—

( 21,343
)



39
(19) Supplemental Financial Information - (Continued)

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

4,237,366

—

—

4,237,366

Lennar Financial Services
—

93,920

215,984

( 10,008
)
299,896

Rialto
—

—

88,549

—

88,549

Lennar Multifamily
—

—

113,700

( 32
)
113,668

Total revenues
—

4,331,286

418,233

( 10,040
)
4,739,479

Cost and expenses:
Lennar Homebuilding
—

3,682,578

8,632

( 10,717
)
3,680,493

Lennar Financial Services
—

90,016

151,324

( 463
)
240,877

Rialto
—

—

93,477

( 367
)
93,110

Lennar Multifamily
—

—

120,237

—

120,237

Corporate general and administrative
100,430

509

—

2,531

103,470

Total costs and expenses
100,430

3,773,103

373,670

( 9,016
)
4,238,187

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

( 7,011
)
378

—

( 6,633
)
Lennar Homebuilding other income (expense), net
( 1,006
)
12,950

126

1,024

13,094

Rialto equity in earnings from unconsolidated entities
—

—

8,361

—

8,361

Rialto other expense, net
—

—

( 20,276
)
—

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

—

33,694

—

33,694

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

66,846

—

529,532

Benefit (provision) for income taxes
31,060

( 170,363
)
( 20,739
)
—

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

19,996

—

( 452,921
)
—

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

413,755

46,107

( 452,921
)
369,490

Less: Net earnings attributable to noncontrolling interests
—

—

6,941

—

6,941

Net earnings attributable to Lennar
$
362,549

413,755

39,166

( 452,921
)
362,549

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

—

482

—

482

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

—

( 6
)
—

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

413,755

39,642

( 452,921
)
363,025

Other comprehensive income attributable to noncontrolling interests
$
—

—

6,941

—

6,941




40
(19) Supplemental Financial Information - (Continued)

Condensed Consolidating Statement of Cash Flows
Six Months Ended May 31, 2017
(In thousands)
Lennar
Corporation
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Consolidating Adjustments
Total
Cash flows from operating activities:
Net earnings (including net loss attributable to noncontrolling interests)
$
251,725

305,455

35,796

( 362,594
)
230,382

Distributions of earnings from guarantor and non-guarantor subsidiaries
334,286

28,308

—

( 362,594
)
—

Other adjustments to reconcile net earnings (including net loss attributable to noncontrolling interests) to net cash provided by (used in) operating activities
( 340,147
)
( 412,545
)
( 43
)
362,594

( 390,141
)
Net cash provided by (used in) operating activities
245,864

( 78,782
)
35,753

( 362,594
)
( 159,759
)
Cash flows from investing activities:
Investments in and contributions to unconsolidated entities, net of distributions of capital
—

( 218,153
)
( 1,103
)
—

( 219,256
)
Proceeds from sales of real estate owned
—

—

55,521

—

55,521

Originations of loans receivable
—

—

( 14,055
)
—

( 14,055
)
Purchases of commercial mortgage-backed securities bonds
—

—

( 40,357
)
—

( 40,357
)
Acquisition, net of cash acquired
( 611,103
)
—

—

—

( 611,103
)
Other
( 3,897
)
( 23,370
)
( 17,019
)
—

( 44,286
)
Distributions of capital from guarantor and non-guarantor subsidiaries
60,000

60,000

—

( 120,000
)
—

Intercompany
( 657,990
)
—

—

657,990

—

Net cash used in investing activities
( 1,212,990
)
( 181,523
)
( 17,013
)
537,990

( 873,536
)
Cash flows from financing activities:
Net repayments under warehouse facilities
—

( 51
)
( 144,214
)
—

( 144,265
)
Proceeds from senior notes and debt issuance costs
1,240,449

—

( 4,509
)
—

1,235,940

Redemption of senior notes
( 400,000
)
—

—

—

( 400,000
)
Net proceeds on Rialto notes payable
—

—

25,340

—

25,340

Net proceeds (payments) on other borrowings
—

( 28,705
)
63,201

—

34,496

Net payments related to noncontrolling interests
—



( 47,589
)
—

( 47,589
)
Excess tax benefits from share-based awards
1,980

—

—

—

1,980

Common stock:

Issuances
693

—

—

—

693

Repurchases
( 83
)
—

—

—

( 83
)
Dividends
( 18,778
)
( 365,455
)
( 117,139
)
482,594

( 18,778
)
Intercompany
—

497,457

160,533

( 657,990
)
—

Net cash provided by (used in) financing activities
824,261

103,246

( 64,377
)
( 175,396
)
687,734

Net decrease in cash and cash equivalents
( 142,865
)
( 157,059
)
( 45,637
)
—

( 345,561
)
Cash and cash equivalents at beginning of period
697,112

377,070

255,347

—

1,329,529

Cash and cash equivalents at end of period
$
554,247

220,011

209,710

—

983,968




41
(19) Supplemental Financial Information - (Continued)

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

413,755

46,107

( 452,921
)
369,490

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

19,996

—

( 452,921
)
—

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

452,921

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

( 355,381
)
249,781

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

( 65,441
)
( 41,775
)
—

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

—

43,412

—

43,412

Originations of loans receivable
—

—

( 16,864
)
—

( 16,864
)
Receipts of principal payments on loans receivable
—

—

5,484

—

5,484

Purchases of commercial mortgage-backed securities bonds
—

—

( 33,005
)
—

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

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

40,000

—

( 80,000
)
—

Intercompany
( 1,008,886
)
—

—

1,008,886

—

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

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

—

—

—

375,000

Net repayments under warehouse facilities
—

—

( 230,206
)
—

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

—

( 746
)
—

495,228

Redemption of senior notes
( 250,000
)
—

—

—

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

—

—

( 233,893
)
Principal payments on Rialto notes payable
—

—

( 2,999
)
—

( 2,999
)
Net payments on other borrowings


( 87,532
)
—

—

( 87,532
)
Net payments related to noncontrolling interests
—

—

( 73,028
)
—

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

—

—

—

7,039

Common stock:

Issuances
594

—

—

—

594

Repurchases
( 971
)
—

—

—

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

( 17,191
)
Intercompany
—

879,733

129,153

( 1,008,886
)
—

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

338,446

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

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

336,048

246,576

—

1,158,445

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

263,403

192,152

—

815,477




42


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, 2016 .
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 seems to continue to be giving way to a more definitive reversion to normal, and our belief regarding the drivers behind this; our expectation that we will experience increased pricing power as a result of the drivers of the housing 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 belief that first-time home buyers will continue to come to the housing market, and the drivers behind this; our expectation that we will be able to continue the pivot of our land strategy towards shorter-term land acquisitions and that we will be able to maintain a 7% to 10% growth rate for the company while we enhance our operating platform by reducing SG&A expenses; our expectation that our 2017 growth rate should be on the higher side or a little bit over our growth goal for the year; our expectation that we will continue to invest in various technologies to significantly improve our operating model; our expectation that in the second half of 2017, our principal focus in our homebuilding operations will continue to be on generating strong operating margins on the homes we sell, and our belief regarding the drivers of such margins; our expectation that we will continue to see somewhat lower gross margins in the third quarter of 2017 compared to the third quarter of 2016; our expectation that we will 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; our expectation that the Company’s main driver of earnings will continue to be our homebuilding and financial services operations, and our expectation that we are currently positioned to deliver between 29,500 and 30,000 homes in fiscal 2017; our intention that we will move back over time to being a pure play homebuilding company; 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 operating revenues 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 our estimates regarding certain tax and accounting matters, including our expectations regarding the result of anticipated settlements with various taxing authorities.
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: increases in operating costs, including costs related to labor, construction materials, real estate taxes, and insurance, and our inability to manage our cost structure, both in our Homebuilding and Lennar Multifamily businesses; unfavorable outcomes in legal proceedings that substantially exceed our expectations; 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 consolidated financial statements for a particular reporting period; our inability to acquire land and pursue real estate opportunities at anticipated prices; our inability to maximize returns on the assets that we acquired in the WCI Communities, Inc. ("WCI") acquisition; 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; decreased demand for our Lennar Multifamily rental properties, and our inability to successfully sell our rental properties; the inability of our Lennar Financial Services segment to maintain or increase its capture rate and benefit from Lennar home deliveries; our inability to successfully execute our strategies, including strategies related to the pivot of our land strategy towards shorter-term land acquisitions, the move to a pure play homebuilding company 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 inability 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 inability to

43


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 inability to comply with the terms of our debt instruments, our inability to refinance our debt on terms that are acceptable to us; and our inability 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 energy tax credits.
Please see our Form 10-K, for the fiscal year ended November 30, 2016 and other filings with the SEC for a further discussion of these and other risks and uncertainties which could affect our future results. We undertake no obligation, other than those imposed by securities laws, 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 that the slow and steady improvement in the homebuilding market that we have seen for the entirety of this recovery seems to continue to be giving way to a more definitive reversion to normal supported by renewed optimism, wage and job growth, and consumer confidence. The recovery is also being sustained by stronger general economic conditions, favorable interest rates and low unemployment levels. We continue to feel that limited supply and production deficits from the past years are now intersecting with land and labor shortages and we started to see some pricing power as we moved through the spring selling season that was offset however by construction costs increases. 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. Additionally, the economic realities of a constrained supply of housing options and the economic realities of higher rental rates are beginning to have an impact on decision making for the first-time home buyer as millennials are continuing to come to the housing market. Our core homebuilding strategy continues to include a pivot of our land strategy towards shorter-term land acquisitions and to maintain a 7% to 10% growth rate for the company while we enhance our operating platform by reducing SG&A expenses. Given our acquisition of WCI, our 2017 growth rate should be on the higher side or a little bit over our growth goal for the year.
We intend to move back to being a pure play homebuilder over time. In order to accomplish this with respect to our other lines of business, such as Rialto and Multifamily, we may also consider transactions such as restructurings, joint ventures, spin-offs or public offerings.
Our core homebuilding business continued to produce solid operating results in the second quarter of 2017 as our gross margin and operating margin from home sales were 21.5% and 12.1%, respectively. Our second quarter new orders and home deliveries increased 12% and 15% year-over-year, to 8,898 homes and 7,710 homes, respectively. Even with 20 basis points of WCI transaction-related expenses, our SG&A as a percentage of revenues from home sales of 9.3% matched the lowest second quarter SG&A percentage in our history, primarily due to improved operating leverage and our continued focus on investing in new technologies. We continue to use various technology initiatives to significantly improve our operating model, and fueled by our digital marketing efforts, our dynamic pricing tool and other technology initiatives as well, we continue to focus on overall operational efficiency driving our SG&A as a percentage of revenues from home sales to historic lows.
Complementing our homebuilding segment, we had strong performances from our other business segments during the second quarter of 2017. Our Lennar Financial Services segment reported earnings of $43.7 million in the second quarter of 2017, consistent with the prior year, despite a significant decrease in refinance transactions because of higher interest rates. The decrease was primarily offset by higher profit per transaction in the segment's title operations.
During the second quarter of 2017, our Multifamily segment’s earnings were $6.5 million primarily due to the sale of one completed rental property by a joint venture. With its geographically diversified pipeline of multifamily products and increased activity in our Lennar Multifamily Venture, this segment continues to grow while capitalizing on future development opportunities.

44


Our Rialto segment had $6.2 million of earnings during the second quarter of 2017, net of noncontrolling interests. During the second quarter, our Rialto Mortgage Finance ("RMF") business continued its consistent program of producing strong results and Rialto's investment management platform also performed well.
In the second half of 2017, 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 continuing to invest in technologies to drive efficiencies. We expect to continue to see somewhat lower gross margins in the third quarter of 2017 compared to the third quarter of 2016 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 shorter-term land opportunities that we expect will drive our future growth and profitability, including ramping up our first-time homebuyer land positions. 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 29,500 and 30,000 homes in fiscal 2017.
(1) Results of Operations
Overview
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and six months ended May 31, 2017 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 $213.6 million , or $0.91 per diluted share ( $0.91 per basic share), in the second quarter of 2017 , compared to net earnings attributable to Lennar of $218.5 million , or $0.95 per diluted share ( $1.01 per basic share), in the second quarter of 2016 . Our net earnings attributable to Lennar were $251.7 million , or $1.07 per diluted share ( $1.07 per basic share), in the six months ended May 31, 2017 , compared to net earnings attributable to Lennar of $362.5 million , or $1.58 per diluted share ( $1.69 per basic share), in the six months ended May 31, 2016 .

45


Financial information relating to our operations was as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Lennar Homebuilding revenues:
Sales of homes
$
2,870,352

2,429,568

4,854,140

4,184,259

Sales of land
15,389

21,317

50,295

53,107

Total Lennar Homebuilding revenues
2,885,741

2,450,885

4,904,435

4,237,366

Lennar Homebuilding costs and expenses:
Costs of homes sold
2,253,477

1,868,045

3,818,100

3,223,790

Costs of land sold
13,651

19,468

46,575

42,080

Selling, general and administrative
268,355

224,775

472,369

414,623

Total Lennar Homebuilding costs and expenses
2,535,483

2,112,288

4,337,044

3,680,493

Lennar Homebuilding operating margins
350,258

338,597

567,391

556,873

Lennar Homebuilding equity in loss from unconsolidated entities
(21,506
)
(9,633
)
(33,040
)
(6,633
)
Lennar Homebuilding other income, net
3,828

13,732

9,567

13,094

Lennar Homebuilding loss due to litigation
—

—

(140,000
)
—

Lennar Homebuilding operating earnings
332,580

342,696

403,918

563,334

Lennar Financial Services revenues
208,363

175,940

356,406

299,896

Lennar Financial Services costs and expenses
164,636

131,852

292,015

240,877

Lennar Financial Services operating earnings
43,727

44,088

64,391

59,019

Rialto revenues
67,988

44,838

149,994

88,549

Rialto costs and expenses
59,076

50,203

125,989

93,110

Rialto equity in earnings from unconsolidated entities
5,730

6,864

6,452

8,361

Rialto other expense, net
(21,104
)
(19,585
)
(37,762
)
(20,276
)
Rialto operating loss
(6,462
)
(18,086
)
(7,305
)
(16,476
)
Lennar Multifamily revenues
99,800

74,152

188,485

113,668

Lennar Multifamily costs and expenses
102,698

73,217

195,347

120,237

Lennar Multifamily equity in earnings from unconsolidated entities
9,427

14,008

32,574

33,694

Lennar Multifamily operating earnings
6,529

14,943

25,712

27,125

Total operating earnings
376,374

383,641

486,716

633,002

Corporate general and administrative expenses
(66,774
)
(55,802
)
(127,473
)
(103,470
)
Earnings before income taxes
$
309,600

327,839

359,243

529,532


46


Three Months Ended May 31, 2017 versus Three Months Ended May 31, 2016
As previously announced on February 10, 2017, we completed our acquisition of WCI. Prior year information does not include WCI data for the three months ended May 31, 2016.
Revenues from home sales increased 18% in the second quarter of 2017 to $2.9 billion from $2.4 billion in the second quarter of 2016 . Revenues were higher primarily due to a 15% 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 7,687 homes in the second quarter of 2017 from 6,711 homes in the second quarter of 2016 . There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other. The increase in home deliveries was primarily driven by an increase in active communities over the last year. The average sales price of homes delivered was $374,000 in the second quarter of 2017 , compared to $362,000 in the second quarter of 2016 , 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 $22,700 per home delivered in the second quarter of 2017 , or 5.7% as a percentage of home sales revenue, compared to $21,800 per home delivered in the second quarter of 2016 , or 5.7% as a percentage of home sales revenue, and $22,700 per home delivered in the first quarter of 2017, or 5.9% as a percentage of home sales revenue.
Gross margins on home sales were $616.9 million , or 21.5% , in the second quarter of 2017 , compared to $561.5 million , or 23.1% , in the second quarter of 2016 . Gross margin percentage on home sales decreased compared to the second quarter of 2016 primarily due to an increase in construction and land costs per home.
Selling, general and administrative expenses were $268.4 million in the second quarter of 2017 , compared to $224.8 million in the second quarter of 2016 . As a percentage of revenues from home sales, selling, general and administrative expenses were 9.3% in the second quarter of 2017 , consistent with the second quarter of 2016 . WCI transaction-related expenses had a negative 20 basis point impact on selling, general and administrative expenses as a percentage of revenues from home sales in the second quarter of 2017 .
Lennar Homebuilding equity in loss from unconsolidated entities was $21.5 million in the second quarter of 2017 , compared to $9.6 million in the second quarter of 2016 . In the second quarter of 2017 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of net operating losses from our unconsolidated entities. The operating losses from our unconsolidated entities were primarily driven by general and administrative expenses, as there were no significant home and land sale transactions during the second quarter of 2017 . In the second quarter of 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $6.7 million of equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties.
Lennar Homebuilding other income, net, was $3.8 million in the second quarter of 2017 , compared to $13.7 million in the second quarter of 2016 . Other income, net, in the second quarter of 2016 was primarily related to a profit participation received by one of Lennar Homebuilding's consolidated joint ventures.
Lennar Homebuilding interest expense was $71.9 million in the second quarter of 2017 ( $69.9 million was included in costs of homes sold, $0.7 million in costs of land sold and $1.3 million in other income, net), compared to $63.9 million in the second quarter of 2016 ( $62.1 million was included in costs of homes sold, $0.6 million in costs of land sold and $1.2 million in other income, net). 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 $43.7 million in the second quarter of 2017 , compared to $44.1 million in the second quarter of 2016 . Operating earnings were impacted by a significant decrease in refinance transactions, offset by higher profit per transaction in the segment's title operations.
Operating earnings for our Rialto segment were $6.2 million in the second quarter of 2017 (which included a $6.5 million operating loss and an add back of $12.6 million of net loss attributable to noncontrolling interests). Operating loss in the second quarter of 2016 was $13.8 million (which included an $18.1 million operating loss and an add back of $4.3 million of net loss attributable to noncontrolling interests). The increase in operating earnings is primarily due to an increase in incentive income related to carried interest distributions from the Rialto real estate funds, partially offset by an increase in general and administrative expenses and real estate owned impairments. In addition, the second quarter of 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.

47


Operating earnings for our Lennar Multifamily segment were $6.5 million in the second quarter of 2017 , primarily due to the segment's $11.4 million share of a gain as a result of the sale of an operating property by one of Lennar Multifamily's unconsolidated entities, partially offset by general and administrative expenses. In the second quarter of 2016 , our Lennar Multifamily segment had operating earnings of $14.9 million primarily due to the segment's $15.4 million share of a gain as a result of the sale of an operating property by one of its unconsolidated entities and a gain of $5.2 million on a third-party land sale.
Corporate general and administrative expenses were $66.8 million , or 2.0% as a percentage of total revenues, in the second quarter of 2017 , compared to $55.8 million , or 2.0% as a percentage of total revenues, in the second quarter of 2016 .
Net earnings (loss) attributable to noncontrolling interests were ($12.9) million and $5.6 million in the second quarter of 2017 and 2016 , respectively. Net loss attributable to noncontrolling interests during the second quarter of 2017 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. Net earnings attributable to noncontrolling interests in the second quarter of 2016 were primarily attributable to earnings related to Lennar Homebuilding consolidated joint ventures, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the second quarter of 2017 and 2016 , we had a tax provision of $108.9 million and $103.8 million , respectively. Our overall effective income tax rates were 33.76% and 32.21% in the second quarter of 2017 and 2016 , respectively. The effective tax rate for both the second quarter of 2017 and 2016 included tax benefits related to settlements with the IRS, domestic production activities deduction and energy tax credits, offset primarily by state income tax expense.
Six Months Ended May 31, 2017 versus Six Months Ended May 31, 2016
As previously announced on February 10, 2017, we completed our acquisition of WCI. The results of operations include activity related to WCI from February 10, 2017 to May 31, 2017. Prior year information does not include WCI data for the six months ended May 31, 2016.
Revenues from home sales increased 16% in the six months ended May 31, 2017 to $4.9 billion from $4.2 billion in the six months ended May 31, 2016 . Revenues were higher primarily due to a 14% increase in the number of home deliveries, excluding unconsolidated entities, and a 2% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 13,120 homes in the six months ended May 31, 2017 from 11,517 homes in the six months ended May 31, 2016 . There was an increase in home deliveries in all of our Homebuilding segments and Homebuilding Other. The increase in home deliveries was primarily driven by an increase in active communities over the last year. The average sales price of homes delivered was $370,000 in the six months ended May 31, 2017 , compared to $363,000 in the six months ended May 31, 2016 , primarily due to product mix and increased pricing in certain of our markets due to favorable market conditions. Sales incentives offered to homebuyers were $22,700 per home delivered in the six months ended May 31, 2017 , or 5.8% as a percentage of home sales revenue, compared to $21,700 per home delivered in the six months ended May 31, 2016 , or 5.6% as a percentage of home sales revenue.
Gross margins on home sales were $1.0 billion , or 21.3% , in the six months ended May 31, 2017 , compared to $960.5 million , or 23.0% , in the six months ended May 31, 2016 . Gross margin percentage on home sales decreased compared to the six months ended May 31, 2016 primarily due to an increase in construction and land costs per home. Gross profits on land sales were $3.7 million in the six months ended May 31, 2017 , compared to $11.0 million in the six months ended May 31, 2016 .
Selling, general and administrative expenses were $472.4 million in the six months ended May 31, 2017 , compared to $414.6 million in the six months ended May 31, 2016 . As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.7% in the six months ended May 31, 2017 , from 9.9% in the six months ended May 31, 2016 , due to improved operating leverage as a result of an increase in home deliveries. In addition, WCI transaction-related expenses had a negative 30 basis point impact on selling, general and administrative expenses as a percentage of revenues from home sales in the six months ended May 31, 2017 .
Lennar Homebuilding equity in loss from unconsolidated entities was $33.0 million in the six months ended May 31, 2017 , compared to $6.6 million in the six months ended May 31, 2016 . In the six months ended May 31, 2017 , Lennar Homebuilding equity in loss from unconsolidated entities was attributable to our share of net operating losses from our unconsolidated entities, which was primarily driven by general and administrative expenses, as there were no significant home and land sale transactions during the six months ended May 31, 2017 . In the six months ended May 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $12.7 million of equity in earnings from one of our unconsolidated entities primarily due to sales of homesites to third parties.

48


Lennar Homebuilding other income, net, was $9.6 million in the six months ended May 31, 2017 , compared to $13.1 million in the six months ended May 31, 2016 . In the six months ended May 31, 2016 , other income, net, included a profit participation received by one of Lennar Homebuilding's consolidated joint ventures.
Lennar Homebuilding loss due to litigation of $140 million was related to an accrual recorded in the six months ended May 31, 2017 , which represented the high end of the range of expected liability associated with litigation regarding a contract we entered into in 2005 to purchase property in Maryland (see Note 17 of the Notes to Condensed Consolidated Financial Statements).
Lennar Homebuilding interest expense was $124.3 million in the six months ended May 31, 2017 ( $118.6 million was included in costs of homes sold, $3.1 million in costs of land sold and $2.5 million in other income, net), compared to $109.1 million in the six months ended May 31, 2016 ( $105.4 million was included in costs of homes sold, $1.3 million in costs of land sold and $2.4 million in other income, net). 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 $64.4 million in the six months ended May 31, 2017 , compared to $59.0 million in the six months ended May 31, 2016 . The increase in profitability was primarily due to increased profitability in the segment's title operations, partially offset by a decrease in refinance transactions.
Operating earnings for our Rialto segment were $18.2 million in the six months ended May 31, 2017 (which included a $7.3 million operating loss and an add back of $25.5 million of net loss attributable to noncontrolling interests). Operating loss for the six months ended May 31, 2016 was $11.8 million (which included a $16.5 million operating loss and an add back of $4.6 million of net loss attributable to noncontrolling interests). The increase in operating earnings is primarily related to an increase in RMF earnings as a result of higher securitization margins as well as an increase in incentive income related to carried interest distributions from the Rialto real estate funds. This was partially offset by an increase in loan impairments, real estate owned impairments and general and administrative expenses. In addition, the six months ended May 31, 2016 included a $16.0 million write-off of uncollectible receivables related to the hospital.
Operating earnings for our Lennar Multifamily segment were $25.7 million in the six months ended May 31, 2017 , primarily due to the segment's $37.4 million share of gains as a result of the sale of three operating properties by Lennar Multifamily's unconsolidated entities, partially offset by general and administrative expenses. In the six months ended May 31, 2016 , our Lennar Multifamily segment had operating earnings of $27.1 million primarily due to the segment's $35.8 million share of gains as a result of the sale of two operating properties by its unconsolidated entities and a gain of $5.2 million on a third-party land sale.
Corporate general and administrative expenses were $127.5 million , or 2.3% as a percentage of total revenues, in the six months ended May 31, 2017 , compared to $103.5 million , or 2.2% as a percentage of total revenues, in the six months ended May 31, 2016 .
Net earnings (loss) attributable to noncontrolling interests were ($21.3) million and $6.9 million in the six months ended May 31, 2017 and 2016 , respectively. Net loss attributable to noncontrolling interests during the six months ended May 31, 2017 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 the Lennar Homebuilding consolidated joint ventures. Net earnings attributable to noncontrolling interests in the six months ended May 31, 2016 were primarily attributable to earnings related to Lennar Homebuilding consolidated joint ventures, partially offset by a net loss related to the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the six months ended May 31, 2017 and 2016 , we had a tax provision of $128.9 million and $160.0 million , respectively. Our overall effective income tax rates were 33.86% and 30.62% in the six months ended May 31, 2017 and 2016 , respectively. The effective tax rate for both the six months ended May 31, 2017 and 2016 included tax benefits for settlements with the IRS, the domestic production activities deduction, and energy tax credits, offset primarily by state income tax expense.


49


Homebuilding Segments
We have aggregated our homebuilding activities into three reportable segments, which we refer to as Homebuilding East, Homebuilding Central, and Homebuilding West, 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 three reportable segments.
As a result of a change in our reportable segments during fiscal year 2016, we restated certain prior year amounts in the condensed consolidated financial statements to conform with the 2017 presentation. This change had no impact on our condensed consolidated financial statements for the periods presented.
At May 31, 2017 , our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions located in:
East: Florida (1) , Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas
West: California and Nevada
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1) Florida includes the financial information related to WCI from the date of acquisition (February 10, 2017) to May 31, 2017.

The following tables set forth selected financial and operational information related to our homebuilding operations for the periods indicated:
Selected Financial and Operational Data
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Homebuilding revenues:
East:
Sales of homes
$
1,194,677

953,350

1,962,137

1,600,137

Sales of land
213

948

479

13,215

Total East
1,194,890

954,298

1,962,616

1,613,352

Central:
Sales of homes
672,182

591,356

1,160,923

991,793

Sales of land
10,160

17,631

37,600

31,034

Total Central
682,342

608,987

1,198,523

1,022,827

West:
Sales of homes
766,296

718,029

1,314,944

1,264,458

Sales of land
3,898

30

8,048

4,940

Total West
770,194

718,059

1,322,992

1,269,398

Other:
Sales of homes
237,197

166,833

416,136

327,871

Sales of land
1,118

2,708

4,168

3,918

Total Other
238,315

169,541

420,304

331,789

Total homebuilding revenues
$
2,885,741

2,450,885

4,904,435

4,237,366


50


Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Operating earnings:
East:
Sales of homes
$
152,459

139,432

233,227

217,937

Sales of land
(823
)
(152
)
(515
)
6,089

Equity in earnings (loss) from unconsolidated entities
2,176

(154
)
2,015

(124
)
Other income (expense), net
(105
)
3,812

3,271

3,742

Loss due to litigation
—

—

(140,000
)
—

Total East
153,707

142,938

97,998

227,644

Central:
Sales of homes
75,148

67,623

128,050

100,369

Sales of land
1,719

1,396

2,754

2,915

Equity in earnings from unconsolidated entities
3

1

46

44

Other expense, net
(926
)
(258
)
(2,048
)
(1,371
)
Total Central
75,944

68,762

128,802

101,957

West:
Sales of homes
91,561

114,452

153,482

199,080

Sales of land
603

(41
)
1,282

946

Equity in loss from unconsolidated entities
(23,707
)
(9,733
)
(35,072
)
(6,862
)
Other income, net
2,767

9,129

4,892

9,477

Total West
71,224

113,807

124,584

202,641

Other:
Sales of homes
29,352

15,241

48,912

28,460

Sales of land
239

646

199

1,077

Equity in earnings (loss) from unconsolidated entities
22

253

(29
)
309

Other income, net
2,092

1,049

3,452

1,246

Total Other
31,705

17,189

52,534

31,092

Total homebuilding operating earnings
$
332,580

342,696

403,918

563,334



51


Summary of Homebuilding Data

Deliveries:
Three Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
3,621

3,032

$
1,194,677

953,671

$
330,000

315,000

Central
2,008

1,830

672,182

591,356

335,000

323,000

West
1,570

1,503

780,995

727,384

497,000

484,000

Other
511

359

237,198

166,832

464,000

465,000

Total
7,710

6,724

$
2,885,052

2,439,243

$
374,000

363,000

Of the total homes delivered listed above, 23 homes with a dollar value of $14.7 million and an average sales price of $639,000 represent home deliveries from unconsolidated entities for the three months ended May 31, 2017 , compared to 13 home deliveries with a dollar value of $9.7 million and an average sales price of $744,000 for the three months ended May 31, 2016 .
Six Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
6,091

5,096

$
1,962,137

1,601,426

$
322,000

314,000

Central
3,447

3,111

1,160,923

991,793

337,000

319,000

West
2,724

2,671

1,341,748

1,286,918

493,000

482,000

Other
901

678

416,137

327,870

462,000

484,000

Total
13,163


11,556

$
4,880,945

4,208,007

$
371,000

364,000

Of the total homes delivered listed above, 43 homes with a dollar value of $26.8 million and an average sales price of $623,000 represent home deliveries from unconsolidated entities for the six months ended May 31, 2017 , compared to 39 home deliveries with a dollar value of $23.7 million and an average sales price of $609,000 for the six months ended May 31, 2016 .

Sales Incentives (1):
Three Months Ended
Sales Incentives
(In thousands)
Average Sales Incentives Per
Home Delivered
Sales Incentives
as a % of Revenue
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
$
82,872

67,305

$
22,900

22,200

6.5
%
6.6
%
Central
55,230

46,603

27,500

25,500

7.6
%
7.3
%
West
28,406

25,518

18,400

17,100

3.6
%
3.4
%
Other
8,004

6,722

15,700

18,700

3.3
%
3.9
%
Total
$
174,512

146,148

$
22,700

21,800

5.7
%
5.7
%
Six Months Ended
Sales Incentives
(In thousands)
Average Sales Incentives Per
Home Delivered
Sales Incentives
as a % of Revenue
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
$
137,459

111,353

$
22,600

21,900

6.6
%
6.5
%
Central
93,657

80,611

27,200

25,900

7.5
%
7.5
%
West
51,967

43,986

19,400

16,700

3.8
%
3.4
%
Other
14,970

13,888

16,600

20,500

3.5
%
4.1
%
Total
$
298,053

249,838

$
22,700

21,700

5.8
%
5.6
%
(1)
Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.

52


New Orders (2):
Three Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
4,271

3,568

$
1,388,165

1,109,894

$
325,000

311,000

Central
2,077

2,140

703,300

716,028

339,000

335,000

West
2,035

1,781

1,025,456

834,569

504,000

469,000

Other
515

473

248,841

221,393

483,000

468,000

Total
8,898

7,962

$
3,365,762

2,881,884

$
378,000

362,000

Of the total new orders listed above, 16 homes with a dollar value of $11.2 million and an average sales price of $698,000 represent new orders from unconsolidated entities for the three months ended May 31, 2017 , compared to nine new orders with a dollar value of $5.4 million and an average sales price of $597,000 for the three months ended May 31, 2016 .
Six Months Ended
Homes
Dollar Value (In thousands)
Average Sales Price
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East
7,215

6,096

$
2,322,953

1,907,942

$
322,000

313,000

Central
3,697

3,770

1,248,166

1,246,198

338,000

331,000

West
3,585

3,071

1,814,070

1,458,418

506,000

475,000

Other
884

819

420,985

377,195

476,000

461,000

Total
15,381

13,756

$
5,806,174

4,989,753

$
377,000

363,000

Of the total new orders listed above, 21 homes with a dollar value of $15.4 million and an average sales price of $734,000 represent new orders from unconsolidated entities for the six months ended May 31, 2017 , compared to 24 new orders with a dollar value of $14.1 million and an average sales price of $588,000 for the six months ended May 31, 2016 .
(2)
New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three and six months ended May 31, 2017 and 2016 .

Backlog:
Homes
Dollar Value (In thousands)
Average Sales Price
May 31,
May 31,
May 31,
2017
2016
2017
2016
2017
2016
East (1)
4,727

3,963

$
1,612,757

1,287,728

$
341,000

325,000

Central
2,571

2,727

908,712

940,070

353,000

345,000

West
2,391

1,754

1,220,758

843,871

511,000

481,000

Other (2)
512

570

260,696

264,101

509,000

463,000

Total
10,201

9,014

$
4,002,923

3,335,770

$
392,000

370,000

Of the total homes in backlog listed above, eight homes with a backlog dollar value of $4.6 million and an average sales price of $574,000 represent the backlog from unconsolidated entities at May 31, 2017 , compared to 74 homes with a backlog dollar value of $52.8 million and an average sales price of $713,000 at May 31, 2016 .
(1)
During the six months ended May 31, 2017 , we acquired 360 homes in backlog as a result of the WCI acquisition. During the six months ended May 31, 2016 , we acquired 111 homes in backlog from other homebuilders.
(2)
During the six months ended May 31, 2016 , we acquired 57 homes in backlog.
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.

53


We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
2017
2016
2017
2016
East
12
%
12
%
14
%
13
%
Central
17
%
18
%
18
%
18
%
West
11
%
13
%
12
%
13
%
Other
9
%
8
%
11
%
9
%
Total
13
%
14
%
14
%
14
%
Active Communities:
May 31,
2017
2016
East (1)
345

293

Central
200

217

West
139

128

Other
52

54

Total
736

692

Of the total active communities listed above, four and three communities represent active communities being developed by unconsolidated entities as of May 31, 2017 and 2016 , respectively.
(1)
We acquired 51 active communities related to the WCI acquisition on February 10, 2017 of which 50 are active as of May 31, 2017.
The following table details our gross margins on home sales for the three and six months ended May 31, 2017 and 2016 for each of our reportable homebuilding segments and Homebuilding Other:
Three Months Ended
Six Months Ended
May 31,
May 31,
(Dollars in thousands)
2017
2016
2017
2016
East:
Sales of homes
$
1,194,677

953,350

$
1,962,137

1,600,137

Costs of homes sold
921,883

721,121

1,518,993

1,214,516

Gross margins on home sales
272,794

22.8%
232,229

24.4%
443,144

22.6
%
385,621

24.1
%
Central:
Sales of homes
672,182

591,356

1,160,923

991,793

Costs of homes sold
533,477

468,510

920,814

790,672

Gross margins on home sales
138,705

20.6%
122,846

20.8%
240,109

20.7
%
201,121

20.3
%
West:
Sales of homes
766,296

718,029

1,314,944

1,264,458

Costs of homes sold
614,348

546,428

1,055,006

959,254

Gross margins on home sales
151,948

19.8%
171,601

23.9%
259,938

19.8
%
305,204

24.1
%
Other:
Sales of homes
237,197

166,833

416,136

327,871

Costs of homes sold
183,769

131,986

323,287

259,348

Gross margins on home sales
53,428

22.5%
34,847

20.9%
92,849

22.3
%
68,523

20.9
%
Total gross margins on home sales
$
616,875

21.5%
561,523

23.1%
$
1,036,040

21.3
%
960,469

23.0
%

54


Three Months Ended May 31, 2017 versus Three Months Ended May 31, 2016
Homebuilding East: Revenues from home sales increased for the second quarter of 2017 compared to the second quarter of 2016 , primarily due to an increase in the number of home deliveries in Florida, partially offset by a decrease in the number of home deliveries in Georgia. Revenues from home sales also increased as a result of the increase in the average sales price of homes delivered in Florida and the Carolinas. The increase in the number of deliveries and average sales price of homes delivered in Florida was primarily driven by an increase in higher-priced active communities over the last year related to the WCI acquisition. The decrease in the number of deliveries in Georgia was primarily due to a decrease in deliveries per active communities as a result of the timing of opening and closing of communities. The increase in the average sales price of homes delivered in the Carolinas is primarily due to an increase in home deliveries in higher-priced communities. Gross margin percentage on home sales for the second quarter of 2017 decreased compared to the same period last year primarily due to an increase in direct construction costs per home, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Central: Revenues from home sales increased for the second quarter of 2017 compared to the second quarter of 2016 , primarily due to an increase in the number of home deliveries in all the states in the segment, except Colorado, and an increase 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 higher demand as the number of deliveries per active community increased. The decrease in the number of deliveries in Colorado was primarily due to the timing of when the homes were closed. The increase in the average sales price of homes delivered was primarily due to favorable market conditions and a change in product mix driven by an increase in home deliveries in higher-priced communities in the second quarter of 2017 as some of our lower-priced communities closed-out. Gross margin percentage on home sales for the second quarter of 2017 decreased slightly compared to the same period last year primarily due to an increase in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Homebuilding West: Revenues from home sales increased for the second quarter of 2017 compared to the second quarter of 2016 , primarily due to an increase in the number of home deliveries in California and an increase in the average sales price of homes delivered in Nevada. The increase of the number of home deliveries in California is primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered in Nevada was primarily due to a change in product mix and because we have been able to increase the sales prices in certain of our communities due to favorable market conditions. Gross margin percentage on home sales for the second quarter of 2017 decreased compared to the same period last year primarily due to an increase in direct construction and land costs per home.
Homebuilding Other: Revenues from home sales increased for the second quarter of 2017 compared to the second quarter of 2016 , primarily due to an increase the number of home deliveries in all the states in Homebuilding Other. The increase in the number of deliveries was primarily driven by higher demand as the number of deliveries per active community increased. Gross margin percentage on home sales for the second quarter of 2017 increased compared to the same period last year primarily due to a change in product mix as we opened lower-priced communities that resulted in a decrease in direct construction and land costs per home and a decrease in sales incentives offered to homebuyers as a percentage of revenues from home sales.
Six Months Ended May 31, 2017 versus Six Months Ended May 31, 2016
Homebuilding East: Revenues from home sales increased for the six months ended May 31, 2017 compared to the six months ended May 31, 2016 , primarily due to an increase in the number of home deliveries in all the states in the segment, except Georgia and Virginia. Revenues from home sales also increased as a result of the increase in an average sales price of homes delivered in Florida and the Carolinas. The increase in the number of deliveries and average sales price of homes delivered in Florida was primarily driven by an increase in higher-priced active communities over the last year related to the WCI acquisition. The decrease in the number of deliveries in Georgia was primarily due to a decrease in deliveries per active communities as a result of the timing of opening and closing of communities. The decrease in the number of deliveries in Virginia was primarily due to a decrease in the number of active communities compared to the same period last year. The increase in the average sales price of homes delivered in the Carolinas is primarily due to an increase in home deliveries in higher-priced communities. Gross margin percentage on home sales for the six months ended May 31, 2017 decreased compared to the same period last year primarily due to an increase in direct construction costs per home, partially offset by an increase in the average sales price of homes delivered.
Homebuilding Central: Revenues from home sales increased for the six months ended May 31, 2017 compared to the six months ended May 31, 2016 , 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 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 favorable market conditions and a change in product mix driven by an increase in home deliveries in higher-priced communities in the six months ended May 31, 2017 as some of our lower-priced communities closed-out. Gross

55


margin percentage on home sales for the six months ended May 31, 2017 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.
Homebuilding West: Revenues from home sales increased for the six months ended May 31, 2017 compared to the six months ended May 31, 2016 , primarily due to an increase in the average sales price of homes delivered in Nevada as well as an increase in the number of home deliveries in California. The increase in the average sales price of homes delivered in Nevada 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 of the number of home deliveries in California is primarily due to higher demand as the number of deliveries per active community increased in addition to an increase in the number of active communities. Gross margin percentage on home sales for the six months ended May 31, 2017 decreased compared to the same period last year primarily due to an increase in direct construction and land costs per home.
Homebuilding Other: Revenues from home sales increased for the six months ended May 31, 2017 compared to the six months ended May 31, 2016 , primarily due to an increase in the number of home deliveries in all the states of Homebuilding Other, partially offset by a decrease in the average sales price of homes delivered in all the states in Homebuilding Other, except Washington where average sales price increased. 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 average sales price of homes delivered was primarily driven by a change in product mix due to closing out the remaining homes in higher-priced communities and opening lower-priced communities during the six months ended May 31, 2017 . The increase in the average sales price of homes delivered in Washington was primarily due to favorable market conditions. Gross margin percentage on home sales for the six months ended May 31, 2017 increased compared to the same period last year primarily due to a change in product mix as we opened lower-priced communities that resulted in a decrease in direct construction and land costs per home, partially offset by a decrease in the average sales price of homes delivered. In addition, there was 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.
As part of the WCI acquisition in February 2017, Lennar Financial Services acquired a real estate brokerage business under the Berkshire Hathaway Home Services brand. This business operates only in Florida and should not have a significant impact on the segment.
Subsequent to May 31, 2017, our mortgage financing services operations changed its name from Universal American Mortgage Company, LLC to Eagle Home Mortgage, LLC.
The following table sets forth selected financial and operational information related to our Lennar Financial Services segment:
Three Months Ended
Six Months Ended
May 31,
May 31,
(Dollars in thousands)
2017
2016
2017
2016
Revenues
$
208,363

175,940

356,406

299,896

Costs and expenses
164,636

131,852

292,015

240,877

Operating earnings
$
43,727

44,088

64,391

59,019

Dollar value of mortgages originated
$
2,323,000

2,355,000

4,138,000

4,019,000

Number of mortgages originated
8,200

8,500

14,800

14,600

Mortgage capture rate of Lennar homebuyers
80
%
83
%
81
%
82
%
Number of title and closing service transactions
27,900

29,400

51,500

51,800

Number of title policies issued
75,900

71,300

160,000

132,600

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

56


focus is to manage third-party capital and to originate and sell into securitizations commercial mortgage loans. Rialto has continued 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 loss was as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues
$
67,988

44,838

149,994

88,549

Costs and expenses (1)
59,076

50,203

125,989

93,110

Rialto equity in earnings from unconsolidated entities
5,730

6,864

6,452

8,361

Rialto other expense, net (2)
(21,104
)
(19,585
)
(37,762
)
(20,276
)
Operating loss (3)
$
(6,462
)
(18,086
)
(7,305
)
(16,476
)
(1)
Costs and expenses included loan impairments of $5.2 million and $17.9 million for the three and six months ended May 31, 2017 , respectively, and loan impairments of $4.4 million and $6.7 million for the three and six months ended May 31, 2016 , respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests).
(2)
Rialto other expense, net, included REO impairments of $13.8 million and $26.2 million for the three and six months ended May 31, 2017 , respectively, and REO impairments of $4.7 million and $7.6 million for the three and six months ended May 31, 2016 , respectively.
(3)
Operating loss for the three and six months ended May 31, 2017 included net loss attributable to noncontrolling interests of $12.6 million and $25.5 million , respectively. Operating loss for the three and six months ended May 31, 2016 included net loss attributable to noncontrolling interests of $4.3 million and $4.6 million , respectively.
Rialto Mortgage Finance
RMF originates and sells into securitizations five, seven and ten year commercial first mortgage loans, generally with principal amounts between $2 million and $75 million , which are secured by income producing properties. This business has become a significant contributor to Rialto's revenues.
During the six months ended May 31, 2017 , RMF originated loans with a total principal balance of $837.7 million , of which $823.7 million were recorded as loans held-for-sale and $14.1 million as accrual loans within loans receivable, net, and sold $870.4 million of loans into five separate securitizations. During the six months ended May 31, 2016 , RMF originated loans with a total principal balance of $670.3 million , of which $654.0 million were recorded as loans held-for-sale and $16.3 million as accrual loans within loans receivable, net, and sold $766.4 million of loans into five separate securitizations.
FDIC Portfolios
In 2010, Rialto 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. In February 2017, the FDIC exercised its “clean-up call rights” under the Amended and Restated Limited Liability Company Agreement. As a result, Rialto has until July 10, 2017 to liquidate and sell the assets in the FDIC Portfolios. After July 10, 2017, the FDIC can, at its discretion, sell any remaining assets. At May 31, 2017 , the consolidated LLCs had total combined assets of $117.5 million , which primarily included $80.3 million of real estate owned, net and $23.8 million of loans held-for-sale.

57


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
$119 million (including $52 million by us)
Rialto Real Estate Fund III
2015
$1.9 billion (including $140 million by us)
Rialto Credit Partnership, LP
2016
$220 million (including $20 million by us)
Rialto also earns fees for its role as a manager of these vehicles and for providing asset management and other services to those vehicles and other third parties.
At May 31, 2017 and November 30, 2016 , the carrying value of Rialto's commercial mortgage-backed securities ("CMBS") was $112.5 million and $71.3 million , respectively. These securities were purchased at discounts ranging from 9% to 78% with coupon rates ranging from 1.3% to 4.4% , stated and assumed final distribution dates between November 2020 and February 2027 , and stated maturity dates between November 2043 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.
Lennar Multifamily Segment
We have been actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. Our Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
As of May 31, 2017 and November 30, 2016 , our balance sheet had $653.2 million and $526.1 million , respectively, of assets related to our Lennar Multifamily segment, which included investments in unconsolidated entities of $377.3 million and $318.6 million , respectively. Our net investment in the Lennar Multifamily segment as of May 31, 2017 and November 30, 2016 was $530.1 million and $408.2 million , respectively. During the three and six months ended May 31, 2017 , our Lennar Multifamily segment sold one and three operating properties, respectively, through its unconsolidated entities resulting in the segment's $11.4 million and $37.4 million share of gains, respectively. During the three and six months ended May 31, 2016 , our Lennar Multifamily segment sold one and two operating properties, respectively, through its unconsolidated entities resulting in the segment's $15.4 million and $35.8 million share of gains, respectively.
Our Lennar Multifamily segment had equity investments in 29 and 28 unconsolidated entities (including the Lennar Multifamily Venture, the "Venture") as of May 31, 2017 and November 30, 2016 , respectively. As of May 31, 2017 , our Lennar Multifamily segment had interests in 57 communities with development costs of $5.4 billion, of which six communities were completed and operating, 17 communities were partially completed and leasing, 23 communities were under construction and the remaining communities were either owned or under contract. As of May 31, 2017 , our Lennar Multifamily segment also had a pipeline of potential future projects totaling $2.7 billion in development costs across a number of states that will be developed primarily by future unconsolidated entities.
The Venture is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with $2.2 billion in equity commitments, including a $504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs.

58


(2) Financial Condition and Capital Resources
At May 31, 2017 , we had cash and cash equivalents related to our homebuilding, financial services, Rialto and multifamily operations of $984.0 million , compared to $1.3 billion at November 30, 2016 and $815.5 million at May 31, 2016 .
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 cash borrowed under our warehouse lines of credit and our credit facility.
Operating Cash Flow Activities
During the six months ended May 31, 2017 and 2016 , cash used in operating activities totaled $159.8 million and $175.4 million , respectively. During the six months ended May 31, 2017 , cash used in operating activities was impacted primarily by an increase in inventories due to strategic land purchases, land development and construction costs, partially offset by our net earnings and a decrease in loans held-for-sale of which $45.2 million related to RMF and $119.0 million related to Lennar Financial Services. For the six months ended May 31, 2017 , distributions of earnings from unconsolidated entities were (1) $35.4 million from Lennar Multifamily unconsolidated entities, (2) $8.1 million from Rialto unconsolidated entities, and (3) $0.9 million from Lennar Homebuilding unconsolidated entities.
During the six months ended May 31, 2016 , cash used in operating activities was impacted by an increase in inventories due to strategic land purchases, land development and construction costs and a decrease in accounts payable and other liabilities, partially offset by our net earnings, a decrease in receivables and a net decrease in loans held-for-sale primarily related to RMF. For the six months ended May 31, 2016 , distributions of earnings from unconsolidated entities were (1) $34.8 million from Lennar Multifamily unconsolidated entities, (2) $7.8 million from Rialto unconsolidated entities, and (3) $1.1 million from Lennar Homebuilding unconsolidated entities
Investing Cash Flow Activities
During the six months ended May 31, 2017 and 2016 , cash used in investing activities totaled $873.5 million and $149.6 million , respectively. During the six months ended May 31, 2017 , our cash used in investing activities was primarily due to our $611.1 million acquisition of WCI, net of cash acquired. In addition, we had cash contributions of (1) $236.6 million to Lennar Homebuilding unconsolidated entities, including $100 million to FivePoint, primarily for working capital and paydowns of joint venture debt, (2) $55.7 million to Lennar Multifamily unconsolidated entities primarily for working capital, and (3) $23.5 million to Rialto unconsolidated entities comprised primarily of $18.1 million contributed to Rialto Real Estate Fund III ("Fund III") and $5.3 million contributed to Rialto Credit Partnership Fund, LP ("RCP Fund"). Cash used in investing activities was also impacted by purchases of CMBS bonds by our Rialto segment. This was partially offset by the receipt of $55.5 million of proceeds from the sales of REO and by distributions of capital of (1) $54.7 million from Lennar Multifamily unconsolidated entities, of which $25.8 million was distributed by the Venture; (2) $23.2 million from Rialto unconsolidated entities comprised of $14.5 million distributed by Rialto Real Estate Fund II, LP (" Fund II"), $2.4 million distributed by Fund III, $2.5 million distributed by Rialto Capital CMBS Funds (the "CMBS Funds") and $3.6 million distributed by Mezzanine Partners Fund, LP (the "Mezzanine Fund") and $0.2 million distributed by RCP Fund; and (3) $18.6 million from Lennar Homebuilding unconsolidated entities.
During the six months ended May 31, 2016 , our cash used in investing activities was primarily impacted by cash contributions of (1) $94.9 million to Lennar Multifamily unconsolidated entities primarily for working capital, (2) $91.2 million to Lennar Homebuilding unconsolidated entities primarily for working capital, and (3) $24.1 million contributed to Rialto's CMBS Funds. In addition, cash used in investing activities was impacted by purchases of commercial mortgage backed bonds and originations of loans receivable by our Rialto segment. This was partially offset by the receipt of $43.4 million of proceeds from the sales of REO and by distributions of capital of (1) $66.3 million from Lennar Multifamily unconsolidated entities, of which $43.6 million was distributed by the Venture; (2) $25.7 million from Lennar Homebuilding unconsolidated entities, and(3) $11.0 million from Rialto unconsolidated entities comprised of $5.5 million distributed by Mezzanine Fund, $4.3 million distributed by Fund II and $1.2 million distributed by the CMBS Funds.
Financing Cash Flow Activities
During the six months ended May 31, 2017 and 2016 , our cash provided by (used in) financing activities totaled $687.7 million and ($18.0) million , respectively. During the six months ended May 31, 2017 , our cash provided by financing activities was primarily attributed to the receipt of proceeds related to the (1) issuance of $600 million aggregate principal amount of 4.125% senior notes due 2022 (the " 4.125% Senior Notes"), (2) issuance of $650 million aggregate principal amount of 4.50% senior notes due 2024 (the "4.50% Senior Notes"), (3) $65.1 million of proceeds from other borrowings, and (4) $35.5 million of proceeds from issuance of Rialto notes payable. This was partially offset by (1) the retirement of $400 million aggregate principal amount of our 12.25% convertible senior notes due 2017 (the "12.25% Senior Notes"), (2) $144.3 million of net repayments under our warehouse facilities which was comprised of $284.6 million of net repayments under our Lennar Financial Services warehouse repurchase facilities, partially offset by $140.3 million of net borrowings under our Rialto

59


warehouse facilities, (3) $47.9 million of payments related to noncontrolling interests, and (4) $30.6 million of principal payments on other borrowings.
During the six months ended May 31, 2016 , our cash used in financing activities was primarily impacted by $230.2 million of net repayments under our Lennar Financial Services' and Rialto's warehouse repurchase facilities, $233.9 million of exchanges and conversions of our 2.75% convertible senior notes due 2020, the redemption of $250 million aggregate principal amount of our 6.50% senior notes due April 2016, $103.2 million of principal payments on other borrowings and $73.2 million of payments related to noncontrolling interests. This 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 and $375 million of net borrowings under our unsecured revolving credit facility (the "Credit Facility").
Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Lennar Homebuilding operations. Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital are calculated as follows:
(Dollars in thousands)
May 31,
2017
November 30,
2016
May 31,
2016
Lennar Homebuilding debt
$
5,767,689

4,575,977

5,316,235

Stockholders’ equity
7,322,571

7,026,042

6,118,366

Total capital
$
13,090,260

11,602,019

11,434,601

Lennar Homebuilding debt to total capital
44.1
%

39.4
%
46.5
%
Lennar Homebuilding debt
$
5,767,689

4,575,977

5,316,235

Less: Lennar Homebuilding cash and cash equivalents
747,652

1,050,138

601,192

Net Lennar Homebuilding debt
$
5,020,037

3,525,839

4,715,043

Net Lennar Homebuilding debt to total capital (1)
40.7
%
33.4
%
43.5
%
(1)
Net Lennar Homebuilding debt to total capital is a non-GAAP financial measure defined as net Lennar Homebuilding debt (Lennar Homebuilding debt less Lennar Homebuilding cash and cash equivalents) divided by total capital (net Lennar Homebuilding debt plus stockholders' equity). We believe the ratio of net Lennar Homebuilding debt to total capital is a relevant and a useful financial measure to investors in understanding the leverage employed in our Lennar Homebuilding operations. However, because net Lennar Homebuilding debt to total capital is not calculated in accordance with GAAP, this financial measure should not be considered in isolation or as an alternative to financial measures prescribed by GAAP. Rather, this non-GAAP financial measure should be used to supplement our GAAP results.
At May 31, 2017 , Lennar Homebuilding debt to total capital was lower compared to May 31, 2016 , primarily as a result of an increase in stockholders' equity primarily related to our net earnings, partially offset by a net increase in Lennar Homebuilding debt due to the issuance of senior notes and debt assumed related to the WCI acquisition.
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 as we intend to move back to being a pure play homebuilding company over time. If any of these transactions are implemented, they could materially impact the amount and composition of our indebtedness outstanding, increase or decrease our interest expense, dilute our existing stockholders and/or affect the net book value of our assets. At May 31, 2017 , we had no agreements or understandings regarding any significant transactions.
Our Lennar Homebuilding average debt outstanding was $5.6 billion with an average rate for interest incurred of 5.1% for the six months ended May 31, 2017 , compared to $5.3 billion with an average rate for interest incurred of 5.0% for the six months ended May 31, 2016 . Interest incurred related to Lennar Homebuilding debt for the six months ended May 31, 2017 was $148.9 million , compared to $143.4 million for the six months ended May 31, 2016 .
In May 2017, we amended our Credit Facility to increase the maximum borrowings from $1.8 billion to $2.0 billion and extend the maturity on $1.4 billion of the Credit Facility from June 2020 to June 2022, with $160 million maturing in June 2018 and the remaining $50 million maturing in June 2020. As of May 31, 2017 , the Credit Facility included a $403 million accordion feature, subject to additional commitments. 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 May 31, 2017 and November 30, 2016 , 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

60


the total amounts outstanding during the period. We believe that we were in compliance with our debt covenants at May 31, 2017 . In addition, we had $330 million of letter of credit facilities with different financial institutions.
Under the amended Credit Facility agreement executed in May 2017 (the "Credit Agreement"), as of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately $4.2 billion plus the sum of 50% of the cumulative consolidated net income from February 28, 2017, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 28, 2017, minus the lesser of 50% of the amount paid after May 18, 2017 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 May 31, 2017 :
(Dollars in thousands)
Covenant Level
Level Achieved as of
May 31, 2017
Minimum net worth test
$
4,251,969

5,796,137

Maximum leverage ratio
65.0
%
44.2
%
Liquidity test (1)
1.00

2.76

(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 $318.7 million and $270.8 million at May 31, 2017 and November 30, 2016 , respectively. Our financial letters of credit outstanding were $144.3 million and $210.3 million at May 31, 2017 and November 30, 2016 , respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, at May 31, 2017 , we had outstanding surety bonds of $1.2 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds.
In January 2017, we issued $600 million aggregate principal amount of 4.125% Senior Notes at a price of 100% . Proceeds from the offering, after payment of expenses, were $595.2 million . We used the net proceeds from the sale of the 4.125% Senior Notes to fund a portion of the cash consideration for our acquisition of WCI and to pay for costs and expenses related to this acquisition as well as for general corporate purposes. Interest on the 4.125% Senior Notes is due semi-annually beginning July 15, 2017. The 4.125% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries.
On February 10, 2017, we acquired WCI and became a co-borrower with regard to its 6.875% senior notes due 2021 (the" 6.875% Senior Notes"). The 6.875% Senior Notes were recorded at fair value with a principal outstanding amount of $249.8 million and are callable at declining premiums until maturity.
In April 2017, we issued $650 million aggregate principal amount of the 4.50% Senior Notes at a price of 100% . Proceeds from the offering, after payment of expenses, were $645.0 million . We used a portion of the net proceeds from the sales of the 4.50% Senior Notes for the retirement of our 12.25% Senior Notes for 100% of their $400 million outstanding principal amount, plus accrued and unpaid interest. We intend to use the balance of the net proceeds together with cash on hand for general corporate purposes, which may include the redemption of our 6.875% Senior Notes. Interest on the 4.50% Senior Notes is due semi-annually beginning October 30, 2017. The 4.50% Senior Notes are unsecured and unsubordinated, but are guaranteed by substantially all of our 100% owned homebuilding subsidiaries.
Currently, substantially all of our 100% owned homebuilding 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 those 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

61


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.
At May 31, 2017 , our Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures June 2017 (1)
$
600,000

364-day warehouse repurchase facility that matures September 2017
300,000

364-day warehouse repurchase facility that matures December 2017 (2)
400,000

364-day warehouse repurchase facility that matures March 2018 (3)
150,000

Total
$
1,450,000

(1)
Subsequent to May 31, 2017 , the warehouse repurchase facility maturity date was extended to June 2018.
(2)
Maximum aggregate commitment includes an uncommitted amount of $250 million .
(3)
Maximum aggregate commitment includes an uncommitted amount of $75 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 $792.4 million and $1.1 billion at May 31, 2017 and November 30, 2016 , respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $824.1 million and $1.1 billion , at May 31, 2017 and November 30, 2016 , 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 for.
At May 31, 2017 , Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures October 2017
$
500,000

Warehouse repurchase facility that matures December 2017
200,000

364-day warehouse repurchase facility that matures January 2018
250,000

Total - Loan origination and securitization business (RMF)
$
950,000

Warehouse repurchase facility that matures August 2018 (two - one year extensions) (1)
100,000

Total
$
1,050,000

(1)
Rialto uses this warehouse repurchase facility to finance the origination of floating rate accrual loans, which are reported as accrual loans within loans receivable, net. Borrowings under this facility were $43.3 million as of both May 31, 2017 and November 30, 2016 .
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $320.3 million and $180.2 million as of May 31, 2017 and November 30, 2016 , 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. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the loans held-for-sale to investors and by collecting on receivables on loans sold, but not yet paid for. Without the facilities, the Rialto segment would have to use cash from operations and other funding sources to finance its lending activities.

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As of May 31, 2017 and November 30, 2016 , the carrying amount, net of debt issuance costs, of Rialto's 7.00% senior notes due 2018 was $349.0 million and $348.7 million , respectively.
Changes in Capital Structure
On May 16, 2017, we paid cash dividends of $0.04 per share for both our Class A and Class B common stock to holders of record at the close of business on April 18, 2017, as declared by our Board of Directors on May 2, 2017. On June 28, 2017, our Board of Directors declared a quarterly cash dividend of $0.04 per share on both our Class A and Class B common stock, payable July 27, 2017 to holders of record at the close of business on July 13, 2017.
Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.
Off-Balance Sheet Arrangements
Lennar Homebuilding: Investments in Unconsolidated Entities
At May 31, 2017 , we had equity investments in 37 homebuilding and land unconsolidated entities (of which three had recourse debt, eight had non-recourse debt and 26 had no debt), compared to 38 homebuilding and land unconsolidated entities at November 30, 2016 . 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 partners. Each joint venture is governed by an executive committee consisting of members from the partners.
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations and Selected Information
Three Months Ended
Six Months Ended
May 31,
May 31,
(Dollars in thousands)
2017
2016
2017
2016
Revenues
$
132,587

208,636

178,723

308,362

Costs and expenses
190,845

201,370

269,911

298,570

Other income
6,117

—

6,117

—

Net earnings (loss) of unconsolidated entities
$
(52,141
)
7,266

(85,071
)
9,792

Lennar Homebuilding equity in loss from unconsolidated entities
$
(21,506
)
(9,633
)
(33,040
)
(6,633
)
Lennar Homebuilding cumulative share of net earnings - deferred at May 31, 2017 and 2016, respectively
$
35,306

46,842

Lennar Homebuilding investments in unconsolidated entities
$
995,400

785,883

Equity of the unconsolidated entities
$
3,899,478

3,235,415

Lennar Homebuilding investment % in the unconsolidated entities (1)
26
%
24
%
(1)
Our share of profit and cash distributions from the sales of land could be higher compared to our ownership interest in unconsolidated entities if certain specified internal rate of return or cash flow milestones are achieved.
For both the three and six months ended May 31, 2017 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of net operating losses from our unconsolidated entities. The operating losses from our unconsolidated entities were primarily driven by general and administrative expenses as there were no significant home and land sale transactions to offset those expenses during the three and six months ended May 31, 2017 .
For both the three and six months ended May 31, 2016 , Lennar Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of costs associated with the FivePoint combination. This was partially offset by $6.7 million and $12.7 million , respectively, of equity in earnings from one of our unconsolidated entities primarily due to sales to third parties of 253 and 471 homesites, respectively. For both the three and six months ended May 31, 2016 , 312 homesites

63


were sold to Lennar by one of our unconsolidated entities for $92.0 million that resulted in $29.7 million of gross profit, of which our portion was deferred.

Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
393,507

221,334

Inventories
3,979,975

3,889,795

Other assets
961,126

1,334,116

$
5,334,608

5,445,245

Liabilities and equity:
Accounts payable and other liabilities
$
651,791

791,245

Debt (1)
783,339

888,664

Equity
3,899,478

3,765,336

$
5,334,608

5,445,245

(1)
Debt is net of debt issuance costs of $5.7 million and $4.2 million , as of May 31, 2017 and November 30, 2016 , respectively.
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 FivePoint entity. The fair values of the assets contributed to this FivePoint entity are included within the unconsolidated entities summarized condensed balance sheet presented above. A portion of the assets of one of the three strategic joint ventures transferred to a new unconsolidated entity was retained by us and our venture partner. The transactions did not have a material impact to our financial position or cash flows for the year ended November 30, 2016 . For the year ended November 30, 2016 , we recorded $42.6 million of our share of combination costs and operational net losses in equity in loss from unconsolidated entities on our condensed consolidated statement of operations.
In May 2017, FivePoint completed its initial public offering ("IPO"). Concurrent with the IPO, we invested $100 million in FivePoint. As of May 31, 2017 , we own approximately 40% of FivePoint and the carrying amount of our investment is $356.4 million .
As of May 31, 2017 and November 30, 2016 , our recorded investments in Lennar Homebuilding unconsolidated entities were $995.4 million and $811.7 million , respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of both May 31, 2017 and November 30, 2016 was $1.2 billion . 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 FivePoint entity 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)
May 31,
2017
November 30,
2016
Debt
$
783,339

888,664

Equity
3,899,478

3,765,336

Total capital
$
4,682,817

4,654,000

Debt to total capital of our unconsolidated entities
16.7
%
19.1
%
Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:
(In thousands)
May 31,
2017
November 30,
2016
Land development
$
967,057

787,138

Homebuilding
28,343

24,585

Total investments
$
995,400

811,723


64


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 of another unconsolidated entity or commingle funds among Lennar Homebuilding unconsolidated entities.
In connection with loans to a Lennar Homebuilding unconsolidated entity, we and our partners often guarantee to a lender, either jointly and severally or on a several basis, any or all of the following: (i) the completion of the development, in whole or in part, (ii) indemnification of the lender from environmental issues, (iii) indemnification of the lender from "bad boy acts" of the unconsolidated entity (or full recourse liability in the event of an unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan to cost will not exceed a certain percentage (maintenance or remargining guarantee) or that a percentage of the outstanding loan will be repaid (repayment guarantee).
In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we sometimes have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the joint and several guarantee.
The total debt of Lennar Homebuilding unconsolidated entities in which we have investments, including Lennar's maximum recourse exposure, were as follows:
(Dollars in thousands)
May 31,
2017
November 30,
2016
Non-recourse bank debt and other debt (partner’s share of several recourse)
$
73,239

48,945

Non-recourse land seller debt and other debt (1)
1,997

323,995

Non-recourse debt with completion guarantees
305,420

147,100

Non-recourse debt without completion guarantees
327,877

320,372

Non-recourse debt to Lennar
708,533

840,412

Lennar's maximum recourse exposure (2)
80,468

52,438

Debt issuance costs
(5,662
)
(4,186
)
Total debt
$
783,339

888,664

Lennar’s maximum recourse exposure as a % of total JV debt
10
%
6
%
(1)
Non-recourse land seller debt and other debt as of November 30, 2016 included a $320 million non-recourse note related to a transaction between one of our unconsolidated entities and another unconsolidated joint venture, which was settled in December 2016.
(2)
As of May 31, 2017 and November 30, 2016 , our maximum recourse exposure was primarily related to repayment guarantees provided by us on three unconsolidated entities' debt and one unconsolidated entity's debt, respectively.
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 May 31, 2017 and November 30, 2016 , the fair values of the repayment and completion guarantees were not material. We believe that as of May 31, 2017 , 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 would 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 with regard to obligations of our joint ventures (see Note 12 of the Notes to Condensed Consolidated Financial Statements).

65


The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities ("JVs") debt as per current debt arrangements as of May 31, 2017 and it 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
2017
2018
2019
Thereafter
Other
Maximum recourse debt exposure to Lennar
$
80,468

—

3,274

47,012

30,182

—

Debt without recourse to Lennar
708,533

30,149

148,870

252,269

275,248

1,997

Debt issuance costs
(5,662
)
—

—

—

—

(5,662
)
Total
$
783,339

30,149

152,144

299,281

305,430

(3,665
)
The table below indicates the assets, debt and equity of our 10 largest Lennar Homebuilding unconsolidated joint venture investments as of May 31, 2017 :
(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
$
356,433

2,026,171

—

69,518

69,518

1,483,318

4
%
Heritage Hills Irvine
152,882

554,311

24,894

174,267

199,161

349,762

36
%
Heritage Fields El Toro
146,091

1,430,039

—

9,182

9,182

1,298,853

1
%
Runkle Canyon
42,631

120,146

—

33,350

33,350

86,563

28
%
Treasure Island Community Development
41,904

157,996

—

67,845

67,845

83,838

45
%
Ballpark Village
29,007

94,777

—

25,235

25,235

60,013

30
%
Krome Groves Land Trust
22,942

89,569

7,617

18,638

26,255

63,061

29
%
Fifth Wall Ventures SPV I
22,640

22,774

—

—

—

22,761

—

MS Rialto Residential Holdings
18,540

73,681

—

—

—

71,021

—

Lennar Intergulf (150 Ocean)
17,758

63,690

—

27,575

27,575

35,515

44
%
10 largest JV investments
850,828

4,633,154

32,511

425,610

458,121

3,554,705

11
%
Other JVs
144,572

701,454

47,957

280,926

328,883

344,773

49
%
Total
$
995,400

5,334,608

80,468

706,536

787,004

3,899,478

17
%
Land seller debt and other debt
—

1,997

1,997

Debt issuance costs
—

—

(5,662
)
Total JV debt
$
80,468

708,533

783,339

(1)
The 10 largest joint ventures presented above represent the majority of total JVs assets and equity and 40% of total JV maximum recourse debt exposure to Lennar and 60% 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.


66


Rialto: Investments in Unconsolidated Entities
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
May 31,
2017
May 31,
2017
November 30,
2016
(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

$
48,519

58,116

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

1,305,000

100,000

100,000

84,862

96,192

Rialto Mezzanine Partners Fund, LP
2013
300,000

300,000

33,799

33,799

21,188

23,643

Rialto Capital CMBS Funds
2014
119,174

119,174

52,474

52,474

50,948

50,519

Rialto Real Estate Fund III
2015
1,887,000

362,242

140,000

25,318

25,520

9,093

Rialto Credit Partnership, LP
2016
220,000

121,225

19,999

11,020

11,182

5,794

Other investments
2,082

2,384

$
244,301

245,741

As manager of real estate funds, Rialto is entitled to receive additional revenue through carried interests if the funds meet certain performance thresholds. Rialto also periodically receives advance distributions 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 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. The amounts presented in the table below include advance and carried interest distributions received as follows:
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Rialto Real Estate Fund, LP (1)
$
9,005

1,540

18,960

6,093

Rialto Real Estate Fund II, LP
156

85

156

85

Rialto Real Estate Fund III, LP
1,448

—

1,448

—

Rialto Mezzanine Partners Fund, LP
48

225

214

300

Rialto Capital CMBS Funds
383

634

1,135

951

$
11,040

2,484

21,913

7,429

(1)
Rialto received $8.8 million and $18.8 million of distributions, net of prior advance distributions, with regard to its carried interest in Rialto Real Estate Fund, LP during the three and six months ended May 31, 2017 , respectively.
The following table represents amounts Rialto would have received had the funds ceased operations and hypothetically liquidated all their investments at their estimated fair values on May 31, 2017 , 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.
May 31, 2017
(In thousands)
Hypothetical Carried Interest
Paid as Advanced Tax Distribution
Paid as Carried Interest
Hypothetical Carried Interest, Net
Rialto Real Estate Fund, LP
$
168,434

52,064

18,811

97,559

Rialto Real Estate Fund II, LP (1)
30,912

9,639

—

21,273

$
199,346

61,703

18,811

118,832

(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 carried interest 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 a 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.

67


Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
77,047

230,229

Loans receivable
434,771

406,812

Real estate owned
360,337

439,191

Investment securities
1,543,517

1,379,155

Investments in partnerships
415,316

398,535

Other assets
190,885

29,036

$
3,021,873

2,882,958

Liabilities and equity:
Accounts payable and other liabilities
$
44,989

36,131

Notes payable (1)
617,587

532,264

Equity
2,359,297

2,314,563

$
3,021,873

2,882,958

(1)
Notes payable are net of debt issuance costs of $4.1 million and $2.9 million , as of May 31, 2017 and November 30, 2016 , respectively.
Statements of Operations
Three Months Ended
Six Months Ended
May 31,
May 31,
(Dollars in thousands)
2017
2016
2017
2016
Revenues
$
61,030

51,240

118,186

95,536

Costs and expenses
29,000

20,704

57,001

41,603

Other income, net (1)
9,321

26,710

9,648

11,548

Net earnings of unconsolidated entities
$
41,351

57,246

70,833

65,481

Rialto equity in earnings from unconsolidated entities
$
5,730

6,864

6,452

8,361

Rialto's investments in unconsolidated entities
$
244,301

238,740

Equity of the unconsolidated entities
$
2,359,297

2,254,440

Rialto's investment % in the unconsolidated entities
10
%
11
%
(1)
Other income, net, included realized and unrealized gains (losses) on investments.
Lennar Multifamily: Investments in Unconsolidated Entities
At May 31, 2017 , Lennar Multifamily had equity investments in 29 unconsolidated entities that are engaged in multifamily residential developments (of which 17 had non-recourse debt and 12 had no debt), compared to 28 unconsolidated entities at November 30, 2016 . 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.
The Venture is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with $2.2 billion in equity commitments, including a $504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. The Venture is currently seeded with 39 undeveloped multifamily assets that were previously purchased or under contract by the Lennar Multifamily segment totaling approximately 12,000 apartments with projected project costs of $4.1 billion as of May 31, 2017 . During the six months ended May 31, 2017 , $334.5 million in equity commitments were called, of which we contributed $76.0 million representing our pro-rata portion of the called equity. During the six months ended May 31, 2017 , we received no distributions as a return of capital from the Venture, except for distributions of capital related to land contributions. As of May 31, 2017 , $1.3 billion of the $2.2 billion in equity commitments had been called, of which we had contributed $291.9 million representing our pro-rata portion of the called equity, resulting in a remaining equity commitment for us of $212.1 million . As of May 31, 2017

68


and November 30, 2016 , the carrying value of our investment in the Venture was $268.1 million and $198.2 million , respectively.
We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants at May 31, 2017 .
Summarized financial information on a combined 100% basis related to Lennar Multifamily’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2017
November 30,
2016
Assets:
Cash and cash equivalents
$
44,765

43,658

Operating properties and equipment
2,658,080

2,210,627

Other assets
38,160

33,703

$
2,741,005

2,287,988

Liabilities and equity:
Accounts payable and other liabilities
$
223,061

196,617

Notes payable (1)
727,070

577,085

Equity
1,790,874

1,514,286

$
2,741,005

2,287,988

(1)
Notes payable are net of debt issuance costs of $17.1 million and $12.3 million , as of May 31, 2017 and November 30, 2016 , respectively.
Statements of Operations and Selected Information
Three Months Ended
Six Months Ended
May 31,
May 31,
(In thousands)
2017
2016
2017
2016
Revenues
$
13,975

9,649

25,592

17,963

Costs and expenses
24,477

14,058

46,823

25,730

Other income, net
28,190

30,272

78,729

70,394

Net earnings of unconsolidated entities
$
17,688

25,863

57,498

62,627

Lennar Multifamily equity in earnings from unconsolidated entities (1)
$
9,427

14,008

32,574

33,694

Our investments in unconsolidated entities
$
377,265

304,171

Equity of the unconsolidated entities
$
1,790,874

1,029,002

Our investment % in the unconsolidated entities (2)


21
%
30
%
(1)
During the three and six months ended May 31, 2017 , our Lennar Multifamily segment sold one and three operating properties, respectively, through its unconsolidated entities resulting in the segment's $11.4 million and $37.4 million share of gains, respectively. During the three and six months ended May 31, 2016 , our Lennar Multifamily segment sold one and two operating properties, respectively, through its unconsolidated entities resulting in the segment's $15.4 million and $35.8 million share of gains, respectively.
(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.

69


Option Contracts
We often obtain access to land through option contracts, which generally enable us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the options.
The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties ("optioned") or unconsolidated JVs (i.e., controlled homesites) at May 31, 2017 and 2016 :
Controlled Homesites
May 31, 2017
Optioned
JVs
Total
Owned
Homesites
Total
Homesites
East
15,678

482

16,160

62,658

78,818

Central
5,281

1,135

6,416

31,659

38,075

West
2,317

4,514

6,831

35,362

42,193

Other
1,679

—

1,679

6,330

8,009

Total homesites
24,955

6,131

31,086

136,009

167,095


Controlled Homesites
May 31, 2016
Optioned
JVs
Total
Owned
Homesites
Total
Homesites
East
17,819

470

18,289

55,271

73,560

Central
6,904

1,135

8,039

31,320

39,359

West
2,383

4,466

6,849

37,531

44,380

Other
1,572

—

1,572

6,662

8,234

Total homesites
28,678

6,071

34,749

130,784

165,533

We evaluate certain option contracts for land to determine whether they are VIEs and, if so, whether we are the primary beneficiary of certain of these option contracts. Although we do not have legal title to the optioned land, if we are deemed to be the primary beneficiary or make a significant deposit for optioned land, we may need to consolidate the land under option at the purchase price of the optioned land.
During the six months ended May 31, 2017 , consolidated inventory not owned increased by $17.6 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2017 . 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 inventory consolidated, we had a net reclass related to option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of May 31, 2017 . 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 option contracts with third parties and unconsolidated entities consisted of non-refundable option deposits and pre-acquisition costs totaling $91.1 million and $85.0 million at May 31, 2017 and November 30, 2016 , respectively. Additionally, we had posted $41.1 million and $45.1 million of letters of credit in lieu of cash deposits under certain land and option contracts as of May 31, 2017 and November 30, 2016 , respectively.


70


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, 2016 , except that:
•
In January 2017, we issued $600 million aggregate principal amount of 4.125% Senior Notes.
•
In February 2017, we acquired WCI and became a co-borrower with regard to its 6.875% Senior Notes with a principal outstanding amount of $249.8 million and are callable at declining premiums until maturity.
•
In April 2017, we issued $650 million aggregate principal amount of 4.50% Senior Notes.
•
In May 2017, we retired $400 million aggregate principal amount of 12.25% Senior Notes.
•
As of May 31, 2017 , borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities were $363.6 million and $792.4 million , respectively.
The following summarizes our contractual obligations with regard to our long-term debt and interest commitments as of May 31, 2017 :
Payments Due by Period
(In thousands)
Total
Six Months ending November 30, 2017
December 1, 2017 through November 30, 2018
December 1, 2018 through November 30, 2020
December 1, 2020 through November 30, 2022
Thereafter
Lennar Homebuilding - Senior notes and other debts payable (1)
$
5,790,868

33,395

701,831

1,482,583

1,977,633

1,595,426

Rialto - Notes and other debts payable (2)
786,411

375,929

24,286

350,786

4,421

30,989

Lennar Financial Services - Notes and other debts payable
792,623

792,440

108

75

—

—

Interest commitments under interest bearing debt (3)
1,219,175

153,027

268,652

394,985

255,039

147,472

(1)
The 6.875% Senior Notes have been included in this table based on their maturity date, but the 6.875% Senior Notes are callable by us at an 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)
Primarily includes notes payable and other debts payable of $350.8 million related to Rialto's 7.00% Senior Notes and $363.6 million related to the Rialto warehouse repurchase facilities. These amounts exclude debt issuance costs and any discounts/premiums.
(3)
Interest commitments on variable interest-bearing debt are determined based on the interest rates as of May 31, 2017 .
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether to exercise our options. This reduces our financial risk associated with land holdings. At May 31, 2017 , we had access to 31,086 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At May 31, 2017 , we had $91.1 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted $41.1 million of letters of credit in lieu of cash deposits under certain land and option contracts.
At May 31, 2017 , we had letters of credit outstanding in the amount of $463.0 million (which included $41.1 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 May 31, 2017 , we had outstanding surety bonds of $1.2 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all of the development and construction activities are completed. As of May 31, 2017 , there were approximately $575.4 million , or 48% , 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.

71


Our Lennar Financial Services segment had a pipeline of loan applications in process of $2.7 billion at May 31, 2017 . Loans in process for which interest rates were committed to the borrowers totaled approximately $754.8 million as of May 31, 2017 . 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, futures 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, futures contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At May 31, 2017 , we had open commitments amounting to $1.2 billion to sell MBS with varying settlement dates through August 2017 and open futures contracts in the amount of $892.0 million with settlement dates through March 2024.
(3) New Accounting Pronouncements
See Note 18 of the Notes to Condensed Consolidated Financial Statements included under Item 1 of this Report for a discussion of new accounting pronouncements applicable to our Company.

(4) Critical Accounting Policies
We believe that there have been no significant changes to our critical accounting policies during the six months ended May 31, 2017 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, 2016 .

72


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 January 2017, we issued $600 million aggregate principal amount of 4.125% Senior Notes.
In February 2017, we acquired WCI Communities, Inc. and became a co-borrower with regard to its 6.875% Senior Notes with a principal outstanding amount of $249.8 million .
In April 2017, we issued $650 million aggregate principal amount of 4.50% Senior Notes.
In May 2017, we retired $400 million aggregate principal amount of 12.25% Senior Notes.
As of May 31, 2017 , we had borrowings under Rialto's and Lennar Financial Services' warehouse repurchase facilities of $363.6 million and $792.4 million , respectively.

Information Regarding Interest Rate Sensitivity
Principal (Notional) Amount by
Expected Maturity and Average Interest Rate
May 31, 2017
Six Months Ending November 30,
Years Ending November 30,
Fair Value at May 31,
(Dollars in millions)
2017
2018
2019
2020
2021
2022
Thereafter
Total
2017
LIABILITIES:
Lennar Homebuilding:
Senior notes and other debts payable:
Fixed rate
$
19.8

693.5

1,394.3

44.8

773.9

1,192.7

1,595.4

5,714.4

5,987.7

Average interest rate
3.0
%
5.4
%
4.4
%
1.1
%
5.4
%
4.4
%
4.7
%
4.7
%
—

Variable rate
$
13.6

8.3

17.9

25.6

11.1

—

—

76.5

81.6

Average interest rate
3.5
%
4.2
%
4.5
%
4.0
%
3.1
%
—

—

3.9
%
—

Rialto:
Notes and other debts payable:
Fixed rate
$
16.7

1.0

350.8

—

1.1

3.3

31.0

403.9

426.1

Average interest rate
6.6
%
6.7
%
6.7
%
—

3.3
%
3.3
%
3.3
%
6.5
%
—

Variable rate
$
359.2

23.3

—

—

—

—

—

382.5

382.4

Average interest rate
3.3
%
3.1
%
—

—

—

—

—

3.3
%
—

Lennar Financial Services:
Notes and other debts payable:
Variable rate
$
792.4

0.1

0.1

—

—

—

—

792.6

792.6

Average interest rate
3.3
%
4.0
%
4.0
%
—

—

—

—

3.3
%
—

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, 2016 .


73


Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer participated in an evaluation by our management of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on their participation in that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of May 31, 2017 to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
Our CEO and CFO also participated in an evaluation by our management of any changes in our internal control over financial reporting that occurred during the quarter ended May 31, 2017 . 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 during the downturn, 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 believed the decision was contrary to applicable law and appealed the decision.
On March 23, 2017, the United States Court of Appeals for the Fourth Circuit held oral argument in the appeal. Following oral argument, we concluded that it was appropriate to establish an accrual of $140 million for the litigation. The accrual represented the high end of the range of expected liability associated with the litigation, and did not include our estimate of the fair value of the property. On April 12, 2017, the United States Court of Appeals for the Fourth Circuit issued a decision upholding the lower court’s decision. We subsequently purchased the property for $114 million , which approximates our estimate of the fair value of the property, and paid approximately $124 million in interest and other closing costs. We previously accrued for the amount we expect to pay as reimbursement for attorney’s fees.
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. Subsequent to May 31, 2017, Lennar paid monetary sanctions related to stormwater compliance that were not 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, 2016 .

74


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None

Items 3 - 5. Not Applicable

75


Item 6. Exhibits
31.1.
31.2.
32.
101.
The following financial statements from Lennar Corporation Quarterly Report on Form 10-Q for the quarter ended May 31, 2017, filed on June 30, 2017, 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.


76


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:
June 30, 2017
/s/    Bruce Gross
Bruce Gross
Vice President and Chief Financial Officer
Date:
June 30, 2017
/s/    David Collins
David Collins
Controller


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