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 February 28, 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  ¨    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 March 31, 2010:

 

Class A

   153,634,729

Class B

   31,291,318

 

 

 


Part I. Financial Information

 

Item 1. Financial Statements

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)

(unaudited)

 

     February 28,
2010 (1)
   November 30,
2009 (1)

ASSETS

     

Lennar Homebuilding:

     

Cash and cash equivalents

   $ 732,386    1,330,603

Restricted cash

     172,502    9,225

Income tax receivables

     241,664    334,428

Receivables, net

     98,798    122,053

Inventories:

     

Finished homes and construction in progress

     1,606,003    1,503,346

Land under development

     2,000,080    1,990,430

Consolidated inventory not owned

     494,933    594,213
           

Total inventories

     4,101,016    4,087,989

Investments in unconsolidated entities

     599,649    599,266

Other assets

     248,674    263,803
           
     6,194,689    6,747,367

Rialto Investments:

     

Cash and cash equivalents

     54,000    —  

Loans receivable

     1,217,294    —  

Investments in unconsolidated entities

     51,232    9,874

Other assets

     18,798    —  
           
     1,341,324    9,874

Lennar Financial Services

     445,734    557,550
           

Total assets

   $ 7,981,747    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 non-recourse liabilities of consolidated VIEs.

As of February 28, 2010, total assets include $2,108.5 million related to consolidated VIEs of which $48.2 million is included in Lennar Homebuilding cash and cash equivalents, $0.4 million in Lennar Homebuilding restricted cash, $5.9 million in Lennar Homebuilding receivables, net, $239.1 million in Lennar Homebuilding finished homes and construction in progress, $334.6 million in Lennar Homebuilding land under development, $35.4 million in Lennar Homebuilding investments in unconsolidated entities, $155.3 million in Lennar Homebuilding other assets, $54.0 million in Rialto Investments cash and cash equivalents, $1,217.3 million in Rialto Investments loans receivable and $18.3 million in Rialto Investments other assets.

As of November 30, 2009, total assets include $819.3 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, $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.

 

2


Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets — (Continued)

(In thousands, except per share amounts)

(unaudited)

 

     February 28,
2010 (2)
    November 30,
2009 (2)
 

LIABILITIES AND EQUITY

    

Lennar Homebuilding:

    

Accounts payable

   $ 174,019      169,596   

Liabilities related to consolidated inventory not owned

     424,210      518,359   

Senior notes and other debts payable

     2,682,928      2,761,352   

Other liabilities

     796,091      862,584   
              
     4,077,248      4,311,891   

Rialto Investments:

    

Notes payable and other liabilities

     627,013      —     

Lennar Financial Services

     299,122      414,886   
              

Total liabilities

     5,003,383      4,726,777   
              

Stockholders’ equity:

    

Preferred stock

     —        —     

Class A common stock of $0.10 par value per share; Authorized: February 28, 2010 and November 30, 2009 – 300,000 shares; Issued: February 28, 2010 – 165,233 and November 30, 2009 – 165,155 shares

     16,523      16,515   

Class B common stock of $0.10 par value per share; Authorized: February 28, 2010 and November 30, 2009 – 90,000 shares; Issued: February 28, 2010 – 32,968 and November 30, 2009 – 32,964 shares

     3,297      3,296   

Additional paid-in capital

     2,216,119      2,208,934   

Retained earnings

     814,515      828,424   

Treasury stock, at cost; February 28, 2010 – 11,644 Class A common shares and 1,680 Class B common shares; November 30, 2009 – 11,543 Class A common shares and 1,680 Class B common shares

     (615,263   (613,690
              

Total stockholders’ equity

     2,435,191      2,443,479   
              

Noncontrolling interests

     543,173      144,535   
              

Total equity

     2,978,364      2,588,014   
              

Total liabilities and equity

   $ 7,981,747      7,314,791   
              

 

(2) As of February 28, 2010, total liabilities include $885.9 million related to consolidated VIEs of which $15.2 million is included in Lennar Homebuilding accounts payable, $56.0 million in Lennar Homebuilding other liabilities, $187.8 million in Lennar Homebuilding senior notes and other debts payable and $626.9 million in Rialto Investments notes payable and other liabilities.

As of November 30, 2009, total liabilities include $274.5 million related to consolidated VIEs of which $27.2 million is included in Lennar Homebuilding accounts payable, $60.1 million in Lennar Homebuilding other liabilities and $187.2 million in Lennar Homebuilding senior notes and other debts payable.

See accompanying notes to condensed consolidated financial statements.

 

3


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(unaudited)

 

     Three Months Ended
February 28,
 
     2010     2009  

Revenues:

    

Lennar Homebuilding

   $ 520,776      529,034   

Lennar Financial Services

     53,365      64,029   

Rialto Investments

     301      —     
              

Total revenues

     574,442      593,063   
              

Costs and expenses:

    

Lennar Homebuilding (1)

     501,965      606,559   

Lennar Financial Services

     54,266      63,537   

Rialto Investments

     1,403      556   

Corporate general and administrative

     22,640      27,475   
              

Total costs and expenses

     580,274      698,127   
              

Lennar Homebuilding equity in loss from unconsolidated entities

     (8,894   (2,917

Other income (expense), net (2)

     14,203      (35,805

Other interest expense

     (18,665   (12,029

Rialto Investments equity in earnings from unconsolidated entities

     143      —     
              

Loss before income taxes

     (19,045   (155,815

Benefit (provision) for income taxes (3)

     11,572      (1,848
              

Net loss (including net loss attributable to noncontrolling interests)

   $ (7,473   (157,663

Less: Net loss attributable to noncontrolling interests

     (950   (1,734
              

Net loss attributable to Lennar

   $ (6,523   (155,929
              

Basic and diluted loss per share

   $ (0.04   (0.98
              

Cash dividends per each Class A and Class B common share

   $ 0.04      0.04   
              

 

(1) Lennar Homebuilding costs and expenses include $7.4 million and $51.2 million, respectively, of valuation adjustments for the three months ended February 28, 2010 and 2009.
(2) Other income (expense), net includes $37.2 million of valuation adjustments to the Company’s investments in unconsolidated entities for the three months ended February 28, 2009.
(3) Benefit (provision) for income taxes for the three months ended February 28, 2010 and 2009 includes a valuation allowance of $2.8 million and $57.7 million, respectively, that the Company recorded against the entire amount of deferred tax assets generated as a result of its net loss during the periods presented.

See accompanying notes to condensed consolidated financial statements.

 

4


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

     Three months ended
February 28,
 
     2010     2009  

Cash flows from operating activities:

    

Net loss (including net loss attributable to noncontrolling interests)

   $ (7,473   (157,663

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

    

Depreciation and amortization

     2,904      5,329   

Amortization of discount/premium on debt, net

     382      721   

Lennar Homebuilding equity in loss from unconsolidated entities

     8,894      2,917   

Distributions of earnings from Lennar Homebuilding unconsolidated entities

     —        982   

Rialto Investments equity in earnings from unconsolidated entities

     (143   —     

Distributions of earnings from Rialto Investments unconsolidated entities

     96      —     

Share-based compensation expense

     6,298      7,720   

Gain on retirement of Lennar Homebuilding senior notes and other debt

     (8,904   —     

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

     7,403      88,453   

Changes in assets and liabilities:

    

Increase in restricted cash

     (1,875   (7,546

Decrease in receivables

     185,643      218,473   

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

     (91,553   (31,376

Decrease in other assets

     18,318      4,862   

Decrease in Lennar Financial Services loans held-for-sale

     41,783      36,830   

Decrease in accounts payable and other liabilities

     (72,357   (89,507
              

Net cash provided by operating activities

     89,416      80,195   
              

Cash flows from investing activities:

    

Increase in restricted cash related to cash collateralized letters of credit

     (164,150   —     

Net (additions) disposals of operating properties and equipment

     (1,920   98   

Investments in and contributions to Lennar Homebuilding unconsolidated entities

     (15,816   (51,765

Distributions of capital from Lennar Homebuilding unconsolidated entities

     9,542      2,036   

Investments in and contributions to Rialto Investments unconsolidated entities

     (41,315   (9,874

Investments in and contributions to Rialto Investments consolidated entities (net of $54,000 cash and cash equivalents consolidated)

     (211,059   —     

Decrease in Lennar Financial Services loans held-for-investment

     611      894   

Purchases of investment securities

     (202   (72

Proceeds from sales and maturities of investment securities

     200      1,964   
              

Net cash used in investing activities

     (424,109   (56,719
              

Cash flows from financing activities:

    

Net borrowings (repayments) under Lennar Financial Services debt

     (105,172   4,554   

Partial redemption of 5.125% senior notes due 2010

     (38,275   —     

Proceeds from other borrowings

     1,163      14,030   

Principal payments on other borrowings

     (45,118   (20,020

Exercise of land option contracts from an unconsolidated land investment venture

     (16,070   (3,768

Receipts related to noncontrolling interests

     5,127      3,376   

Payments related to noncontrolling interests

     (3,127   (2,866

Common stock:

    

Issuances

     890      —     

Repurchases

     (1,573   (686

Dividends

     (7,386   (6,412
              

Net cash used in financing activities

     (209,541   (11,792
              

See accompanying notes to condensed consolidated financial statements.

 

5


Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows — (Continued)

(In thousands)

(unaudited)

 

     Three months ended
February 28,
 
     2010     2009  

Net (decrease) increase in cash and cash equivalents

   $ (544,234   11,684   

Cash and cash equivalents at beginning of period

     1,457,438      1,203,422   
              

Cash and cash equivalents at end of period

   $ 913,204      1,215,106   
              

Summary of cash and cash equivalents:

    

Lennar Homebuilding

   $ 732,386      1,099,864   

Lennar Financial Services

     126,818      115,242   

Rialto Investments

     54,000      —     
              
   $ 913,204      1,215,106   
              

Supplemental disclosures of non-cash investing and financing activities:

    

Non-cash contributions to Lennar Homebuilding unconsolidated entities

   $ 2,023      239   

Purchases of inventories financed by sellers

   $ 3,590      4,226   

Consolidations of newly formed or previously unconsolidated entities, net:

    

Receivables

   $ —        6,958   

Loans receivable

   $ 1,217,294      —     

Inventories

   $ 8,517      46,890   

Investments in unconsolidated entities

   $ —        (20,016

Investments in consolidated entities

   $ (211,059   —     

Other assets

   $ 18,268      451   

Debts payable and other liabilities

   $ (635,432   (34,412

Noncontrolling interests

   $ (397,588   129   

See accompanying notes to condensed consolidated financial statements.

 

6


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

(1) Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 15) in which Lennar Corporation is deemed to be the primary beneficiary (the “Company”). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2009. 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 statement of operations for the three months ended February 28, 2010 is 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 income (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 requires 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).

Reclassification

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. In the first quarter of 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.

 

7


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

The Rialto Investments (“Rialto”) segment is a new reportable segment that meets the reportable segment criteria set forth in GAAP. 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). The Rialto segment’s operations are focused on the acquisition and monetization of distressed real estate asset investments, asset management and workout strategies.

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.

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. 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. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations, as well as in other states.

Operations of the Rialto segment include providing advisory services, due diligence, workout strategies, ongoing asset management services and the acquisition and monetization of distressed loans and securities portfolios.

Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. 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.

 

8


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Lennar Financial Services operating earnings (loss) 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.

Rialto Investments operating loss consists of revenues generated primarily from sub-advisory services and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for providing such services.

Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s 2009 Annual Report on Form 10-K. 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)    February 28,
2010
   November 30,
2009

Assets:

     

Homebuilding East

   $ 1,464,884    1,469,671

Homebuilding Central

     689,138    703,669

Homebuilding West

     1,980,607    1,986,558

Homebuilding Houston

     224,371    214,706

Homebuilding Other

     751,838    756,068

Lennar Financial Services

     445,734    557,550

Rialto Investments (1)

     1,341,324    9,874

Corporate and unallocated

     1,083,851    1,616,695
           

Total assets

   $ 7,981,747    7,314,791
           

 

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

 

9


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

     Three Months Ended
February 28,
 
(In thousands)    2010     2009  

Revenues:

    

Homebuilding East

   $ 142,060      180,698   

Homebuilding Central

     66,083      62,709   

Homebuilding West

     164,317      141,226   

Homebuilding Houston

     75,794      81,028   

Homebuilding Other

     72,522      63,373   

Lennar Financial Services

     53,365      64,029   

Rialto Investments

     301      —     
              

Total revenues (1)

   $ 574,442      593,063   
              

Operating earnings (loss):

    

Homebuilding East

   $ 20,523      (32,292

Homebuilding Central

     (7,247   (26,646

Homebuilding West

     (7,892   (59,330

Homebuilding Houston

     5,454      215   

Homebuilding Other

     (5,383   (10,223

Lennar Financial Services

     (901   492   

Rialto Investments

     (959   (556
              

Total operating earnings (loss)

     3,595      (128,340

Corporate and unallocated

     (22,640   (27,475
              

Loss before income taxes

   $ (19,045   (155,815
              

 

(1) Total revenues are net of sales incentives of $73.7 million ($37,100 per home delivered) for the three months ended February 28, 2010, compared to $107.9 million ($50,500 per home delivered) for the three months ended February 28, 2009.

 

10


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

 

     Three Months Ended
     February 28,
(In thousands)    2010    2009

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

     

East

   $ 297    13,478

Central

     1,099    8,081

West

     689    18,398

Houston

     60    146

Other

     3,924    677
           

Total

     6,069    40,780
           

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

     

East

     —      139

Central

     1,334    78
           

Total

     1,334    217
           

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

     

East

     —      5,780

Central

     —      82

West

     —      515

Houston

     —      721

Other

     —      3,133
           

Total

     —      10,231
           

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

     

West

     1,216    —  
           

Total

     1,216    —  
           

Valuation adjustments to investments in unconsolidated entities:

     

East

     —      2,566

Central

     —      7,618

West

     —      25,550

Other

     —      1,491
           

Total

     —      37,225
           

Write-offs of other receivables:

     

Other

     1,518    —  
           

Total

     1,518    —  
           

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

   $ 10,137    88,453
           

The Company recorded significantly lower valuation adjustments during the first quarter of 2010. Recent demand trends in the communities in which the Company is selling homes indicate that the market may be stabilizing and that homebuyers are more confident and are taking advantage of increased affordability resulting from lower home prices, historically low interest rates and government stimulus programs despite high unemployment rates, foreclosures and tightening credit standards. If these trends do not 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 option contracts.

 

11


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(3) Lennar Homebuilding Investments in Unconsolidated Entities

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

 

Statements of Operations

  
     Three Months Ended  
     February 28,  
(In thousands)    2010     2009  

Revenues

   $ 56,755      65,783   

Costs and expenses

     79,180      115,198   
              

Net loss of unconsolidated entities

   $ (22,425   (49,415
              

The Company’s share of net loss recognized

   $ (8,894   (2,917
              

Balance Sheets

  
     February 28,     November 30,  
(Dollars in thousands)    2010     2009  

Assets:

    

Cash and cash equivalents

   $ 141,359      171,946   

Inventories

     3,623,934      3,628,491   

Other assets

     344,162      403,383   
              
   $ 4,109,455      4,203,820   
              

Liabilities and equity:

    

Accounts payable and other liabilities

   $ 340,550      366,141   

Debt

     1,538,352      1,588,390   

Equity of:

    

The Company

     599,649      599,266   

Others

     1,630,904      1,650,023   
              

Total equity of unconsolidated entities

     2,230,553      2,249,289   
              
   $ 4,109,455      4,203,820   
              

The Company’s equity in its unconsolidated entities

     27   27
              

In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley 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 condensed consolidated balance sheet in consolidated inventory not owned. As of February 28, 2010 and November 30, 2009, the portfolio of land (including land development costs) of $457.0 million and $477.9 million, respectively, is reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities in which the Company has investments.

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.

 

12


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

 

     February 28,     November 30,  
(In thousands)    2010     2009  

Several recourse debt – repayment

   $ 37,351      42,691   

Several recourse debt – maintenance

     74,964      75,238   

Joint and several recourse debt – repayment

     85,428      85,799   

Joint and several recourse debt – maintenance

     81,592      81,592   

Land seller debt and other debt recourse exposure

     —        2,420   
              

The Company’s maximum recourse exposure

     279,335      287,740   

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

     (93,185   (93,185
              

The Company’s net recourse exposure

   $ 186,150      194,555   
              

During the three months ended February 28, 2010, the Company reduced its maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities by $8.4 million, of which $5.9 million was paid by the Company and $2.5 million primarily related to the assignment of the Company’s ownership interest in a Lennar Homebuilding unconsolidated entity, as well as the joint ventures selling inventory. As of February 28, 2010, the Company had $13.2 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 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 Lennar Homebuilding’s unconsolidated entities with recourse debt were as follows:

 

     February 28,    November 30,
(In thousands)    2010    2009

Assets

   $ 1,302,930    1,324,993

Liabilities

     752,796    777,836

Equity

     550,134    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 its reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s share of any funds the unconsolidated entity distributes.

In 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

 

13


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

guarantors complete the construction of the improvements for which the financing was obtained. If the construction was to be done in phases, very often the guarantee is to complete only the phases as to which construction has already commenced and for which loan proceeds were used. Under many of the completion guarantees, the guarantors are permitted, under certain circumstances, to use undisbursed loan proceeds to satisfy the completion obligations, and in many of those cases, the guarantors pay interest only on those funds, with no repayment of the principal of such funds required.

During the three months ended February 28, 2010, there were no payments under maintenance and completion guarantees and there were payments for loan repayments, including amounts paid under the Company’s repayment guarantees, of $5.9 million. During the three months ended February 28, 2009, there were no payments under maintenance guarantees, a payment of $5.6 million under a completion guarantee related to one joint venture and loan repayments, including amounts paid under the Company’s repayment guarantees, of $18.8 million. These guarantee payments are recorded primarily as contributions to the Company’s Lennar Homebuilding unconsolidated entities.

As of February 28, 2010, the fair values of the maintenance guarantees, completion guarantees and repayment guarantees were not material. The Company believes that as of February 28, 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).

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

 

     February 28,     November 30,  
(In thousands)    2010     2009  

The Company’s net recourse exposure

   $ 186,150      194,555   

Reimbursement agreements from partners

     93,185      93,185   
              

The Company’s maximum recourse exposure

   $ 279,335      287,740   
              

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

   $ 129,877      140,078   

Non-recourse land seller debt or other debt

     47,390      47,478   

Non-recourse bank debt with completion guarantees

     603,959      608,397   

Non-recourse bank debt without completion guarantees

     477,791      504,697   
              

Non-recourse debt to the Company

     1,259,017      1,300,650   
              

Total debt

   $ 1,538,352      1,588,390   
              

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

     18   18
              

 

14


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(4) Equity and Comprehensive 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 three months ended February 28, 2010 and 2009:

 

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

Balance at November 30, 2009

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

Net loss (including net loss attributable to

    noncontrolling interests)

    (7,473   —     —     —     —        (6,523   (950

Employee stock and directors plans

    1,305      8   1   2,869   (1,573   —        —     

Amortization of restricted stock

    4,316      —     —     4,316   —        —        —     

Cash dividends

    (7,386   —     —     —     —        (7,386   —     

Receipts related to noncontrolling interests

    5,127      —     —     —     —        —        5,127   

Payments related to noncontrolling interests

    (3,127   —     —     —     —        —        (3,127

Rialto Investments non-cash consolidations

    397,588      —     —     —     —        —        397,588   
                                     

Balance at February 28, 2010

  $ 2,978,364      16,523   3,297   2,216,119   (615,263   814,515      543,173   
                                     
          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)

    (157,663   —     —     —     —        (155,929   (1,734

Employee stock and directors plans

    1,978      —     —     2,664   (686   —        —     

Amortization of restricted stock

    4,731      —     —     4,731   —        —        —     

Cash dividends

    (6,412   —     —     —     —        (6,412   —     

Receipts related to noncontrolling interests

    3,376      —     —     —     —        —        3,376   

Payments related to noncontrolling interests

    (2,866   —     —     —     —        —        (2,866

Non-cash activity related to

noncontrolling interests

    (250   —     —     —     —        —        (250
                                     

Balance at February 28, 2009

  $ 2,631,647      14,050   3,296   1,952,021   (612,810   1,110,818      164,272   
                                     

The Company’s comprehensive loss for both the three months ended February 28, 2010 and 2009 was the same as its net loss (including net loss attributable to noncontrolling interests).

The Company has a stock repurchase program which permits the purchase of up to 20 million shares of its outstanding common stock. During the three months ended February 28, 2010 and 2009, there were no repurchases of common stock under the stock repurchase program. As of February 28, 2010, 6.2 million shares of common stock can be repurchased in the future under the program.

Treasury stock increased by 0.1 million common shares during the three months ended February 28, 2010 in connection with activity related primarily to the Company’s equity compensation plans.

(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 all available evidence, during the first quarter of fiscal 2010, the Company recorded a valuation allowance of $2.8 million against the entire amount of deferred tax assets generated during that period. At February 28, 2010 and November 30, 2009, the Company’s deferred tax asset valuation allowance was $650.2 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.

At February 28, 2010 and November 30, 2009, the Company had $69.8 million and $77.2 million of gross unrecognized tax benefits. During the three months ended February 28, 2010, total unrecognized tax benefits decreased by $7.4 million primarily as a result of a settlement with state taxing authorities. If the Company were to recognize these tax benefits, $47.7 million would affect the Company’s effective tax rate.

 

15


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

The Company expects the total amount of unrecognized tax benefits to decrease by $15.1 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 February 28, 2010, the Company had $30.1 million accrued for interest and penalties, of which $0.3 million was recorded during the three months ended February 28, 2010. 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.

Subsequent to February 28, 2010, the Company received a tax refund of $230.3 million.

(6) Loss Per Share

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. As a result of the Company’s net loss during both the three months ended February 28, 2010 and 2009, the weighted average number of common shares outstanding used for calculating basic and diluted loss per share are the same because the inclusion of securities or other contracts to issue common stock would be anti-dilutive.

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. However, 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 both the three months ended February 28, 2010 and 2009. The adoption of these provisions did not have a material impact to the Company’s basic and diluted loss per share.

Basic and diluted loss per share were calculated as follows:

 

     Three Months Ended  
     February 28,  
(In thousands, except per share amounts)    2010     2009  

Net loss attributable to Lennar

   $ (6,523   (155,929

Less: distributed earnings allocated to nonvested shares

     87      63   
              

Numerator for basic and diluted loss per share – net loss attributable to

    common shareholders

   $ (6,610   (155,992
              

Denominator for basic and diluted loss per share – weighted average common shares outstanding

     182,660      158,621   
              

Basic and diluted loss per share

   $ (0.04   (0.98
              

Options to purchase 5.9 million and 8.0 million shares, respectively, of Class A and Class B common stock in total were outstanding and anti-dilutive for the three months ended February 28, 2010 and 2009.

 

16


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(7) Lennar Financial Services Segment

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

 

     February 28,    November 30,
(In thousands)    2010    2009

Assets:

     

Cash and cash equivalents

   $ 126,818    126,835

Restricted cash

     28,394    25,646

Receivables, net (1)

     54,259    123,967

Loans held-for-sale (2)

     140,923    182,706

Loans held-for-investment, net

     23,930    25,131

Investments held-to-maturity

     2,514    2,512

Goodwill

     34,046    34,046

Other (3)

     34,850    36,707
           
   $ 445,734    557,550
           

Liabilities:

     

Notes and other debts payable

   $ 112,385    217,557

Other (4)

     186,737    197,329
           
   $ 299,122    414,886
           

 

(1) Receivables, net primarily relate to loans sold to investors for which the Company had not yet been paid as of February 28, 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 of $3.6 million and $4.7 million, respectively, as of February 28, 2010 and November 30, 2009, carried at fair value.
(4) Other liabilities include forward contracts of $2.0 million and $3.6 million, respectively, as of February 28, 2010 and November 30, 2009, carried at fair value.

At February 28, 2010, the Lennar Financial Services segment had two warehouse repurchase facilities that mature in June 2010 with a maximum aggregate commitment of $200 million and $100 million, respectively, and another warehouse repurchase facility that matures in July 2010 with a maximum aggregate commitment of $125 million. The maximum aggregate commitment under these facilities totaled $425 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 $112.3 million and $217.5 million, respectively, at February 28, 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 $164.0 million and $266.9 million, respectively, at February 28, 2010 and November 30, 2009. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

 

17


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(8) Rialto Investments Segment

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

 

     February 28,   November 30,  
(In thousands)    2010   2009  

Assets:

    

Cash and cash equivalents

   $ 54,000   —     

Loans receivable

     1,217,294   —     

Investments in unconsolidated entities

     51,232   9,874   

Other

     18,798   —     
            
   $ 1,341,324   9,874   
            

Liabilities:

    

Notes payable and other

   $ 627,013   —     
            

Rialto’s operating loss for the three months ended February 28, 2010 and 2009 was as follows:

 

    Three Months Ended  
    February 28,  
(In thousands)   2010            2009         

Revenues

  $ 301      —     

Costs and expenses

           1,403           556   

Rialto Investments equity in earnings from unconsolidated entities

    143      —     
             

Operating loss

  $ (959   (556
             

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 approximate $3 billion unpaid principal balance of the loan portfolios consist of more than 5,500 distressed residential and commercial real estate loans and have an initial fair value of $1.2 billion. The FDIC retained a 60% equity interest in the LLCs and has provided $626.9 million of notes guaranteed by the FDIC 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. Additionally, if the LLCs 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%.

The fair value of the acquired loans reflects the fair value of each of the assets as of the date of acquisition, February 9, 2010, which approximates the fair value as of February 28, 2010. However, the amount that the LLCs realize on these assets could differ materially from their carrying value, based on the sale of underlying collateral.

The Company consolidated the LLCs because the LLCs are variable interest entities and the Company was determined to be the primary beneficiary. The LLCs are considered VIEs due to the FDIC’s guarantee on the $626.9 million notes payable, as well as the Company’s $10 million guarantee of servicer performance. 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 February 28, 2010, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.6 billion, respectively.

In addition, 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 $1.1 billion made by private investors in this fund, and the U.S. Treasury has committed to a matching amount of approximately $1.1 billion of equity in the fund, as well as agreed to

 

18


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

extend up to approximately $2.2 billion of financing. During the three months ended February 28, 2010, the Company invested $41.3 million in the AB PPIP fund. As of February 28, 2010, the Company’s investment in the AB PPIP fund was $42.2 million. Management fee income related to the sub-advisory services was $0.3 million during the three months ended February 28, 2010.

A subsidiary in the Rialto segment also has a $9.0 million investment in a service and infrastructure provider to the residential home loan market (the “Servicer”), which will provide services to the LLCs.

Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities in which Rialto has investments that are accounted for by the equity method as of February 28, 2010 was as follows:

 

Balance Sheets      
      February 28,    November 30,  
(In thousands)    2010    2009 (1)  

Assets:

     

Cash and cash equivalents

   $ 2,229    2,229   

Investment securities

     1,507,598    —     

Other assets

     396,520    179,985   
             
   $ 1,906,347    182,214   
             

Liabilities and equity:

     

Accounts payable and other liabilities

   $ 266,573    58,209   

Partner loans

     135,570    135,570   

Debt

     848,000    —     

Equity of:

     

Rialto Investments

     51,232    9,874   

Others

     604,972    (21,439
             

Total equity of unconsolidated entities

     656,204    (11,565
             
   $ 1,906,347    182,214   
             

 

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

 

Statements of Operations       
     Three Months Ended  
     February 28,  
(In thousands)    2010     2009  

Revenues

   $      84,187              4,794   

Costs and expenses

     89,450      8,456   
              

Net loss of unconsolidated entities

   $ (5,263   (3,662
              

Rialto Investments’ share of net earnings (loss) recognized

   $ 143      —     
              

(9) Lennar Homebuilding Cash and Cash Equivalents

Cash and cash equivalents as of February 28, 2010 and November 30, 2009 included $2.3 million and $5.8 million, respectively, of cash held in escrow for approximately three days.

(10) Lennar Homebuilding Restricted Cash

Restricted cash consists primarily of $164.2 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 which the homes were sold.

 

19


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(11) Lennar Homebuilding Senior Notes and Other Debts Payable

 

(Dollars in thousands)    February 28,
2010
   November 30,
2009

5.125% senior notes due 2010

   $ 212,676    249,955

5.95% senior notes due 2011

     244,780    244,727

5.95% senior notes due 2013

     347,471    347,471

5.50% senior notes due 2014

     248,365    248,365

5.60% senior notes due 2015

     501,321    501,424

6.50% senior notes due 2016

     249,774    249,760

12.25% senior notes due 2017

     392,726    392,392

Mortgage notes on land and other debt

     485,815    527,258
           
   $ 2,682,928    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 February 28, 2010, the Company had $162.7 million of cash-collateralized letters of credit.

The Company’s performance letters of credit outstanding were $86.6 million and $97.7 million, respectively, at February 28, 2010 and November 30, 2009. The Company’s financial letters of credit outstanding were $211.9 million and $205.4 million, respectively, at February 28, 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 February 28, 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 $772.5 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 February 28, 2010, there were approximately $312.8 million, or 40%, 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.

During the first quarter of 2010, the Company redeemed $37.3 million of its 5.125% senior notes due October 2010. In addition, during the first quarter of 2010, the Company retired $53.2 million of mortgage notes on land and other debt, resulting in a pre-tax gain of $9.3 million.

 

20


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(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  
     February 28,  
(In thousands)    2010     2009  

Warranty reserve, beginning of period

   $ 157,896      129,449   

Warranties issued during the period

     5,139      5,393   

Adjustments to pre-existing warranties from changes in estimates

     (902   19,074   

Payments

     (20,308   (14,220
              

Warranty reserve, end of period

   $ 141,825      139,696   
              

As of February 28, 2010, the Company identified approximately 750 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 (3.7%) and nationally (0.9%) 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.

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 in the Company’s warranty reserve in the future.

Through February 28, 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 months ended February 28, 2010. As of February 28, 2010, the warranty reserve, net of payments, was $47.3 million. During the three months ended February 28, 2010, the Company received a $20 million payment related to its receivable for covered damages under its insurance coverage 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. As of February 28, 2010, the Company’s insurance receivable for covered damages under its insurance coverage was $21.6 million. The Company is also seeking 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.

 

21


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(13) Share-Based Payment

During the three months ended February 28, 2010 and 2009, compensation expense related to the Company’s share-based payment awards was as follows:

 

     Three Months Ended
     February 28,
(In thousands)    2010    2009

Stock options

   $ 1,982    2,989

Nonvested shares

     4,316    4,731
           

Total compensation expense for share-based awards

   $ 6,298    7,720
           

During the three months ended February 28, 2010 and 2009, the Company did not grant any stock options or nonvested shares.

(14) Financial Instruments

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at February 28, 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, receivables, net, income tax receivables and accounts payable, which had fair values approximating their carrying amounts due to the short maturities of these instruments.

 

     February 28, 2010    November 30, 2009
(In thousands)    Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value

ASSETS

           

Rialto Investments:

           

Loans receivable

   $ 1,217,294    1,217,294    —      —  

Lennar Financial Services:

           

Loans held-for-investment, net

   $ 23,930    25,332    25,131    26,818

Investments held-to-maturity

   $ 2,514    2,525    2,512    2,529

LIABILITIES

           

Lennar Homebuilding:

           

Senior notes and other debts payable

   $ 2,682,928    2,718,060    2,761,352    2,754,737

Rialto Investments:

           

Notes payable

   $ 626,906    572,717    —      —  

Lennar Financial Services:

           

Notes and other debts payable

   $ 112,385    112,385    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 values for loans receivable reflects the fair value of each of the assets as of the date of acquisition, February 9, 2010, which approximates fair value as of February 28, 2010. For notes payable, the fair value of the fixed rate borrowing was calculated based on a 5-year treasury yield as of February 28, 2010.

 

22


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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

GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

 

Level 1    Fair value determined based on quoted prices in active markets for identical assets.
Level 2    Fair value determined using significant other observable inputs.
Level 3    Fair value determined using significant unobservable inputs.

The Company’s financial instruments measured at fair value at February 28, 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
February 28, 2010
 

(In thousands)

     

Loans held-for-sale (1)

   Level 2    $ 140,923   

Mortgage loan commitments

   Level 2    $ 3,562   

Forward contracts

   Level 2    $ (1,968

 

(1) The aggregate fair value of loans held-for-sale of $140.9 million exceeds its aggregate principal balance of $136.8 million by $4.1 million.

(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.

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 JV’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.

At February 28, 2010, the Company had investments in and advances to unconsolidated entities established to acquire and develop land for sale to the Company in connection with its homebuilding operations, for sale to third parties or for the construction of homes for sale to third-party homebuyers. The

 

23


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

Company evaluated all agreements as of February 28, 2010. Due to the Company’s evaluation, there were no material entities that consolidated during the three months ended February 28, 2010, except for the FDIC’s LLCs. These LLCs are considered VIEs due to FDIC’s guarantee on the $626.9 million notes payable, as well as the Company’s $10 million guarantee of servicer performance. In addition, 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. During the three months ended February 28, 2010, there were no VIEs that were deconsolidated.

At February 28, 2010 and November 30, 2009, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $599.6 million and $599.3 million, respectively.

Consolidated VIEs

As of February 28, 2010, the carrying amount of the VIEs’ assets and non-recourse liabilities that consolidated were $2,108.5 million and $885.9 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 asset and could walk away from the contract.

Unconsolidated VIEs

At February 28, 2010 and November 30, 2009, the Company’s recorded investment in VIEs that are unconsolidated and its estimated maximum exposure to loss were as follows:

 

As of February 28, 2010      
(In thousands)    Investments in
Unconsolidated
VIEs
   Lennar’s
Maximum
Exposure to Loss

Lennar Homebuilding (1)

   $ 83,956    83,956

Rialto Investments (2)

     51,232    85,092
           

Total

   $ 135,188    169,048
           
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

     9,874    9,874
           

Total

   $ 94,226    94,226
           

 

(1) For Lennar Homebuilding’s investment in unconsolidated VIEs, the maximum exposure to loss is limited to its investment in the unconsolidated VIEs because there are no commitments to fund capital and the unconsolidated VIEs’ debt is non-recourse to the Company.
(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 February 28, 2010, the Company had contributed $41.3 million of the $75 million commitment and it cannot walk away from its commitment to fund capital. Therefore, as of February 28, 2010, the maximum exposure to loss for Rialto’s unconsolidated VIEs was $33.9 million higher than the carrying amount of its investment.

 

24


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

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 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 $33.7 million remaining commitment to the AB PPIP fund. The Company and the other partners did not guarantee any debt of these 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 asset and could walk away from the contract.

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 it 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 three months ended February 28, 2010, the effect of consolidation of these option contracts was an increase of $0.3 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 February 28, 2010. This increase was offset by the Company exercising its options to acquire land under certain contracts previously consolidated and the deconsolidation

 

25


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

of certain option contracts totaling $75.5 million related to the adoption of certain new provisions of ASC 810, resulting in a net decrease in consolidated inventory not owned of $99.3 million for the three months ended February 28, 2010. To reflect the purchase price of the inventory consolidated, the Company reclassified $0.4 million of related option deposits from land under development to consolidated inventory not owned in the accompanying condensed consolidated balance sheet as of February 28, 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.

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 $127.2 million and $127.4 million, respectively, at February 28, 2010 and November 30, 2009. Additionally, the Company had posted $52.3 million and $58.2 million, respectively, of letters of credit in lieu of cash deposits under certain option contracts as of February 28, 2010 and November 30, 2009.

(16) 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 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.

 

26


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) 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 and 12.25% senior notes due 2017 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

February 28, 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

   $ 1,027,543      163,375    54,432      —        1,245,350

Inventories

     —        3,527,310    573,706      —        4,101,016

Investments in unconsolidated entities

     —        564,222    35,427      —        599,649

Other assets

     38,877      54,461    155,336      —        248,674

Investments in subsidiaries

     3,362,294      805,174    —        (4,167,468   —  
                             
     4,428,714      5,114,542    818,901      (4,167,468   6,194,689

Rialto Investments

     51,771      —      1,289,553      —        1,341,324

Lennar Financial Services

     —        149,907    295,827      —        445,734
                             

Total assets

   $ 4,480,485      5,264,449    2,404,281      (4,167,468   7,981,747
                             

LIABILITIES AND EQUITY

           

Lennar Homebuilding:

           

Accounts payable and other liabilities

   $ 219,509      682,302    68,299      —        970,110

Liabilities related to consolidated inventory not owned

     —        424,210    —        —        424,210

Senior notes and other debts payable

     2,197,113      198,691    287,124      —        2,682,928

Intercompany

     (371,435   540,831    (169,396   —        —  
                             
     2,045,187      1,846,034    186,027      —        4,077,248

Rialto Investments

     107      —      626,906      —        627,013

Lennar Financial Services

     —        56,121    243,001      —        299,122
                             

Total liabilities

     2,045,294      1,902,155    1,055,934      —        5,003,383

Stockholders’ equity

     2,435,191      3,362,294    805,174      (4,167,468   2,435,191

Noncontrolling interests

     —        —      543,173      —        543,173
                             

Total equity

     2,435,191      3,362,294    1,348,347      (4,167,468   2,978,364
                             

Total liabilities and equity

   $ 4,480,485      5,264,449    2,404,281      (4,167,468   7,981,747
                             

 

27


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) 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
                            

 

28


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended February 28, 2010

 

(In thousands)

   Lennar
Corporation
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        507,747      13,029      —        520,776   

Lennar Financial Services

     —        32,062      35,761      (14,458   53,365   

Rialto Investments

     301      —        —        —        301   
                                

Total revenues

     301      539,809      48,790      (14,458   574,442   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        484,058      19,893      (1,986   501,965   

Lennar Financial Services

     —        35,200      30,215      (11,149   54,266   

Rialto Investments

     1,403      —        —        —        1,403   

Corporate general and administrative

     21,431      —        —        1,209      22,640   
                                

Total costs and expenses

     22,834      519,258      50,108      (11,926   580,274   
                                

Lennar Homebuilding equity in loss from

    unconsolidated entities

     —        (8,875   (19   —        (8,894

Other income, net

     9,242      14,194      —        (9,233   14,203   

Other interest expense

     (11,765   (18,665   —        11,765      (18,665

Rialto Investments equity in earnings from unconsolidated entities

     143      —        —        —        143   
                                

Earnings (loss) before income taxes

     (24,913   7,205      (1,337   —        (19,045

Benefit (provision) for income taxes

     15,873      (4,608   307      —        11,572   

Equity in earnings (loss) from subsidiaries

     2,517      (80   —        (2,437   —     
                                

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

     (6,523   2,517      (1,030   (2,437   (7,473

Less: Net loss attributable to noncontrolling interests

     —        —        (950   —        (950
                                

Net earnings (loss) attributable to Lennar

   $ (6,523   2,517      (80   (2,437   (6,523
                                

 

29


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Operations

Three Months Ended February 28, 2009

 

    

Lennar

   

Guarantor

   

Non-Guarantor

             

(In thousands)

   Corporation     Subsidiaries     Subsidiaries     Eliminations     Total  

Revenues:

          

Lennar Homebuilding

   $ —        518,623      10,411      —        529,034   

Lennar Financial Services

     —        34,786      44,772      (15,529   64,029   
                                

Total revenues

     —        553,409      55,183      (15,529   593,063   
                                

Costs and expenses:

          

Lennar Homebuilding

     —        605,202      14,480      (13,123   606,559   

Lennar Financial Services

     —        31,423      33,119      (1,005   63,537   

Rialto Investments

     556      —        —        —        556   

Corporate general and administrative

     25,727      —        —        1,748      27,475   
                                

Total costs and expenses

     26,283      636,625      47,599      (12,380   698,127   
                                

Lennar Homebuilding equity in loss from unconsolidated entities

     —        (2,917   —        —        (2,917

Other income (expense), net

     8,780      (35,969   —        (8,616   (35,805

Other interest expense

     (11,765   (12,029   —        11,765      (12,029
                                

Earnings (loss) before income taxes

     (29,268   (134,131   7,584      —        (155,815

(Provision) benefit for income taxes

     3,140      (1,610   (3,378   —        (1,848

Equity in earnings (loss) from subsidiaries

     (129,801   5,940      —        123,861      —     
                                

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

     (155,929   (129,801   4,206      123,861      (157,663

Less: Net loss attributable to noncontrolling interests

     —        —        (1,734   —        (1,734
                                

Net earnings (loss) attributable to Lennar

   $ (155,929   (129,801   5,940      123,861      (155,929
                                

 

30


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended February 28, 2010

 

    

Lennar

   

Guarantor

   

Non-Guarantor

             

(Dollars in thousands)

   Corporation     Subsidiaries     Subsidiaries     Eliminations     Total  

Cash flows from operating activities:

          

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

   $ (6,523   2,517      (1,030   (2,437   (7,473

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

     69,607      (85,644   110,489      2,437      96,889   
                                

Net cash provided by (used in) operating activities

     63,084      (83,127   109,459      —        89,416   
                                

Cash flows from investing activities:

          

Increase in restricted cash related to cash collateralized letters of credit

     (164,150   —        —        —        (164,150

Increase in investments in unconsolidated entities, net

     —        (6,010   (264   —        (6,274

Investments in and contributions to Rialto Investments unconsolidated entities

     (41,315   —        —        —        (41,315

Investments in and contributions to Rialto Investments consolidated entities (net of $54,000 cash and cash equivalents consolidated)

     (265,059   —        54,000      —        (211,059

Other

     (594   (566   (151   —        (1,311
                                

Net cash provided by (used in) investing activities

     (471,118   (6,576   53,585      —        (424,109
                                

Cash flows from financing activities:

          

Net repayments under Lennar Financial Services debt

     —        (11   (105,161   —        (105,172

Partial redemption of 5.125% senior notes due 2010

     (38,275   —        —        —        (38,275

Net repayments on other borrowings

     —        (25,191   (18,764   —        (43,955

Exercise of land option contracts from an unconsolidated land investment venture

     —        (16,070   —        —        (16,070

Net receipts related to noncontrolling interests

     —        —        2,000      —        2,000   

Common stock:

          

Issuances

     890      —        —        —        890   

Repurchases

     (1,573   —        —        —        (1,573

Dividends

     (7,386   —        —        —        (7,386

Intercompany

     (154,039   117,584      36,455      —        —     
                                

Net cash provided by (used in) financing activities

     (200,383   76,312      (85,470   —        (209,541
                                

Net increase (decrease) in cash and cash equivalents

     (608,417   (13,391   77,574      —        (544,234

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

   $ 614,752      140,922      157,530      —        913,204   
                                

 

31


Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(unaudited)

 

(17) Supplemental Financial Information – (Continued)

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended February 28, 2009

 

(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)

   $ (155,929   (129,801   4,206      123,861      (157,663

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

     226,078      221,136      (85,495   (123,861   237,858   
                                

Net cash provided by (used in) operating activities

     70,149      91,335      (81,289   —        80,195   
                                

Cash flows from investing activities:

          

Increase in investments in unconsolidated entities, net

     —        (49,729   —        —        (49,729

Investments in and contributions to Rialto Investments unconsolidated entities

     (9,874   —        —        —        (9,874

Other

     (25   2,054      855      —        2,884   
                                

Net cash provided by (used in) investing activities

     (9,899   (47,675   855      —        (56,719
                                

Cash flows from financing activities:

          

Net borrowings (repayments) under Lennar Financial Services debt

     —        (24   4,578      —        4,554   

Net borrowings (repayments) on other borrowings

     —        4,770      (10,760   —        (5,990

Exercise of land option contracts from an unconsolidated land investment venture

     —        (3,768   —        —        (3,768

Net receipts related to noncontrolling interests

     —        —        510      —        510   

Common stock:

          

Repurchases

     (686   —        —        —        (686

Dividends

     (6,412   —        —        —        (6,412

Intercompany

     (34,028   (48,394   82,422      —        —     
                                

Net cash provided by (used in) financing activities

     (41,126   (47,416   76,750      —        (11,792
                                

Net increase (decrease) in cash and cash equivalents

     19,124      (3,756   (3,684   —        11,684   

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

   $ 1,026,718      121,681      66,707      —        1,215,106   
                                

 

32


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended November 30, 2009.

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

In the first quarter of 2010, we experienced improved traffic levels, higher backlog, lower cancellation rates and reduced sales incentives. This leads us to believe that potential homebuyers are more confident and recognize the increased affordability of homeownership.

As we strategically position ourselves in an effort to return to profitability in 2010, our core business continues to improve. Our focus on reducing construction costs combined with lower sales incentives led to gross margin on homes sales improving to 19.2% from 6.5% last year. Additionally, our right-sizing of the business resulted in a 360 basis point improvement in S,G&A expenses as a percentage of home sales to 15.8%, compared to last year. This operational focus allowed us to generate a 3.4% operating margin, which is our highest operating margin in four years.

As the results from our core business have improved and our balance sheet liquidity has strengthened, we are well positioned to invest in new opportunities as noted by our first quarter investments. Our new reportable segment, Rialto Investments, partnered with the Federal Deposit Insurance Corporation (“FDIC”) to own portfolios of distressed real estate loans and will manage, work through and add value to these portfolios. Rialto Investments also invested in a fund formed under the Federal government’s Public-Private Investment Program (“PPIP”), which is focused on acquiring securities backed by real estate loans. In addition to the investments made by our new reportable segment, our homebuilding operations acquired access to well-located homesites through strategic land deals.

While it is difficult to predict the potential negative impact from the elimination of the federal homebuyer tax credit, we believe that consumer confidence and current affordability will offset this impact over time. Despite recent increases in material costs, we believe that our core business will continue to improve as we deliver homes from our recent strategic land acquisitions, volume levels increase and sales incentives decrease as the recovery of the housing market continues. We are also optimistic that our recent strategic investments entered into by our Rialto Investments segment will create significant long-term value for our shareholders.

 

33


(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 months ended February 28, 2010 are not necessarily indicative of the results to be expected for the full year.

Our net loss attributable to Lennar was $6.5 million, or $0.04 per basic and diluted share, in the first quarter of 2010, compared to a net loss attributable to Lennar of $155.9 million, or $0.98 per basic and diluted share, in the first quarter of 2009. The decrease in net loss attributable to Lennar in the first quarter of 2010, compared to the first quarter of 2009, was due to reduced construction costs, lower S,G&A expenses and improving market conditions in certain markets in which we operate, which resulted in a lower cancellation rate and reduced sales incentives. Gross margin percentage on home sales improved compared to last year, primarily due to a reduction of valuation adjustments, which were not material in the first quarter of 2010, and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.

Financial information relating to our operations was as follows:

 

     Three Months Ended
February 28,
 
(In thousands)    2010     2009  

Lennar Homebuilding revenues:

    

Sales of homes

   $ 513,348      522,758   

Sales of land

     7,428      6,276   
              

Total Lennar Homebuilding revenues

     520,776      529,034   
              

Lennar Homebuilding costs and expenses:

    

Cost of homes sold

     414,972      488,576   

Cost of land sold

     6,075      16,806   

Selling, general and administrative

     80,918      101,177   
              

Total Lennar Homebuilding costs and expenses

     501,965      606,559   
              

Lennar Homebuilding operating margins

     18,811      (77,525

Lennar Homebuilding equity in loss from unconsolidated entities

     (8,894   (2,917

Other income (expense), net

     14,203      (35,805

Other interest expense

     (18,665   (12,029
              

Lennar Homebuilding operating earnings (loss)

   $ 5,455      (128,276
              

Lennar Financial Services revenues

   $ 53,365      64,029   

Lennar Financial Services costs and expenses

     54,266      63,537   
              

Lennar Financial Services operating earnings (loss)

   $ (901   492   
              

Rialto Investments revenue

   $ 301      —     

Rialto Investments costs and expenses

     1,403      556   

Rialto Investments equity in earnings from unconsolidated entities

     143      —     
              

Rialto Investments operating loss

   $ (959   (556
              

Total operating earnings (loss)

   $ 3,595      (128,340

Corporate general and administrative expenses

     (22,640   (27,475
              

Loss before income taxes

   $ (19,045   (155,815
              

Revenues from home sales decreased 2% in the first quarter of 2010 to $513.3 million from $522.8 million in 2009. Revenues were lower primarily due to a 7% decrease in the number of home deliveries excluding unconsolidated entities, partially offset by a 6% increase in the average sales price of homes delivered in the first quarter of 2010. New home deliveries, excluding unconsolidated entities, decreased to 1,988 homes in the first quarter of 2010 from 2,136 homes last year. In the first quarter of 2010, new home

 

34


deliveries were lower compared to the first quarter of 2009 in our Homebuilding East and Homebuilding Houston segments, partially offset by an increase in deliveries in our Homebuilding West segment and Homebuilding Other. The average sales price of homes delivered increased to $258,000 in the first quarter of 2010 from $244,000 in the same period last year primarily due to an increase in deliveries in our Homebuilding West segment, specifically in California. Sales incentives offered to homebuyers as a percentage of home sales revenue improved to 12.5% in the first quarter of 2010, from 17.1% in the first quarter of 2009.

Although deliveries in the first quarter of 2010 were lower than in the first quarter of 2009, the dollar value of new orders was 20% higher in the first quarter of 2010 than in the first quarter of 2009 and the dollar value of backlog at February 28, 2010 was 29% higher than the backlog at February 28, 2009. Also the cancellation rate in the first quarter was 13% compared with 21% during the first quarter of 2009.

Gross margins on home sales were $98.4 million, or 19.2%, in the first quarter of 2010, compared to gross margins on home sales of $34.2 million, or 6.5%, in the first quarter of 2009, which included $40.8 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 $20.3 million, or 20%, in the first quarter of 2010, compared to the same period last year, primarily due to a reduction in fixed costs. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 15.8% in the first quarter of 2010, from 19.4% in the first quarter of 2009.

Gross profits on land sales totaled $1.4 million in the first quarter of 2010, compared to losses on land sales of $10.5 million in the first quarter of 2009, which included $0.2 million of valuation adjustments and $10.2 million of write-offs of deposits and pre-acquisition costs related to homesites that were under option.

Equity in loss from unconsolidated entities was $8.9 million in the first quarter of 2010, compared to equity in loss from unconsolidated entities of $2.9 million in the first quarter of 2009.

Other income (expense), net, totaled $14.2 million in the first quarter of 2010, compared to other income (expense), net, of ($35.8) million in the first quarter of 2009, which included $37.2 million of valuation adjustments to our investments in unconsolidated entities.

Homebuilding interest expense was $33.2 million in the first quarter of 2010 ($14.3 million was included in cost of homes sold, $0.2 million in cost of land sold and $18.7 million in other interest expense), compared to $17.0 million in the first quarter of 2009 ($4.8 million was included in cost of homes sold, $0.2 million in cost of land sold and $12.0 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, as well as a reduction in qualifying assets eligible for interest capitalization as a result of a decrease in inventories from prior year.

Net loss attributable to noncontrolling interests was $1.0 million and $1.7 million, respectively, in the first quarter of 2010 and 2009.

Sales of land, 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 us and unconsolidated entities in which we have investments.

Operating loss for the Lennar Financial Services segment was $0.9 million in the first quarter of 2010, compared to operating earnings of $0.5 million in the first quarter of 2009. The current quarter results were slightly lower due to decreased volume in the segment’s mortgage and title operations.

Operating loss for the Rialto Investments (“Rialto”) segment, a new reportable segment, was $1.0 million in the first quarter of 2010, compared to an operating loss of $0.6 million in the first quarter of 2009. During the first quarter of 2010, revenues in this

 

35


segment were $0.3 million, which primarily consisted of fees earned for PPIP sub-advisory services. Revenue recognition related to the portfolio of distressed real estate loans acquired in partnership with the FDIC will commence in the second quarter of 2010, as most of the loans acquired had not been transferred from the FDIC’s existing servicers prior to the end of our first quarter and the revenues related to the loans that had been transferred were not material. During the first quarter of 2010, expenses in this segment were $1.4 million, which consisted of general and administrative expenses primarily related to due diligence costs and other costs incurred in connection with the acquisition of the portfolio of real estate loans in partnership with the FDIC. This segment also had net $0.1 million of equity in earnings from unconsolidated entities generated by the AllianceBernstein L.P. (“AB”) PPIP fund and a service and infrastructure provider to the residential home loan market (the “Servicer”) in which we have an investment.

Corporate general and administrative expenses were reduced by $4.8 million, or 18%, in the first quarter of 2010, compared to the first quarter of 2009. As a percentage of total revenues, corporate general and administrative expenses decreased to 3.9% in the first quarter of 2010, from 4.6% in the first quarter of 2009, primarily due to reduced professional and personnel costs.

During the three months ended February 28, 2010, we generated deferred tax assets of $2.8 million and recorded a non-cash valuation allowance against the entire amount of deferred tax assets generated. A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on available evidence, it is more likely than not that such assets will not be realized.

Our overall effective income tax rates were 63.95% and (1.2%), respectively, for the three months ended February 28, 2010 and 2009. The change in the effective tax rate, compared with the same period during 2009, resulted primarily from the reversal of gross unrecognized tax benefits as a result of a settlement with state taxing authorities.

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 February 28, 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.

 

36


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
February 28,
(In thousands)    2010    2009

Revenues:

     

East:

     

Sales of homes

   $ 138,693    178,372

Sales of land

     3,367    2,326
           

Total East

     142,060    180,698
           

Central:

     

Sales of homes

     65,775    61,902

Sales of land

     308    807
           

Total Central

     66,083    62,709
           

West:

     

Sales of homes

     162,531    140,490

Sales of land

     1,786    736
           

Total West

     164,317    141,226
           

Houston:

     

Sales of homes

     73,827    78,621

Sales of land

     1,967    2,407
           

Total Houston

     75,794    81,028
           

Other:

     

Sales of homes

     72,522    63,373
           

Total Other

     72,522    63,373
           

Total homebuilding revenues

   $ 520,776    529,034
           

 

37


     Three Months Ended
February 28,
 
(In thousands)    2010     2009  

Operating earnings (loss):

    

East:

    

Sales of homes

   $ 15,483      (15,837

Sales of land

     1,234      (5,482

Equity in loss from unconsolidated entities

     (819   (1,698

Other income (expense), net

     10,583      (5,688

Other interest expense

     (5,958   (3,587
              

Total East

     20,523      (32,292
              

Central:

    

Sales of homes

     (2,342   (16,991

Sales of land

     (1,069   118   

Equity in loss from unconsolidated entities

     (428   (642

Other expense, net

     (866   (7,457

Other interest expense

     (2,542   (1,674
              

Total Central

     (7,247   (26,646
              

West:

    

Sales of homes

     735      (31,954

Sales of land

     609      (1,116

Equity in earnings (loss) from unconsolidated entities

     (7,488   244   

Other income (expense), net

     5,250      (22,321

Other interest expense

     (6,998   (4,183
              

Total West

     (7,892   (59,330
              

Houston:

    

Sales of homes

     5,313      2,383   

Sales of land

     579      (917

Equity in loss from unconsolidated entities

     (19   (815

Other income, net

     368      126   

Other interest expense

     (787   (562
              

Total Houston

     5,454      215   
              

Other:

    

Sales of homes

     (1,731   (4,596

Sales of land

     —        (3,133

Equity in loss from unconsolidated entities

     (140   (6

Other expense, net

     (1,132   (465

Other interest expense

     (2,380   (2,023
              

Total Other

     (5,383   (10,223
              

Total homebuilding operating earnings (loss)

   $ 5,455      (128,276
              

 

38


Summary of Homebuilding Data

Deliveries:

 

     Three Months Ended
     Homes    Dollar Value (In thousands)    Average Sales Price
     February 28,
2010
   February 28,  
2009
   February 28,
2010
       February 28,
2009
   February 28,
2010
        February 28,
2009

East

   609    794    $ 138,693      178,372    $     228,000               225,000

Central

   317    315      65,775      61,902      207,000       197,000

West

   448    409      175,330      148,115      391,000       362,000

Houston

   346    405      73,827      78,621      213,000       194,000

Other

   284    219      72,522      63,373      255,000       289,000
                                      

Total

   2,004    2,142    $ 526,147      530,383    $ 263,000       248,000
                                      

Of the total homes delivered listed above, 16 homes with a dollar value of $12.8 million and an average sales price of $800,000 represent deliveries from unconsolidated entities for the three months ended February 28, 2010, compared to 6 home deliveries with a dollar value of $7.6 million and an average sales price of $1,271,000 for the three months ended February 28, 2009.

Sales Incentives (1):

 

     Three Months Ended  
     Sales Incentives
(In thousands)
   Average Sales Incentives
Per Home Delivered
   Sales Incentives
as a % of Revenue
 
     February 28,
2010
   February 28,
2009
   February 28,
2010
   February 28,
2009
   February 28,
2010
    February 28,
2009
 

East

   $ 23,104    42,257    $ 37,900    53,200    14.2   19.2

Central

     11,119    13,733      35,100    43,600    14.4   18.3

West

     16,298    29,059      37,700    72,100    9.1   17.1

Houston

     13,228    12,620      38,200    31,200    15.2   13.8

Other

     9,972    10,242      35,100    46,800    12.1   13.9
                                    

Total

   $ 73,721    107,911    $ 37,100    50,500    12.5   17.1
                                    

 

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

New Orders (2):

 

     Three Months Ended
     Homes    Dollar Value (In thousands)    Average Sales Price
     February 28,
2010
   February 28,  
2009
   February 28,
2010
       February 28,
2009
   February 28,
2010
       February 28,
2009

East

   970    716    $ 211,363      155,281    $     218,000              217,000

Central

   416    366      84,979      72,846      204,000      199,000

West

   454    491      163,357      161,676      360,000      329,000

Houston

   388    395      82,552      74,069      213,000      188,000

Other

   349    222      86,357      59,464      247,000      268,000
                                     

Total

   2,577    2,190    $ 628,608      523,336    $ 244,000      239,000
                                     

 

(2) New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three months ended February 28, 2010 and 2009.

Of the total new orders listed above, 9 homes with a dollar value of $8.0 million and an average sales price of $894,000 represent new orders from unconsolidated entities for the three months ended February 28, 2010, compared to 8 new orders with a dollar value of $4.9 million and an average sales price of $612,000 for the three months ended February 28, 2009.

 

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Backlog:

 

     Homes    Dollar Value (In thousands)    Average Sales Price
     February 28,
2010
   February 28,  
2009
   February 28,
2010
       February 28,
2009
   February 28,
2010
       February 28,
2009

East

   1,043    711    $ 251,205      180,785        241,000              254,000

Central

   266    174      55,141      35,395    207,000      203,000

West

   342    329      132,341      122,260    387,000      372,000

Houston

   291    259      69,560      53,168    239,000      205,000

Other

   262    174      73,291      58,513    280,000      336,000
                                   

Total

   2,204    1,647    $ 581,538      450,121    264,000      273,000
                                   

Of the total homes in backlog listed above, 2 homes with a backlog dollar value of $2.5 million and an average sales price of $1,238,000 represent the backlog from unconsolidated entities at February 28, 2010, compared with backlog from unconsolidated entities of 9 homes with a backlog dollar value of $9.3 million and an average sales price of $1,038,000 at February 28, 2009.

Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales contracts if they fail to qualify for financing or under certain other circumstances. We experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:

 

     Three Months Ended
February 28,
 
     2010     2009  

East

   11   24

Central

   15   18

West

   11   16

Houston

   14   23

Other

   16   20
            

Total

   13   21
            

Homebuilding East: Homebuilding revenues decreased for the three months ended February 28, 2010, compared to the three months ended February 28, 2009, primarily due to a decrease in the average sales price of homes delivered in Maryland and Virginia and a decrease in the number of home deliveries in Florida, partially offset by an increase in the number of home deliveries in Maryland and Virginia. Gross margins on home sales were $34.8 million, or 25.1%, in 2010, compared to gross margins on home sales of $10.8 million, or 6.1%, in 2009, including valuation adjustments of $13.5 million. Gross margin percentage on homes sales improved compared to last year primarily due to a reduction of valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales (14.2% in 2010, compared to 19.2% in 2009).

Gross profits on land sales were $1.2 million for the three months ended February 28, 2010, compared to losses on land sales of $5.5 million for the three months ended February 28, 2009 (including $5.8 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.1 million of valuation adjustments).

Homebuilding Central: Homebuilding revenues increased for the three months ended February 28, 2010, compared to the three months ended February 28, 2009, primarily due to an increase in the average sales price of homes delivered in all states in this segment. Gross margins on home sales were $8.9 million, or 13.6%, in 2010, compared to gross margins on home sales of ($1.7) million, or (2.8%), in 2009, including $8.1 million of valuation adjustments. Gross margin percentage on homes sales improved compared to last year primarily due to a reduction of valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales (14.4% in 2010, compared to 18.3% in 2009).

Losses on land sales were $1.1 million for the three months ended February 28, 2010 (including $1.3 million of valuation adjustments), compared to gross profits on land sales of $0.1 million for the three months ended February 28, 2009 (net of $0.1 million of write-offs of deposits and pre-acquisition costs related to land under development that we do not intend to purchase and $0.1 million of valuation adjustments).

 

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Homebuilding West: Homebuilding revenues increased for the three months ended February 28, 2010, compared to the three months ended February 28, 2009, primarily due to an increase in the number of home deliveries and average sales price of homes delivered in California. Gross margins on home sales were $30.8 million, or 19.0%, in 2010, compared to gross margins on home sales of $6.9 million, or 4.9%, in 2009, including $18.4 million of valuation adjustments. Gross margin percentage on homes sales improved compared to last year primarily due to a reduction of valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales (9.1% in 2010, compared to 17.1% in 2009).

Gross profits on land sales were $0.6 million for the three months ended February 28, 2010, compared to losses on land sales of $1.1 million for the three months ended February 28, 2009 (including $0.5 million of write-offs of deposits and pre-acquisition costs related to land under development that we do not intend to purchase).

Homebuilding Houston: Homebuilding revenues decreased for the three months ended February 28, 2010, compared to the three months ended February 28, 2009, primarily due to a decrease in the number of home deliveries, partially offset by an increase in the average sales price of homes delivered. Gross margins on home sales were $14.4 million, or 19.5%, in 2010, compared to gross margins on home sales of $12.2 million, or 15.6%, in 2009. Gross margin percentage on homes sales improved compared to last year primarily due to reduced costs.

Gross profits on land sales were $0.6 million for the three months ended February 28, 2010, compared to losses on land sales of $0.9 million for the three months ended February 28, 2009 (including $0.7 million of write-offs of deposits and pre-acquisition costs related to land under development that we do not intend to purchase).

Homebuilding Other: Homebuilding revenues increased for the three months ended February 28, 2010, compared to the three months ended February 28, 2009, primarily due to an increase in the number of home deliveries in all of the states in this segment, except for Illinois. Gross margins on home sales were $9.4 million, or 12.9%, in 2010, compared to gross margins on home sales of $5.9 million, or 9.4%, in 2009. Gross margin percentage on homes sales improved compared to last year primarily due to reduced sales incentives offered to homebuyers as a percentage of revenues from home sales (12.1% in 2010, compared to 13.9% in 2009).

There were no land sales in Homebuilding Other for the three months ended February 28, 2010. Losses on land sales for the three months ended February 28, 2009 were $3.1 million due to write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase.

At February 28, 2010 and 2009, we owned 82,605 homesites and 74,167 homesites, respectively, and had access to an additional 21,569 homesites and 34,260 homesites, respectively, through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At November 30, 2009, we owned 82,703 homesites and had access to an additional 21,173 homesites through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At February 28, 2010, 2% of the homesites we owned were subject to home purchase contracts. At February 28, 2010 and 2009, our backlog of sales contracts was 2,204 homes ($581.5 million) and 1,647 homes ($450.1 million), respectively. The increase in backlog was primarily attributable to an increase in new orders in the three months ended February 28, 2010, compared to the three months ended February 28, 2009.

 

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Lennar Financial Services Segment

The following table presents selected financial data related to our Lennar Financial Services segment for the periods indicated:

 

     Three Months Ended
February 28,
 
(Dollars in thousands)    2010     2009  

Revenues

   $ 53,365      64,029   

Costs and expenses

     54,266      63,537   
              

Operating earnings (loss)

   $ (901   492   
              

Dollar value of mortgages originated

   $ 551,000      969,000   
              

Number of mortgages originated

     2,500      4,200   
              

Mortgage capture rate of Lennar homebuyers

     85   85
              

Number of title and closings service transactions

     23,300      27,100   
              

Number of title policies issued

     24,800      15,000   
              

Rialto Investments Segment

Our Rialto Investments segment is a new reportable segment that meets the reportable segment criteria set forth in GAAP. 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. Our Rialto segment provides advisory services, due diligence, workout strategies, ongoing asset management services and acquires and monetizes distressed loans and securities portfolios.

The following table presents the results of operations of our Rialto segment for the periods indicated:

 

     Three Months Ended
February 28,
 
(In thousands)    2010     2009  

Revenue

   $ 301      —     

Costs and expenses

           1,403      556   

Rialto Investments equity in earnings from unconsolidated entities

     143      —     
              

Operating loss

   $ (959       (556
              

In February 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC, for approximately $243 million (net of transactions costs and a $22 million working capital reserve). The LLCs hold performing and non-performing loans formerly owned by 22 failed financial institutions. The approximate $3 billion unpaid principal balance of the loan portfolios consists of more than 5,500 distressed residential and commercial real estate loans and have an initial fair value of $1.2 billion. The FDIC retained a 60% equity interest in the LLCs and has provided $626.9 million of notes guaranteed by the FDIC with 0% interest, which are non-recourse to us. In accordance with GAAP, interest has not been imputed because the notes are with, and guaranteed by, a governmental agency. Additionally, if the LLCs meet certain internal rate of return and distribution thresholds, our equity interest in the LLCs could be reduced from 40% down to 30%, with a corresponding increase to the FDIC’s equity interest from 60% up to 70%.

We consolidated the LLCs because the LLCs are variable interest entities (“VIEs”) and we were determined to be the primary beneficiary. The LLCs are considered VIEs due to the FDIC’s guarantee on the $626.9 million notes payable, as well as our $10 million guarantee of servicer performance. We determined that we were the primary beneficiary because we have the power to direct the activities of the LLCs that most significantly impact the LLCs performance through our management and servicer contracts. At February 28, 2010, these consolidated LLCs had total combined assets and liabilities of $1.3 billion and $0.6 billion, respectively.

 

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An affiliate in the Rialto segment is a sub-advisor to the AB PPIP fund and receives management fees for sub-advisory services. During the first quarter of 2010, we invested $41.3 million in the AB PPIP fund. As of February 28, 2010, our investment in the AB PPIP fund was $42.2 million. Management fee income related to the sub-advisory services was $0.3 million during the first quarter of 2010.

We have grouped these investments, along with our $9.0 million investment in the Servicer, which will provide services to the LLCs, in our Rialto segment.

(2) Financial Condition and Capital Resources

At February 28, 2010, we had cash and cash equivalents related to our homebuilding, financial services and Rialto operations of $913.2 million, compared to $1,215.1 million at February 28, 2009. Subsequent to February 28, 2010, we received a tax refund of $230.3 million.

We finance our land acquisition and development activities, construction activities, financial services activities, Rialto activities and general operating needs primarily with cash generated from our operations, debt issuances and equity offerings, as well as cash borrowed under our warehouse lines of credit.

Operating Cash Flow Activities

During the three months ended February 28, 2010 and 2009, cash provided by operating activities amounted to $89.4 million and $80.2 million, respectively. During the three months ended February 28, 2010, cash provided by operating activities were positively impacted by the receipt of a tax refund of $93.8 million generated from losses incurred prior to fiscal 2010 and a decrease in our Lennar Financial Services receivables, net which relates primarily to loans sold to investors but not yet paid for as of February 28, 2010. This was partially offset by a decrease in accounts payable and other liabilities and an increase in inventories due to strategic land purchases.

Investing Cash Flow Activities

During the three months ended February 28, 2010 and 2009, cash used in investing activities totaled $424.1 million and $56.7 million, respectively. During the three months ended February 28, 2010, our Rialto segment contributed $265.1 million of cash (including a $22 million working capital reserve) to acquire indirectly 40% managing member interests in two LLCs in partnership with the FDIC. Upon the consolidation of the LLCs that hold the two portfolios of real estate loans acquired in the FDIC transaction, the Company consolidated $54.0 million of cash, resulting in net contributions to consolidated entities by the Rialto segment of $211.1 million during the three months ended February 28, 2010. The Rialto segment also contributed $41.3 million of cash to unconsolidated entities (the AB PPIP fund). During the three months ended February 28, 2010, we also contributed $15.8 million of cash to Lennar Homebuilding unconsolidated entities, compared to $51.8 million during the three months ended February 28, 2009. In addition, there was an increase in cash used in investing activities related to an increase of $164.2 million in restricted cash due to cash used to collateralize letters of credit.

We are always looking at the possibility of acquiring homebuilders and other companies. However, at February 28, 2010, we had no agreements or understandings regarding any significant transactions.

Financing Cash Flow Activities

During the three months ended February 28, 2010, our cash used in financing activities were primarily attributed to the partial redemption of senior notes, principal payments on other borrowings and net repayments under our Lennar Financial Services’ warehouse repurchase facilities.

 

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Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Lennar Homebuilding and Rialto operations. Management believes providing a measure of leverage of our Lennar Homebuilding and Rialto operations enables management and readers of our financial statements to better understand our financial position and performance. Lennar Homebuilding and Rialto debt to total capital and net Lennar Homebuilding and Rialto debt to total capital are calculated as follows:

 

(Dollars in thousands)   February 28,
2010
    November 30,
2009 (1)
    February 28,
2009 (1)
 

Lennar Homebuilding and Rialto debt

  $ 3,309,834      2,761,352      2,574,115   

Total equity

    2,978,364      2,588,014      2,631,647   
                   

Total capital

  $ 6,288,198      5,349,366      5,205,762   
                   

Lennar Homebuilding and Rialto debt to total capital

    52.6   51.6   49.4
                   

Lennar Homebuilding and Rialto debt

  $ 3,309,834      2,761,352      2,574,115   

Less: Lennar Homebuilding and Rialto cash and cash equivalents

    786,386      1,330,603      1,099,864   
                   

Net Lennar Homebuilding and Rialto debt

  $ 2,523,448      1,430,749      1,474,251   
                   

Net Lennar Homebuilding and Rialto debt to total capital (2)

    45.9   35.6   35.9
                   

 

(1) The Rialto segment did not have cash and cash equivalents prior to the first quarter of 2010.
(2) Net Lennar Homebuilding and Rialto debt to total capital consists of net Lennar Homebuilding and Rialto debt (Lennar Homebuilding and Rialto debt less Lennar Homebuilding and Rialto cash and cash equivalents) divided by total capital (net Lennar Homebuilding and Rialto debt plus total equity).

At February 28, 2010, Lennar Homebuilding and Rialto debt to total capital and net Lennar Homebuilding debt to total capital were higher compared to February 28, 2009, due to the increase in Lennar Homebuilding debt as a result of an increase in mortgage notes on land and other debt, an increase in Rialto’s notes payable and a decrease in Lennar Homebuilding cash and cash equivalents.

 

(Dollars in thousands)    February 28,
2010
    November 30,
2009
    February 28,
2009
 

Lennar Homebuilding debt

   2,682,928      2,761,352      2,574,115   

Stockholders’ equity

   2,435,191      2,443,479      2,467,375   
                  

Total capital

   5,118,119      5,204,831      5,041,490   
                  

Lennar Homebuilding debt to total capital

   52.4   53.1   51.1
                  

Lennar Homebuilding debt

   2,682,928      2,761,352      2,574,115   

Less: Lennar Homebuilding cash and cash equivalents

   732,386      1,330,603      1,099,864   
                  

Net Lennar Homebuilding debt

   1,950,542      1,430,749      1,474,251   
                  

Net Lennar Homebuilding debt to total capital (1)

   44.5   36.9   37.4
                  

 

(1) Net Lennar Homebuilding debt to total capital consists of net Lennar Homebuilding debt (Lennar Homebuilding debt less Lennar Homebuilding cash and cash equivalents) divided by total capital (net Lennar Homebuilding debt plus stockholders’ equity).

At February 28, 2010, Lennar Homebuilding debt to total capital and net Lennar Homebuilding debt to total capital were higher compared to February 28, 2009, due to the increase in Lennar Homebuilding debt as a result of an increase in Lennar Homebuilding mortgage notes on land and other debt and a decrease in Lennar Homebuilding cash and cash equivalents.

Our Lennar Homebuilding average debt outstanding was $2.7 billion for the three months ended February 28, 2010, compared to $2.6 billion in the three months ended February 28, 2009. The average rate for interest incurred was 6.3% for the three months ended February 28, 2010, compared to 5.6% for the three months ended February 28, 2009. Interest incurred related to homebuilding debt for the three months ended February 28, 2010 was $45.9 million, compared to $38.5 million in the same period last year. The majority of our short-term financing needs, including financings for land acquisition and development activities and general operating needs, are met with cash generated from operations, debt issuances and equity offerings.

In February 2010, we terminated our $1.1 billion senior unsecured revolving credit facility (the “Credit Facility”). We had no outstanding borrowings under the Credit Facility as it was only being used to issue letters of credit. We entered into cash-collateralized letter of credit agreements with two banks with a capacity totaling $225 million. As of February 28, 2010, we had $162.7 million of cash-collateralized letters of credit. We expect to save over $8 million annually as a result of terminating the Credit Facility and entering into more cost effective cash-collateralized letter of credit agreements.

        Our performance letters of credit outstanding were $86.6 million and $97.7 million, respectively, at February 28, 2010 and November 30, 2009. Our financial letters of credit outstanding were $211.9 million and $205.4 million, respectively, at February 28, 2010 and November 30, 2009. Performance letters of credit are generally posted with regulatory bodies to guarantee our 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.

 

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During the first quarter of 2010, we redeemed $37.3 million of our 5.125% senior notes due October 2010. In addition, during the first quarter of 2010, we retired $53.2 million of Lennar Homebuilding mortgage notes on land and other debt, resulting in a pre-tax gain of $9.3 million.

At February 28, 2010, our Lennar Financial Services segment had two warehouse repurchase facilities that mature in June 2010 with a maximum aggregate commitment of $200 million and $100 million, respectively, and another warehouse repurchase facility that matures in July 2010 with a maximum aggregate commitment of $125 million. The maximum aggregate commitment under these facilities totaled $425 million.

Our 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 $112.3 million and $217.5, respectively, at February 28, 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 $164.0 million and $266.9 million, respectively, at February 28, 2010 and November 30, 2009.

Due to the fact that our Lennar Financial Services segment’s borrowings under the lines of credit are generally repaid with the proceeds from the sale of mortgage loans and receivables on loans that secure those borrowings, the facilities are not likely to be a call on our current cash or future cash resources. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling mortgage loans held-for-sale and by collecting on receivables on loans sold to investors but not yet paid. Without the facilities, our Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

Our Rialto notes payable totaled $626.9 million as of February 28, 2010, which are notes guaranteed by the FDIC with 0% interest. These notes are non-recourse to us.

Changes in Capital Structure

We have a stock repurchase program which permits the purchase of up to 20 million shares of our outstanding common stock. During the three months ended February 28, 2010 and 2009, there were no repurchases of common stock under the stock repurchase program. As of February 28, 2010, 6.2 million shares of common stock can be repurchased in the future under the program.

Treasury stock increased by 0.1 million common shares during the three months ended February 28, 2010 in connection with activity related primarily to our equity compensation plans.

On February 12, 2010, we paid cash dividends of $0.04 per share for both our Class A and Class B common stock to holders of record at the close of business on January 26, 2010, as declared by our Board of Directors on January 12, 2010.

Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity.

Off-Balance Sheet Arrangements

Lennar Homebuilding: Investments in Unconsolidated Entities

At February 28, 2010, we had equity investments in 58 unconsolidated entities, compared to 61 unconsolidated entities at November 30, 2009. Historically, we invested in unconsolidated entities that acquire and develop land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, enabled us to acquire land to which we could not otherwise obtain access, or could not

 

45


obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures are land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers give us access to homesites owned or controlled by our partner. Joint ventures with other homebuilders provide us with the ability to bid jointly with our partner for large land parcels. Joint ventures with financial partners allow us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners allow us to combine our homebuilding expertise with the specific expertise (e.g., commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners.

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

 

Statements of Operations and Selected Information     
     Three Months Ended
February 28,
 
(Dollars in thousands)    2010     2009  

Revenues

   $ 56,755      65,783   

Costs and expenses

     79,180      115,198   
              

Net loss of unconsolidated entities

   $ (22,425   (49,415
              

Our share of net loss

   $ (8,156   (4,300

Our share of net loss – recognized

   $ (8,894   (2,917

Our cumulative share of net earnings – deferred at February 28, 2010 and 2009, respectively

   $ 11,064      22,098   

Our investments in unconsolidated entities

   $ 599,649      766,938   

Equity of the unconsolidated entities

   $ 2,230,553      2,628,570   
              

Our investment % in the unconsolidated entities

     27   30
              
Balance Sheets     

(Dollars in thousands)

   February 28,
2010
    November 30,
2009
 

Assets:

    

Cash and cash equivalents

   $ 141,359      171,946   

Inventories

     3,623,934      3,628,491   

Other assets

     344,162      403,383   
              
   $ 4,109,455      4,203,820   
              

Liabilities and equity:

    

Accounts payable and other liabilities

   $ 340,550      366,141   

Debt

     1,538,352      1,588,390   

Equity of:

    

Lennar

     599,649      599,266   

Others

     1,630,904      1,650,023   
              

Total equity of unconsolidated entities

     2,230,553      2,249,289   
              
   $ 4,109,455      4,203,820   
              

Our equity in the unconsolidated entities

     27   27
              

In fiscal 2007, we sold a portfolio of land to a strategic land investment venture with Morgan Stanley Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which we have a 20% ownership interest and 50% voting rights. Due to our continuing involvement, the transaction did not qualify as a sale by us under GAAP; thus, the inventory has remained on our condensed consolidated balance sheets in consolidated inventory not owned. As of February 28, 2010 and November 30, 2009, the portfolio of land (including land development costs) of $457.0 million and $477.9 million, respectively, is reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities in which we have investments.

 

46


Debt to total capital of the Lennar Homebuilding unconsolidated entities in which we have investments was calculated as follows:

 

     (Dollars in thousands)    February 28,
2010
    November 30,
2009
 

    Debt

   $ 1,538,352      1,588,390   

    Equity

     2,230,553      2,249,289   
              

    Total capital

   $ 3,768,905      3,837,679   
              

    Debt to total capital of our unconsolidated entities

     40.8   41.4
              

Our investments in Lennar Homebuilding unconsolidated entities by type of venture were as follows:

 

(In thousands)    February 28,
2010
   November 30,
2009

Land development

   $ 555,184    555,799

Homebuilding

            44,465    43,467
           

Total investments

   $ 599,649    599,266
           

The summary of our net recourse exposure related to the Lennar Homebuilding unconsolidated entities in which we have investments was as follows:

 

     February 28,
2010
    November 30,
2009
 
(In thousands)             

Several recourse debt – repayment

   $ 37,351      42,691   

Several recourse debt – maintenance

            74,964      75,238   

Joint and several recourse debt – repayment

     85,428      85,799   

Joint and several recourse debt – maintenance

     81,592      81,592   

Land seller debt and other debt recourse exposure

     —        2,420   
              

Lennar’s maximum recourse exposure

     279,335      287,740   

Less: joint and several reimbursement agreements with our partners

     (93,185   (93,185
              

Our net recourse exposure

   $ 186,150      194,555   
              

During the three months ended February 28, 2010, we reduced our maximum recourse exposure related to indebtedness of our Lennar Homebuilding unconsolidated entities by $8.4 million, of which $5.9 million was paid by us and $2.5 million primarily related to the assignment of our ownership interest in a Lennar Homebuilding unconsolidated entity, as well as the joint ventures selling inventory. As of February 28, 2010, we had $13.2 million of obligation guarantees recorded as a liability on our condensed consolidated balance sheet. The obligation guarantees are estimated based on current facts and circumstances and any unexpected changes may lead us to incur additional obligation guarantees in the future.

Indebtedness of an unconsolidated entity is secured by its own assets. Some unconsolidated entities own multiple properties and other assets. There is no cross collateralization of debt to different unconsolidated entities. We also do not use our investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among our unconsolidated entities.

In connection with a loan to an unconsolidated entity, we and our partners often guarantee to a lender either jointly and severally or on a several basis, any, or all of the following: (i) the completion of the development, in whole or in part, (ii) indemnification of the lender from environmental issues, (iii) indemnification of the lender from “bad boy acts” of the unconsolidated entity (or full recourse liability in the event of unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan to cost will not exceed a certain percentage (maintenance or remargining guarantee) or that a percentage of the outstanding loan will be repaid (repayment guarantee).

 

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In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we generally have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the joint and several guarantee.

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

 

(In thousands)    February 28,
2010
   November 30,
2009

Assets

   $ 1,302,930    1,324,993

Liabilities

     752,796    777,836

Equity

     550,134    547,157

In addition, in most instances in which we have guaranteed debt of a Lennar Homebuilding unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Some of our guarantees are repayment guarantees and some are maintenance guarantees. In a repayment guarantee, we and our venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. In the event of default, if our venture partner does not have adequate financial resources to meet its obligation under our reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value of the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If we are required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes.

In many of the loans to Lennar Homebuilding unconsolidated entities, we and our joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction was to be done in phases, very often the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Under many of the completion guarantees, the guarantors are permitted, under certain circumstances, to use undisbursed loan proceeds to satisfy the completion of obligations, and in many of those cases, the guarantors pay interest only on those funds, with no repayment of the principal of such funds required.

During the three months ended February 28, 2010, there were no payments under maintenance and completion guarantees and there were payments for loan repayments, including amounts paid under our repayment guarantees, of $5.9 million. During the three months ended February 28, 2009, there were no payments under maintenance guarantees, a payment of $5.6 million under a completion guarantee related to one joint venture and loan repayments, including amounts paid under our repayment guarantees, of $18.8 million. These guarantee payments are recorded primarily as contributions to our Lennar Homebuilding unconsolidated entities.

 

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As of February 28, 2010, the fair values of the maintenance guarantees, completion guarantees and repayment guarantees were not material. We believe that as of February 28, 2010, in the event we become legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or we and our partners would contribute additional capital into the venture.

The total debt of Lennar Homebuilding unconsolidated entities in which we have investments was as follows:

 

(In thousands)    February 28,
2010
    November 30,
2009
 

Lennar’s net recourse exposure

   $ 186,150      194,555   

Reimbursement agreements from partners

     93,185      93,185   
              

Lennar’s maximum recourse exposure

   $ 279,335      287,740   
              

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

   $ 129,877      140,078   

Non-recourse land seller debt and other debt

     47,390      47,478   

Non-recourse bank debt with completion guarantees

     603,959      608,397   

Non-recourse bank debt without completion guarantees

     477,791      504,697   
              

Non-recourse debt to Lennar

     1,259,017      1,300,650   
              

Total debt

   $ 1,538,352      1,588,390   
              

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

     18   18
              

In view of current credit market conditions, it is not uncommon for lenders to real estate developers, including joint ventures in which we have interests, to assert non-monetary defaults (such as failure to meet construction completion deadlines or declines in the market value of collateral below required amounts) or technical monetary defaults against the real estate developers. In most instances, those asserted defaults are resolved by modifications of the loan terms, additional equity investments or other concessions by the borrowers. In addition, in some instances, real estate developers, including joint ventures in which we have interests, are forced to request temporary waivers of covenants in loan documents or modifications of loan terms, which are often, but not always obtained. However, in some instances developers, including joint ventures in which we have interests, are not able to meet their monetary obligations to lenders, and are thus declared in default. Because we sometimes guarantee all or portions of the obligations to lenders of joint ventures in which we have interests, when these joint ventures default on their obligations, lenders may or may not have claims against us. Normally, we do not make payments with regard to guarantees of joint venture obligations while the joint ventures are contesting assertions regarding sums due to their lenders. When it is determined that a joint venture is obligated to make a payment that we have guaranteed and the joint venture will not be able to make that payment, we accrue the amounts probable to be paid by us as a liability. Although we generally fulfill our guarantee obligations within reasonable time after we determine that we are obligated with regard to them, at any point in time it is likely that we will have some balance of unpaid guarantee liability. At February 28, 2010, the liability for unpaid guarantees of joint venture indebtedness on our consolidated balance sheet totaled $13.2 million.

The following table summarizes the principal maturities of our Lennar Homebuilding unconsolidated entities (“JVs”) debt as per current debt arrangements as of February 28, 2010 and does not represent estimates of future cash payments that will be made to reduce JV debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.

 

          Principal Maturities of Unconsolidated JVs by Period
(In thousands)    Total JV
Assets (1)
   Total JV
Debt
   2010    2011    2012    Thereafter    Other
Debt (2)

Net recourse debt to Lennar

      $ 186,150    98,293    37,706    43,408    6,743    —  

Reimbursement agreements

        93,185    8,862    50,878    33,445    —      —  
                                  

Gross recourse debt to Lennar

   $ 1,302,930      279,335    107,155    88,584    76,853    6,743    —  

Debt without recourse to Lennar

     2,547,832      1,259,017    138,908    991,346    70,412    9,040    49,311
                                      

Total

   $ 3,850,762      1,538,352    246,063    1,079,930    147,265    15,783    49,311
                                      

 

(1) Excludes unconsolidated joint venture assets where the joint venture has no debt.
(2) Represents land seller debt and other debt.

 

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The following table is a breakdown of the assets, debt and equity of the Lennar Homebuilding unconsolidated joint ventures by partner type as of February 28, 2010:

 

(Dollars in thousands)   Total JV
Assets
  Gross
Recourse
Debt to
Lennar
  Reimbursement
Agreements
  Net
Recourse
Debt to
Lennar
  Total Debt
Without
Recourse to
Lennar
  Total JV
Debt
  Total JV
Equity
  JV Debt
to Total
Capital
Ratio
    Remaining
Homes/
Homesites
in JV