Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2010

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  x    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  x    NO  ¨

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

 

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

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

Common stock outstanding as of September 30, 2010:

Class A  153,659,030

Class B    31,291,294

 

 

 


Part I. Financial Information

 

Item 1. Financial Statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(unaudited)

 

     August 31,
2010 (1)
   November 30,
2009 (1)

ASSETS

     

Lennar Homebuilding:

     

Cash and cash equivalents

   $ 865,657    1,330,603

Restricted cash

     131,473    9,225

Income tax receivables

     11,726    334,428

Receivables, net

     60,860    122,053

Inventories:

     

Finished homes and construction in progress

     1,636,056    1,503,346

Land under development

     2,174,249    1,990,430

Consolidated inventory not owned

     464,022    594,213
           

Total inventories

     4,274,327    4,087,989

Investments in unconsolidated entities

     664,916    599,266

Other assets

     296,012    263,803
           
     6,304,971    6,747,367

Rialto Investments:

     

Cash and cash equivalents

     62,153    —  

Defeasance cash to retire notes payable

     62,855    —  

Loans receivable

     1,133,565    —  

Real estate owned

     58,905    —  

Investments in unconsolidated entities

     78,777    9,874

Other assets

     18,679    —  
           
     1,414,934    9,874

Lennar Financial Services

     559,994    557,550
           

Total assets

   $ 8,279,899    7,314,791
           

 

(1) As a result of the adoption of 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 of consolidated variable interest entities (“VIEs”) that are owned by the consolidated VIEs and liabilities of consolidated VIEs as to which there is no recourse against the Company.

As of August 31, 2010, total assets include $2,259.8 million related to consolidated VIEs of which $62.4 million is included in Lennar Homebuilding cash and cash equivalents, $0.2 million in Lennar Homebuilding restricted cash, $4.8 million in Lennar Homebuilding receivables, net, $228.6 million in Lennar Homebuilding finished homes and construction in progress, $350.9 million in Lennar Homebuilding land under development, $92.2 million in Lennar Homebuilding consolidated inventory not owned, $36.9 million in Lennar Homebuilding investments in unconsolidated entities, $154.0 million in Lennar Homebuilding other assets, $58.8 million in Rialto Investments cash and cash equivalents, $62.9 million in Rialto Investments defeasance cash to retire notes payable, $1,133.6 million in Rialto Investments loans receivable, $58.9 million in Rialto Investments real estate owned and $15.6 million in Rialto Investments other assets.

As of November 30, 2009, total assets include $1,002.0 million related to consolidated VIEs of which $25.9 million is included in Lennar Homebuilding cash and cash equivalents, $1.5 million in Lennar Homebuilding restricted cash, $5.5 million in Lennar Homebuilding receivables, net, $253.2 million in Lennar Homebuilding finished homes and construction in progress, $341.0 million in Lennar Homebuilding land under development, $182.7 million in Lennar Homebuilding consolidated inventory not owned, $35.3 million in Lennar Homebuilding investments in unconsolidated entities and $156.9 million in Lennar Homebuilding other assets.

See accompanying notes to condensed consolidated financial statements.

 

1


Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets — (Continued)

(In thousands, except share and per share amounts)

(unaudited)

 

     August 31,
2010 (2)
    November 30,
2009 (2)
 

LIABILITIES AND EQUITY

    

Lennar Homebuilding:

    

Accounts payable

   $ 200,015      169,596   

Liabilities related to consolidated inventory not owned

     393,051      518,359   

Senior notes and other debts payable

     2,843,229      2,761,352   

Other liabilities

     749,613      862,584   
              
     4,185,908      4,311,891   

Rialto Investments:

    

Notes payable and other liabilities

     638,990      —     

Lennar Financial Services

     386,578      414,886   
              

Total liabilities

     5,211,476      4,726,777   
              

Stockholders’ equity:

    

Preferred stock

     —        —     

Class A common stock of $0.10 par value per share; Authorized: August 31, 2010 and November 30, 2009 – 300,000,000 shares; Issued: August 31, 2010 – 165,313,618 shares and November 30, 2009 – 165,154,591 shares

     16,531      16,515   

Class B common stock of $0.10 par value per share; Authorized: August 31, 2010 and November 30, 2009 – 90,000,000 shares; Issued: August 31, 2010 – 32,970,914 shares and November 30, 2009 – 32,963,579 shares

     3,297      3,296   

Additional paid-in capital

     2,227,955      2,208,934   

Retained earnings

     869,476      828,424   

Treasury stock, at cost; August 31, 2010 – 11,664,744 Class A common shares and 1,679,620 Class B common shares; November 30, 2009 – 11,542,970 Class A common shares and 1,679,620 Class B common shares

     (615,496   (613,690
              

Total stockholders’ equity

     2,501,763      2,443,479   
              

Noncontrolling interests

     566,660      144,535   
              

Total equity

     3,068,423      2,588,014   
              

Total liabilities and equity

   $ 8,279,899      7,314,791   
              

 

(2) As of August 31, 2010, total liabilities include $953.7 million related to consolidated VIEs as to which there was no recourse against the Company, of which $17.7 million is included in Lennar Homebuilding accounts payable, $65.9 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $187.2 million in Lennar Homebuilding senior notes and other debts payable, $49.9 million in Lennar Homebuilding other liabilities and $633.0 million in Rialto Investments notes payable and other liabilities.

As of November 30, 2009, total liabilities include $429.9 million related to consolidated VIEs as to which there was no recourse against the Company, of which $27.2 million is included in Lennar Homebuilding accounts payable, $155.4 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $187.2 million in Lennar Homebuilding senior notes and other debts payable and $60.1 million in Lennar Homebuilding other liabilities.

See accompanying notes to condensed consolidated financial statements.

 

2


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
     2010     2009     2010     2009  

Revenues:

        

Lennar Homebuilding

   $ 718,149      643,613      1,944,253      1,977,876   

Lennar Financial Services

     68,826      77,117      196,727      227,770   

Rialto Investments

     38,000      —        72,918      —     
                          

Total revenues

     824,975      720,730      2,213,898      2,205,646   
                          

Costs and expenses:

        

Lennar Homebuilding (1)

     663,662      704,360      1,822,316      2,150,194   

Lennar Financial Services

     62,013      65,961      177,162      199,583   

Rialto Investments

     26,156      496      47,073      1,517   

Corporate general and administrative

     23,994      27,557      68,868      84,806   
                          

Total costs and expenses

     775,825      798,374      2,115,419      2,436,100   
                          

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (2)

     986      (42,303   (9,310   (105,110

Other income (expense), net (3)

     324      (29,269   14,274      (73,103

Other interest expense

     (17,668   (22,428   (53,849   (48,950

Rialto Investments equity in earnings from unconsolidated entities

     6,643      —        6,350      —     
                          

Earnings (loss) before income taxes

     39,435      (171,644   55,944      (457,617

Benefit (provision) for income taxes (4)

     (605   (2,740   21,997      (6,135
                          

Net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests)

     38,830      (174,384   77,941      (463,752

Less: Net earnings (loss) attributable to noncontrolling interests

     8,795      (2,779   14,710      (11,033
                          

Net earnings (loss) attributable to Lennar

   $ 30,035      (171,605   63,231      (452,719
                          

Basic earnings (loss) per share

   $ 0.16      (0.97   0.34      (2.72
                          

Diluted earnings (loss) per share

   $ 0.16      (0.97   0.34      (2.72
                          

Cash dividends per each Class A and Class B common share

   $ 0.04      0.04      0.12      0.12   
                          

 

(1) Lennar Homebuilding costs and expenses include $12.3 million and $25.3 million, respectively, of valuation adjustments for the three and nine months ended August 31, 2010; and $58.8 million and $152.0 million, respectively, of valuation adjustments for the three and nine months ended August 31, 2009.
(2) Lennar Homebuilding equity in earnings (loss) from unconsolidated entities include valuation adjustments related to assets of unconsolidated entities in which the Company has investments of $9.2 million and $10.5 million, respectively, for the three and nine months ended August 31, 2010; and $31.0 million and $81.0 million, respectively, for the three and nine months ended August 31, 2009.
(3) Other income (expense), net includes valuation adjustments to investments in unconsolidated entities of $27.5 million and $71.7 million, respectively, for the three and nine months ended August 31, 2009.
(4) Benefit (provision) for income taxes for the three and nine months ended August 31, 2010 includes a reversal of the Company’s deferred tax asset valuation allowance of $12.0 million and $7.2 million, respectively; and an increase of the Company’s deferred tax asset valuation allowance of $60.2 million and $162.4 million, respectively, for the three and nine months ended August 31, 2009.

See accompanying notes to condensed consolidated financial statements.

 

3


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

     Nine Months Ended
August 31,
 
     2010     2009  

Cash flows from operating activities:

    

Net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests)

   $ 77,941      (463,752

Adjustments to reconcile net earnings (loss) (including net earnings (loss) attributable to noncontrolling interests) to net cash provided by operating activities:

    

Depreciation and amortization

     9,726      14,054   

Amortization of discount/premium on debt, net

     3,168      1,363   

Lennar Homebuilding equity in loss from unconsolidated entities, including $10.5 million and $81.0 million, respectively of the Company’s share of valuation adjustments related to assets of unconsolidated entities for the nine months ended August 31, 2010 and 2009

     9,310      105,110   

Distributions of earnings from Lennar Homebuilding unconsolidated entities

     5,616      2,098   

Rialto Investments equity in earnings from unconsolidated entities

     (6,350   —     

Distributions of earnings from Rialto Investments unconsolidated entities

     1,868      —     

Share-based compensation expense

     16,995      21,963   

Gain on retirement of Lennar Homebuilding other debt

     (19,384   —     

Loss (gain) on retirement of Lennar Homebuilding senior notes

     11,714      (1,169

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

     27,416      224,247   

Changes in assets and liabilities:

    

Increase in restricted cash

     (1,793   (10,619

Decrease in receivables

     347,712      281,333   

(Increase) decrease in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs

     (230,323   263,886   

Decrease in other assets

     20,387      15,731   

(Increase) decrease in Lennar Financial Services loans held-for-sale

     (8,384   47,193   

Decrease in accounts payable and other liabilities

     (76,532   (114,522
              

Net cash provided by operating activities

     189,087      386,916   
              

Cash flows from investing activities:

    

Increase in restricted cash related to cash collateralized letters of credit

     (121,976   —     

Net additions to operating properties and equipment

    
(603

  (832

Investments in and contributions to Lennar Homebuilding unconsolidated entities

     (162,329   (268,380

Distributions of capital from Lennar Homebuilding unconsolidated entities

     19,656      24,221   

Investments in and contributions to Rialto Investments unconsolidated entities

     (64,310   (9,874

Investments in and contributions to Rialto Investments consolidated entities (net of $93.3 million cash and cash equivalents consolidated)

     (171,778   —     

Increase in Rialto Investments defeasance cash to retire notes payable

     (62,855   —     

Receipts of principal payments on loans receivable

     10,430      —     

Decrease in Lennar Financial Services loans held-for-investment

     1,712      3,749   

Purchases of investment securities

     (5,826   (1,647

Proceeds from sales and maturities of investment securities

     719      18,184   
              

Net cash used in investing activities

     (557,160   (234,579
              

Cash flows from financing activities:

    

Net repayments of Lennar Financial Services debt

     (14,351   (81,179

Proceeds from senior notes

     247,323      392,392   

Proceeds from 2.00% convertible senior notes due 2020

     276,500      —     

Debt issuance costs of senior notes

     (8,785   (5,500

Partial redemption of senior notes

     (375,421   (23,824

 

4


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows — (Continued)

(In thousands)

(unaudited)

 

     Nine Months Ended
August 31,
 
     2010     2009  

Redemption of senior notes

     —        (281,477

Proceeds from other borrowings

     4,369      17,543   

Principal payments on other borrowings

     (131,623   (67,712

Exercise of land option contracts from an unconsolidated land investment venture

     (35,784   (22,907

Receipts related to noncontrolling interests

     12,039      3,588   

Payments related to noncontrolling interests

     (3,882   (3,366

Common stock:

    

Issuances

     1,769      221,125   

Repurchases

     (1,806   (1,130

Dividends

     (22,179   (20,260
              

Net cash (used in) provided by financing activities

     (51,831   127,293   
              

Net (decrease) increase in cash and cash equivalents

     (419,904   279,630   

Cash and cash equivalents at beginning of period

     1,457,438      1,203,422   
              

Cash and cash equivalents at end of period

   $ 1,037,534      1,483,052   
              

Summary of cash and cash equivalents:

    

Lennar Homebuilding

   $ 865,657      1,336,739   

Rialto Investments

     62,153      —     

Lennar Financial Services

     109,724      146,313   
              
   $ 1,037,534      1,483,052   
              

Supplemental disclosures of non-cash investing and financing activities:

    

Non-cash contributions to Lennar Homebuilding unconsolidated entities

   $ 4,364      280   

Non-cash distributions from Lennar Homebuilding unconsolidated entities

   $ 2,558      90,744   

Purchases of inventories financed by sellers

   $ 15,969      9,290   

Non-cash reclass from inventory to operating properties and equipment

   $ —        102,775   

Rialto Investments real estate owned

   $ 58,905      —     

Consolidations/deconsolidations of newly formed or previously unconsolidated/consolidated entities, net:

    

Receivables

   $ 2,077      9,821   

Loans receivable

   $ 1,178,012      —     

Inventories

   $ 49,047      191,621   

Investments in unconsolidated entities

   $ (36,811   (99,363

Investments in consolidated entities

   $ (171,778   —     

Other assets

   $ 64,717      69,574   

Debts payable and other liabilities

   $ (686,006   (156,040

Noncontrolling interests

   $ (399,258   (15,613

See accompanying notes to condensed consolidated financial statements.

 

5


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 in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”) (see Note 15). 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 for the year ended November 30, 2009 filed on Form 8-K dated April 26, 2010. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and nine months ended August 31, 2010 are not necessarily indicative of the results to be expected for the full year.

On December 1, 2009, the Company adopted certain provisions of ASC 810. As required by these provisions, the presentation of noncontrolling interests, previously referred to as minority interests, has been changed on the condensed consolidated balance sheets to be reflected as a component of total equity and on the condensed consolidated statements of operations to separately disclose the amount of net earnings (loss) attributable to Lennar and the noncontrolling interests. In addition, the Company has also presented the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its subsidiaries (see Note 4).

In addition, on December 1, 2009, the Company also adopted other provisions of ASC 810 that amended the consolidation guidance applicable to VIEs and the definition of a VIE, and require enhanced disclosures to provide more information about an enterprise’s involvement in a VIE. ASC 810 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. The adoption of these provisions resulted in certain additional disclosures and in the deconsolidation of certain option contracts totaling $75.5 million, previously included in the Company’s consolidated inventory not owned in its condensed consolidated balance sheets (see Note 15).

Reclassifications

Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform with the 2010 presentation. These reclassifications had no impact on the Company’s results of operations. For the three and nine months ended August 31, 2009, the Company included other interest expense as a component of other income (expense), net in the condensed consolidated statements of operations. In 2010, the Company separately disclosed other interest expense in its condensed consolidated statements of operations and reclassified prior year amounts to conform with the 2010 presentation. In addition, as a result of the Company’s new reportable segment, Rialto Investments, the Company reclassified certain prior year amounts in the condensed consolidated financial statements to conform with the 2010 presentation.

 

6


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

(2) Operating and Reporting Segments

The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:

 

  (1) Homebuilding East

 

  (2) Homebuilding Central

 

  (3) Homebuilding West

 

  (4) Homebuilding Houston

 

  (5) Lennar Financial Services

 

  (6) Rialto Investments

Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.

The Rialto Investments (“Rialto”) segment is a new reportable segment that met the reportable segment criteria set forth in GAAP beginning in the first quarter of 2010. All prior year segment information has been restated to conform with the 2010 presentation. The change had no effect on the Company’s condensed consolidated financial statements, except for certain reclassifications (see Note 1). Rialto focuses on commercial and residential real estate opportunities arising from dislocations in the United States real estate markets and the eventual restructure and recapitalization of those markets.

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, and to a lesser extent, multi-level residential buildings, 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 and land sold, selling, general and administrative expenses and other interest expense of the segment. The Company’s reportable homebuilding segments, and all other homebuilding operations not required to be reported separately, have divisions located in:

East: Florida, Maryland, New Jersey and Virginia

Central: Arizona, Colorado and Texas (1)

West: California and Nevada

Houston: Houston, Texas

Other: Georgia, Illinois, Minnesota, North Carolina and South Carolina

 

  (1) Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. Substantially all of the loans the Lennar Financial Services segment originates are sold in the secondary mortgage market on a servicing released, non-recourse basis; although, the Company remains liable for certain limited representations and warranties related to loan sales. Lennar Financial Services operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates primarily in the same states as the Company’s homebuilding operations, as well as in other states.

 

7


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Operations of the Rialto segment include sourcing, underwriting, pricing, managing, turning around and ultimately monetizing real estate assets, as well as providing similar services to others in markets across the country. Rialto Investments operating earnings (loss) consists of revenues generated primarily from accretable interest income associated with the portfolios of real estate loans acquired in partnership with the FDIC, fees for sub-advisory services and equity in earnings from unconsolidated entities, less the costs incurred by the segment for managing the portfolios and providing advisory services.

Each reportable segment follows the same accounting principles described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements for the year ended November 30, 2009 filed on Form 8-K dated April 26, 2010. In addition, the Rialto Investments reportable segment also follows the accounting policies identified in Section 4 of Item 2 of this Form 10-Q, “Critical Accounting Policies.” Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent stand alone entity during the periods presented.

Financial information relating to the Company’s operations was as follows:

 

(In thousands)    August 31,
2010
   November 30,
2009

Assets:

     

Homebuilding East

   $ 1,561,400    1,469,671

Homebuilding Central

     718,133    703,669

Homebuilding West

     2,117,423    1,986,558

Homebuilding Houston

     238,120    214,706

Homebuilding Other

     737,199    756,068

Rialto Investments (1)

     1,414,934    9,874

Lennar Financial Services

     559,994    557,550

Corporate and unallocated

     932,696    1,616,695
           

Total assets

   $ 8,279,899    7,314,791
           

 

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

 

8


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues:

        

Homebuilding East

   $ 257,181      192,056      623,128      601,801   

Homebuilding Central

     102,308      96,913      270,262      252,211   

Homebuilding West

     173,925      172,818      517,509      591,761   

Homebuilding Houston

     91,649      102,412      270,729      300,316   

Homebuilding Other

     93,086      79,414      262,625      231,787   

Lennar Financial Services

     68,826      77,117      196,727      227,770   

Rialto Investments

     38,000      —        72,918      —     
                          

Total revenues (1)

   $ 824,975      720,730      2,213,898      2,205,646   
                          

Operating earnings (loss):

        

Homebuilding East

   $ 49,384      (52,776   85,642      (86,272

Homebuilding Central

     (8,250   (9,707   (15,953   (54,930

Homebuilding West

     (10,640   (92,215   (16,868   (242,096

Homebuilding Houston

     5,313      3,570      19,954      10,002   

Homebuilding Other

     2,322      (3,619   277      (26,185

Lennar Financial Services

     6,813      11,156      19,565      28,187   

Rialto Investments

     18,487      (496   32,195      (1,517
                          

Total operating earnings (loss)

     63,429      (144,087   124,812      (372,811

Corporate and unallocated

     (23,994   (27,557   (68,868   (84,806
                          

Earnings (loss) before income taxes

   $ 39,435      (171,644   55,944      (457,617
                          

 

(1) Total revenues are net of sales incentives of $89.1 million ($30,600 per home delivered) and $253.2 million ($32,500 per home delivered), respectively, for the three and nine months ended August 31, 2010, compared to $112.2 million ($42,200 per home delivered) and $385.3 million ($48,600 per home delivered), respectively, for the three and nine months ended August 31, 2009.

 

9


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

 

      Three Months Ended
August 31,
   Nine Months Ended
August 31,
(In thousands)    2010    2009    2010    2009

Valuation adjustments to finished homes, CIP and land on which the Company intends to build homes:

           

East

   $ 1,061    38,701    3,825    60,972

Central

     3,362    1,209    4,652    11,463

West

     2,478    6,879    5,091    40,903

Houston

     62    517    162    760

Other

     4,360    2,092    8,704    10,638
                     

Total

     11,323    49,398    22,434    124,736
                     

Valuation adjustments to land the Company intends to sell or has sold to third parties:

           

East

     52    —      97    2,117

Central

     260    7    2,040    1,185

West

     637    5    753    2,533

Houston

     14    628    14    628
                     

Total

     963    640    2,904    6,463
                     

Write-offs of option deposits and pre-acquisition costs:

           

East

     —      5,963    —      11,743

Central

     —      —      —      82

West

     —      2,779    —      4,482

Houston

     —      —      —      721

Other

     —      —      —      3,786
                     

Total

     —      8,742    —      20,814
                     

Company’s share of valuation adjustments related to assets of unconsolidated entities:

           

East

     229    —      229    251

Central

     4,734    600    4,734    1,454

West (1)

     4,282    30,351    5,498    79,296
                     

Total

     9,245    30,951    10,461    81,001
                     

Valuation adjustments to investments in unconsolidated entities:

           

East

     159    —      560    2,566

Central

     —      1,024    —      13,179

West

     —      26,381    —      54,407

Other

     —      80    —      1,571
                     

Total

     159    27,485    560    71,723
                     

Write-offs of other receivables:

           

West

     —      511    —      511

Other

     —      —      1,518    —  
                     

Total

     —      511    1,518    511
                     

Total valuation adjustments and write-offs of option deposits and pre-acquisition costs and other receivables

   $ 21,690    117,727    37,877    305,248
                     

 

(1) For the three and nine months ended August 31, 2010, a $15.0 million valuation adjustment related to the assets of an unconsolidated entity was not included because it resulted from a linked transaction where there was also a pre-tax gain of $22.7 million related to a debt extinguishment. The net pre-tax gain of $7.7 million from the transaction was included in Homebuilding equity in earnings (loss) from unconsolidated entities for three and nine months ended August 31, 2010.

 

10


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

The Company recorded significantly lower valuation adjustments during the three and nine months ended August 31, 2010. However, as expected, after the expiration of the Federal homebuyer tax credit at the end of April, demand trends in many communities in which the Company is selling homes decreased despite the increased affordability from lower home prices and historically low interest rates. If these trends continue and there is further deterioration in the homebuilding market, it may cause additional pricing pressures and slower absorption. This may potentially lead to additional valuation adjustments in the future. In addition, market conditions may cause the Company to re-evaluate its strategy regarding certain assets that could result in further valuation adjustments and/or additional write-offs of option deposits and pre-acquisition costs due to abandonment of those options contracts.

(3) Lennar Homebuilding Investments in Unconsolidated Entities

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

Statements of Operations

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues

   $ 84,327      97,572      183,850      216,815   

Costs and expenses

     152,322      264,385      300,322      959,750   
                          

Net loss of unconsolidated entities (1)

   $ (67,995   (166,813   (116,472   (742,935
                          

The Company’s share of net earnings (loss) recognized

   $ 986      (42,303   (9,310   (105,110
                          

 

(1) The net loss of unconsolidated entities for both the three and nine months ended August 31, 2010 and 2009 was primarily related to valuation adjustments recorded by the unconsolidated entities. The Company’s exposure to such losses was significantly lower as a result of its small ownership interest in the respective unconsolidated entities or its previous valuation adjustments to its investments in unconsolidated entities. In addition, the Company recorded a net pre-tax gain of $7.7 million from a transaction related to one of its unconsolidated entities for the three and nine months ended August 31, 2010.

Balance Sheets

 

(Dollars in thousands)    August 31,
2010
    November 30,
2009
 

Assets:

    

Cash and cash equivalents

   $ 94,460      171,946   

Inventories

     3,471,963      3,628,491   

Other assets

     301,403      403,383   
              
   $ 3,867,826      4,203,820   
              

Liabilities and equity:

    

Accounts payable and other liabilities

   $ 316,155      366,141   

Debt

     1,284,718      1,588,390   

Equity of:

    

The Company

     664,916      599,266   

Others

     1,602,037      1,650,023   
              

Total equity of unconsolidated entities

     2,266,953      2,249,289   
              
   $ 3,867,826      4,203,820   
              

The Company’s equity in its unconsolidated entities

     29   27
              

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s consolidated balance sheet in consolidated inventory not owned. As of August 31, 2010 and November 30, 2009, the portfolio of land (including land development costs) of $422.8 million and $477.9 million, respectively, is reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.

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

 

11


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

 

(In thousands)    August 31,
2010
    November 30,
2009
 

Several recourse debt – repayment

   $ 36,795      42,691   

Several recourse debt – maintenance

     29,454      75,238   

Joint and several recourse debt – repayment

     48,446      85,799   

Joint and several recourse debt – maintenance

     65,592      81,592   

Land seller debt and other debt recourse exposure

     —        2,420   
              

The Company’s maximum recourse exposure

     180,287      287,740   

Less: joint and several reimbursement agreements with the Company’s partners

     (60,878   (93,185
              

The Company’s net recourse exposure

   $ 119,409      194,555   
              

During the nine months ended August 31, 2010, the Company reduced its maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities by $107.5 million, of which $80.5 million was paid by the Company primarily through capital contributions to unconsolidated entities and $27.0 million related to a reduction in the number of joint ventures in which the Company has investments, the reduction of joint and several recourse debt and the joint ventures selling inventory.

As of November 30, 2009, the Company’s obligation guarantees, recorded as a liability on its condensed consolidated balance sheet were $14.1 million. During the nine months ended August 31, 2010, the liability was reduced by a net $3.4 million. The liability was reduced by $11.0 million as a result of the debt extinguishment related to one of the Company’s unconsolidated entities and by $1.6 million due to cash paid related to an obligation guarantee previously recorded. This was partially offset by an accrual of $9.2 million established by the Company to cover claims arising under obligation guarantees. As of August 31, 2010, the Company had $10.7 million of obligation guarantees recorded as a liability on its condensed consolidated balance sheet. The obligation guarantees are estimated based on current facts and circumstances and any unexpected changes may lead the Company to incur additional liabilities under its obligation guarantees in the future.

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

 

(In thousands)    August 31,
2010
   November 30,
2009

Assets

   $ 1,026,194    1,324,993

Liabilities

     504,261    777,836

Equity

     521,933    547,157

In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. Some of the Company’s guarantees are repayment guarantees and some are maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified

 

12


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would generally constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s share of any funds the unconsolidated entity distributes.

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

During the three months ended August 31, 2010, there were: (1) payments of $3.0 million under the Company’s maintenance guarantees, (2) at the election of the Company, a loan paydown of $50.3 million, representing both the Company’s and its partner’s share, in return for a 4-year loan extension and the rights to obtain preferred returns and priority distributions at one of the Company’s unconsolidated entities, and (3) a $19.3 million payment to extinguish debt at a discount and buyout the partner of one of the Company’s unconsolidated entities resulting in a net pre-tax gain of $7.7 million. In addition, during the three months ended August 31, 2010, there were other loan paydowns of $0.9 million. During the three months ended August 31, 2009, there were no payments under maintenance guarantees and there were other loan repayments of $21.9 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the three months ended August 31, 2010, and 2009, there were no payments under completion guarantees.

During the nine months ended August 31, 2010, there were: (1) payments of $8.0 million under the Company’s maintenance guarantees, (2) at the election of the Company, a loan paydown of $50.3 million, representing both the Company’s and its partner’s share, in return for a 4-year loan extension and the rights to obtain preferred returns and priority distributions at one of the Company’s unconsolidated entities, and (3) a $19.3 million payment to extinguish debt at a discount and buyout the partner of one of the Company’s unconsolidated entities resulting in a net pre-tax gain of $7.7 million. In addition, during the nine months ended August 31, 2010, there were other loan paydowns of $27.9 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the nine months ended August 31, 2009, there were payments of $18.0 million under the Company’s maintenance guarantees and there were other loan repayments of $60.4 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the nine months ended August 31, 2010, there were no payments under completion guarantees. During the nine months ended August 31, 2009, there was a payment of $5.6 million under a completion guarantee related to one joint venture.

Payments made to, or on behalf of, the Company’s unconsolidated entities, including payments made under guarantees, are recorded primarily as capital contributions to the Company’s Lennar Homebuilding unconsolidated entities.

As of August 31, 2010, the fair values of the maintenance guarantees, completion guarantees and repayment guarantees were not material. The Company believes that as of August 31, 2010, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or the Company and its partners would contribute additional capital into the venture.

In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 11).

 

13


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

 

(Dollars in thousands)    August 31,
2010
    November 30,
2009
 

The Company’s net recourse exposure

   $ 119,409      194,555   

Reimbursement agreements from partners

     60,878      93,185   
              

The Company’s maximum recourse exposure

   $ 180,287      287,740   
              

Non-recourse bank debt and other debt (partners’ share of several recourse)

   $ 83,483      140,078   

Non-recourse land seller debt or other debt

     46,604      47,478   

Non-recourse bank debt with completion guarantees

     597,662      608,397   

Non-recourse bank debt without completion guarantees

     376,682      504,697   
              

Non-recourse debt to the Company

     1,104,431      1,300,650   
              

Total debt

   $ 1,284,718      1,588,390   
              

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

     14   18
              

(4) Equity and Comprehensive Income (Loss)

The following table reflects the changes in equity attributable to both Lennar Corporation and the noncontrolling interests of its consolidated subsidiaries in which it has less than a 100% ownership interest for both the nine months ended August 31, 2010 and 2009:

 

           Stockholders’ Equity        
(In thousands)    Total
Equity
    Class A
Common Stock
   Class B
Common Stock
   Additional Paid
in Capital
   Treasury
Stock
    Retained
Earnings
    Noncontrolling
Interests
 

Balance at November 30, 2009

   $ 2,588,014      16,515    3,296    2,208,934    (613,690   828,424      144,535   

Net earnings (including net earnings attributable to noncontrolling interests)

     77,941      —      —      —      —        63,231      14,710   

Employee stock and directors plans

     5,284      16    1    7,073    (1,806   —        —     

Amortization of restricted stock

     11,948      —      —      11,948    —        —        —     

Cash dividends

     (22,179   —      —      —      —        (22,179   —     

Receipts related to noncontrolling interests

     12,039      —      —      —      —        —        12,039   

Payments related to noncontrolling interests

     (3,882   —      —      —      —        —        (3,882

Rialto Investments non-cash consolidations

     397,588                   397,588   

Non-cash activity related to noncontrolling interests

     1,670      —      —      —      —        —        1,670   
                                         

Balance at August 31, 2010

   $ 3,068,423      16,531    3,297    2,227,955    (615,496   869,476      566,660   
                                         

 

14


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

           Stockholders’ Equity        
(In thousands)    Total
Equity
    Class A
Common Stock
   Class B
Common Stock
   Additional Paid
in Capital
   Treasury
Stock
    Retained
Earnings
    Noncontrolling
Interests
 

Balance at November 30, 2008

   $ 2,788,753      14,050    3,296    1,944,626    (612,124   1,273,159      165,746   

Net loss (including net loss attributable to noncontrolling interests)

     (463,752   —      —      —      —        (452,719   (11,033

Issuance of Class A common shares

     220,971      2,096    —      218,875    —        —        —     

Employee stock and directors plans

     21,970      208    —      22,892    (1,130   —        —     

Amortization of restricted stock

     12,991      —      —      12,991    —        —        —     

Cash dividends

     (20,260   —      —      —      —        (20,260   —     

Receipts related to noncontrolling interests

     3,588      —      —      —      —        —        3,588   

Payments related to noncontrolling interests

     (3,366   —      —      —      —        —        (3,366

Non-cash activity related to noncontrolling interests

     16,456      —      —      —      —        —        16,456   
                                         

Balance at August 31, 2009

   $ 2,577,351      16,354    3,296    2,199,384    (613,254   800,180      171,391   
                                         

Comprehensive income (loss) attributable to Lennar was the same as net earnings (loss) attributable to Lennar and comprehensive income (loss) attributable to noncontrolling interests was the same as the net earnings (loss) attributable to noncontrolling interests for both the three and nine months ended August 31, 2010 and 2009.

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During both 2009 and 2010, there were no share repurchases under the stock repurchase program. As of August 31, 2010, 6.2 million shares of common stock can be repurchased in the future under the program.

During the three months ended August 31, 2010, treasury stock increased by an immaterial amount of common shares. During the nine months ended August 31, 2010, treasury stock increased by 0.1 million common shares, in connection with activity related to the Company’s equity compensation plan and forfeitures of restricted stock.

(5) Income Taxes

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically based on the more-likely-than-not realization threshold criterion. In the assessment for a valuation allowance, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with loss carryforwards not expiring unused and tax planning alternatives.

Based upon an evaluation of all available evidence, during the three and nine months ended August 31, 2010, the Company recorded a reversal to the deferred tax asset valuation allowance of $12.0 million and $7.2 million, respectively, primarily due to the net earnings generated during this period. At August 31, 2010 and November 30, 2009, the Company’s deferred tax assets, which are fully offset by a valuation allowance were $640.2 million and $647.4 million, respectively. In future periods, the allowance could be reduced based on sufficient evidence indicating that it is more likely than not that a portion or all of the Company’s deferred tax assets will be realized.

 

15


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

At August 31, 2010 and November 30, 2009, the Company had $46.0 million and $77.2 million, respectively, of gross unrecognized tax benefits. During the nine months ended August 31, 2010, total unrecognized tax benefits decreased by $31.2 million primarily as a result of the withdrawal of an issue by the IRS and settlements with state taxing authorities. If the Company were to recognize these tax benefits, $25.0 million would affect the Company’s effective tax rate.

The Company expects the total amount of unrecognized tax benefits to decrease by $14.4 million within twelve months as a result of the settlement of certain tax accounting items with the IRS with respect to the prior examination cycle that carried over to the current years under examination, and as a result of the conclusion of examinations with a number of state taxing authorities. The majority of these items were previously recorded as deferred tax liabilities and the settlement will not affect the Company’s tax rate.

At August 31, 2010, the Company had $27.4 million accrued for interest and penalties, of which $1.9 million was recorded during the nine months ended August 31, 2010. The accrual for interest was reduced by $8.1 million during the nine months ended August 31, 2010 as a result of settlements with state taxing authorities and the withdrawal of an issue by the IRS. At November 30, 2009, the Company had $33.6 million accrued for interest and penalties.

The IRS is currently examining the Company’s federal income tax returns for fiscal years 2005 through 2009, and certain state taxing authorities are examining various fiscal years. The final outcome of these examinations is not yet determinable. The statute of limitations for the Company’s major tax jurisdictions remains open for examination for fiscal years 2003 and subsequent years.

(6) Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net earnings (loss) 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.

Effective December 1, 2009, the Company adopted certain provisions under ASC Topic 260, Earnings per Share. Under these provisions, 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, therefore, 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. For the three and nine months ended August 31, 2009, the nonvested shares were excluded from the calculation of the denominator for diluted loss per share because including them would be anti-dilutive due to the Company’s net loss during those periods. The adoption of these provisions did not have a material impact to the Company’s basic and diluted loss per share.

 

16


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Basic and diluted earnings (loss) per share were calculated as follows:

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands, except per share amounts)    2010    2009     2010    2009  

Numerator:

          

Net earnings (loss) attributable to Lennar

   $ 30,035    (171,605   63,231    (452,719

Less: distributed earnings allocated to nonvested shares

     75    44      237    157   

Less: undistributed earnings allocated to nonvested shares

     235    —        443    —     
                        

Numerator for basic earnings (loss) per share

     29,725    (171,649   62,551    (452,876

Plus: interest on 2.00% convertible senior notes due 2020, net of tax

     871    —        1,123    —     
                        

Numerator for diluted earnings (loss) per share

   $ 30,596    (171,649   63,674    (452,876
                        

Denominator:

          

Denominator for basic earnings (loss) per share – weighted average common shares outstanding

     183,065    176,770      182,913    166,658   

Effect of dilutive securities:

          

Share-based payment

     26    —        171    —     

2.00% convertible senior notes due 2020

     10,005    —        4,313    —     
                        

Denominator for diluted earnings (loss) per share – weighted average common shares outstanding

     193,096    176,770      187,397    166,658   
                        

Basic earnings (loss) per share

   $ 0.16    (0.97   0.34    (2.72
                        

Diluted earnings (loss) per share

   $ 0.16    (0.97   0.34    (2.72
                        

Options to purchase 5.3 million and 6.8 million shares, respectively, of common stock were outstanding and anti-dilutive for the three months ended August 31, 2010 and 2009. Options to purchase 4.6 million and 7.5 million shares, respectively, of common stock were outstanding and anti-dilutive for the nine months ended August 31, 2010 and 2009.

(7) Lennar Financial Services Segment

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

 

(In thousands)    August 31,
2010
   November 30,
2009

Assets:

     

Cash and cash equivalents

   $ 109,724    126,835

Restricted cash

     27,167    25,646

Receivables, net (1)

     130,526    123,967

Loans held-for-sale (2)

     190,538    182,706

Loans held-for-investment, net

     21,392    25,131

Investments held-to-maturity

     7,621    2,512

Goodwill

     34,046    34,046

Other (3)

     38,980    36,707
           
   $ 559,994    557,550
           

Liabilities:

     

Notes and other debts payable

   $ 203,206    217,557

Other (4)

     183,372    197,329
           
   $ 386,578    414,886
           

 

(1) Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of August 31, 2010 and November 30, 2009, respectively.
(2) Loans held-for-sale relate to unsold loans carried at fair value.
(3) Other assets include mortgage loan commitments carried at fair value of $6.7 million and $4.7 million, respectively, as of August 31, 2010 and November 30, 2009.
(4) Other liabilities include forward contracts carried at fair value of $5.0 million and $3.6 million, respectively, as of August 31, 2010 and November 30, 2009.

 

17


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

At August 31, 2010, the Lennar Financial Services segment had a warehouse repurchase facility that matures in April 2011 with a maximum aggregate commitment of $100 million and an additional uncommitted amount of $100 million. In addition, the Lennar Financial Services segment amended its warehouse repurchase facility that matured in July 2010 by extending its maturity to July 2011 and increasing the maximum aggregate commitment from $125 million to $175 million to replace the $100 million warehouse repurchase facility that matured in August 2010. However, for the outstanding borrowings of $51.7 million under the facility that matured in August 2010, the maturity was extended through October 2010. At August 31, 2010, the maximum aggregate commitment under these facilities totaled $275 million.

Subsequent to August 31, 2010, the maximum aggregate commitment of Lennar Financial Services segment’s warehouse repurchase facility that matures in April 2011 was increased to $150 million and the uncommitted amount was decreased to $50 million.

The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $203.1 million (which includes the $51.7 million of borrowings discussed above) and $217.5 million, respectively, at August 31, 2010 and November 30, 2009, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $214.2 million and $266.9 million, respectively, at August 31, 2010 and November 30, 2009. If the facilities are not renewed, the borrowings under the facilities will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

The Company reviews goodwill annually (or whenever indicators of impairment exist) in accordance with GAAP. Due to operating losses in the title operations of the Lennar Financial Services segment, the Company evaluated the carrying value of its Lennar Financial Services segment’s goodwill prior to its annual impairment test. The Company determined the fair value of its title operations based on the income approach. The evaluation concluded that a goodwill impairment was not required as of August 31, 2010.

(8) Rialto Investments Segment

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

 

(In thousands)    August 31,
2010
   November 30,
2009

Assets:

     

Cash and cash equivalents

   $ 62,153    —  

Defeasance cash to retire notes payable

     62,855    —  

Loans receivable

     1,133,565    —  

Real estate acquired through, or in lieu of, foreclosures

     58,905    —  

Investments in unconsolidated entities

     78,777    9,874

Other

     18,679    —  
           
   $ 1,414,934    9,874
           

Liabilities:

     

Notes payable

   $ 626,906    —  

Other

     12,084    —  
           
   $ 638,990    —  
           

 

18


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Rialto’s operating earnings (loss) for the three and nine months ended August 31, 2010 and 2009 was as follows:

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010    2009     2010    2009  

Revenues

   $ 38,000    —        72,918    —     

Costs and expenses

     26,156    496      47,073    1,517   

Rialto Investments equity in earnings from unconsolidated entities

     6,643    —        6,350    —     
                        

Operating earnings (loss) (1)

   $ 18,487    (496   32,195    (1,517
                        

 

(1) Operating earnings (loss) for the three and nine months ended August 31, 2010 included $10.8 million and $20.4 million, respectively, of net earnings attributable to noncontrolling interests.

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the Federal Deposit Insurance Corporation (“FDIC”), for approximately $243 million (net of transaction costs and a $22 million working capital reserve). The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions. The two portfolios consist of more than 5,500 distressed residential and commercial real estate loans with an aggregate unpaid principal balance of approximately $3 billion and had an initial fair value of approximately $1.2 billion. The FDIC retained a 60% equity interest in the LLCs and provided $626.9 million of notes with 0% interest, which are non-recourse to the Company. In accordance with GAAP, interest has not been imputed because the notes are with, and guaranteed by, a governmental agency. The notes are secured by the loans held by the LLCs. Additionally, if the LLCs exceed expectations and meet certain internal rate of return and distribution thresholds, the Company’s equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%. As of August 31, 2010, the notes payable balance was $626.9 million; however, during the nine months ended August 31, 2010, $62.9 million of cash collections on loans in excess of expenses were deposited in a defeasance account, established for the repayment of the notes payable, per the agreement with the FDIC. The funds in the defeasance account will be used to retire the notes payable upon their maturity.

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 its management and servicer contracts. At August 31, 2010, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.6 billion, respectively.

All of the acquired loans for which (1) there was evidence of credit quality deterioration since origination and (2) for which it was deemed probable that the Company would be unable to collect all contractually required principal and interest payments were accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310-30”). For loans accounted for under ASC 310-30, management determined the value of the loan portfolio based on extensive due diligence on the loans, the underlying properties and the borrowers. Factors considered in the valuation were projected cash flows for the loans, type of loan and related collateral, classification status and current discount rates.

Under ASC 310-30, loans were pooled together according to common risk characteristics. The excess of the cash flows expected to be collected from the loans receivable at acquisition over the initial investment for those loans receivable is referred to as the accretable yield and is recognized in interest income over the expected life of the pools primarily using the constant effective yield method. The difference between contractually required payments at acquisition and the cash flows expected to be

 

19


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

collected is referred to as the nonaccretable difference. Changes in the expected cash flows of loans receivable from the date of acquisition will either impact the accretable yield or result in a charge to the provision for loan losses in the period in which the changes become probable. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of contractually required payments such that the nonaccretable difference is not affected. Subsequent significant decreases to the expected cash flows related to loan impairment will generally result in a charge to the provision for loan losses, resulting in an increase to the allowance for loan losses, and a reclassification from accretable yield to nonaccretable difference. Subsequent probable and significant increases in cash flows will result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield. Certain amounts related to the ASC 310-30 loans are estimates and may change as the Company obtains additional information related to the respective loans.

Since the second quarter of 2010 the Company has recorded accretable interest income on its loan portfolios. The accretion of interest income is based on various estimates regarding loan performance. As the Company continues to obtain additional information related to the respective loans, these estimates may change from quarter-to-quarter. Therefore, the amounts of accretable interest income recorded for the three and nine months ended August 31, 2010 are not necessarily indicative of the results to be expected for the full year. The estimate of the total contractually required payments of the loans receivable at acquisition, February 9, 2010, was $3.7 billion, the cash flows expected to be collected on loans receivable being accounted for under ASC 310-30 were $1.6 billion, and both the carrying amount and fair value of those loans receivable was $1.2 billion. The accretable yield related to the loans receivable at May 31, 2010 was $0.3 billion. During the three and nine months ended August 31, 2010, the Rialto segment recognized $37.1 million and $69.9 million, respectively, of accretable interest income related to the loans receivable. During the three and nine months ended August 31, 2010, there were additions to the accretable yield of $45.0 million and $374.1 million, respectively. During both the three and nine months ended August 31, 2010, there were deletions of $27.2 million. The accretable yield related to the loans receivable at August 31, 2010 was $0.3 billion. At both the acquisition date and August 31, 2010, there were loans receivable with a carrying value of approximately $100 million for which interest income was not being recognized because the timing and/or amounts of expected cash flows on such loans are not reasonably estimable.

In addition to the acquisition and management of the FDIC portfolios, an affiliate in the Rialto segment is a sub-advisor to the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. The sub-advisor receives management fees for sub-advisory services. The Company committed to invest $75 million of the total equity commitments of approximately $1.2 billion made by private investors in this fund, and the U.S. Treasury has committed to a matching amount of approximately $1.2 billion of equity in the fund, as well as agreed to extend up to approximately $2.3 billion of debt financing. During the three and nine months ended August 31, 2010, the Company invested $7.5 million and $63.8 million, respectively, in the AB PPIP fund. As of August 31, 2010, the Company’s investment in the AB PPIP fund was $71.2 million.

Additionally, another subsidiary in the Rialto segment also has a $7.5 million, or approximately 5%, investment in a service and infrastructure provider to the residential home loan market (the “Service Provider”), which provides services to the consolidated LLCs.

 

20


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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 as of August 31, 2010 was as follows:

Balance Sheets

 

(In thousands)    August 31,
2010
   November 30,
2009 (1)
 

Assets:

     

Cash and cash equivalents

   $ 33,635    2,229   

Investments

     3,964,989    —     

Other assets

     176,943    179,985   
             
   $ 4,175,567    182,214   
             

Liabilities and equity:

     

Accounts payable and other liabilities

   $ 88,994    58,209   

Partner loans

     137,820    135,570   

Debt

     1,775,000    —     

Equity of:

     

Rialto Investments

     78,777    9,874   

Others

     2,094,976    (21,439
             

Total equity of unconsolidated entities

     2,173,753    (11,565
             
   $ 4,175,567    182,214   
             

 

(1) Amounts included as of November 30, 2009 relate only to the Service Provider because the Company did not invest in the AB PPIP fund until December 2009.

Statements of Operations

 

      Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010    2009     2010    2009  

Revenues

   $ 114,585    18,110      233,912    39,346   

Costs and expenses

     57,760    26,399      128,115    61,831   

Other gains

     158,616    —        154,947    —     
                        

Net earnings (loss) of unconsolidated entities

     215,441    (8,289   260,744    (22,485
                        

Rialto Investments’ share of net earnings recognized

   $ 6,643    —        6,350    —     
                        

(9) Lennar Homebuilding Cash and Cash Equivalents

Cash and cash equivalents as of August 31, 2010 and November 30, 2009 included $11.2 million and $5.8 million, respectively, of cash held in escrow for approximately three days.

(10) Lennar Homebuilding Restricted Cash

Restricted cash as of August 31, 2010 consists primarily of $122.0 million of cash used to collateralize letters of credit. Restricted cash also includes customer deposits on home sales held in restricted accounts until title transfers to the homebuyer, as required by the state and local governments in the locations in which the homes were sold.

 

21


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(11) Lennar Homebuilding Senior Notes and Other Debts Payable

 

(Dollars in thousands)    August 31,
2010
   November 30,
2009

5.125% senior notes due 2010

   $ 99,229    249,955

5.95% senior notes due 2011

     113,189    244,727

5.95% senior notes due 2013

     266,035    347,471

5.50% senior notes due 2014

     248,509    248,365

5.60% senior notes due 2015

     501,216    501,424

6.50% senior notes due 2016

     249,788    249,760

12.25% senior notes due 2017

     393,031    392,392

6.95% senior notes due 2018

     247,323    —  

2.00% convertible senior notes due 2020

     276,500    —  

Mortgage notes on land and other debt

     448,409    527,258
           
   $ 2,843,229    2,761,352
           

In February 2010, the Company terminated its $1.1 billion senior unsecured revolving credit facility (the “Credit Facility”). The Company had no outstanding borrowings under the Credit Facility as it was only being used to issue letters of credit. The Company entered into cash-collateralized letter of credit agreements with two banks with a capacity totaling $225 million. As of August 31, 2010, the Company had $120.8 million of cash-collateralized letters of credit.

The Company’s performance letters of credit outstanding were $74.9 million and $97.7 million, respectively, at August 31, 2010 and November 30, 2009. The Company’s financial letters of credit outstanding were $195.9 million and $205.4 million, respectively, at August 31, 2010 and November 30, 2009. Performance letters of credit are generally posted with regulatory bodies to guarantee the Company’s performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts and for insurance risks, credit enhancements and as other collateral. Additionally, at August 31, 2010, the Company had outstanding performance and surety bonds related to site improvements at various projects (including certain projects of the Company’s joint ventures) of $720.7 million. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all development and construction activities are completed. As of August 31, 2010, there were approximately $329.0 million, or 46%, of costs to complete related to these site improvements. The Company does not presently anticipate any draws upon these bonds, but if 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 May 2010, the Company issued $250 million of 6.95% senior notes due 2018 (the “6.95% Senior Notes”) at a price of 98.929% in a private placement. Proceeds from the offering, after payment of initial purchaser’s discount and expenses, were $243.9 million. The Company used the net proceeds of the sale of the 6.95% Senior Notes to fund purchases pursuant to its tender offer for its 5.125% senior notes due October 2010, its 5.95% senior notes due 2011 and its 5.95% senior notes due 2013. Interest on the 6.95% Senior Notes is due semi-annually beginning December 1, 2010. The 6.95% Senior Notes are unsecured and unsubordinated, and may at some time be guaranteed by some or substantially all of the Company’s subsidiaries. Subsequently, most of the privately placed 6.95% Senior Notes were exchanged for substantially identical 6.95% senior notes that had been registered under the Securities Act of 1933. At August 31, 2010, the carrying amount of the 6.95% Senior Notes was $247.3 million.

In May 2010, the Company issued $276.5 million of 2.00% convertible senior notes due 2020 (the “2.00% Convertible Senior Notes”) at a price of 100% in a private placement. Proceeds from the offering, after payment of expenses, were $271.2 million. The net proceeds are being used for general corporate purposes, including repayments or repurchases of existing senior notes or other indebtedness. The 2.00% Convertible Senior Notes are convertible into shares of Class A common stock at the initial conversion rate of 36.1827 shares of common stock per $1,000 principal amount of the 2.00% Convertible Senior Notes, which is equivalent to an initial conversion price of approximately $27.64 per share of Class A common stock, subject to anti-dilution adjustments. Holders of the 2.00% Convertible Senior Notes will have the

 

22


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

right to require the Company to repurchase them for cash equal to 100% of their principal amount, plus accrued but unpaid interest, on each of December 1, 2013 and December 1, 2015. The Company will have the right to redeem the 2.00% Convertible Senior Notes at any time on or after December 1, 2013 for 100% of their principal amount, plus accrued but unpaid interest. Interest on the 2.00% Senior Notes is due semi-annually beginning December 1, 2010. Beginning with the nine-month interest period commencing December 1, 2013, under certain circumstances based on the average trading price of the 2.00% Convertible Senior Notes, the Company may be required to pay contingent interest. The 2.00% Convertible Senior Notes are unsecured and unsubordinated, and may at some time be guaranteed by some or substantially all of the Company’s subsidiaries. At August 31, 2010, the carrying amount of the 2.00% Convertible Senior Notes was $276.5 million.

In May 2010, the Company repurchased $289.4 million aggregate principal amount of its senior notes due 2010, 2011 and 2013 through a tender offer that ran from April 27, 2010 through May 25, 2010, resulting in a pre-tax loss of $10.8 million. Through the tender offer, the Company repurchased $76.4 million principal amount of its 5.125% senior notes due October 2010, $130.8 million of its 5.95% senior notes due 2011 and $82.3 million of its 5.95% senior notes due 2013.

In addition to the tender offer, during the nine months ended August 31, 2010, the Company repurchased $74.4 million principal amount of its 5.125% senior notes due October 2010 and $1.0 million principal amount of its 5.95% senior notes due 2011, resulting in a net pre-tax loss of $0.9 million. During the nine months ended August 31, 2010, the Company also retired $151.0 million of mortgage notes on land and other debt, resulting in a pre-tax gain of $19.4 million.

In October 2010, the Company retired the remaining $99.2 million of its 5.125% senior notes due October 2010 for 100% of the outstanding principal amount plus accrued and unpaid interest as of the maturity date.

(12) Product Warranty

Warranty and similar reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Reserves are determined based on historical data and trends with respect to similar product types and geographical areas. The Company regularly monitors the warranty reserve and makes adjustments to its pre-existing warranties in order to reflect changes in trends and historical data as information becomes available. Warranty reserves are included in other liabilities in the accompanying condensed consolidated balance sheets. The activity in the Company’s warranty reserve was as follows:

 

     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010     2009     2010     2009  

Warranty reserve, beginning of period

   $ 126,464      142,174      157,896      129,449   

Warranties issued during the period

     6,639      6,475      18,509      19,757   

Adjustments to pre-existing warranties from changes in estimates

     4,057      13,967      3,317      42,746   

Payments

     (19,862   (18,678   (62,424   (48,014
                          

Warranty reserve, end of period

   $ 117,298      143,938      117,298      143,938   
                          

As of August 31, 2010, the Company identified approximately 890 homes delivered in Florida primarily during its 2006 and 2007 fiscal years that are confirmed to have defective Chinese drywall and resulting damage. This represents a small percentage of homes the Company delivered in Florida (4.2%) and nationally (1.0%) during those fiscal years in the aggregate. Defective Chinese drywall appears to be an industry-wide issue as other homebuilders have publicly disclosed that they are experiencing similar issues with defective Chinese drywall.

 

23


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Based on its efforts to date, the Company has not identified defective Chinese drywall in homes delivered by the Company outside of Florida. The Company is continuing its investigation of homes delivered during the relevant time period in order to determine whether there are additional homes, not yet inspected, with defective Chinese drywall and resulting damage. If the outcome of the Company’s inspections identifies more homes than the Company has estimated to have defective Chinese drywall, it might require an increase to the Company’s warranty reserve in the future. The Company has replaced defective Chinese drywall when it has been found in homes the Company has built.

Through August 31, 2010, the Company has accrued $80.7 million of warranty reserves related to homes confirmed as having defective Chinese drywall, as well as an estimate for homes not yet inspected that may contain Chinese drywall. No additional amount was accrued during the three and nine months ended August 31, 2010. As of August 31, 2010, the warranty reserve, net of payments, was $29.1 million. During the nine months ended August 31, 2010, the Company received payments of $58.5 million under its insurance coverage and through third party recoveries relative to the costs it has incurred and expects to incur remedying the homes confirmed and estimated to have defective Chinese drywall and resulting damage. The Company continues to seek additional reimbursement from its subcontractors, insurers and others for costs the Company has incurred or expects to incur to investigate and repair defective Chinese drywall and resulting damage.

(13) Share-Based Payment

During the three and nine months ended August 31, 2010 and 2009, compensation expense related to the Company’s share-based payment awards was as follows:

 

     Three Months Ended
August 31,
   Nine Months Ended
August 31,
(In thousands)    2010    2009    2010    2009

Stock options

   $ 1,535    2,994    5,047    8,972

Nonvested shares

     3,821    3,377    11,948    12,991
                     

Total compensation expense for share-based awards

   $ 5,356    6,371    16,995    21,963
                     

During the three months ended August 31, 2010, the Company did not grant any stock options or nonvested shares. During the nine months ended August 31, 2010, the Company granted an immaterial amount of stock options and did not issue any nonvested shares. During both the three and nine months ended August 31, 2009, the Company granted an immaterial amount of stock options and did not issue any nonvested shares.

 

24


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(14) Financial Instruments

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at August 31, 2010 and November 30, 2009, 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, defeasance cash to retire notes payable, receivables, net, income tax receivables and accounts payable, which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.

 

     August 31, 2010    November 30, 2009
(In thousands)    Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

ASSETS

           

Rialto Investments:

           

Loans receivable

   $ 1,133,565    1,133,565    —      —  

Lennar Financial Services:

           

Loans held-for-investment, net

   $ 21,392    22,784    25,131    26,818

Investments held-to-maturity

   $ 7,621    7,636    2,512    2,529

LIABILITIES

           

Lennar Homebuilding:

           

Senior notes and other debts payable

   $ 2,843,229    2,804,322    2,761,352    2,754,737

Rialto Investments:

           

Notes payable

   $ 626,906    610,596    —      —  

Lennar Financial Services:

           

Notes and other debts payable

   $ 203,206    203,206    217,557    217,557

The following methods and assumptions are used by the Company in estimating fair values:

Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices. The Company’s variable-rate borrowings are tied to market indices and approximate fair value due to the short maturities associated with the majority of the instruments.

Rialto Investments—The fair value for loans receivable is based on discounted cash flows as of August 31, 2010. For notes payable, the fair value of the zero percent notes provided by the FDIC was calculated based on a 5-year treasury yield as of August 31, 2010.

Lennar Financial Services—The fair values are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by management on the basis of discounted cash flows or other financial information.

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


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

The Company’s financial instruments measured at fair value at August 31, 2010 on a recurring basis are all within the Lennar Financial Services segment and are summarized below:

 

Financial Instruments

   Fair Value
Hierarchy
   Fair Value at
August 31, 2010
 
(Dollars in thousands)            

Loans held-for-sale (1)

   Level 2    $ 190,538   

Mortgage loan commitments

   Level 2    $ 6,689   

Forward contracts

   Level 2    $ (4,966

 

(1) The aggregate fair value of loans held-for-sale of $190.5 million exceeds its aggregate principal balance of $183.3 million by $7.2 million.

The estimated fair values of the Lennar Financial Services segment 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:

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 derivatives instruments used to economically hedge them without having to apply complex hedge accounting provisions.

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.

Forward contracts— Fair value is based on quoted market prices for similar financial instruments.

Rialto real estate owned— During the three months ended August 31, 2010, the Rialto Investments segment recorded real estate owned (“REO”) of $58.9 million measured at fair value (Level 3) on a nonrecurring basis. REO is initially recorded at fair value at the date of taking title less estimated costs to sell. The fair value of the REO is either based upon the appraised value or broker’s opinion value at the time of foreclosure.

(15) Consolidation of Variable Interest Entities

GAAP requires the consolidation of VIEs in which an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIEs economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company’s variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management and development agreements between the Company and a VIE, (4) loans provided by the Company to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. The Company examines specific criteria and uses its judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered in determining whether the Company is the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between the Company and the other partner(s) and contracts to purchase assets from VIEs.

 

26


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Generally, all major decision making in the Company’s joint ventures is shared between all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by the Company are nominal and believed to be at market and there is no significant economic disproportionality between the Company and other partners. Generally, the Company purchases less than a majority of the joint venture’s assets and the purchase prices under the Company’s option contracts are believed to be at market.

Generally, Lennar Homebuilding unconsolidated entities become VIEs and consolidate when the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, the Company continues to fund operations and debt paydowns through partner loans or substituted capital contributions.

The Company evaluated all joint venture agreements as of August 31, 2010. Based on the Company’s evaluation, there were no material entities that consolidated during the three and nine months ended August 31, 2010, except for the LLCs in partnership with the FDIC in the Company’s Rialto segment. 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’ economic performance through its management and servicer contracts. During the three and nine months ended August 31, 2010, there were no VIEs that deconsolidated other than the $75.5 million of option contracts that deconsolidated as a result of the adoption of ASC 810.

At August 31, 2010 and November 30, 2009, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $664.9 million and $599.3 million, respectively, and the Rialto Investments segment’s investments in unconsolidated entities as of August 31, 2010 and November 30, 2009 were $78.8 million and $9.9 million, respectively.

Consolidated VIEs

As of August 31, 2010, the carrying amount of the VIEs’ assets and non-recourse liabilities that consolidated were $2,259.8 million and $953.7 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 a VIE. The VIEs are not guarantors of Company’s senior notes and other debts payable. In addition, 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.

 

27


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Unconsolidated VIEs

At August 31, 2010 and November 30, 2009, the Company’s recorded investments in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:

 

As of August 31, 2010      
(In thousands)    Investments in
Unconsolidated
VIEs
   Lennar’s
Maximum
Exposure to Loss

Lennar Homebuilding (1)

   $ 142,776    173,084

Rialto Investments (2)

     78,777    92,047
           

Total

   $ 221,553    265,131
           

 

As of November 30, 2009      
(In thousands)    Investments in
Unconsolidated
VIEs
   Lennar’s
Maximum
Exposure to Loss

Lennar Homebuilding (1)

   $ 84,352    84,352

Rialto Investments (2)

     9,874    9,874
           

Total

   $ 94,226    94,226
           

 

(1) At August 31, 2010, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investments in the unconsolidated VIEs in addition to $30.0 million of recourse debt of one of the unconsolidated VIEs. At November 30, 2009, the maximum exposure to loss of Lennar Homebuilding’s investments in unconsolidated VIEs is limited to its investments in the unconsolidated VIEs.
(2) For Rialto’s investment in unconsolidated VIEs, the Company made a $75 million commitment to fund capital in the AB PPIP fund. As of August 31, 2010, the Company had contributed $63.8 million of the $75 million commitment and it cannot walk away from its commitment to fund capital. Therefore, as of August 31, 2010, the maximum exposure to loss for Rialto’s unconsolidated VIEs was higher than the carrying amount of its investment. At November 30, 2009, the maximum recourse exposure to loss of Rialto’s investment in unconsolidated VIEs was limited to its investments in the unconsolidated entities.

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, the VIEs have an executive committee made up of representatives from each partner. The members of the executive committee have equal vote 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. Furthermore, the Company’s economic interest is not significantly disproportionate to the point where it would indicate that the Company has the power to direct these activities.

The Company and other partners do not generally have an obligation to make capital contributions to the VIEs, except for the Company’s $11.2 million remaining commitment to the AB PPIP fund and $30.0 million of recourse debt of one of the Lennar Homebuilding unconsolidated VIEs. 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. 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.

 

28


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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.

A majority of the Company’s option contracts require a non-refundable cash deposit or irrevocable letter of credit based on a percentage of the purchase price of the land. The Company’s option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on the fair value at the time of takedown.

The Company’s investments in option contracts are recorded at cost unless those investments are determined to be impaired, in which case the Company’s investments are written down to fair value. The Company reviews option contracts for indicators of impairment during each reporting period. The most significant indicator of impairment is a decline in the fair value of the optioned property such that the purchase and development of the optioned property would no longer meet the Company’s targeted return on investment with appropriate consideration given to the length of time available to exercise the option. Such declines could be caused by a variety of factors including increased competition, decreases in demand or changes in local regulations that adversely impact the cost of development. Changes in any of these factors would cause the Company to re-evaluate the likelihood of exercising its land options.

Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, the Company is not required to purchase land in accordance with those take-down schedules. In substantially all instances, the Company has the right and ability to not exercise its option and forfeit its deposit without further penalty, other than termination of the option and loss of any unapplied portion of its deposit and pre-acquisition costs. Therefore, in substantially all instances, the Company does not consider the take-down price to be a firm contractual obligation.

When the Company does not intend to exercise an option, it writes off any unapplied deposit and pre-acquisition costs associated with the option contract.

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, it is required to consolidate the land under option at the purchase price of the optioned land. During the nine months ended August 31, 2010, the effect of consolidation of these option contracts was a net increase of $10.5 million to consolidated inventory not owned with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 31, 2010. To reflect the purchase price of the inventory consolidated, the Company reclassified the related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of August 31, 2010. 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. However, consolidated inventory not owned decreased due to (1) the Company exercising its options to acquire land under certain contracts previously consolidated and (2) the deconsolidation of certain option contracts totaling $75.5 million related to the adoption of certain new provisions under ASC 810, resulting in a decrease in consolidated inventory not owned of $130.2 million for the nine months ended August 31, 2010.

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 $151.9 million and $127.4 million, respectively, at August 31, 2010 and November 30, 2009. Additionally, the Company had posted $48.8 million and $58.2 million, respectively, of letters of credit in lieu of cash deposits under certain option contracts as of August 31, 2010 and November 30, 2009.

 

29


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(16) Subsequent Events

On September 30, 2010, the Company completed the acquisitions of approximately $740 million of distressed real estate assets, in separate transactions, from three large financial institutions. The combined portfolio includes 397 loans with a total unpaid principal balance of approximately $529 million and 306 REO properties with an appraised value of approximately $211 million. The distressed real estate assets were acquired at a discount. The Company paid $310 million for the distressed real estate assets of which, $125 million was a 5-year senior unsecured note provided by one of the selling financial institutions.

The loans consist primarily of non-performing residential and commercial acquisition development and construction loans. The real estate properties consist of land, lots, and single-family and multi-family residential communities at varying stages of completion. The acquired assets are located in 17 states, primarily in the Mid-Atlantic and Southeast regions of the United States with the largest concentration of assets in Florida, Georgia and North Carolina. In the combined portfolio, 65% of the assets are residential and 35% are commercial.

(17) New Accounting Pronouncements

In December 2007, the FASB updated certain provisions of ASC Topic 805, Business Combinations, (“ASC 805”). These provisions broaden the guidance of ASC 805, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition requirement of assets acquired, liabilities assumed and interests transferred as a result of business combinations. ASC 805 expands on required disclosures to improve the financial statement users’ abilities to evaluate the nature and financial effects of business combinations. ASC 805 was effective for the Company for business combinations that close on or after December 1, 2009. The adoption of these new provisions did not have a material effect on the Company’s condensed consolidated financial statements.

In April 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, (“ASU 2010-18”). Under ASU 2010-18, modification of loans accounted for within a pool under provisions for loans acquired with deteriorated credit quality does not result in removal of such loans from the pool even if the modification would otherwise be considered a troubled debt restructuring. An entity must continue to consider whether the pool of assets in which the modified loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans acquired with deteriorated credit quality that are not accounted for within a pool. Loans accounted for individually that were acquired with deteriorated credit quality continue to be subject to the accounting provisions for troubled debt restructuring by creditors. The amended guidance is to be applied prospectively, with early application permitted. ASU 2010-18 is effective for modifications of loans accounted for within a pool that occur on or after September 1, 2010. The adoption of this ASU did not have a material effect on the Company’s condensed consolidated financial statements.

 

30


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information

The indentures governing the principal amounts of the Company’s 5.125% senior notes due 2010, 5.95% senior notes due 2011, 5.95% senior notes due 2013, 5.50% senior notes due 2014, 5.60% senior notes due 2015, 6.50% senior notes due 2016, 12.25% senior notes due 2017, 6.95% senior notes due 2018 and 2.00% convertible senior notes due 2020 require that, if any of the Company’s 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. Until recently, the Company had a Credit Facility that required that substantially all of the Company’s subsidiaries guarantee Lennar Corporation’s obligations under the Credit Facility, and therefore, those subsidiaries also guaranteed the Company’s obligations with regard to its senior notes. The Company recently terminated the Credit Facility and therefore there are no guarantors of Lennar Corporation’s obligations with regard to its senior notes. The entities referred to as “guarantors” in the following tables are subsidiaries that would have been guarantors if the Credit Facility were still in effect. Supplemental financial information for the guarantors is presented as follows:

Condensed Consolidating Balance Sheet

August 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Total

ASSETS

           

Lennar Homebuilding:

           

Cash and cash equivalents, restricted cash, receivables, net and income tax receivables

   $ 876,278      125,998    67,440      —        1,069,716

Inventories

     —        3,694,853    579,474      —        4,274,327

Investments in unconsolidated entities

     —        628,050    36,866      —        664,916

Other assets

     39,311      102,700    154,001      —        296,012

Investments in subsidiaries

     3,381,274      871,437    —        (4,252,711   —  
                             
     4,296,863      5,423,038    837,781      (4,252,711   6,304,971

Rialto Investments

     85,153      —      1,329,781      —        1,414,934

Lennar Financial Services

     —        150,635    409,359      —        559,994
                             

Total assets

   $ 4,382,016      5,573,673    2,576,921      (4,252,711   8,279,899
                             

LIABILITIES AND EQUITY

           

Lennar Homebuilding:

           

Accounts payable and other liabilities

   $ 230,006      654,011    65,611      —        949,628

Liabilities related to consolidated inventory not owned

     —        393,051    —        —        393,051

Senior notes and other debts payable

     2,394,820      190,501    257,908      —        2,843,229

Intercompany

     (750,598   900,480    (149,882   —        —  
                             
     1,874,228      2,138,043    173,637      —        4,185,908

Rialto Investments

     6,025      —      632,965      —        638,990

Lennar Financial Services

     —        54,356    332,222      —        386,578
                             

Total liabilities

     1,880,253      2,192,399    1,138,824      —        5,211,476

Stockholders’ equity

     2,501,763      3,381,274    871,437      (4,252,711   2,501,763

Noncontrolling interests

     —        —      566,660      —        566,660
                             

Total equity

     2,501,763      3,381,274    1,438,097      (4,252,711   3,068,423
                             

Total liabilities and equity

   $ 4,382,016      5,573,673    2,576,921      (4,252,711   8,279,899
                             

 

31


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Balance Sheet

November 30, 2009

 

(In thousands)

   Lennar
Corporation
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
    Eliminations     Total

ASSETS

            

Lennar Homebuilding:

            

Cash and cash equivalents, restricted cash, receivables, net and income tax receivables

   $ 1,564,529    198,524    33,256      —        1,796,309

Inventories

     —      3,493,784    594,205      —        4,087,989

Investments in unconsolidated entities

     —      563,984    35,282      —        599,266

Other assets

     44,232    63,040    156,531      —        263,803

Investments in subsidiaries

     3,389,625    522,148    —        (3,911,773   —  
                            
     4,998,386    4,841,480    819,274      (3,911,773   6,747,367

Rialto Investments

     9,874    —      —        —        9,874

Lennar Financial Services

     —      153,545    404,005      —        557,550
                            

Total assets

   $ 5,008,260    4,995,025    1,223,279      (3,911,773   7,314,791
                            

LIABILITIES AND EQUITY

            

Lennar Homebuilding:

            

Accounts payable and other liabilities

   $ 246,501    702,091    83,588      —        1,032,180

Liabilities related to consolidated inventory not owned

     —      518,359    —        —        518,359

Senior notes and other debts payable

     2,234,093    223,545    303,714      —        2,761,352

Intercompany

     84,187    102,454    (186,641   —        —  
                            
     2,564,781    1,546,449    200,661      —        4,311,891

Rialto Investments

     —      —      —        —        —  

Lennar Financial Services

     —      58,951    355,935      —        414,886
                            

Total liabilities

     2,564,781    1,605,400    556,596      —        4,726,777

Stockholders’ equity

     2,443,479    3,389,625    522,148      (3,911,773   2,443,479

Noncontrolling interests

     —      —      144,535      —        144,535
                            

Total equity

     2,443,479    3,389,625    666,683      (3,911,773   2,588,014
                            

Total liabilities and equity

   $ 5,008,260    4,995,025    1,223,279      (3,911,773   7,314,791
                            

 

32


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended August 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        705,693      12,456      —        718,149   

Lennar Financial Services

     —        38,756      44,884      (14,814   68,826   

Rialto Investments

     866      —        37,134      —        38,000   
                                

Total revenues

     866      744,449      94,474      (14,814   824,975   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        646,072      19,189      (1,599   663,662   

Lennar Financial Services

     —        38,598      35,611      (12,196   62,013   

Rialto Investments

     8,753      —        17,403      —        26,156   

Corporate general and administrative

     22,686      —        —        1,308      23,994   
                                

Total costs and expenses

     31,439      684,670      72,203      (12,487   775,825   
                                

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities

     —        1,173      (187   —        986   

Other income, net

     9,653      370      —        (9,699   324   

Other interest expense

     (12,026   (17,668   —        12,026      (17,668

Rialto Investments equity in earnings from unconsolidated entities

     6,643      —        —        —        6,643   
                                

Earnings (loss) before income taxes

     (26,303   43,654      22,084      —        39,435   

Benefit (provision) for income taxes

     14,587      (12,274   (2,918   —        (605

Equity in earnings from subsidiaries

     41,751      10,371      —        (52,122   —     
                                

Net earnings (including net earnings attributable to noncontrolling interests)

     30,035      41,751      19,166      (52,122   38,830   

Less: Net earnings attributable to noncontrolling interests

     —        —        8,795      —        8,795   
                                

Net earnings attributable to Lennar

   $ 30,035      41,751      10,371      (52,122   30,035   
                                

 

33


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended August 31, 2009

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        636,918      6,695      —        643,613   

Lennar Financial Services

     —        43,750      49,406      (16,039   77,117   

Rialto Investments

     —        —        —        —        —     
                                

Total revenues

     —        680,668      56,101      (16,039   720,730   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        694,217      12,078      (1,935   704,360   

Lennar Financial Services

     —        40,699      37,258      (11,996   65,961   

Rialto Investments

     496      —        —        —        496   

Corporate general and administrative

     25,823      —        —        1,734      27,557   
                                

Total costs and expenses

     26,319      734,916      49,336      (12,197   798,374   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (42,211   (92   —        (42,303

Other income (expense), net

     8,198      (29,283   —        (8,184   (29,269

Other interest expense

     (12,026   (22,428   —        12,026      (22,428
                                

Earnings (loss) before income taxes

     (30,147   (148,170   6,673      —        (171,644

Benefit (provision) for income taxes

     2,789      (2,401   (3,128   —        (2,740

Equity in earnings (loss) from subsidiaries

     (144,247   6,324      —        137,923      —     
                                

Net earnings (loss) (including net loss attributable to noncontrolling interests)

     (171,605   (144,247   3,545      137,923      (174,384

Less: Net loss attributable to noncontrolling interests

     —        —        (2,779   —        (2,779
                                

Net earnings (loss) attributable to Lennar

   $ (171,605   (144,247   6,324      137,923      (171,605
                                

 

34


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Nine Months Ended August 31, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        1,903,889      40,364      —        1,944,253   

Lennar Financial Services

     —        113,845      127,103      (44,221   196,727   

Rialto Investments

     2,990      —        69,928      —        72,918   
                                

Total revenues

     2,990      2,017,734      237,395      (44,221   2,213,898   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        1,763,857      62,997      (4,538   1,822,316   

Lennar Financial Services

     —        111,956      101,241      (36,035   177,162   

Rialto Investments

     15,519      —        31,554      —        47,073   

Corporate general and administrative

     65,117      —        —        3,751      68,868   
                                

Total costs and expenses

     80,636      1,875,813      195,792      (36,822   2,115,419   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (9,084   (226   —        (9,310

Other income, net

     28,391      14,302      —        (28,419   14,274   

Other interest expense

     (35,818   (53,849   —        35,818      (53,849

Rialto Investments equity in earnings from unconsolidated entities

     6,350      —        —        —        6,350   
                                

Earnings (loss) before income taxes

     (78,723   93,290      41,377      —        55,944   

Benefit (provision) for income taxes

     48,852      (23,418   (3,437   —        21,997   

Equity in earnings from subsidiaries

     93,102      23,230      —        (116,332   —     
                                

Net earnings (including net earnings attributable to noncontrolling interests)

     63,231      93,102      37,940      (116,332   77,941   

Less: Net earnings attributable to noncontrolling interests

     —        —        14,710      —        14,710   
                                

Net earnings attributable to Lennar

   $ 63,231      93,102      23,230      (116,332   63,231   
                                

 

35


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Nine Months Ended August 31, 2009

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        1,947,066      30,810      —        1,977,876   

Lennar Financial Services

     —        123,941      146,512      (42,683   227,770   

Rialto Investments

     —        —        —        —        —     
                                

Total revenues

     —        2,071,007      177,322      (42,683   2,205,646   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        2,116,834      50,368      (17,008   2,150,194   

Lennar Financial Services

     —        113,785      106,365      (20,567   199,583   

Rialto Investments

     1,517      —        —        —        1,517   

Corporate general and administrative

     79,690      —        —        5,116      84,806   
                                

Total costs and expenses

     81,207      2,230,619      156,733      (32,459   2,436,100   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (104,872   (238   —        (105,110

Other income (expense), net

     25,636      (73,145   —        (25,594   (73,103

Other interest expense

     (35,818   (48,950   —        35,818      (48,950
                                

Earnings (loss) before income taxes

     (91,389   (386,579   20,351      —        (457,617

(Provision) benefit for income taxes

     10,207      (5,310   (11,032   —        (6,135

Equity in earnings (loss) from subsidiaries

     (371,537   20,352      —        351,185      —     
                                

Net earnings (loss) (including net loss attributable to noncontrolling interests)

     (452,719   (371,537   9,319      351,185      (463,752

Less: Net loss attributable to noncontrolling interests

     —        —        (11,033   —        (11,033
                                

Net earnings (loss) attributable to Lennar

   $ (452,719   (371,537   20,352      351,185      (452,719
                                

 

36


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Nine Months Ended August 31, 2010

 

(Dollars in thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities:

          

Net earnings (including net earnings attributable to noncontrolling interests)

   $ 63,231      93,102      37,940      (116,332   77,941   

Adjustments to reconcile net earnings (including net earnings attributable to noncontrolling interests) to net cash provided by (used in) operating activities

     339,037      (308,908   (35,315   116,332      111,146   
                                

Net cash provided by (used in) operating activities

     402,268      (215,806   2,625      —        189,087   
                                

Cash flows from investing activities:

          

Increase in restricted cash related to cash collateralized letters of credit

     (121,976   —        —        —        (121,976

Investments in and contributions to Lennar Homebuilding unconsolidated entities, net

     —        (140,434   (2,239   —        (142,673

Investments in and contributions to Rialto Investments unconsolidated entities

     (64,310   —        —        —        (64,310

Investments in and contributions to Rialto Investments consolidated entities (net of $93.3 million cash and cash equivalents consolidated)

     (265,059   —        93,281      —        (171,778

Increase in Rialto Investments defeasance cash to retire notes payable

     —        —        (62,855   —        (62,855

Receipts of principal payments of loans receivable

     —        —        10,430      —        10,430   

Other

     (959   (2,268   (771   —        (3,998
                                

Net cash provided by (used in) investing activities

     (452,304   (142,702   37,846      —        (557,160
                                

Cash flows from financing activities:

          

Net repayments of Lennar Financial Services debt

     —        (21   (14,330   —        (14,351

Net proceeds from senior notes

     515,038      —        —        —        515,038   

Partial redemption of senior notes

     (375,421   —        —        —        (375,421

Net repayments on other borrowings

     —        (76,937   (50,317   —        (127,254

Exercise of land option contracts from an unconsolidated land investment venture

     —        (35,784   —        —        (35,784

Net receipts related to noncontrolling interests

     —        —        8,157      —        8,157   

Common stock:

          

Issuances

     1,769      —        —        —        1,769   

Repurchases

     (1,806   —        —        —        (1,806

Dividends

     (22,179   —        —        —        (22,179

Intercompany

     (551,152   452,631      98,521      —        —     
                                

Net cash provided by (used in) financing activities

     (433,751   339,889      42,031      —        (51,831
                                

Net increase (decrease) in cash and cash equivalents

     (483,787   (18,619   82,502      —        (419,904

Cash and cash equivalents at beginning of period

     1,223,169      154,313      79,956      —        1,457,438   
                                

Cash and cash equivalents at end of period

   $ 739,382      135,694      162,458      —        1,037,534   
                                

 

37


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(18) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Nine Months Ended August 31, 2009

 

(Dollars in thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Cash flows from operating activities:

          

Net earnings (loss) (including net loss attributable to noncontrolling interests)

   $ (452,719   (371,537   9,319      351,185      (463,752

Adjustments to reconcile net earnings (loss) (including net loss attributable to noncontrolling interests) to net cash provided by (used in) operating activities

     144,275      1,060,910      (3,332   (351,185   850,668   
                                

Net cash provided by (used in) operating activities

     (308,444   689,373      5,987      —        386,916   
                                

Cash flows from investing activities:

          

Investments in and contributions to Lennar

Homebuilding unconsolidated entities, net

     —        (196,155   (48,004   —        (244,159

Investments in and contributions to Rialto Investments unconsolidated entities

     (9,874   —        —        —        (9,874

Other

     (52   19,966      (460   —        19,454   
                                

Net cash used in investing activities

     (9,926   (176,189   (48,464   —        (234,579
                                

Cash flows from financing activities:

          

Net repayments of Lennar Financial Services debt

     —        (69   (81,110   —        (81,179

Net proceeds from senior notes

     386,892      —        —        —        386,892   

Redemption of senior notes

     (281,477   —        —        —        (281,477

Partial redemption of senior notes

     (23,824   —        —        —        (23,824

Net repayments on other borrowings

     —        (4,664   (45,505   —        (50,169

Exercise of land option contracts from an unconsolidated land investment venture

     —        (22,907   —        —        (22,907

Net receipts related to noncontrolling interests

     —        —        222      —        222   

Common stock:

          

Issuances

     221,125      —        —        —        221,125   

Repurchases

     (1,130   —        —        —        (1,130

Dividends

     (20,260   —        —        —        (20,260

Intercompany

     275,181      (474,123   198,942      —        —     
                                

Net cash provided by (used in) financing activities

     556,507      (501,763   72,549      —        127,293   
                                

Net increase in cash and cash equivalents

     238,137      11,421      30,072      —        279,630   

Cash and cash equivalents at beginning of period

     1,007,594      125,437      70,391      —        1,203,422   
                                

Cash and cash equivalents at end of period

   $ 1,245,731      136,858      100,463      —        1,483,052   
                                

 

38


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 for our fiscal year ended November 30, 2009 filed on Form 8-K dated April 26, 2010.

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,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” included in Item 1A of our Annual Report on Form 10-K for our fiscal year ended November 30, 2009. We do not undertake any obligation to update forward-looking statements, except as required by Federal securities laws.

Outlook

During the first nine months of our 2010 fiscal year, we continued to see a housing market that was trying to stabilize. The expiration of the Federal homebuyer tax credit at the end of April has been more impactful than originally anticipated. As a result, our new sales orders for the third quarter were down 15% from the prior year. We believe that the recovery in the housing market is in a rocky stabilization process that will ultimately give way to improvement in the market; however, the timing and the degree of improvement remain uncertain.

We have remained focused on improving our core business and returning our company to profitability in 2010 and have achieved year-to-date profitability through our third quarter. Our principal focus in our homebuilding operations is on maintaining and improving our gross profit margin on the homes we sell rather than increasing sales volume. We have taken steps over the past several years to reduce costs and right-size our overhead structure. We have also repositioned our product offering to target first-time and value-focused homebuyers, the result of which has only recently begun to be reflected in our operating results. We continue to make carefully underwritten strategic acquisitions in well-positioned markets that will support our homebuilding operations going forward. As a result, we are beginning to open communities with land that we purchased relatively recently at prices that reflect the recent depressed state of the market with respect to land that is suitable for residential homebuilding.

Along with the improvement in our homebuilding operations, our recently formed Rialto Investments segment has already started to contribute to our bottom line results. During the nine months ended August 31, 2010, our Rialto Investments segment generated $11.8 million of operating earnings primarily from the Federal Deposit Insurance Corporation (“FDIC”) loan portfolios acquired in the first quarter, fees for sub-advisory services and equity in earnings from unconsolidated entities. We expect this segment to be a growing component of our operating earnings in the future as we continue to evaluate and execute on potential opportunities.

Our balance sheet strength positions us to capitalize on future high-return investment opportunities. Although, we remain cautious about the immediate future, we believe that our core businesses are on the right track to achieving sustainable profitability and that we’ve properly positioned our company to capitalize on opportunities as they present themselves in an evolving market.

 

39


(1) Results of Operations

Overview

We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three and nine months ended August 31, 2010 are not necessarily indicative of the results to be expected for the full year.

Net earnings attributable to Lennar were $30.0 million, or $0.16 per basic and diluted share, in the third quarter of 2010, compared to net loss attributable to Lennar of $171.6 million, or $0.97 per basic and diluted share, in the third quarter of 2009. Net earnings attributable to Lennar was $63.2 million, or $0.34 per basic and diluted share, in the nine months ended August 31, 2010, compared to net loss attributable to Lennar of $452.7 million, or $2.72 per basic and diluted share, in the nine months ended August 31, 2009. The improvement in operating results year over year was a result of lower valuation adjustments, reduced sales incentives and cost reduction initiatives implemented during the downturn such as lowering our construction costs, repositioning our product offering to target first-time value-focused homebuyers and reducing our overhead structure. In addition, during fiscal 2010 our operating results have been positively impacted by our Rialto Investments segment, which began to generate revenues from the FDIC loan portfolios acquired in the first quarter and equity in earnings from its unconsolidated entities. Gross margin percentage on home sales improved for the three and nine months ended August 31, 2010, compared to the same periods last year, primarily due to a reduction in valuation adjustments in the three and nine months ended August 31, 2010, and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales. Although sales incentives offered to homebuyers were lower for the third quarter of 2010 compared to the third quarter of 2009 and the second quarter of 2010, it is likely there will be at least some increase in the sales incentives offered to homebuyers in the fourth quarter of 2010 compared to the third quarter of 2010.

 

40


Financial information relating to our operations was as follows:

 

(In thousands)    Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
   2010     2009     2010     2009  

Lennar Homebuilding revenues:

        

Sales of homes

   $ 697,413      635,266      1,905,519      1,946,624   

Sales of land

     20,736      8,347      38,734      31,252   
                          

Total homebuilding revenues

     718,149      643,613      1,944,253      1,977,876   
                          

Lennar Homebuilding costs and expenses:

        

Cost of homes sold

     549,994      585,770      1,516,313      1,786,854   

Cost of land sold

     16,452      17,792      31,090      48,839   

Selling, general and administrative

     97,216      100,798      274,913      314,501   
                          

Total homebuilding costs and expenses

     663,662      704,360      1,822,316      2,150,194   
                          

Lennar Homebuilding operating margins

     54,487      (60,747   121,937      (172,318

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities

     986      (42,303   (9,310   (105,110

Other income (expense), net

     324      (29,269   14,274      (73,103

Other interest expense

     (17,668   (22,428   (53,849   (48,950
                          

Lennar Homebuilding operating earnings (loss)

   $ 38,129      (154,747   73,052      (399,481
                          

Lennar Financial Services revenues

   $ 68,826      77,117      196,727      227,770   

Lennar Financial Services costs and expenses

     62,013      65,961      177,162      199,583   
                          

Lennar Financial Services operating earnings

   $ 6,813      11,156      19,565      28,187   
                          

Rialto Investments revenues

   $ 38,000      —        72,918      —     

Rialto Investments costs and expenses

     26,156      496      47,073      1,517   

Rialto Investments equity in earnings from unconsolidated entities

     6,643      —        6,350      —     
                          

Rialto Investments operating earnings (loss) (1)

   $ 18,487      (496   32,195      (1,517
                          

Total operating earnings (loss)

   $ 63,429      (144,087   124,812      (372,811

Corporate general and administrative expenses

     (23,994   (27,557   (68,868   (84,806
                          

Earnings (loss) before income taxes

   $ 39,435      (171,644   55,944      (457,617
                          

 

(1) Rialto Investments operating earnings (loss) for the three and nine months ended August 31, 2010 include $10.8 million and $20.4 million, respectively, of net earnings attributable to noncontrolling interests.

Three Months Ended August 31, 2010 versus Three Months Ended August 31, 2009

Revenues from home sales increased 10% in the third quarter of 2010 to $697.4 million from $635.3 million in 2009. Revenues were higher primarily due to a 9% increase in the number of home deliveries, excluding unconsolidated entities. New home deliveries, excluding unconsolidated entities, increased to 2,909 homes in the third quarter of 2010 from 2,660 homes last year. The average sales price of homes delivered increased to $240,000 in the third quarter of 2010 from $239,000 in the same period last year. Sales incentives offered to homebuyers were $30,600 per home delivered in the third quarter of 2010, or 11.3% as a percentage of home sales revenue, compared to $42,200 per home delivered in the same period last year, or 15.0% as a percentage of home sales revenue.

Gross margins on home sales were $147.4 million, or 21.1%, in the third quarter of 2010, which included $11.3 million of valuation adjustments, compared to gross margins on home sales of $49.5 million, or 7.8%, in the third quarter of 2009, which included $49.4 million of valuation adjustments. Gross margin for the third quarter of 2010 includes third-party recoveries related to Chinese drywall, offset by valuation adjustments, which resulted in a net 80 basis points benefit to the gross margin percentage.

 

41


Selling, general and administrative expenses were reduced by $3.6 million, or 4%, in the third quarter of 2010, compared to the same period last year, primarily due to reductions in legal and occupancy expenses. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 13.9% in the third quarter of 2010, from 15.9% in 2009.

Gross profits on land sales totaled $4.3 million in the third quarter of 2010, compared to losses on land sales of $9.4 million in the third quarter of 2009, which included $8.7 million in write-offs of deposits and pre-acquisition costs.

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was $1.0 million in the third quarter of 2010, which included a net pre-tax gain of $7.7 million as a result of a transaction by one of our unconsolidated entities, offset by $9.2 million of valuation adjustments related to assets of unconsolidated entities in which we have investments. In the third quarter of 2009, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($42.3) million, which included $31.0 million of valuation adjustments related to assets of unconsolidated entities in which we have investments.

Other income (expense), net, totaled $0.3 million in the third quarter of 2010, compared to other income (expense), net, of ($29.3) million in the third quarter of 2009, which included $27.5 million of valuation adjustments to our investments in unconsolidated entities.

Homebuilding interest expense was $36.7 million in the third quarter of 2010 ($18.1 million was included in cost of homes sold, $0.9 million in cost of land sold and $17.7 million in other interest expense), compared to $40.7 million in the third quarter of 2009 ($17.8 million was included in cost of homes sold, $0.5 million in cost of land sold and $22.4 million in other interest expense). Despite an increase in debt, interest expense decreased primarily due to an increase in qualifying assets eligible for interest capitalization and savings resulting from the termination of our senior unsecured revolving credit facility during the first quarter of 2010.

Net earnings (loss) attributable to noncontrolling interests were $8.8 million and ($2.8) million, respectively, in the third quarter of 2010 and 2009.

Sales of land, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities, other income (expense), net and net earnings (loss) attributable to noncontrolling interests may vary significantly from period to period depending on the timing of land sales and other transactions entered into by the Company and unconsolidated entities in which it has investments.

Operating earnings for the Lennar Financial Services segment was $6.8 million in the third quarter of 2010, compared to operating earnings of $11.2 million in the same period last year. The decrease in operating earnings was primarily due to lower profits per loan in the segment’s mortgage operations.

In the third quarter of 2010, operating earnings for the Rialto Investments segment were $18.5 million (which included $10.8 million of net earnings attributable to noncontrolling interests), compared to an operating loss of $0.5 million in the same period last year. In the third quarter of 2010, revenues in this segment were $38.0 million, which consisted primarily of accretable interest income associated with the portfolio of real estate loans acquired in partnership with the FDIC. In the third quarter of 2010, expenses in this segment were $26.2 million, which consisted primarily of carrying costs related to that portfolio of real estate loans, underwriting expenses and general and administrative expenses. The segment also had equity in earnings from unconsolidated entities of $6.6 million during the third quarter of 2010, consisting primarily of unrealized gains and interest income related to the Company’s investment in the AllianceBernstein L.P. (“AB”) fund formed under the Federal government’s Public-Private Investment Program (“PPIP”).

Corporate general and administrative expenses were reduced by $3.6 million, or 13%, in the third quarter of 2010, compared to the third quarter of 2009 primarily due to our cost reduction initiatives implemented during the downturn. Corporate general and administrative expenses as a percentage of total revenues decreased to 2.9% in the third quarter of 2010, from 3.8% in the third quarter of 2009.

 

42


During the three months ended August 31, 2010, we recorded a reversal to our deferred tax asset valuation allowance of $12.0 million due to the net earnings generated during the period.

Our overall effective income tax rates were 1.98% and (1.62%), respectively, for the three months ended August 31, 2010 and 2009. The change in the effective tax rate, compared to the same period during 2009, resulted primarily from tax-related interest expense under Accounting Standard Codification (“ASC”) Topic 740, Income Taxes.

Nine Months Ended August 31, 2010 versus Nine Months Ended August 31, 2009

Revenues from home sales decreased 2% in the nine months ended August 31, 2010 to $1,905.5 million from $1,946.6 million in 2009. Revenues were lower primarily due to a 2% decrease in the number of home deliveries, excluding unconsolidated entities. New home deliveries, excluding unconsolidated entities, decreased to 7,799 homes in the nine months ended August 31, 2010 from 7,934 homes last year. The average sales price of homes delivered for both the nine months ended August 31, 2010 and 2009 was $245,000. Sales incentives offered to homebuyers as a percentage of home sales revenue were $32,500 per home delivered in the nine months ended August 31, 2010, or 11.7% as a percentage of home sales revenue, compared to $48,600 per home delivered in the same period last year, or 16.5% as a percentage of home sales revenue.

Gross margins on home sales were $389.2 million, or 20.4%, in the nine months ended August 31, 2010, which included $22.4 million of valuation adjustments, compared to gross margins on home sales of $159.8 million, or 8.2%, in the nine months ended August 31, 2009, which included $124.7 million of valuation adjustments. Gross margin percentage on home sales improved compared to last year primarily due to a reduction in valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.

Selling, general and administrative expenses were reduced by $39.6 million, or 13%, in the nine months ended August 31, 2010, compared to the same period last year, primarily due to reductions in legal and occupancy expenses. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 14.4% in the nine months ended August 31, 2010, from 16.2% in 2009.

Gross profits on land sales totaled $7.6 million in the nine months ended August 31, 2010, compared to losses on land sales of $17.6 million in the nine months ended August 31, 2009, which included $6.5 million of valuation adjustments and $20.8 million in write-offs of deposits and pre-acquisition costs.

Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($9.3) million in the nine months ended August 31, 2010, which included $10.5 million of valuation adjustments related to assets of unconsolidated entities in which we have investments, partially offset by a net pre-tax gain of $7.7 million as a result of a transaction by one of our unconsolidated entities. In the nine months ended August 31, 2009, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities was ($105.1) million, which included $81.0 million of valuation adjustments related to assets of unconsolidated entities in which we have investments.

Other income (expense), net, totaled $14.3 million in the nine months ended August 31, 2010, which included a $19.4 million pre-tax gain on the extinguishment of other debt and other income, partially offset by a $11.7 million pre-tax loss related to the repurchase of senior notes. Other income (expense), net, totaled ($73.1) million in the nine months ended August 31, 2009, which included $71.7 million of valuation adjustments to our investments in unconsolidated entities.

 

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Homebuilding interest expense was $107.0 million in the nine months ended August 31, 2010 ($51.8 million was included in cost of homes sold, $1.4 million in cost of land sold and $53.8 million in other interest expense), compared to $99.5 million in the nine months ended August 31, 2009 ($45.5 million was included in cost of homes sold, $5.0 million in cost of land sold and $49.0 million in other interest expense). Interest expense increased primarily due to the interest related to the $400 million 12.25% senior notes due 2017 issued during the second quarter of 2009, partially offset by savings resulting from the termination of the our senior unsecured revolving credit facility during the first quarter of 2010.

Net earnings (loss) attributable to noncontrolling interests were $14.7 million and ($11.0) million, respectively, in the nine months ended August 31, 2010 and 2009.

Sales of land, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities, other income (expense), net and net earnings (loss) attributable to noncontrolling interests may vary significantly from period to period depending on the timing of land sales and other transactions entered into by the Company and unconsolidated entities in which it has investments.

Operating earnings for the Lennar Financial Services segment were $19.6 million in the nine months ended August 31, 2010, compared to operating earnings of $28.2 million in the same period last year. The decrease in operating earnings was primarily due to decreased volume in the segment’s mortgage and title operations, partially offset by $5.1 million of proceeds received from the previous sale of a cable system.

In the nine months ended August 31, 2010, operating earnings for the Rialto Investments segment were $32.2 million (which included $20.4 million of net earnings attributable to noncontrolling interests), compared to an operating loss of $1.5 million in the same period last year. In the nine months ended August 31, 2010, revenues in this segment were $72.9 million, which consisted primarily of accretable interest income associated with the portfolio of real estate loans acquired in partnership with the FDIC. In the nine months ended August 31, 2010, expenses in this segment were $47.1 million, which consisted primarily of carrying costs related to that portfolio of real estate loans, underwriting expenses and general and administrative expenses. The segment also had equity in earnings from unconsolidated entities of $6.4 million during the nine months ended August 31, 2010, consisting primarily of unrealized gains and interest income related to the Company’s investment in the AB PPIP fund.

Corporate general and administrative expenses were reduced by $15.9 million, or 19%, in the nine months ended August 31, 2010, compared to the same period last year primarily due to our cost reduction initiatives implemented during the downturn. As a percentage of total revenues, corporate general and administrative expenses decreased to 3.1% in the nine months ended August 31, 2010, from 3.8% in the same period last year.

During the nine months ended August 31, 2010, we recorded a reversal to our deferred tax asset valuation allowance of $7.2 million primarily due to the net earnings generated during the period.

Our overall effective income tax rates were (53.35%) and (1.37%), respectively, for the nine months ended August 31, 2010 and 2009. The change in the effective tax rate, compared to the same period in 2009, resulted primarily from the reversal of gross unrecognized tax benefits as a result of the withdrawal of an issue by the IRS and settlement with state taxing authorities.

 

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Homebuilding Segments

We have grouped our homebuilding activities into four reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West and Homebuilding Houston, based primarily upon similar economic characteristics, geography and product type. Information about homebuilding activities in states that do not have economic characteristics that are similar to those in other states in the same geographic area is grouped under “Homebuilding Other.” References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.

At August 31, 2010, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding divisions located in:

East: Florida, Maryland, New Jersey and Virginia

Central: Arizona, Colorado and Texas (1)

West: California and Nevada

Houston: Houston, Texas

Other: Georgia, Illinois, Minnesota, North Carolina and South Carolina

 

(1) Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

 

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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
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010     2009     2010     2009  

Revenues:

        

East:

        

Sales of homes

   $ 253,628      190,321      611,422      583,630   

Sales of land

     3,553      1,735      11,706      18,171   
                          

Total East

     257,181      192,056      623,128      601,801   
                          

Central:

        

Sales of homes

     95,837      94,297      261,697      247,823   

Sales of land

     6,471      2,616      8,565      4,388   
                          

Total Central

     102,308      96,913      270,262      252,211   
                          

West:

        

Sales of homes

     164,957      170,974      505,100      587,970   

Sales of land

     8,968      1,844      12,409      3,791   
                          

Total West

     173,925      172,818      517,509      591,761   
                          

Houston:

        

Sales of homes

     89,905      100,442      264,675      295,596   

Sales of land

     1,744      1,970      6,054      4,720   
                          

Total Houston

     91,649      102,412      270,729      300,316   
                          

Other:

        

Sales of homes

     93,086      79,232      262,625      231,605   

Sales of land

     —        182      —        182   
                          

Total Other

     93,086      79,414      262,625      231,787   
                          

Total homebuilding revenues

   $ 718,149      643,613      1,944,253      1,977,876   
                          

 

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     Three Months Ended
August 31,
    Nine Months Ended
August 31,
 
(In thousands)    2010     2009     2010     2009  

Operating earnings (loss):

        

East:

        

Sales of homes

   $ 51,362