LENNAR CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "Selected Financial Data" and our audited consolidated financial statements and accompanying notes included elsewhere in this Report. Special Note Regarding Forward-Looking Statements This annual report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. These forward-looking statements typically include the words "anticipate," "believe," "consider," "estimate," "expect," "forecast," "intend," "objective," "plan," "predict," "projection," "seek," "strategy," "target," "will" or other words of similar meaning. Some of them are opinions formed based upon general observations, anecdotal evidence and industry experience, but that are not supported by specific investigation or analysis. These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from what is anticipated by our forward-looking statements. The most important factors that could cause actual results to differ materially from those anticipated by our forward-looking statements include, but are not limited to: slowdowns in the real estate markets across the nation, including a slowdown in real estate markets in regions where we have significant homebuilding or multifamily development activities; increases in operating costs, including costs related to labor, construction materials, real estate taxes and insurance, which exceed our ability to increase prices, either in our Homebuilding or our Multifamily businesses; our inability to successfully execute our strategies, including our land lighter and our even flow production strategy; changes in general economic and financial conditions that reduce demand for our products and services, lower our profit margins or reduce our access to credit; our inability to acquire land at anticipated prices; the possibility that we will incur nonrecurring costs that affect earnings in one or more reporting periods; decreased demand for our homes or multifamily rental properties; the possibility that our increasing use of technology will not result in improvement to our SG&A expenses and bottom line, and will not justify its cost; inability of the technology companies in which we have investments to operate profitably; increased competition for home sales from other sellers of new and resale homes; increases in mortgage interest rates; a decline in the value of our inventories and resulting write-downs of the carrying value of our real estate assets; the failure of the participants in various joint ventures to honor their commitments; difficulty obtaining land-use entitlements or construction financing; natural disasters and other unforeseen events for which our insurance does not provide adequate coverage; new laws or regulatory changes that adversely affect the profitability of our businesses; our inability to refinance our debt as it matures on terms that are acceptable to us; and changes in accounting standards that adversely affect our reported earnings or financial condition. Please see "Item 1A-Risk Factors" of this Annual Report for a further discussion of these and other risks and uncertainties which could affect our future results. We undertake no obligation to revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events, except to the extent we are legally required to disclose certain matters inSEC filings or otherwise. 21
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Outlook
During the fourth quarter, the housing market continued to strengthen. We saw
traffic and sales continue to improve from last year's market pause as lower
interest rates and slower price appreciation positively impacted affordability.
That, together with low unemployment, wage growth, consumer confidence and
economic growth, drove home purchasers, especially at the entry level, to return
to the housing market.
We have remained focused on our pivot to a land lighter strategy. From
controlling the timing of land purchases, to reducing our years-owned supply of
homesites, to increasing the percentage of land controlled through options or
agreements versus owned land, we are migrating towards a significantly smaller
owned land inventory. At the beginning of 2019, we set a two-year goal of
increasing the homesites we control but do not own from 25% to 40% of our land
needs. We made great progress on this front, and finished the year at 33%. Based
on our progress, our new goal is to have 50% of our land needs controlled versus
owned by the end of fiscal 2021. We also believe that, based on our progress on
reducing our years-owned supply of homesites from 4.4 years at the end of the
third quarter to 4.1 years at the end of the fourth quarter, we can reduce our
years-owned supply of homesites to 3 years by the end of fiscal 2021. While our
most immediately impactful focus remains on our land spend and our inventory, we
are also driving our asset-base lower as we continue to focus on monetizing
non-core assets and business segments.
Our size and scale in each of our strategic markets continues to facilitate our
management of costs even in labor constrained markets. Our continued focus on
technology and leveraging our size and scale is driving efficiencies that are
reflected in our consistent improvement in SG&A and our bottom line. In the
fourth quarter, our SG&A expense as a percentage of home sale revenues continued
its downward trend with our lowest fourth quarter level ever at 7.6%.
In addition, through contributions from our technology initiatives in our
financial services platform, we decreased loan origination costs and simplified
our business process to improve customer experience, which in part drove the
financial services segment's record profit in the fourth quarter. Technology,
together with management focus, has enabled efficiency, a better customer
experience and a much better bottom line. Over the next two years we expect to
see some of the same technology-based improvements that we used in our financial
services platform affecting our core homebuilding operations, specifically in
areas of customer acquisition costs, even flow production and inventory
management.
Our backlog, combined with our current housing inventory, leads us to expect to
close between 54,000 and 55,000 homes in fiscal 2020. Although the price per
home may decrease as we focus more on the entry level market, we expect our
fiscal 2020 gross margins to remain consistent with fiscal 2019 as we increase
our home sales pace while continuing to focus on reducing construction spend by
keeping cost per square foot flat while average square footage is declining,
leveraging field expenses over a greater number of deliveries and reducing
interest expense. Accordingly, we expect to generate strong cash flow in 2020,
that we can use to pay down debt and return capital to shareholders through our
increased dividend and strategic share repurchases. With a solid balance sheet,
leading market positions and continued execution of our core operating
strategies, we believe we are well positioned for strong profitability and cash
flow in 2020.
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Results of Operations Overview Our net earnings attributable to Lennar were$1.8 billion , or$5.74 per diluted share ($5.76 per basic share) in 2019 and$1.7 billion , or$5.44 per diluted share ($5.46 per basic share) in 2018. The following table sets forth financial and operational information for the years indicated related to our operations: Years EndedNovember 30 , (Dollars in thousands, except average sales price) 2019
2018
Homebuilding revenues: Sales of homes$ 20,560,147
18,810,552
Sales of land and other homebuilding revenue 233,069
267,045
Total Homebuilding revenues 20,793,216
19,077,597
Homebuilding costs and expenses: Costs of homes sold 16,323,989
15,121,738
Costs of land sold 206,526
206,956
Selling, general and administrative 1,715,185
1,608,109
Total Homebuilding costs and expenses 18,245,700
16,936,803
Homebuilding operating margins 2,547,516
2,140,794
Homebuilding equity in loss from unconsolidated entities (13,273 ) (90,209 ) Homebuilding other income (expenses), net (31,338 )
203,902
Homebuilding operating earnings$ 2,502,905
2,254,487
Financial Services revenues$ 824,810
954,631
Financial Services costs and expenses 600,168
754,915
Financial Services operating earnings$ 224,642
199,716
Multifamily revenues$ 604,700
421,132
Multifamily costs and expenses 599,604
429,759
Multifamily equity in earnings from unconsolidated entities and other gain
11,294 51,322
Multifamily operating earnings$ 16,390
42,695
Lennar Other revenues$ 36,835
118,271
Lennar Other costs and expenses 11,794
115,969
Lennar Other equity in earnings from unconsolidated entities
15,372 24,110
Lennar Other expense, net (8,944 ) (60,119 ) Lennar Other operating earnings (loss)$ 31,469 (33,707 ) Total operating earnings$ 2,775,406
2,463,191
Gain on sale of Rialto investment and asset management platform
- 296,407
Acquisition and integration costs related toCalAtlantic -
152,980
Corporate general and administrative expenses 341,114
343,934
Earnings before income taxes$ 2,434,292
2,262,684
Net earnings attributable to Lennar$ 1,849,052
1,695,831
Gross margin as a % of revenues from home sales 20.6 % 19.6 % S,G&A expenses as a % of revenues from home sales 8.3 % 8.5 % Operating margin as a % of revenues from home sales 12.3 % 11.1 % Average sales price$ 400,000 413,000 Effects of CalAtlantic Acquisition For the year endedNovember 30, 2018 , Homebuilding revenue included$7.0 billion of revenues, and earnings before income taxes included$491.3 million of pre-tax earnings fromCalAtlantic since the date of acquisition, which included acquisition and integration costs of$153.0 million . These acquisition and integration costs were comprised mainly of severance 23
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expenses and transaction costs and were included within the acquisition and integration costs related toCalAtlantic line item in the consolidated statement of operations for the year endedNovember 30, 2018 . 2019 versus 2018 InJuly 2019 , the FASB issued Accounting Standards Update 2019-07, "Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification", which makes a number of changes meant to simplify certain disclosures in financial condition and results of operations, particularly by eliminating year-to-year comparisons between prior periods previously disclosed. In complying with the relevant aspects of the rule covering the current year annual report, we now include disclosures on results of operations for fiscal year 2019 versus 2018 only. For discussion of fiscal year 2018 vs 2017 see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report filed with theSEC for the fiscal year endedNovember 30, 2018 . Revenues from home sales increased 9% in the year endedNovember 30, 2019 to$20.6 billion from$18.8 billion in the year endedNovember 30, 2018 . Revenues were higher primarily due to a 13% increase in the number of home deliveries, excluding unconsolidated entities, partially offset by a 3% decrease in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 51,412 homes in the year endedNovember 30, 2019 from 45,563 homes in the year endedNovember 30, 2018 , primarily as a result of an increase in home deliveries in all of Homebuilding's segments except Homebuilding Other. The average sales price of homes delivered, excluding unconsolidated entities, decreased to$400,000 in the year endedNovember 30, 2019 from$413,000 in the year endedNovember 30, 2018 reflecting our continued focus on the entry-level market and, in general, moving down the price curve. Gross margins on home sales were$4.2 billion , or 20.6%, in the year endedNovember 30, 2019 compared to$3.7 billion , or 19.6% (21.8% excluding purchase accounting), in the year endedNovember 30, 2018 . The gross margin percentage on home sales increased because the year endedNovember 30, 2018 included$414.6 million or 220 basis points of backlog/construction in progress write-up related to purchase accounting adjustments onCalAtlantic homes that were delivered in that period. This was partially offset by higher construction costs as a percentage of home sales revenue. Selling, general and administrative expenses were$1.7 billion in the year endedNovember 30, 2019 , compared to$1.6 billion in the year endedNovember 30, 2018 . As a percentage of revenues from home sales, selling, general and administrative expenses improved to 8.3% in the year endedNovember 30, 2019 , from 8.5% in the year endedNovember 30, 2018 , due to improved operating leverage as a result of an increase in home deliveries. Homebuilding equity in loss from unconsolidated entities, gross margin on land sales and other homebuilding revenue and homebuilding other income (expense), net, totaled a loss of$18.1 million in the year endedNovember 30, 2019 , compared to earnings of$173.8 million in the year endedNovember 30, 2018 . Homebuilding equity in loss from unconsolidated entities was$13.3 million in the year endedNovember 30, 2019 , compared to Homebuilding equity in loss from unconsolidated entities of$90.2 million in the year endedNovember 30, 2018 , which was attributable to our share of net operating losses from our unconsolidated entities, which were primarily driven by valuation adjustments related to assets of Homebuilding's unconsolidated entities and general and administrative expenses, partially offset by profits from land sales. Gross margin on land sales and other homebuilding revenue was$26.5 million in the year endedNovember 30, 2019 , compared to$60.1 million in the year endedNovember 30, 2018 . Homebuilding other income (expense), net, totaled($31.3) million in the year endedNovember 30, 2019 , compared to$203.9 million in the year endedNovember 30, 2018 . In the year endedNovember 30, 2018 , other income, net, was primarily related to a$164.9 million gain on the sale of an 80% interest in one of Homebuilding's strategic joint ventures,Treasure Island Holdings . Homebuilding interest expense was$395.0 million in the year endedNovember 30, 2019 ($371.8 million was included in costs of homes sold,$5.6 million in costs of land sold and$17.6 million in other interest expense), compared to$316.2 million in the year endedNovember 30, 2018 ($301.3 million was included in costs of homes sold,$3.6 million in costs of land sold and$11.3 million in other interest expense). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries. Operating earnings for the Financial Services segment were$244.3 million in the year endedNovember 30, 2019 (which included$224.6 million of operating earnings and an add back of$19.6 million of net loss attributable to noncontrolling interests), compared to$199.7 million in the year endedNovember 30, 2018 . Operating earnings increased due to an improvement in the mortgage business as a result of a higher capture rate of increased Lennar home deliveries, as well as reductions in loan origination costs driven in part by technology initiatives. Operating earnings of our title business decreased as a result of a decline in retail closed orders due to the sale of a majority of our retail agency business and title insurance underwriter in the first quarter of 2019. This decrease in retail volume was partially offset by an increase in captive business volume and a decrease in operating expenses. Operating earnings for the Multifamily segment were$18.1 million in the year endedNovember 30, 2019 (which included$16.4 million of operating earnings and an add back of$1.8 million of net loss attributable to noncontrolling interests), 24
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compared to operating earnings of$42.7 million in the year endedNovember 30, 2018 . Operating earnings in the year endedNovember 30, 2019 was primarily due to the segment's$16.3 million share of gains as a result of the sale of two operating properties by Multifamily's unconsolidated entities,$11.9 million gain on the sale of an investment in an operating property and$19.3 million of promote revenue related to nine properties in LMV I, partially offset by general and administrative expenses, compared to the segment's$61.2 million share of gains as a result of the sale of six operating properties by Multifamily's unconsolidated entities and the sale of an investment in an operating property in the year endedNovember 30, 2018 . Operating earnings for the Lennar Other segment in the year endedNovember 30, 2019 were$32.0 million (which included$31.5 million of operating earnings and an add back of$0.6 million of net loss attributable to noncontrolling interests). Operating loss for the Lennar Other segment in the year endedNovember 30, 2018 was$30.4 million (which included$33.7 million of operating loss and an add back of$3.3 million of net loss attributable to noncontrolling interests). The increase in operating earnings was primarily related to non-recurring expenses incurred in the year endedNovember 30, 2018 and an increase in our equity in earnings from the Rialto fund investments that were retained when we sold the Rialto investment and asset management platform. Corporate general and administrative expenses were$341.1 million , or 1.5% as a percentage of total revenues, in the year endedNovember 30, 2019 , compared to$343.9 million , or 1.7% as a percentage of total revenues, in the year endedNovember 30, 2018 . The decrease in corporate general and administrative expenses as a percentage of total revenues was due to improved operating leverage as a result of an increase in revenues. In the years endedNovember 30, 2019 and 2018, we had a tax provision of$592.2 million and$545.2 million , respectively. Our overall effective income tax rates were 24.3% for both the years endedNovember 30, 2019 and 2018. During the year endedNovember 30, 2018 , we recorded a non-cash one-time write down of deferred tax assets that resulted in income tax expense of$68.6 million as a result of the Tax Cuts and Jobs Act enacted inDecember 2017 , offset primarily by tax benefits for tax accounting method changes implemented during the period. Homebuilding Segments Our Homebuilding operations construct and sell homes primarily for first-time, move-up, active adult and luxury homebuyers primarily under the Lennar brand name. In addition, our homebuilding operations purchase, develop and sell land to third parties. In certain circumstances, we diversify our operations through strategic alliances and attempt to minimize our risks by investing with third parties in joint ventures. Our chief operating decision makers ("CODM") manage and assess our performance at a regional level. Therefore, we performed an assessment of our operating segments in accordance with ASC 280, Segment Reporting, ("ASC 280") and determined that each of our four homebuilding regions (Homebuilding East, Homebuilding Central, Homebuilding Texas, and Homebuilding West), financial services operations, multifamily operations and Lennar Other are our operating segments. Information about homebuilding activities in our urban divisions that do not have economic characteristics similar to those in other divisions within the same geographic area is grouped under "Homebuilding Other," which is not a reportable segment. In the first quarter of 2019, as a result of the reclassification of RMF and certain other Rialto assets from the Rialto segment to the Financial Services segment effectiveDecember 1, 2018 , we renamed the Rialto segment as "Lennar Other" and included in this segment certain strategic technology investments, which were reclassified from the Homebuilding segments to Lennar Other. Prior periods have been reclassified to conform with the 2019 presentation. References in this Management's Discussion and Analysis of Financial Condition and Results of Operations to Homebuilding segments are to those four reportable segments. AtNovember 30, 2019 our homebuilding operating segments and Homebuilding Other consisted of homebuilding divisions located in: East:Florida ,New Jersey ,North Carolina ,Pennsylvania andSouth Carolina Central:Georgia ,Illinois ,Indiana ,Maryland ,Minnesota ,Tennessee andVirginia Texas :Texas West:Arizona ,California ,Colorado ,Nevada ,Oregon ,Utah andWashington Other: Urban divisions and other homebuilding related investments primarily inCalifornia , including FivePoint 25
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The following tables set forth selected financial and operational information related to our homebuilding operations for the years indicated: Selected Financial and Operational Data
Years Ended November 30,
(In thousands) 2019 2018
Homebuilding revenues:
East:
Sales of homes $ 7,059,267 6,193,868Sales of land and other homebuilding revenue 39,670 55,996 Total East
7,098,937 6,249,864
Central:
Sales of homes 2,718,836 2,260,105
Sales of land and other homebuilding revenue 20,170 30,782 Total Central
2,739,006 2,290,887
Sales of homes 2,526,364 2,366,844
Sales of land and other homebuilding revenue 52,598 54,555 Total Texas
2,578,962 2,421,399
West:
Sales of homes 8,203,790 7,934,138
Sales of land and other homebuilding revenue 23,514 125,712 Total West
8,227,304 8,059,850
Other:
Sales of homes 51,890 55,597 Sales of land and other homebuilding revenue 97,117 - Total Other 149,007 55,597 Total homebuilding revenues$ 20,793,216 19,077,597 26
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Years Ended November 30,
(In thousands) 2019 2018
Homebuilding operating earnings (loss):
East:
Sales of homes $ 936,045 728,934
Sales of land and other homebuilding revenue 25,888
20,287
Equity in loss from unconsolidated entities (793 ) (818 ) Other income, net 16,235 10,818 Total East 977,375 759,221 Central: Sales of homes 273,009 180,150 Sales of land and other homebuilding revenue 6,047
909
Equity in earnings from unconsolidated entities 178 691 Other income, net 5,382 858 Total Central 284,616 182,608Texas : Sales of homes 278,121 165,094 Sales of land and other homebuilding revenue 11,634
10,808
Equity in earnings from unconsolidated entities 569 469 Other expense, net (4,450 ) (3,922 ) Total Texas 285,874 172,449 West: Sales of homes 1,062,701 1,029,251 Sales of land and other homebuilding revenue (19,405 )
30,375
Equity in earnings (loss) from unconsolidated entities 1,263
(212 ) Other income, net 6,291 22,888 Total West 1,050,850 1,082,302 Other: Sales of homes (28,903 ) (22,709 ) Sales of land and other homebuilding revenue 2,379 (2,305 ) Equity in loss from unconsolidated entities (1) (14,490 ) (90,339 ) Other income (expense), net (2) (54,796 )
173,260
Total Other (95,810 )
57,907
Total homebuilding operating earnings$ 2,502,905
2,254,487
(1) Equity in loss from unconsolidated entities for the year ended
2018 included our share of operational net losses from unconsolidated
entities driven by general and administrative expenses and valuation
adjustments related to assets of Homebuilding unconsolidated entities,
partially offset by profit from land sales.
(2) Other expense, net for the year ended
loss of
entity. Other income, net for the year ended November 30, 2018 included
$164.9 million related to a gain on the sale of an 80% interest in one of
Homebuilding's joint ventures, Treasure Island Holdings .
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Summary of Homebuilding Data
Deliveries:
Years Ended November 30,
Homes Dollar Value (In thousands) Average Sales Price
2019 2018 2019 2018 2019 2018
East 20,979 18,161 7,079,863 6,193,868 337,000 341,000
Central 7,071 5,865 2,718,836 2,260,105 385,000 385,000
Texas 8,193 7,146 2,526,364 2,366,844 308,000 331,000
West 15,178 14,352 8,203,790 7,934,138 541,000 553,000
Other 70 103 67,439 103,330 963,000 1,003,000
Total 51,491 45,627 20,596,292 18,858,285 400,000 413,000
Of the total homes delivered listed above, 79 homes with a dollar value of $36.1
million and an average sales price of $458,000 represent home deliveries from
unconsolidated entities for the year ended November 30, 2019 and 64 home
deliveries with a dollar value of $47.7 million and an average sales price of
$746,000 for the year ended November 30, 2018 .
New Orders (1):
Years Ended November 30,
Homes Dollar Value (In thousands) Average Sales Price
2019 2018 2019 2018 2019 2018
East 20,718 19,297 7,002,496 6,505,867 338,000 337,000
Central 7,098 5,855 2,750,420 2,263,946 387,000 387,000
Texas 8,215 7,078 2,478,981 2,284,726 302,000 323,000
West 15,335 13,516 8,024,755 7,544,235 523,000 558,000
Other 73 80 66,903 82,522 916,000 1,032,000
Total 51,439 45,826 20,323,555 18,681,296 395,000 408,000
Of the total new orders listed above, 103 represent the dollar value of new
orders from unconsolidated entities with a dollar value of $43.7 million and an
average sales price of $424,000 for the year ended November 30, 2019 and 58 new
orders with a dollar value of $39.7 million and an average sales price of
$685,000 for the year ended November 30, 2018 .
(1) New orders represent the number of new sales contracts executed with
homebuyers, net of cancellations, during the years ended November 30, 2019
and 2018.
Backlog (2):
November 30,
Homes Dollar Value (In thousands) Average Sales Price
2019 2018 2019 2018 2019 2018
East (3) 6,827 7,075 2,448,498 2,522,710 359,000 357,000
Central 2,013 1,986 821,837 790,252 408,000 398,000
Texas 2,170 2,148 713,337 760,721 329,000 354,000
West 4,558 4,401 2,308,417 2,487,451 506,000 565,000
Other 9 6 8,453 8,989 939,000 1,498,000
Total 15,577 15,616 6,300,542 6,570,123 404,000 421,000
Of the total homes in backlog listed above, 31 homes with a backlog dollar value
of $10.2 million and an average sales price of $328,000 represent homes in
backlog from unconsolidated entities at November 30, 2019 and 17 homes with a
dollar value of $7.1 million and an average sales price of $420,000 represent
homes in backlog from unconsolidated entities at November 30, 2018 .
(2) During the year ended November 30, 2018 , we acquired a total of 6,481 homes
in backlog in connection with the
acquired that were in backlog, 2,126 homes were in the East, 1,281 homes were
in the Central, 877 homes were in
(3) During the year ended
Backlog represents the number of homes under sales contracts. Homes are sold
using sales contracts, which are generally accompanied by sales deposits. In
some instances, purchasers are permitted to cancel sales if they fail to qualify
for
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financing or under certain other circumstances. We do not recognize revenue on
homes under sales contracts until the sales are closed and title passes to the
new homeowners.
We experienced cancellation rates as follows:
Years Ended November 30,
2019 2018
East 15 % 14 %
Central 12 % 11 %
Texas 23 % 21 %
West 15 % 14 %
Other 7 % 21 %
Total 16 % 15 %
Active Communities:
November 30,
2019 2018 (1)
East 428 481
Central 255 243
Texas 238 240
West 359 361
Other 3 4
Total 1,283 1,329
Of the total active communities listed above, five communities represent active
communities being developed by unconsolidated entities as of both November 30,
2019 and 2018.
(1) We acquired 542 active communities as part of the CalAtlantic acquisition on
were in the Central, 99 were in Texas and 131 were in the West.
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The following table details our gross margins on home sales for each of our reportable homebuilding segments and Homebuilding Other:
Years Ended November 30,
(Dollars in thousands) 2019 2018 (1)
East:
Sales of homes $ 7,059,267 6,193,868
Costs of homes sold 5,526,335 4,900,188
Gross margins on home sales 1,532,932 21.7% 1,293,680 20.9%
Central:
Sales of homes 2,718,836 2,260,105
Costs of homes sold 2,215,955 1,882,114
Gross margins on home sales 502,881 18.5% 377,991 16.7%
Texas:
Sales of homes 2,526,364 2,366,844
Costs of homes sold 2,003,650 1,952,366
Gross margins on home sales 522,714 20.7% 414,478 17.5%
West:
Sales of homes 8,203,790 7,934,138
Costs of homes sold 6,520,975 6,331,368
Gross margins on home sales 1,682,815 20.5% 1,602,770 20.2%
Other:
Sales of homes 51,890 55,597
Costs of homes sold (2) 57,074 55,702
Gross margins on home sales (2) (5,184 ) (10.0)% (105 ) (0.2)%
Total gross margins on home sales
(1) During the year endedNovember 30, 2018 , gross margins on home sales included backlog/construction in progress write-up of$414.6 million related to purchase accounting onCalAtlantic homes that were delivered in fiscal year 2018. (2) Negative gross margins were due to period costs in Urban divisions that impact costs of homes sold without any sales of homes revenue. Homebuilding East: Revenues from home sales increased in 2019 compared to 2018, primarily due to an increase in the number of home deliveries in all the states in the segment, partially offset by a decrease in the average sales price in all the states of the segment, except in the Carolinas andNew Jersey /New York . The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the average sales price of homes delivered was primarily due to our continued focus on the entry-level market and, in general, moving down the price curve. Gross margin percentage on home sales for the year endedNovember 30, 2019 increased compared to the same period last year primarily due to decreases in construction costs per home and purchase accounting adjustments onCalAtlantic homes that were in backlog/construction in progress when we acquiredCalAtlantic , which reduced the gross margin percentage on those deliveries in fiscal year 2018. Homebuilding Central: Revenues from home sales increased in 2019 compared to 2018, primarily due to an increase in the number of home deliveries in all the states in the segment. The increase in the number of deliveries was primarily driven by an increase in active communities and an increase in the number of home deliveries per active community. The average sales prices of home deliveries were flat from 2019 compared to 2018. Gross margin percentage on home sales for the year endedNovember 30, 2019 increased compared to the same period last year primarily due to purchase accounting adjustments onCalAtlantic homes that were in backlog/construction in progress when we acquiredCalAtlantic , which reduced the gross margin percentage on those deliveries in 2018. Homebuilding Texas: Revenues from home sales increased in 2019 compared to 2018, primarily due to an increase in the number of home deliveries, partially offset by a decrease in the average sales price. The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the average sales price of homes delivered was primarily due to our continued focus on the entry-level market and, in general, moving down the price curve. Gross margin percentage on home sales for the year endedNovember 30, 2019 increased compared to the same period last year primarily due to decreases in construction costs per home and purchase accounting adjustments onCalAtlantic homes that were in backlog/construction in progress when we acquiredCalAtlantic , which reduced the gross margin percentage on those deliveries in 2018. 30
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Homebuilding West: Revenues from home sales increased in 2019 compared to 2018, primarily due to an increase in the number of home deliveries in all the states in the segment, exceptColorado . The increase in revenues was partially offset by a decrease in the average sales price of homes delivered inArizona ,California andOregon . The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the number of home deliveries inColorado was primarily due to a decrease in active communities and timing of opening and closing of communities. The decrease in the average sales price of homes delivered inArizona ,California andOregon was primarily due to our continued focus on the entry-level market and, in general, moving down the price curve. Gross margin percentage on home sales for the year endedNovember 30, 2019 increased compared to the same period last year primarily due to purchase accounting adjustments onCalAtlantic homes that were in backlog/construction in progress when we acquiredCalAtlantic , which reduced the gross margin percentage on those deliveries in 2018. Financial Services Segment Our Financial Services reportable segment primarily provides mortgage financing, title and closing services primarily for buyers of our homes, as well as property and casualty insurance. The segment also originates and sells into securitizations commercial mortgage loans through its RMF business. Our Financial Services segment sells substantially all of the residential loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements. The following table sets forth selected financial and operational information related to our Financial Services segment: Years Ended November 30, (Dollars in thousands) 2019 2018 Revenues$ 824,810 954,631 Costs and expenses 600,168 754,915 Operating earnings$ 224,642 199,716 Dollar value of mortgages originated$ 10,930,900
11,079,000
Number of mortgages originated 34,800
36,500
Mortgage capture rate of Lennar homebuyers 76 % 73 % Number of title and closing service transactions 59,700 118,000 Number of title policies issued 19,800
297,600
RMF
RMF originates and sells into securitizations five, seven and ten year commercial first mortgage loans, which are secured by income producing properties. This business has become a significant contributor to Financial Services' revenues. During the year endedNovember 30, 2019 , RMF originated loans with a total principal balance of$1.6 billion , all of which were recorded as loans held-for-sale, except$15.3 million which were recorded as accrual loans within loans receivables, net, and sold$1.4 billion of loans into 11 separate securitizations. During the year endedNovember 30, 2018 , RMF originated loans with a principal balance of$1.4 billion all of which were recorded as loans held-for-sale and sold$1.5 billion of loans into 16 separate securitizations. As ofNovember 30, 2019 and 2018, originated loans with an unpaid balance of$158.4 million and$218.4 million , respectively, were sold into a securitization trust but not settled and thus were included as receivables, net. Multifamily Segment We have been actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. Our Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in selectU.S. markets. Originally, our Multifamily segment focused on building multifamily properties and selling them shortly after they were completed. However, more recently we have focused on creating and participating in ventures that build multifamily properties with the intention of retaining them after they are completed. As ofNovember 30, 2019 and 2018, our balance sheet had$1.1 billion and$874.2 million , respectively, of assets related to our Multifamily segment, which included investments in unconsolidated entities of$561.2 million and$481.1 million , respectively. Our net investment in our Multifamily segment as ofNovember 30, 2019 and 2018 was$829.5 million and$703.6 million , respectively. During the year endedNovember 30, 2019 , our Multifamily segment sold, through its unconsolidated entities, two operating properties and an investment in an operating property resulting in the segment's$28.1 million share of gains. The gain of$11.9 million recognized on the sale of the investment in an operating property and 31
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recognition of our share of deferred development fees that were capitalized at the joint venture level are included in Multifamily equity in earnings (loss) from unconsolidated entities and other gain, and are not included in net earnings (loss) of unconsolidated entities. During the year endedNovember 30, 2018 , our Multifamily segment sold, through its unconsolidated entities six operating properties and an investment in an operating property resulting in the segment's$61.2 million share of gains. The gain of$15.7 million recognized on the sale of the investment in an operating property and recognition of our share of deferred development fees that were capitalized at the joint venture level are included in Multifamily equity in earnings from unconsolidated entities and other gain, and are not included in net earnings of unconsolidated entities. Our Multifamily segment had equity investments in 19 and 22 unconsolidated entities, including LMV I and LMV II, as ofNovember 30, 2019 and 2018, respectively. As ofNovember 30, 2019 , our Multifamily segment had interests in 63 communities with development costs of$7.4 billion , of which 31 communities were completed and operating, six communities were partially completed and leasing, 20 communities were under construction and the remaining communities were owned by joint ventures. As ofNovember 30, 2019 , our Multifamily segment also had a pipeline of potential future projects, which were under contract or had letters of intent, totaling approximately$4.5 billion in anticipated development costs across a number of states that will be developed primarily by unconsolidated entities. LMV I is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with$2.2 billion in equity commitments, including a$504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. InMarch 2018 , our Multifamily segment completed the first closing of a second LMV II for the development, construction and property management of Class-A multifamily assets. InJune 2019 , our Multifamily segment completed the final closing of LMV II which has approximately$1.3 billion of equity commitments, including a$381 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. As of and for the year endedNovember 30, 2019 ,$330.2 million in equity commitments were called, of which we contributed our portion of$94.1 million , which was made up of a$191.0 million inventory and cash contributions, offset by$96.9 million of distributions as a return of capital, resulting in a remaining equity commitment for us of$205.7 million . As ofNovember 30, 2019 ,$582.3 million of the$1.3 billion in equity had been called. As ofNovember 30, 2019 and 2018, the carrying value of our investment in LMV II was$153.3 million and$63.0 million , respectively. The difference between our net contributions and the carrying value of our investments was related to a basis difference. As ofNovember 30, 2019 , LMV II included 16 undeveloped multifamily assets totaling approximately 5,600 apartments with projected project costs of approximately$2.4 billion . Lennar Other Segment Our Lennar Other segment includes fund investments we retained subsequent to the sale of the Rialto investment and asset management platform as well as strategic investments in technology companies that are looking to improve the homebuilding and financial services industries to better serve our customers and increase efficiencies. As ofNovember 30, 2019 and 2018, our balance sheet had$495.4 million and$589.0 million , respectively, of assets in the Lennar Other segment, which included investments in unconsolidated entities of$403.7 million and$424.1 million , respectively. AtNovember 30, 2019 and 2018, the carrying value of Lennar Other's commercial mortgage-backed securities ("CMBS") was$54.1 million and$60.0 million , respectively. These securities were purchased at discount rates ranging from 6% to 86% with coupon rates ranging from 1.3% to 4.0%, stated and assumed final distribution dates betweenNovember 2020 andOctober 2026 , and stated maturity dates betweenNovember 2049 andMarch 2059 . We review changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on our CMBS. Based on management's assessment, no impairment charges were recorded during the years endedNovember 30, 2019 and 2018. We classify these securities as held-to-maturity based on our intent and ability to hold the securities until maturity. We have financing agreements to finance CMBS that have been purchased as investments by the segment. AtNovember 30, 2019 and 2018, the carrying amount, net of debt issuance costs, of outstanding debt in these agreements was$13.3 million and$12.6 million , respectively, and the interest is incurred at a rate of 3.9%. Financial Condition and Capital Resources AtNovember 30, 2019 , we had cash and cash equivalents and restricted cash related to our homebuilding, financial services, multifamily and other operations of$1.5 billion , compared to$1.6 billion atNovember 30, 2018 . We finance all of our activities including homebuilding, financial services, multifamily, other and general operating needs primarily with cash generated from our operations, debt issuances and equity offerings as well as cash borrowed under our warehouse lines of credit and our unsecured revolving credit facility (the "Credit Facility"). 32
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Operating Cash Flow Activities During 2019 and 2018, cash provided by operating activities totaled$1.5 billion and$1.7 billion , respectively. During 2019, cash provided by operating activities was positively impacted by our net earnings and a decrease in receivables of$312.3 million , partially offset by an increase in inventories due to strategic land purchases, land development and construction costs of$623.6 million and an increase in Financial Services loans held-for-sale of$431.3 million . For the year endedNovember 30, 2019 , distributions of earnings from unconsolidated entities were$12.8 million , which included (1)$8.5 million from Multifamily unconsolidated entities, and (2)$4.3 million from Homebuilding unconsolidated entities. During 2018, cash provided by operating activities was positively impacted by our net earnings, an increase in accounts payable and other liabilities of$412.8 million , deferred income tax expense of$268.0 million and a decrease in loans held-for-sale of$5.8 million of which$153.3 million related to our Lennar Other segment, partially offset by an increase in loans held-for-sale of$147.5 million related to Financial Services. In addition, cash provided by operating activities was negatively impacted by an increase in other assets of$24.9 million , an increase in receivables of$431.2 million and an increase in inventories due to strategic land purchases, land development and construction costs of$135.9 million . For the year endedNovember 30, 2018 , distributions of earnings from unconsolidated entities were$113.1 million , which included (1)$69.9 million from Homebuilding unconsolidated entities, (2)$37.8 million from Multifamily unconsolidated entities, and (3)$5.4 million from the unconsolidated Rialto real estate funds included in the Lennar Other Segment. Investing Cash Flow Activities During 2019 and 2018, cash provided by (used in) investing activities totaled$19.6 million and($594.0) million , respectively. During 2019, our cash provided by investing activities was primarily due to$52.6 million of proceeds from the sales of securities,$70.4 million of proceeds from the sale of two Homebuilding operating properties and other assets, and distributions of capital from unconsolidated entities of$405.7 million , which primarily included (1)$151.9 million from Multifamily unconsolidated entities, (2)$137.6 million from the unconsolidated Rialto real estate funds included in our Lennar Other segment and (3)$93.4 million from Homebuilding unconsolidated entities. This was partially offset by net additions to operating properties and equipment of$86.5 million and cash contributions of$436.2 million to unconsolidated entities, which included (1)$225.8 million to Homebuilding unconsolidated entities, (2)$108.6 million to Multifamily unconsolidated entities and (3)$101.8 million to the unconsolidated Rialto real estate funds and strategic investments included in the Lennar Other segment. During 2018, our cash used in investing activities was primarily due to our$1.1 billion acquisition ofCalAtlantic , net of cash acquired, net additions to operating properties and equipment of$130.4 million and cash contributions of$405.5 million to unconsolidated entities, which included (1)$138.0 million to Homebuilding unconsolidated entities, (2)$113.0 million to Multifamily unconsolidated entities primarily for working capital and (3)$154.6 million to the unconsolidated Rialto real estate funds and strategic investments included in the Lennar Other segment. This was partially offset by the receipt of$340 million from the sale of our Rialto investment and asset management platform to investment funds managed byStone Point Capital ,$225.3 million of proceeds from the sale of investments in unconsolidated entities, including$200 million of proceeds from the sale of an 80% interest in one of our strategic joint ventures,Treasure Island Holdings , proceeds from maturities/sales of investment securities of$85.2 million , and distributions of capital from unconsolidated entities of$362.5 million , which primarily included (1)$172.0 million from Multifamily unconsolidated entities, (2)$136.0 million from Homebuilding unconsolidated entities, and (3)$54.3 million from the unconsolidated Rialto real estate funds and strategic investments included in the Lennar Other segment. Financing Cash Flow Activities During 2019 and 2018, our cash used in financing activities totaled$1.6 billion and$2.2 billion , respectively. During 2019, our cash used in financing activities was primarily impacted by (1)$600 million aggregate principal amount redemption of our 4.50% senior notes dueNovember 2019 , (2)$500 million aggregate principal amount redemption of our 4.500% senior notes dueJune 2019 , (3)$189.5 million principal payments on other borrowings, and (4) repurchase of our common stock for$523.1 million , which included$492.9 million of repurchases of our stock under our repurchase program and$29.0 million of repurchases related to our equity compensation plan. This was partially offset by$166.6 million of net borrowings under our Financial Services warehouse facilities and$88.8 million of proceeds from other borrowings. During 2018, our cash used in financing activities was primarily impacted by (1)$575 million aggregate principal redemption of our 8.375% senior notes due 2018, (2)$454.7 million net repayments under our revolving Credit Facility, (3)$359.0 million of aggregate principal payment on Lennar Other's (formerly our Rialto segment) 7.00% senior notes dueDecember 2018 and other notes payable, (4) payment at maturity of$275 million aggregate principal amount of 4.125% senior notes due 2018, (5)$250 million aggregate principal paid to redeem our 6.95% senior notes due 2018, (6)$138.5 million of principal payments on other borrowings, and (7)$89.6 million of payments related to noncontrolling interests. This was partially offset by$272.9 million of net borrowings under our Financial Services warehouse facilities. 33
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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 Homebuilding operations. Homebuilding debt to total capital and net Homebuilding debt to total capital were calculated as follows:
November 30,
(Dollars in thousands) 2019 2018
Homebuilding debt $ 7,776,638 8,543,868
Stockholders' equity 15,949,517 14,581,535
Total capital $ 23,726,155 23,125,403
Homebuilding debt to total capital 32.8 % 36.9 %
Homebuilding debt $ 7,776,638 8,543,868
Less: Homebuilding cash and cash equivalents 1,200,832 1,337,807 Net Homebuilding debt
$ 6,575,806 7,206,061 Net Homebuilding debt to total capital (1) 29.2 % 33.1 %
(1) Net Homebuilding debt to total capital is a non-GAAP financial measure
defined as net Homebuilding debt (Homebuilding debt less Homebuilding cash
and cash equivalents) divided by total capital (net Homebuilding debt plus
stockholders' equity). Our management believes the ratio of net Homebuilding
debt to total capital is a relevant and a useful financial measure to
investors in understanding the leverage employed in our homebuilding
operations. However, because net Homebuilding debt to total capital is not
calculated in accordance with GAAP, this financial measure should not be
considered in isolation or as an alternative to financial measures prescribed
by GAAP. Rather, this non-GAAP financial measure should be used to supplement
our GAAP results.
AtNovember 30, 2019 , Homebuilding debt to total capital was lower compared toNovember 30, 2018 , as a result of an increase in stockholders' equity primarily related to our net earnings, partially offset by stock repurchases, and a decrease in Homebuilding debt. We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues and earnings. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness for cash or equity, the repurchase of our common stock, the acquisition of homebuilders and other companies, the purchase or sale of assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or pursuing other financing alternatives. In connection with some of our non-homebuilding businesses, we are also considering other types of transactions such as sales, restructuring, joint ventures, spin-offs or initial public offerings as we intend to move back towards being a pure play homebuilding company over time. OnNovember 30, 2018 , we sold theRialto Management Group . However, we retained the right to receive carried interest distributions from some of the funds and other investment vehicles. We also retained limited partner investments in Rialto funds and investment vehicles that totaled$236.7 million as ofNovember 30, 2019 , and we are committed to invest as much as an additional$13.1 million in Rialto funds. The retained aspects of our former Rialto segment are now included in our Lennar Other segment, except for RMF and certain other Rialto assets which are included in our Financial Services segment (see Note 8 and 10 of the notes to our consolidated financial statements). 34
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The following table summarizes our Homebuilding senior notes and other debts payable:
November 30,
(Dollars in thousands) 2019 2018
6.625% senior notes due 2020 (1)
299,421 298,838
8.375% senior notes due 2021 (1) 418,860 435,897
4.750% senior notes due 2021 498,893 498,111
6.25% senior notes due
597,885 596,894
5.375% senior notes due 2022 (1) 258,198 261,055
4.750% senior notes due 2022 571,644 570,564
4.875% senior notes due
646,802 646,078
5.875% senior notes due 2024 (1) 448,158 452,833
4.750% senior notes due 2025 497,558 497,114
5.25% senior notes due 2026 (1) 407,921 409,133
5.00% senior notes due 2027 (1) 352,892 353,275
4.75% senior notes due 2027 893,046 892,297
0.25% convertible senior notes due 2019 - 1,291
4.500% senior notes due 2019 - 499,585
4.50% senior notes due 2019 - 599,176
Mortgage notes on land and other debt 874,887 508,950
$ 7,776,638 8,543,868
(1) These notes were obligations of
subsequently exchanged in part for notes of
million principal amount of 8.375% senior notes due 2021,
principal amount of 6.25% senior notes due 2021,
amount of 5.375% senior notes due 2022,
5.875% senior notes due 2024,
notes due 2026 and
2027. As part of purchase accounting, the senior notes have been recorded at
their fair value as of the date of acquisition (
The carrying amounts of the senior notes listed above are net of debt issuance costs of$22.9 million and$31.2 million , as ofNovember 30, 2019 and 2018, respectively. Our Homebuilding average debt outstanding was$9.1 billion with an average rate of interest incurred of 4.8% for the year endedNovember 30, 2019 , compared to$9.1 billion with an average rate of interest incurred of 4.8% for the year endedNovember 30, 2018 . Interest incurred related to Homebuilding debt for the year endedNovember 30, 2019 was$422.7 million , compared to$423.7 million in 2018. 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, proceeds from sales of debt as well as borrowings under our Credit Facility. InNovember 2019 , we redeemed$600 million aggregate principal amount of our 4.50% senior notes dueNovember 2019 . The redemption price, which was paid in cash, was 100% of the principal amount plus accrued but unpaid interest. InJune 2019 , we redeemed$500 million aggregate principal amount of our 4.500% senior notes dueJune 2019 . The redemption price, which was paid in cash, was 100% of the principal amount plus accrued but unpaid interest. Currently, substantially all of our 100% owned homebuilding subsidiaries are guaranteeing all our senior notes (the "Guaranteed Notes"). The guarantees are full and unconditional. The principal reason our 100% owned homebuilding subsidiaries are guaranteeing the Guaranteed Notes is so holders of the Guaranteed Notes will have rights at least as great with regard to those subsidiaries as any other holders of a material amount of our unsecured debt. Therefore, the guarantees of the Guaranteed Notes will remain in effect with regard to a guarantor subsidiary only while it guarantees a material amount of the debt ofLennar Corporation , as a separate entity, to others. At any time when a guarantor subsidiary is no longer guaranteeing at least$75 million ofLennar Corporation's debt other than the Guaranteed Notes, either directly or by guaranteeing other subsidiaries' obligations as guarantors ofLennar Corporation's debt, the guarantor subsidiary's guarantee of the Guaranteed Notes will be suspended. Therefore, if the guarantor subsidiaries cease guaranteeingLennar Corporation's obligations under our 35
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Credit Facility and our letter of credit facilities and are not guarantors of any new debt, the guarantor subsidiaries' guarantees of the Guaranteed Notes will be suspended until such time, if any, as they again are guaranteeing at least$75 million ofLennar Corporation's debt other than the Guaranteed Notes. If our guarantor subsidiaries are guaranteeing revolving credit lines totaling at least$75 million , we will treat the guarantees of the Guaranteed Notes as remaining in effect even during periods whenLennar Corporation's borrowings under the revolving credit lines are less than$75 million . A subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of. InApril 2019 , we amended the credit agreement governing our Credit Facility to increase the maximum borrowings from$2.0 billion to$2.4 billion and extend the maturity one year toApril 2024 , with$50 million maturing inJune 2020 . InSeptember 2019 , the Credit Facility commitments were increased by$50 million to total commitments of$2.5 billion . Our Credit Facility has a$350 million accordion feature, subject to additional commitments, thus the maximum borrowings could be$2.8 billion . The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to$500 million in commitments may be used for letters of credit. Under our Credit Facility agreement, we are required to maintain a minimum consolidated tangible net worth, a maximum leverage ratio and either a liquidity or an interest coverage ratio. These ratios are calculated per the Credit Facility agreement, which involves adjustments to GAAP financial measures. We believe we were in compliance with our debt covenants as ofNovember 30, 2019 . As of bothNovember 30, 2019 and 2018, we had no outstanding borrowings under the Credit Facility. In addition, we had$305 million in letter of credit facilities with different financial institutions atNovember 30, 2019 . Under the amended Credit Facility agreement executed inApril 2019 (the "Credit Agreement"), as of the end of each fiscal quarter, we are required to maintain minimum consolidated tangible net worth of approximately$7.1 billion plus the sum of 50% of the cumulative consolidated net income for each completed fiscal quarter subsequent toFebruary 28, 2019 , if positive, and 50% of the net cash proceeds from any equity offerings from and afterFebruary 28, 2019 , minus the lesser of 50% of the amount paid afterApril 11, 2019 to repurchase common stock and$375 million . We are required to maintain a leverage ratio that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar quarters. The leverage ratio will have a floor of 60%. If our interest coverage ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar quarters, the leverage ratio we will be required to maintain will be increased by 2.5% per quarter to a maximum of 65%. As of the end of each fiscal quarter, we are also required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio equal to or greater than 1.50:1.00 for the last twelve months then ended. We believe that we were in compliance with our debt covenants atNovember 30, 2019 . The following summarizes our required debt covenants and our actual levels or ratios with respect to those covenants as calculated per the Credit Agreement as ofNovember 30, 2019 : (Dollars in thousands) Covenant Level Level Achieved as of November 30, 2019 Minimum net worth test$ 7,652,808 10,577,157 Maximum leverage ratio 65.0 % 34.5 % Liquidity test (1) 1.00 3.05
(1) We are only required to maintain either (1) liquidity in an amount equal to
or greater than 1.00x consolidated interest incurred for the last twelve
months then ended or (2) an interest coverage ratio of equal to or greater
than 1.50:1.00 for the last twelve months then ended. Although we are in
compliance with our debt covenants for both calculations, we have only
disclosed our liquidity test.
The terms minimum net worth test, maximum leverage ratio, liquidity test and interest coverage ratio used in the Credit Agreement are specifically calculated per the Credit Agreement and differ in specified ways from comparable GAAP or common usage terms. Our performance letters of credit outstanding were$715.8 million and$598.4 million atNovember 30, 2019 and 2018, respectively. Our financial letters of credit outstanding were$184.1 million and$165.4 million atNovember 30, 2019 and 2018, respectively. Performance letters of credit are generally posted with regulatory bodies to guarantee the performance of certain development and construction activities. Financial letters of credit are generally posted in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, atNovember 30, 2019 , we had outstanding surety bonds of$2.9 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds. 36
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At
Maximum
Aggregate
(In thousands) Commitment
364-day warehouse repurchase facility that matures December 2019 (1) $ 500,000
364-day warehouse repurchase facility that matures March 2020 (2) 300,000
364-day warehouse repurchase facility that matures June 2020 500,000
364-day warehouse repurchase facility that matures October 2020 (3) 500,000 Total$ 1,800,000
(1) Subsequent to
and the maximum aggregate commitment was decreased to
amount of
(2) Maximum aggregate commitment includes an uncommitted amount of
(3) Maximum aggregate commitment includes an uncommitted amount of
The Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were$1.4 billion and$1.3 billion atNovember 30, 2019 and 2018, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of$1.4 billion and$1.3 billion atNovember 30, 2019 and 2018, respectively. The combined effective interest rate on the facilities atNovember 30, 2019 was 3.5%. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities. RMF - loans held-for-sale During the year endedNovember 30, 2019 , RMF originated loans with a total principal balance of$1.6 billion , nearly all of which were recorded as loans held-for-sale, except$15.3 million which were recorded as accrual loans within loans receivables, net, and sold$1.4 billion of loans into 11 separate securitizations. During the year endedNovember 30, 2018 , RMF originated loans with a principal balance of$1.4 billion , all of which were recorded as loans held-for-sale and sold$1.5 billion of loans into 16 separate securitizations. As ofNovember 30, 2019 and 2018, originated loans with an unpaid balance of$158.4 million and$218.4 million , respectively, were sold into a securitization trust but not settled and thus were included as receivables, net. AtNovember 30, 2019 , RMF warehouse facilities were as follows: Maximum
Aggregate
(In thousands)
Commitment
364-day warehouse repurchase facility that matures
$ 250,000
364-day warehouse repurchase facility that matures
200,000
364-day warehouse repurchase facility that matures
200,000
364-day warehouse repurchase facility that maturesNovember 2020
200,000
Total - Loans origination and securitization business $
850,000
Warehouse repurchase facility that maturesDecember 2019 (two - one year extensions) (2) 50,000 Total $ 900,000
(1) Subsequent to
2020.
(2) RMF uses this warehouse repurchase facility to finance the origination of
floating rate accrual loans, which are reported as accrual loans within loans
receivable, net. There were borrowings under this facility of
as of
Borrowings under the facilities that finance RMF's loan originations and securitization activities were$216.9 million and$178.8 million as ofNovember 30, 2019 and 2018, respectively, and were secured by a 75% interest in the originated commercial loans financed. The facilities require immediate repayment of the 75% interest in the secured commercial loans when the loans are sold in a securitization and the proceeds are collected. These warehouse repurchase facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the loans held-for-sale to investors. Without the warehouse facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities. 37
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Changes in Capital Structure We had a stock repurchase program adopted in 2001, which originally authorized us to purchase up to 20 million shares of our outstanding common stock. During the year endedNovember 30, 2018 , under our stock repurchase program, we repurchased 6.0 million shares of Class A common stock for$249.9 million at an average share price of$41.63 . InJanuary 2019 , our Board of Directors authorized a stock repurchase program, which replaced the 2001 stock repurchase program, under which we are authorized to purchase up to the lesser of$1 billion in value, or 25 million in shares, of our outstanding Class A or Class B common stock. The repurchase authorization has no expiration date. During the year endedNovember 30, 2019 , we repurchased 9.8 million shares of Class A common stock for approximately$492.9 million at an average share price of$50.41 . During the year endedNovember 30, 2019 , treasury stock increased by 10.5 million shares of Class A common stock due primarily to 9.8 million shares of common stock repurchased during the year through our stock repurchase program. During the year endedNovember 30, 2018 , treasury stock increased by 7.0 million shares of Class A common stock primarily due to 6.0 million shares of common stock repurchased during the year through our stock repurchase program. During the years endedNovember 30, 2019 and 2018, our Class A and Class B common stockholders received an aggregate per share annual dividend of$0.16 . OnJanuary 9, 2020 , our Board of Directors increased the annual dividend rate to$0.50 per share. 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 Homebuilding - Investments in Unconsolidated Entities AtNovember 30, 2019 , we had equity investments in 50 homebuilding and land unconsolidated entities (of which 4 had recourse debt, 8 had non-recourse debt and 38 had no debt), compared to 51 homebuilding and land unconsolidated entities atNovember 30, 2018 . Historically, we have invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we have primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, has enabled us to acquire land which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners' capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners. Although the strategic purposes of our joint ventures and the nature of our joint ventures' partners vary, the joint ventures are generally designed to acquire, develop and/or sell specific assets during a limited life-time. The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint venture. In many cases, our risk is limited to our equity contribution and potential future capital contributions. Additionally, most joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of their communities. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, capital calls relating to the repayment of joint venture debt under payment guarantees generally is required. Under the terms of our joint venture agreements, we generally have the right to share in earnings and distributions of the entities on a pro-rata basis based on our ownership percentage. Some joint venture agreements provide for a different allocation of profit and cash distributions if and when the cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). Homebuilding equity in earnings (loss) from unconsolidated entities excludes our pro-rata share of joint ventures' earnings resulting from land sales to our homebuilding divisions. Instead, we account for those earnings as a reduction of our costs of purchasing the land from the joint ventures or reduce the investment in certain cost sharing unconsolidated entities. This in effect defers recognition of our share of the joint ventures' earnings related to these sales until we deliver a home and title passes to a third-party homebuyer. 38
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In many instances, we are designated as the manager of a venture under the
direction of a management committee that has shared power among the partners of
the unconsolidated entity and we receive fees for such services. In addition, we
often enter into option or purchase contracts to acquire properties from our
joint ventures, generally for market prices at specified dates in the future.
Option contracts, in some instances, require us to make deposits using cash or
irrevocable letters of credit toward the exercise price. These option deposits
are generally negotiated on a case by case basis.
We regularly monitor the results of our unconsolidated joint ventures and any
trends that may affect their future liquidity or results of operations. Joint
ventures in which we have investments may be subject to a variety of financial
and non-financial debt covenants related primarily to equity maintenance, fair
value of collateral and minimum homesite takedown or sale requirements. We
monitor the performance of joint ventures in which we have investments on a
regular basis to assess compliance with debt covenants. For those joint ventures
not in compliance with the debt covenants, we evaluate and assess possible
impairment of our investment.
Our arrangements with joint ventures generally do not restrict our activities or
those of the other participants. However, in certain instances, we agree not to
engage in some types of activities that may be viewed as competitive with the
activities of these ventures in the localities where the joint ventures do
business.
As discussed above, the joint ventures in which we invest generally supplement
equity contributions with third-party debt to finance their activities. In some
instances, the debt financing is non-recourse, thus neither we nor the other
equity partners are a party to the debt instruments. In other cases, we and the
other partners agree to provide credit support in the form of repayment or
maintenance guarantees.
Material contractual obligations of our unconsolidated joint ventures primarily
relate to the debt obligations described above. The joint ventures generally do
not enter into lease commitments because the entities are managed either by us,
or another of the joint venture participants, who supply the necessary
facilities and employee services in exchange for market-based management fees.
However, they do enter into management contracts with the participants who
manage them. Some joint ventures also enter into agreements with developers,
which may be us or other joint venture participants, to develop raw land into
finished homesites or to build homes.
The joint ventures often enter into option or purchase agreements with buyers,
which may include us or other joint venture participants, to deliver homesites
or parcels in the future at market prices. Option deposits are recorded by the
joint ventures as liabilities until the exercise dates at which time the deposit
and remaining exercise proceeds are recorded as revenue. Any forfeited deposit
is recognized as revenue at the time of forfeiture. Our unconsolidated joint
ventures generally do not enter into off-balance sheet arrangements.
As described above, the liquidity needs of joint ventures in which we have
investments vary on an entity-by-entity basis depending on each entity's purpose
and the stage in its life cycle. During formation and development activities,
the entities generally require cash, which is provided through a combination of
equity contributions and debt financing, to fund acquisition and development of
properties. As the properties are completed and sold, cash generated is
available to repay debt and for distribution to the joint ventures' members.
Thus, the amount of cash available for a joint venture to distribute at any
given time is primarily a function of the scope of the joint venture's
activities and the stage in the joint venture's life cycle.
We track our share of cumulative earnings and cumulative distributions of our
joint ventures. For purposes of classifying distributions received from joint
ventures in our statements of cash flows, cumulative distributions are treated
as returns on capital to the extent of cumulative earnings and included in our
consolidated statements of cash flows as cash flow from operating activities.
Cumulative distributions in excess of our share of cumulative earnings are
treated as returns of capital and included in our consolidated statements of
cash flows as cash flows from investing activities.
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Summarized financial information on a combined 100% basis related to Homebuilding's unconsolidated entities that are accounted for by the equity method was as follows: Statements of Operations and Selected Information
Years Ended November 30,
(Dollars in thousands) 2019 2018
Revenues $ 303,963 522,811
Costs and expenses 401,396 720,849
Other income, net (1) 78,406 120,620
Net loss of unconsolidated entities (1) $ (19,027 ) (77,418 )
Homebuilding equity in loss from unconsolidated entities (1) $ (13,273 ) (90,209 )
Homebuilding cumulative share of net earnings - deferred at
November 30 $ 26,499 35,233
Homebuilding investments in unconsolidated entities (2)
870,201
Equity of the unconsolidated entities$ 4,213,756
4,041,666
Homebuilding investment % in the unconsolidated entities (3) 24
% 22 %
(1) During the year ended
attributable to a
consideration recorded by one Homebuilding unconsolidated entity, of which
our pro-rata share was
2018, other income was primarily due to FivePoint recording income resulting
from the Tax Cuts and Jobs Act of 2017's reduction in its corporate tax rate
to reduce its liability pursuant to its tax receivable agreement ("TRA
Liability") with its non-controlling interests. However, we have a 70%
interest in the FivePoint TRA Liability. Therefore, we did not include inHomebuilding's equity in loss from unconsolidated entities our pro-rata share
of earnings related to our portion of the TRA Liability. As a result, our
unconsolidated entities have net losses, but we have a higher equity in loss
from unconsolidated entities.
(2) Does not include the
unconsolidated entity as it was reclassed to other liabilities as of
(3) Our share of profit and cash distributions from operations could be higher
compared to our ownership interest in unconsolidated entities if certain
specified internal rate of return or cash flow milestones are achieved.
For the year endedNovember 30, 2019 , Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of net operating losses from our unconsolidated entities. For the year endedNovember 30, 2018 , Homebuilding equity in loss from unconsolidated entities was primarily attributable to our share of net operating losses from our unconsolidated entities which were primarily driven by valuation adjustments related to assets of Homebuilding's unconsolidated entities and general and administrative expenses, partially offset by profits from land sales. Balance Sheets November 30, (In thousands) 2019 2018 Assets: Cash and cash equivalents$ 602,480 781,833 Inventories 4,514,885 4,291,470 Other assets 1,007,698 1,045,274$ 6,125,063 6,118,577 Liabilities and equity: Accounts payable and other liabilities$ 816,719 874,355 Debt (1) 1,094,588 1,202,556 Equity 4,213,756 4,041,666$ 6,125,063 6,118,577
(1) Debt is net of debt issuance costs of
related to the consolidation of a previously unconsolidated entity during the
year ended
As ofNovember 30, 2019 and 2018, our recorded investments in Homebuilding unconsolidated entities were$1.0 billion and$870.2 million , respectively, while the underlying equity in Homebuilding unconsolidated entities partners' net assets as ofNovember 30, 2019 and 2018 was$1.3 billion and$1.2 billion , respectively. The basis difference was primarily as a result of us contributing our investment in three strategic joint ventures with a higher fair value than book value for an 40
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investment in the FivePoint entity and deferring equity in earnings on land sales to us. Included in our recorded investments in Homebuilding unconsolidated entities is our 40% ownership of FivePoint. As ofNovember 30, 2019 and 2018, the carrying amount of our investment was$374.0 million and$342.7 million , respectively. The Homebuilding unconsolidated entities in which we have investments usually finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities. Debt to total capital of the Homebuilding unconsolidated entities in which we have investments was calculated as follows: November 30, (Dollars in thousands) 2019 2018 Debt$ 1,094,588 1,202,556 Equity 4,213,756 4,041,666 Total capital$ 5,308,344 5,244,222
Debt to total capital of our Homebuilding unconsolidated entities
20.6 % 22.9 %
Our investments in Homebuilding unconsolidated entities by type of venture were
as follows:
November 30,
(In thousands) 2019 2018
Land development $ 923,769 805,678
Homebuilding 85,266 64,523
Total investments (1)
(1) Does not include the
unconsolidated entity as it was reclassed to other liabilities as of
Indebtedness of an unconsolidated entity is secured by its own assets. Some
unconsolidated entities own multiple properties and other assets. There is no
cross collateralization of debt of different unconsolidated entities. We also do
not use our investment in one unconsolidated entity as collateral for the debt
of another unconsolidated entity or commingle funds among Homebuilding
unconsolidated entities.
In connection with loans to a Homebuilding unconsolidated entity, we and our
partners often guarantee to a lender, either jointly and severally or on a
several basis, any or all of the following: (i) the completion of the
development, in whole or in part, (ii) indemnification of the lender from
environmental issues, (iii) indemnification of the lender from "bad boy acts" of
the unconsolidated entity (or full recourse liability in the event of an
unauthorized transfer or bankruptcy) and (iv) that the loan to value and/or loan
to cost will not exceed a certain percentage (maintenance or remargining
guarantee) or that a percentage of the outstanding loan will be repaid
(repayment guarantee).
The total debt of the Homebuilding unconsolidated entities in which we have
investments, including Lennar's maximum recourse exposure, was as follows:
November 30,
(Dollars in thousands) 2019
2018
Non-recourse bank debt and other debt (partner's share of several recourse)
$ 52,007
48,313
Non-recourse debt with completion guarantees 219,558
239,568
Non-recourse debt without completion guarantees 825,192
861,371
Non-recourse debt to Lennar 1,096,757
1,149,252
Lennar's maximum recourse exposure (1) 10,787 65,707 Debt issuance costs$ (12,956 ) (12,403 ) Total debt$ 1,094,588 1,202,556 Lennar's maximum recourse exposure as a % of total JV debt 1 %
5 %
(1) As of
related to us providing a repayment guarantee on two and four unconsolidated
entities' debt, respectively. The decrease in maximum recourse exposure and
total debt was primarily related to the consolidation of a previously
unconsolidated entity during the year ended November 30, 2019 .
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During the year endedNovember 30, 2019 , our maximum recourse exposure related to indebtedness of the Homebuilding unconsolidated entities decreased by$54.9 million , primarily attributable to the consolidation of a previously unconsolidated entity. The recourse debt exposure in the previous table represents our maximum exposure to loss from guarantees and does not take into account the underlying value of the collateral or the other assets of the borrowers that are available to repay debt or to reimburse us for any payments on our guarantees. In addition, in most instances in which we have guaranteed debt of a Homebuilding unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payment. In a repayment guarantee, we and our venture partners guarantee repayment of a portion or all of the debt in the event of a default before the lender would have to exercise its rights against the collateral. 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 generally constitute a capital contribution or loan to the Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes. In connection with many of the loans to Homebuilding unconsolidated entities, we and our joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. If we are required to make a payment under any guarantee, the payment would generally constitute a capital contribution or loan to the Homebuilding unconsolidated entity and increase our share of any funds the unconsolidated entity distributes. As of bothNovember 30, 2019 and 2018, the fair values of the repayment, maintenance and completion guarantees were not material. We believe that as ofNovember 30, 2019 , in the event we become legally obligated to perform under a guarantee of the obligation of a Homebuilding unconsolidated entity due to a triggering event under a guarantee, the collateral is expected to be sufficient to repay at least a significant portion of the obligation or we and our partners would contribute additional capital into the venture. In certain instances, we have placed performance letters of credit and surety bonds with municipalities for our joint ventures (see Note 7 of the notes to our consolidated financial statements). If credit market conditions were to decline, it would not be uncommon for lenders and/or real estate developers, including joint ventures in which we have interests, to assert non-monetary defaults (such as failure to meet construction completion deadlines or declines in the market value of collateral below required amounts) or technical monetary defaults against the real estate developers. In most instances, those asserted defaults are resolved by modifications of the loan terms, additional equity investments or other concessions by the borrowers. In addition, in some instances, real estate developers, including joint ventures in which we have interests, are forced to request temporary waivers of covenants in loan documents or modifications of loan terms, which are often, but not always obtained. However, in some instances developers, including joint ventures in which we have interests, are not able to meet their monetary obligations to lenders, and are thus declared in default. Because we sometimes guarantee all or portions of the obligations to lenders of joint ventures in which we have interests, when these joint ventures default on their obligations, lenders may or may not have claims against us. Normally, we do not make payments with regard to guarantees of joint venture obligations while the joint ventures are contesting assertions regarding sums due to their lenders. When it is determined that a joint venture is obligated to make a payment that we have guaranteed and the joint venture will not be able to make that payment, we accrue the amounts probable to be paid by us as a liability. Although we generally fulfill our guarantee obligations within a reasonable time after we determine that we are obligated with regard to them, at any point in time it is possible that we will have some balance of unpaid guarantee liability. At bothNovember 30, 2019 and 2018, we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our consolidated balance sheets. 42
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The following table summarizes the principal maturities of our Homebuilding
unconsolidated entities ("JVs") debt as per current debt arrangements as of
November 30, 2019 and it does not represent estimates of future cash payments
that will be made to reduce debt balances. Many JV loans have extension options
in the loan agreements that would allow the loans to be extended into future
years.
Principal Maturities of Homebuilding Unconsolidated JVs Debt by Period
Total JV
(In thousands) Debt 2020 2021 2022 Thereafter Other
Maximum recourse debt
exposure to Lennar $ 10,787 - 4,521 6,266 - -
Debt without recourse to
Lennar 1,096,757 136,002 258,402 54,789 647,564 -
Debt issuance costs (12,956 ) - - - - (12,956 )
Total $ 1,094,588 136,002 262,923 61,055 647,564 (12,956 )
The table below indicates the assets, debt and equity of our 10 largest
Homebuilding unconsolidated joint venture investments by the carrying value of
Lennar's investment as of
Maximum Total
Recourse Debt JV Debt
Debt Without to Total
(Dollars in Lennar's Total JV Exposure Recourse Total JV Total JV Capital
thousands) Investment Assets to Lennar toLennar Debt Equity Ratio
FivePoint$ 373,959 2,996,792 - 625,000 625,000 1,889,256 25 % Dublin Crossings 78,124 242,900 - - - 218,569 - % Heritage Fields El Toro 45,131 1,180,669 - 5,919 5,919 1,025,485 1 % Hawk Land Investors 43,254 5,714 - - - 5,609 - % SC East Landco 41,979 114,951 - 15,820 15,820 99,737 14 % Greenbriar Investor 40,000 91,798 - 38,243 38,243 52,187 42 % BHCSP 37,525 110,168 4,521 31,650 36,171 63,562 36 %Mesa Canyon Community Partners 37,367 150,653 - 39,500 39,500 111,255 26 % E.L. Urban Communities 37,002 53,147 - 25,316 25,316 24,376 51 % Runkle Canyon 32,990 66,137 - - - 65,979 - % 10 largest JV investments (1) 767,331 5,012,929 4,521 781,448 785,969 3,556,015 18 % Other JVs 241,704 1,112,134 6,266 315,309 321,575 657,741 33 % Total$ 1,009,035 6,125,063 10,787 1,096,757 1,107,544 4,213,756 21 %
Debt issuance costs - (12,956 ) (12,956 ) Total JV debt 10,787 1,083,801 1,094,588
(1) The 10 largest joint ventures by the carrying value of Lennar's investment
presented above represent the majority of total JVs assets and equity, 42% of
total JV maximum recourse debt exposure to Lennar and 71% of total JV debt
without recourse to Lennar. The joint ventures listed are included in the
Homebuilding West segment, except FivePoint, Heritage
LLC which is in Homebuilding East.
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Multifamily - Investments in Unconsolidated Entities AtNovember 30, 2019 , Multifamily had equity investments in 19 unconsolidated entities that are engaged in multifamily residential developments (of which 8 had non-recourse debt and 11 had no debt), compared to 22 unconsolidated entities atNovember 30, 2018 . We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in selectU.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners' capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners. LMV I is a long-term multifamily development investment vehicle involved in the development, construction and property management of class-A multifamily assets with$2.2 billion in equity commitments, including a$504 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. LMV I has 39 multifamily assets totaling approximately 11,700 apartments with projected project costs of$4.1 billion as ofNovember 30, 2019 . There are 27 completed and operating multifamily assets with 7,950 apartments. During the year endedNovember 30, 2019 ,$184.7 million in equity commitments were called, of which we contributed$44.7 million . During the year endedNovember 30, 2019 , we received$35.5 million of distributions as a return of capital from LMV I. As ofNovember 30, 2019 ,$2.1 billion of the$2.2 billion in equity commitments had been called, of which we had contributed$485.5 million representing our pro-rata portion of the called equity, resulting in a remaining equity commitment for us of$18.5 million . As ofNovember 30, 2019 and 2018, the carrying value of our investment in LMV I was$371.0 million and$383.4 million , respectively. InMarch 2018 , our Multifamily segment completed the first closing of a second Multifamily Venture, LMV II, for the development, construction and property management of class-A multifamily assets. InJune 2019 , our Multifamily segment completed the final closing of LMV II which has approximately$1.3 billion of equity commitments, including a$381 million co-investment commitment by us comprised of cash, undeveloped land and preacquisition costs. As of and for the year endedNovember 30, 2019 ,$330.2 million in equity commitments were called, of which we contributed our portion of$94.1 million , which was made up of$191.0 million in inventory and cash contributions, offset by$96.9 million of distributions as a return of capital, resulting in a remaining equity commitment for us of$205.7 million . As ofNovember 30, 2019 ,$582.3 of the$1.3 billion in equity had been called. As ofNovember 30, 2019 and 2018, the carrying value of our investment in LMV II was$153.3 million and$63.0 million , respectively. The difference between our net contributions and the carrying value of our investments was related to a basis difference. As ofNovember 30, 2019 , LMV II included 16 undeveloped multifamily assets totaling approximately 5,600 apartments with projected project costs of approximately$2.4 billion . The joint ventures are typically structured through non-corporate entities in which control is shared with our venture partners. Each joint venture is unique in terms of its funding requirements and liquidity needs. We and the other joint venture participants typically make pro-rata cash contributions to the joint venture except for cost over-runs relating to the construction of the project. In all cases, we have been required to provide guarantees of completion and cost over-runs to the lenders and partners. These completion guarantees may require us to complete the improvements for which the financing was obtained. Therefore, our risk is limited to our equity contribution, draws on letters of credit and potential future payments under the guarantees of completion and cost over-runs. In certain instances, payments made under the cost over-run guarantees are considered capital contributions. Additionally, the joint ventures obtain third-party debt to fund a portion of the acquisition, development and construction costs of the rental projects. The joint venture agreements usually permit, but do not require, the joint ventures to make additional capital calls in the future. However, the joint venture debt does not have repayment or maintenance guarantees. Neither we nor the other equity partners are a party to the debt instruments. In some cases, we agree to provide credit support in the form of a letter of credit provided to the bank. We regularly monitor the results of our unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants atNovember 30, 2019 . Under the terms of our joint venture agreements, we generally have the right to share in earnings and distributions of the entities on a pro-rata basis based on our ownership percentages. Most joint venture agreements provide for a different allocation of profit and cash distributions if and when the cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). In many instances, we are designated as the development manager and/or the general contractor and/or the property manager of the unconsolidated entity and receive fees for such services. In addition, we generally do not plan to enter into purchase contracts to acquire rental properties from our Multifamily joint ventures. 44
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Our arrangements with joint ventures generally do not restrict our activities or
those of the other participants. However, in certain instances, we agree not to
engage in some types of activities that may be viewed as competitive with the
activities of these ventures in the localities where the joint ventures do
business.
Material contractual obligations of our unconsolidated joint ventures primarily
relate to the debt obligations described above. The joint ventures generally do
not enter into lease commitments because the entities are managed either by us
or the other partners, who supply the necessary facilities and employee services
in exchange for market-based management fees. However, they do enter into
management contracts with the participants who manage them.
As described above, the liquidity needs of joint ventures in which we have
investments vary on an entity-by-entity basis depending on each entity's purpose
and the stage in its life cycle. During formation and development activities,
the entities generally require cash, which is provided through a combination of
equity contributions and debt financing, to fund acquisition, development and
construction of multifamily rental properties. As the properties are completed
and sold, cash generated will be available to repay debt and for distribution to
the joint venture's members. Thus, the amount of cash available for a joint
venture to distribute at any given time is primarily a function of the scope of
the joint venture's activities and the stage in the joint venture's life cycle.
Summarized financial information on a combined 100% basis related to
Multifamily's investments in unconsolidated entities that are accounted for by
the equity method was as follows:
Balance Sheets
November 30,
(In thousands) 2019 2018
Assets:
Cash and cash equivalents $ 74,726 61,571Operating properties and equipment 4,618,518 3,708,613 Other assets
66,960 40,899
$ 4,760,204 3,811,083
Liabilities and equity:
Accounts payable and other liabilities $ 212,706 199,119
Notes payable (1) 2,113,696 1,381,656
Equity 2,433,802 2,230,308
$ 4,760,204 3,811,083
(1) Notes payable are net of debt issuance costs of
million, for the years ended
The following table summarizes the principal maturities of our Multifamily unconsolidated entities debt as per current debt arrangements as ofNovember 30, 2019 and does not represent estimates of future cash payments that will be made to reduce debt balances. Principal Maturities of
Multifamily Unconsolidated JVs Debt by Period
Total JV
(In thousands) Debt 2020 2021 2022 Thereafter Other
Debt without recourse to Lennar $ 2,140,507 470,839 459,534 291,622 918,512 -
Debt issuance costs (26,811 ) - - - - (26,811 )
Total $ 2,113,696 470,839 459,534 291,622 918,512 (26,811 )
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Statements of Operations and Selected Information
Years Ended November 30,
(Dollars in thousands) 2019 2018
Revenues $ 170,598 117,985
Costs and expenses 247,207 172,089
Other income, net 54,578 93,778
Net earnings (loss) of unconsolidated entities $ (22,031 ) 39,674 Multifamily equity in earnings from unconsolidated entities and other gain (1)
$ 11,294
51,322
Our investments in unconsolidated entities$ 561,190
481,129
Equity of the unconsolidated entities$ 2,433,802
2,230,308
Our investment % in the unconsolidated entities (2) 23
% 22 %
(1) During the year ended
through its unconsolidated entities, two operating properties and an
investment in an operating property resulting in the segment's
share of gains. The gain of
investment in an operating property and recognition of our share of deferred
development fees that were capitalized at the joint venture level are
included in Multifamily equity in earnings (loss) from unconsolidated
entities and other gain, and are not included in net earnings (loss) of
unconsolidated entities. During the year ended November 30, 2018 , ourMultifamily segment sold, through its unconsolidated entities six operating
properties and an investment in an operating property resulting in the
segment's
on the sale of the investment in an operating property and recognition of our
share of deferred development fees that were capitalized at the joint venture
level are included in Multifamily equity in earnings from unconsolidated
entities and other gain, and are not included in net earnings of
unconsolidated entities.
(2) Our share of profit and cash distributions from sales of operating properties
could be higher compared to our ownership interest in unconsolidated entities
if certain specified internal rate of return milestones are achieved.
Lennar Other - Investments in Unconsolidated Entities We sold ourRialto Management Group onNovember 30, 2018 . We retained our fund investments along with our carried interests in various Rialto funds and investments in other Rialto balance sheet assets. Our limited partner investments in Rialto funds and investment vehicles totaled$236.7 million atNovember 30, 2019 . We are committed to invest as much as an additional$13.1 million in Rialto funds. As part of the sale of the Rialto investment and asset management platform, we retained our ability to receive a portion of payments with regard to carried interests if funds meet specified performance thresholds. We will periodically receive advance distributions related to the carried interests in order to cover income tax obligations resulting from allocations of taxable income to the carried interests. These distributions are not subject to clawbacks but will reduce future carried interest payments to which we become entitled from the applicable funds and have been recorded as revenues. Advanced and carried interest distributions received during the years endedNovember 30, 2019 and 2018 were$29.7 million and$25.5 million , respectively. The following table represents amounts we would have received had the funds ceased operations and hypothetically liquidated all their investments at their estimated fair values onNovember 30, 2019 , both gross and net of amounts already received as advanced tax distributions. The actual amounts we may receive could be materially different from amounts presented in the table below. Hypothetical Paid as Paid as Carried Hypothetical Advanced Tax Carried Interest, Net (In thousands) Carried Interest Distribution Interest (2) Rialto Real Estate Fund, LP (1)$ 185,335 52,711 55,313 77,311 Rialto Real Estate Fund II, LP (1) 38,268 18,578 417 19,273 Rialto Real Estate Fund III, LP (1) 88,746 18,151 - 70,595$ 312,349 89,440 55,730 167,179
(1) Gross of interests of participating employees (refer to note below).
(2) Rialto previously adopted carried interest plans under which we and
participating employees will receive 60% and 40%, respectively, of carried
interest payments, net of expenses, received by entities that are general
partners of a number of Rialto funds or other investment vehicles. When
distributions of carried interest payments received from funds that existed
at the time of the sale.
Rialto previously adopted carried interest plans under which we and participating employees will receive 60% and 40%, respectively, of carried interest payments, net of expenses, received by entities that are general partners of a number of Rialto funds or other investment vehicles. WhenRialto Management Group was sold, we retained our right to receive 60% of the distributions of carried interest payments received from funds that existed at the time of the sale. 46
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In recent years, we have invested in technology companies that are looking to improve the homebuilding and financial services industries in order to better serve our customers and increase efficiencies. In connection with our strategic technology initiatives, atNovember 30, 2019 and 2018, we had strategic equity investments in 17 and nine unconsolidated entities, respectively, which totaled$167.0 million and$126.7 million , respectively. Option Contracts We often obtain access to land through option contracts, which generally enable us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the options. In fiscal year 2020 and beyond, we anticipate increasing the percentage of our total homesites that we control through options rather than own. The table below indicates the number of homesites owned and homesites to which we had access through option contracts with third parties ("optioned") or unconsolidated JVs (i.e., controlled homesites) atNovember 30, 2019 and 2018: Controlled Homesites Owned Total November 30, 2019 Optioned JVs Total Homesites Homesites East 39,136 16,613 55,749 77,150 132,899 Central 7,102 132 7,234 30,922 38,156 Texas 21,766 - 21,766 36,443 58,209 West 8,144 3,267 11,411 62,424 73,835 Other 5,739 2,311 8,050 2,093 10,143 Total homesites 81,887 22,323 104,210 209,032 313,242 % of total homesites 33 % 67 % Controlled Homesites Owned Total November 30, 2018 Optioned JVs Total Homesites Homesites East 25,699 3,482 29,181 72,367 101,548 Central 5,837 - 5,837 31,684 37,521 Texas 18,890 - 18,890 31,733 50,623 West 8,863 4,576 13,439 62,732 76,171 Other - 1,276 1,276 3,132 4,408 Total homesites 59,289 9,334 68,623 201,648 270,271 % of total homesites 25 % 75 % We evaluate all option contracts for land to determine whether they are variable interest entities ("VIEs") and, if so, whether we are the primary beneficiary of certain of these option contracts. Although we do not have legal title to the optioned land, if we are deemed to be the primary beneficiary or make a significant deposit for optioned land, we may need to consolidate the land under option at the purchase price of the optioned land. During the year endedNovember 30, 2019 , consolidated inventory not owned increased by$104.2 million with a corresponding increase to liabilities related to consolidated inventory not owned in the accompanying consolidated balance sheet as ofNovember 30, 2019 . The increase was primarily related to the consolidation of option contracts, partially offset by us exercising our options to acquire land under previously consolidated contracts. To reflect the purchase price of the inventory consolidated, we had a net reclass related to option deposits from consolidated inventory not owned to land under development in the accompanying consolidated balance sheet as ofNovember 30, 2019 . The liabilities related to consolidated inventory not owned primarily represent the difference between the option exercise prices for the optioned land and our cash deposits. Our exposure to loss related to our option contracts with third parties and unconsolidated entities consisted of our non-refundable option deposits and pre-acquisition costs totaling$320.5 million and$209.5 million atNovember 30, 2019 and 2018, respectively. Additionally, we had posted$75.0 million and$72.4 million of letters of credit in lieu of cash deposits under certain land and option contracts as ofNovember 30, 2019 and 2018, respectively. 47
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Contractual Obligations and Commercial Commitments
The following table summarizes certain of our contractual obligations at
Payments Due by Period
Less than 1 to 3 3 to 5 More than
(In thousands) Total 1 year years years 5 years
Homebuilding - Senior notes and
other debts payable (1) $ 7,728,821 1,055,076 2,891,119 1,595,544 2,187,082
Financial Services - Notes and other
debts payable 1,745,755 1,452,879 138,158 - 154,718
Multifamily - Note payable 36,125 36,125 - - -
Lennar Other - Notes and other debts
payable 15,178 15,178 - - -
Interest commitments under interest
bearing debt (2) 1,502,096 374,642 540,491 342,603 244,360
Operating leases 185,027 41,952 72,216 38,950 31,909 Other contractual obligations (3) 237,388 195,805 41,583
- -
Total contractual obligations (4)
(1) The amounts presented in the table above exclude debt issuance costs and any
discounts/premiums and purchase accounting adjustments.
(2) Interest commitments on variable interest-bearing debt are determined based
on the interest rate as of
(3) Amounts include
to fund the LMV I and LMV II, respectively, for future expenditures related
to the construction and development of the projects and
commitments to Rialto funds.
(4) Total contractual obligations exclude our gross unrecognized tax benefits and
accrued interest and penalties totaling
2019, because we are unable to make reasonable estimates as to the period of
cash settlement with the respective taxing authorities.
We are subject to the usual obligations associated with entering into contracts (including option contracts) for the purchase, development and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land generally enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether to exercise our options. This reduces our financial risk and costs of capital associated with land holdings. AtNovember 30, 2019 , we had access to 104,210 homesites through option contracts with third parties and unconsolidated entities in which we have investments. AtNovember 30, 2019 , we had$320.5 million of non-refundable option deposits and pre-acquisition costs related to certain of these homesites and had posted$75.0 million of letters of credit in lieu of cash deposits under certain land and option contracts. AtNovember 30, 2019 , we had letters of credit outstanding in the amount of$899.9 million (which included the$75.0 million of letters of credit discussed above). These letters of credit are generally posted either with regulatory bodies to guarantee our performance of certain development and construction activities, or in lieu of cash deposits on option contracts, for insurance risks, credit enhancements and as other collateral. Additionally, atNovember 30, 2019 , we had outstanding surety bonds of$2.9 billion including performance surety bonds related to site improvements at various projects (including certain projects of our joint ventures) and financial surety bonds. Although significant development and construction activities have been completed related to these site improvements, these bonds are generally not released until all of the development and construction activities are completed. As ofNovember 30, 2019 , there were approximately$1.4 billion , or 48%, of anticipated future costs to complete related to these site improvements. We do not presently anticipate any draws upon these bonds or letters of credit, but if any such draws occur, we do not believe they would have a material effect on our financial position, results of operations or cash flows. Our Financial Services segment had a pipeline of loan applications in process of$3.5 billion atNovember 30, 2019 . Loans in process for which interest rates were committed to the borrowers totaled approximately$542 million as ofNovember 30, 2019 . Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements. Our Financial Services segment uses mandatory mortgage-backed securities ("MBS") forward commitments, option contracts, futures contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts, futures contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and the option contracts. AtNovember 30, 2019 , we had open commitments amounting to$1.7 billion to sell MBS with varying settlement dates throughFebruary 2020 and there were no open futures contracts. 48
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The following sections discuss market and financing risk, seasonality and interest rates and changing prices that may have an impact on our business: Market and Financing Risk We finance our contributions to JVs, land acquisition and development activities, construction activities, financial services activities, Multifamily activities and general operating needs primarily with cash generated from operations, debt and equity issuances, as well as borrowings under our Credit Facility and warehouse repurchase facilities. We also purchase land under option agreements, which enables us to control homesites until we have determined whether to exercise the options. We try to manage the financial risks of adverse market conditions associated with land holdings by what we believe to be prudent underwriting of land purchases in areas we view as desirable growth markets, careful management of the land development process and limitation of risks by using partners to share the costs of purchasing and developing land as well as obtaining access to land through option contracts. Although we believed our land underwriting standards were conservative, we did not anticipate the severe decline in land values and the sharply reduced demand for new homes encountered in the prior economic downturn. Interest Rates and Changing Prices Inflation can have a long-term impact on us because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and increase the costs of financing land development activities and housing construction. Rising interest rates as well as increased material and labor costs, may reduce gross margins. An increase in materials and labor costs is particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations. New Accounting Pronouncements See Note 1 of the notes to our consolidated financial statements for a comprehensive list of new accounting pronouncements. Critical Accounting Policies and Estimates Our accounting policies are more fully described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. As discussed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements. Listed below are those policies and estimates that we believe are critical and require the use of significant judgment in their application. Business Acquisitions In accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations ("ASC 805"), we account for business acquisitions by allocating the purchase price of the transaction to the estimated fair values of the assets acquired and liabilities assumed. Any amount of the purchase price over the estimated fair value of the identifiable net assets acquired is recorded as goodwill. We believe that the accounting estimate for business combinations is a critical accounting estimate because of the judgment required in assessing the fair value of the assets acquired and liabilities assumed. We develop our estimate of fair value through various valuation methods, including the use of discounted expected future cash flows based on market-based assessments. These assessments are based on current market valuations as well as the current and anticipated future economic conditions in each of our markets. Given these estimates and assumptions of cash flows are based on market conditions that are inherently uncertain, changes in the accuracy of the estimates and assumptions could be affected.Goodwill We have recorded a significant amount of goodwill in connection with the recent acquisition ofCalAtlantic . We record goodwill associated with acquisitions of businesses when the purchase price of the business exceeds the fair value of the net tangible and identifiable assets acquired. In accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC 350"), we evaluate goodwill for potential impairment on at least an annual basis. We evaluate potential impairment by comparing the carrying value of each of our reporting units to their estimated fair values. We believe that the accounting estimate for goodwill is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit. The expected future cash flows for each segment are significantly impacted by current market conditions. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results 49
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for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill represents our best estimate of future events. Homebuilding and Multifamily Operations Homebuilding Revenue Recognition Homebuilding revenues and related profits from sales of homes are recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the homebuyer. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Cash proceeds from home closings held in escrow for our benefit, typically for approximately three days, are included in Homebuilding cash and cash equivalents in the Consolidated Balance Sheets and disclosed in the notes to consolidated balance sheets. Contract liabilities include customer deposits liabilities related to sold but undelivered homes that are included in other liabilities in the Consolidated Balance Sheets. We periodically elect to sell parcels of land to third parties. Cash consideration from land sales is typically due on the closing date, which is generally when performance obligations are satisfied and revenue is recognized as title to and possession of the property are transferred to the buyer. Multifamily Revenue Recognition Our Multifamily segment provides management services with respect to the development, construction and property management of rental projects in joint ventures in which we have investments. As a result, our Multifamily segment earns and receives fees, which are generally based upon a stated percentage of development and construction costs and a percentage of gross rental collections. These fees are recorded over the period in which the services are performed using an input method, which properly depicts the level of effort required to complete the management services. In addition, our Multifamily segment provides general contractor services for the construction of some of its rental projects and recognizes the revenue over the period in which the services are performed using an input method, which properly depicts the level of effort required to complete the construction services. These customer contracts require us to provide management and general contractor services which represents a performance obligation that we satisfy over time. Management fees and general contractor services in the Multifamily segment are included in Multifamily revenue. Inventories Inventories are stated at cost unless the inventory within a community is determined to be impaired, in which case the impaired inventory is written down to fair value. Inventory costs include land, land development and home construction costs, real estate taxes, deposits on land purchase contracts and interest related to development and construction. We review our inventory for indicators of impairment by evaluating each community during each reporting period. The inventory within each community is categorized as finished homes and construction in progress or land under development based on the development state of the community. There were 1,278 and 1,324 active communities, excluding unconsolidated entities, as ofNovember 30, 2019 and 2018, respectively. If the undiscounted cash flows expected to be generated by a community are less than its carrying amount, an impairment charge is recorded to write down the carrying amount of such community to its estimated fair value. In conducting our review for indicators of impairment on a community level, we evaluate, among other things, the margins on homes that have been delivered, margins on homes under sales contracts in backlog, projected margins with regard to future home sales over the life of the community, projected margins with regard to future land sales, and the estimated fair value of the land itself. We pay particular attention to communities in which inventory is moving at a slower than anticipated absorption pace and communities whose average sales price and/or margins are trending downward and are anticipated to continue to trend downward. From this review, we identify communities in which to assess if the carrying values exceed their undiscounted cash flows. We estimate the fair value of our communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above. Each of the homebuilding markets in which we operate is unique, as homebuilding has historically been a local business driven by local market conditions and demographics. Each of our homebuilding markets has specific supply and demand relationships reflective of local economic conditions. Our projected cash flows are impacted by many assumptions. Some of the most critical assumptions in our cash flow models are our projected absorption pace for home sales, sales prices and costs to build and deliver our homes on a community by community basis. In order to arrive at the assumed absorption pace for home sales and the assumed sales prices included in our cash flow model, we analyze our historical absorption pace and historical sales prices in the community and in other comparable 50
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communities in the geographical area. In addition, we consider internal and
external market studies and place greater emphasis on more current metrics and
trends, which generally include, but are not limited to, statistics and
forecasts on population demographics and on sales prices in neighboring
communities, unemployment rates and availability and sales price of competing
product in the geographical area where the community is located as well as the
absorption pace realized in our most recent quarters and the sales prices
included in our current backlog for such communities.
Generally, if we notice a variation from historical results over a span of two
fiscal quarters, we consider such variation to be the establishment of a trend
and adjust our historical information accordingly in order to develop
assumptions on the projected absorption pace and sales prices in the cash flow
model for a community.
In order to arrive at our assumed costs to build and deliver our homes, we
generally assume a cost structure reflecting contracts currently in place with
our vendors adjusted for any anticipated cost reduction initiatives or increases
in cost structure. Those costs assumed are used in our cash flow models for our
communities.
Since the estimates and assumptions included in our cash flow models are based
upon historical results and projected trends, they do not anticipate unexpected
changes in market conditions or strategies that may lead to us incurring
additional impairment charges in the future.
Using all the available information, we calculate our best estimate of projected
cash flows for each community. While many of the estimates are calculated based
on historical and projected trends, all estimates are subjective and change from
market to market and community to community as market and economic conditions
change. The determination of fair value also requires discounting the estimated
cash flows at a rate we believe a market participant would determine to be
commensurate with the inherent risks associated with the assets and related
estimated cash flow streams. The discount rate used in determining each asset's
fair value depends on the community's projected life and development stage.
We estimate the fair value of inventory evaluated for impairment based on market
conditions and assumptions made by management at the time the inventory is
evaluated, which may differ materially from actual results if market conditions
or our assumptions change. For example, changes in market conditions and other
specific developments or changes in assumptions may cause us to re-evaluate our
strategy regarding previously impaired inventory, as well as inventory not
currently impaired but for which indicators of impairment may arise if market
deterioration occurs, and certain other assets that could result in further
valuation adjustments and/or additional write-offs of option deposits and
pre-acquisition costs due to abandonment of those options contracts.
We also have access to land inventory through option contracts, which generally
enables us to defer acquiring portions of properties owned by third parties and
unconsolidated entities until we have determined whether to exercise our
options. A majority of our option contracts require a non-refundable cash
deposit or irrevocable letter of credit based on a percentage of the purchase
price of the land. In determining whether to walk-away from an option contract,
we evaluate the option primarily based upon the expected cash flows from the
property under option.
Our investments in option contracts are recorded at cost unless those
investments are determined to be impaired, in which case our investments are
written down to fair value. We review 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 our
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 us to re-evaluate the likelihood of
exercising our land options.
If we intend to walk-away from an option contract, we record a charge to
earnings in the period such decision is made for the deposit amount and any
related pre-acquisition costs associated with the option contract.
We believe that the accounting related to inventory valuation and impairment is
a critical accounting policy because: (1) assumptions inherent in the valuation
of our inventory are highly subjective and susceptible to change and (2) the
impact of recognizing impairments on our inventory has been and could continue
to be material to our consolidated financial statements. Our evaluation of
inventory impairment, as discussed above, includes many assumptions. The
critical assumptions include the timing of the home sales within a community,
management's projections of selling prices and costs and the discount rate
applied to estimate the fair value of the homesites within a community on the
balance sheet date. Our assumptions on the timing of home sales are critical
because the homebuilding industry has historically been cyclical and sensitive
to changes in economic conditions such as interest rates, credit availability,
unemployment levels and consumer sentiment. Changes in these economic conditions
could materially affect the projected sales price, costs to develop the
homesites and/or absorption rate in a community. Our assumptions on discount
rates are critical because the selection of a discount rate affects the
estimated fair value of the homesites within a community. A higher discount rate
reduces the estimated fair value of the homesites within the community, while a
lower discount rate increases the estimated fair value of the homesites within a
community. Because of changes in economic and market conditions and assumptions
and estimates required of management in valuing inventory
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during changing market conditions, actual results could differ materially from management's assumptions and may require material inventory impairment charges to be recorded in the future. Product Warranty Although we subcontract virtually all aspects of construction to others and our contracts call for the subcontractors to repair or replace any deficient items related to their trades, we are primarily responsible to homebuyers to correct any deficiencies. Additionally, in some instances, we may be held responsible for the actions of or losses incurred by subcontractors. 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 upon historical data and trends with respect to similar product types and geographical areas. We believe the accounting estimate related to the reserve for warranty costs is a critical accounting estimate because the estimate requires a large degree of judgment. AtNovember 30, 2019 , the reserve for warranty costs was$294.1 million , which included$8.2 million of adjustments to pre-existing warranties from changes in estimates during the current year, primarily related to specific claims related to certain of our homebuilding communities and other adjustments. While we believe that the reserve for warranty costs is adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Additionally, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve. Homebuilding, Multifamily and Lennar Other Investments in Unconsolidated Entities We strategically invest in unconsolidated entities that acquire and develop land (1) for our homebuilding operations or for sale to third parties, (2) for construction of homes for sale to third-party homebuyers or (3) for the construction and sale of multifamily rental properties. Our Homebuilding partners generally are unrelated homebuilders, land owners/developers and financial or other strategic partners. Additionally, in recent years, we have invested in technology companies that are looking to improve the homebuilding and financial services industry in order to better serve our customers and increase efficiencies. Our Multifamily partners are all financial partners. Most of the unconsolidated entities through which we acquire and develop land are accounted for by the equity method of accounting because we are not the primary beneficiary or a de-facto agent, and we have a significant, but less than controlling, interest in the entities. We record our investments in these entities in our consolidated balance sheets as Homebuilding, Multifamily or Lennar Other Investments in Unconsolidated Entities and our pro-rata share of the entities' earnings or losses in our consolidated statements of operations as Homebuilding, Multifamily or Lennar Other Equity in Earnings (Loss) from Unconsolidated Entities, as described in Note 5, Note 9 and Note 10 of the notes to our consolidated financial statements. For most unconsolidated entities, we generally have the right to share in earnings and distributions on a pro-rata basis based upon ownership percentages. However, certain Homebuilding unconsolidated entities and all of our Multifamily unconsolidated entities provide for a different allocation of profit and cash distributions if and when cumulative results of the joint venture exceed specified targets (such as a specified internal rate of return). Advances to these entities are included in the investment balance. Management looks at specific criteria and uses its judgment when determining if we are the primary beneficiary of, or have a controlling interest in, an unconsolidated entity. Factors considered in determining whether we have significant influence or we have control include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and continuing involvement. The accounting policy relating to the use of the equity method of accounting is a critical accounting policy due to the judgment required in determining whether the entity is a VIE or a voting interest entity and then whether we are the primary beneficiary or have control or significant influence. We believe that the equity method of accounting is appropriate for our investments in Homebuilding, Multifamily and Lennar Other unconsolidated entities where we are not the primary beneficiary and we do not have a controlling interest, but rather share control with our partners. AtNovember 30, 2019 , the Homebuilding unconsolidated entities in which we had investments had total assets of$6.1 billion and total liabilities of$1.9 billion . AtNovember 30, 2019 , the Multifamily unconsolidated entities in which we had investments had total assets of$4.8 billion and total liabilities of$2.3 billion . We evaluate the long-lived assets in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the fair value of our investment in the unconsolidated entity below its carrying amount has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment's carrying amount over its estimated fair value. The evaluation of our investment in unconsolidated entities for other-than-temporary impairment includes certain critical assumptions: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. 52
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Our assumptions on the projected future distributions from unconsolidated
entities are dependent on market conditions. Specifically, distributions are
dependent on cash to be generated from the sale of inventory by the Homebuilding
unconsolidated entities or operating assets by the Multifamily unconsolidated
entities. Such long-lived assets are also reviewed for potential impairment by
the unconsolidated entities. The unconsolidated entities generally also use a
discount rate of between 10% and 20% in their reviews for impairment, subject to
the perceived risks associated with the community's cash flow streams relative
to its inventory. If a valuation adjustment is recorded by an unconsolidated
entity related to its assets, our proportionate share is reflected in our
Homebuilding or Multifamily equity in earnings (loss) from unconsolidated
entities with a corresponding decrease to our Homebuilding or Multifamily
investment in unconsolidated entities. We believe our assumptions on the
projected future distributions from the unconsolidated entities are critical
because the operating results of the unconsolidated entities from which the
projected distributions are derived are dependent on the status of the
homebuilding industry, which has historically been cyclical and sensitive to
changes in economic conditions such as interest rates, credit availability,
unemployment levels and consumer sentiment. Changes in these economic conditions
could materially affect the projected operational results of the unconsolidated
entities from which the distributions are derived.
Additionally, we evaluate if a decrease in the value of an investment below its
carrying amount is other than-temporary. This evaluation includes certain
critical assumptions made by management and other factors such as age of the
venture, intent and ability for us to recover our investment in the entity,
financial condition and long-term prospects of the unconsolidated entity,
short-term liquidity needs of the unconsolidated entity, trends in the general
economic environment of the land, entitlement status of the land held by the
unconsolidated entity, overall projected returns on investments, defaults under
contracts with third parties (including bank debt), recoverability of the
investment through future cash flows and relationships with the other partners
and banks. If the decline in the fair value of the investment is
other-than-temporary, then these losses are included in Homebuilding other
income, net or Multifamily costs and expenses.
We believe our assumptions on discount rates are critical accounting policies
because the selection of the discount rates affects the estimated fair value of
our investments in unconsolidated entities. A higher discount rate reduces the
estimated fair value of our investments in unconsolidated entities, while a
lower discount rate increases the estimated fair value of our investments in
unconsolidated entities. Because of changes in economic conditions, actual
results could differ materially from management's assumptions and may require
material valuation adjustments to our investments in unconsolidated entities to
be recorded in the future.
Consolidation of Variable Interest Entities
GAAP requires the assessment of whether an entity is a VIE and, if so, if we are
the primary beneficiary at the inception of the entity or at a reconsideration
event. Additionally, 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 VIE's 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.
Our variable interest in VIEs may be in the form of (1) equity ownership,
(2) contracts to purchase assets, (3) management services and development
agreements between us and a VIE, (4) loans provided by us to a VIE or other
partner and/or (5) guarantees provided by members to banks and other third
parties. We examine specific criteria and use our judgment when determining if
we are the primary beneficiary of a VIE. Factors considered in determining
whether we are 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 us and the other partner(s)
and contracts to purchase assets from VIEs.
Generally, all major decision making in our joint ventures is shared among 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 us are nominal and believed to be at market and there is no significant
economic disproportionality between us and other partners. Generally, we
purchase less than a majority of the JV's assets and the purchase prices under
our option contracts are believed to be at market.
Generally, our 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, we continue to fund operations and debt paydowns through
partner loans or substituted capital contributions. The accounting policy
relating to variable interest entities is a critical accounting policy because
the determination of whether an entity is a VIE and, if so, whether we are
primary beneficiary may require us to exercise significant judgment.
Financial Services Operations
Revenue Recognition
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Title premiums on policies issued directly by us are recognized as revenue on
the effective date of the title policies and escrow fees and loan origination
revenues are recognized at the time the related real estate transactions are
completed, usually upon the close of escrow. Revenues from title policies issued
by independent agents are recognized as revenue when notice of issuance is
received from the agent, which is generally when cash payment is received by us.
We believe that the accounting policy related to revenue recognition is a
critical accounting policy because of the significance of revenue.
Loan Origination Liabilities
Substantially all of the loans our Financial Services segment originates are
sold within a short period in the secondary mortgage market on a servicing
released, non-recourse basis. After the loans are sold, we retain potential
liability for possible claims by purchasers that we breached certain limited
industry-standard representations and warranties related to loan sales. Over the
last several years there has been an industry-wide effort by purchasers to
defray their losses by purporting to have found inaccuracies related to sellers'
representations and warranties in particular loan sale agreements. A number of
claims of that type have been brought against us. We do not believe these claims
will have a material adverse effect on our business.
Our mortgage operations have established reserves for possible losses associated
with mortgage loans previously originated and sold to investors. We establish
reserves for such possible losses based upon, among other things, an analysis of
repurchase requests received, an estimate of potential repurchase claims not yet
received and actual past repurchases and losses through the disposition of
affected loans, as well as previous settlements. While we believe that we have
adequately reserved for known losses and projected repurchase requests, given
the volatility in the mortgage industry and the uncertainty regarding the
ultimate resolution of these claims, if either actual repurchases or the losses
incurred resolving those repurchases exceed our expectations, additional
recourse expense may be incurred. This allowance requires management's judgment
and estimates. For these reasons, we believe that the accounting estimate
related to the loan origination losses is a critical accounting estimate.
RMF - Loans Held-for-Sale
The originated mortgage loans are classified as loans held-for-sale and are
recorded at fair value. We elected the fair value option for RMF's loans
held-for-sale in accordance with ASC Topic 825, Financial Instruments, which
permits entities to measure various financial instruments and certain other
items at fair value on a contract-by-contract basis. Changes in fair values of
the loans are reflected in Financial Services' revenues in the accompanying
consolidated statements of operations. Interest income on these loans is
calculated based on the interest rate of the loan and is recorded in Financial
Services' revenues in the accompanying consolidated statements of operations.
Substantially all of the mortgage loans originated are sold within a short
period of time in securitizations on a servicing released, non-recourse basis;
although, we remain liable for certain limited industry-standard representations
and warranties related to loan sales. We recognize revenue on the sale of loans
into securitization trusts when control of the loans has been relinquished.
We believe this is a critical accounting policy due to the significant judgment
involved in estimating the fair values of loans held-for-sale during the period
between when the loans are originated and the time the loans are sold and
because of its significance to our Financial Services' segment.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to a number of market risks in the ordinary course of business.
Our primary market risk exposure relates to fluctuations in interest rates on
our investments, loans held-for-sale, loans held-for-investment and outstanding
variable rate debt.
For fixed rate debt, such as our senior notes, changes in interest rates
generally affect the fair value of the debt instrument, but not our earnings or
cash flows. For variable rate debt such as our unsecured revolving credit
facility and Financial Services' and RMF's warehouse repurchase facilities,
changes in interest rates generally do not affect the fair value of the
outstanding borrowings on the debt facilities, but do affect our earnings and
cash flows.
In our Financial Services operations, we utilize mortgage backed securities
forward commitments, option contracts and investor commitments to protect the
value of rate-locked commitments and loans held-for-sale from fluctuations in
mortgage-related interest rates.
To mitigate interest risk associated with RMF's loans held-for-sale, we use
derivative financial instruments to hedge our exposure to risk from the time a
borrower locks a loan until the time the loan is securitized. We hedge our
interest rate exposure through entering into interest rate swap futures. We also
manage a portion of our credit exposure by buying protection within the CMBX and
CDX markets.
We do not enter into or hold derivatives for trading or speculative purposes.
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The table below provides information atNovember 30, 2019 about our significant instruments that are sensitive to changes in interest rates. For loans held-for-investment, net and investments held-to-maturity, senior notes and other debts payable and notes and other debts payable, the table presents principal cash flows and related weighted average effective interest rates by expected maturity dates and estimated fair values atNovember 30, 2019 . Weighted average variable interest rates are based on the variable interest rates atNovember 30, 2019 . See Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and Notes 1 and 15 of the notes to the consolidated financial statements in Item 8 for a further discussion of these items and our strategy of mitigating our interest rate risk. Information Regarding Interest Rate Sensitivity Principal (Notional) Amount by Expected Maturity and Average Interest Rate November 30, 2019 Fair Value at Years Ending November 30, November 30, (Dollars in millions) 2020 2021 2022 2023 2024 Thereafter Total 2019 ASSETS Lennar Other: Investments held-to-maturity: Fixed rate $ - - - - - 54.1 54.1 56.4 Average interest rate - - - - - 2.8 % 2.8 % - Financial Services: Loans held-for-investment, net and investments held-to-maturity: Fixed rate$ 19.9 9.9 3.1 1.7 1.7 45.1 81.4 77.1 Average interest rate 3.2 % 2.8 % 4.5 % 4.4 % 4.4 % 4.3 % 3.8 % - Variable rate $ - 0.1 15.2 0.1 0.1 1.3 16.8 16.9 Average interest rate - % 3.1 % 6.5 % 3.1 % 3.1 % 3.1 % 6.2 % - LIABILITIES Homebuilding: Senior notes and other debts payable: Fixed rate$ 1,003.6 1,080.6 1,759.8 72.4 1,523.1 2,187.1 7,626.6 8,041.3 Average interest rate 4.0 % 5.9 % 4.8 % 4.2 % 5.0 % 4.9 % 4.9 % - Variable rate$ 51.5 50.7 - - - - 102.2 103.3 Average interest rate 4.5 % 2.0 % - - - - 3.3 % - Financial Services: Notes and other debts payable: Fixed rate$ 0.1 - - - - 154.7 154.8 154.8 Average interest rate 5.5 % - - - - 3.4 % 3.5 % - Variable rate$ 1,452.8 138.1 - - - - 1,590.9 1,590.9 Average interest rate 3.5 % 3.6 % - - - - 3.5 % - Multifamily: Note payable: Fixed rate$ 36.1 - - - - - 36.1 36.1 Average interest rate 4.0 % - - - - - 4.0 % - Lennar Other: Notes and other debts payable: Fixed rate$ 1.9 - - - - - 1.9 1.9 Average interest rate 2.9 % - - - - - 2.9 % - Variable rate$ 13.3 - - - - - 13.3 13.3 Average interest rate 3.9 % - - - - - 3.9 % - 55
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