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Lennar Multifamily Segment
6 Months Ended
May 31, 2016
Segment Reporting [Abstract]  
Operating and Reporting Segments (2)
Operating and Reporting Segments
The Company’s operating segments are aggregated into reportable segments, based primarily upon similar economic characteristics, geography and product type. The Company’s reportable segments consist of:
(1) Homebuilding East
(2) Homebuilding Central
(3) Homebuilding West
(4) Homebuilding Houston
(5) Lennar Financial Services
(6) Rialto
(7) Lennar Multifamily
In the first quarter of 2016, the Company made the decision to divide the Southeast Florida operating division into two operating segments to maximize operational efficiencies given the continued growth of the division. As a result of this change in management structure, the Company re-evaluated its reportable segments and determined that neither operating segment met the reportable criteria set forth in Accounting Standards Codification ("ASC") 280, Segment Reporting. The Company aggregated these operating segments into the Homebuilding East reportable segment as these divisions exhibit similar economic characteristics, geography and product type as the other divisions in Homebuilding East. All prior year segment information has been restated to conform with the 2016 presentation. The change in the reportable segments has no effect on the Company's condensed consolidated financial position, results of operations or cash flows for the periods presented.
Information about homebuilding activities in states which are not economically similar to other states in the same geographic area is grouped under “Homebuilding Other,” which is not considered a reportable segment.
Evaluation of segment performance is based primarily on operating earnings (loss) before income taxes. Operations of the Company’s homebuilding segments primarily include the construction and sale of single-family attached and detached homes as well as the purchase, development and sale of residential land directly and through the Company’s unconsolidated entities. Operating earnings (loss) for the homebuilding segments consist of revenues generated from the sales of homes and land, equity in earnings (loss) from unconsolidated entities and other income (expense), net, less the cost of homes sold and land sold, selling, general and administrative expenses and other interest expense of the segment.
The Company’s reportable homebuilding segments and all other homebuilding operations not required to be reported separately have homebuilding divisions located in:
East: Florida, Georgia, Maryland, New Jersey, North Carolina, South Carolina and Virginia
Central: Arizona, Colorado and Texas(1) 
West: California and Nevada
Houston: Houston, Texas
Other: Illinois, Minnesota, Oregon, Tennessee and Washington
(1)Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.
Operations of the Lennar Financial Services segment include primarily mortgage financing, title insurance and closing services for both buyers of the Company’s homes and others. The Lennar Financial Services segment sells substantially all of the loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Lennar Financial Services’ operating earnings consist of revenues generated primarily from mortgage financing, title insurance and closing services, less the cost of such services and certain selling, general and administrative expenses incurred by the segment. The Lennar Financial Services segment operates generally in the same states as the Company’s homebuilding operations as well as in other states.
Operations of the Rialto segment include raising, investing and managing third-party capital, originating and securitizing commercial mortgage loans as well as investing its own capital in real estate related mortgage loans, properties and related securities. Rialto utilizes its vertically-integrated investment and operating platform to underwrite, diligence, acquire, manage, workout and add value to diverse portfolios of real estate loans, properties and real estate related securities as well as providing strategic real estate capital. Rialto’s operating earnings consist of revenues generated primarily from gains from securitization transactions and interest income from the Rialto Mortgage Finance (“RMF”) business, interest income associated with portfolios of real estate loans acquired and other portfolios of real estate loans and assets acquired, asset management, due diligence and underwriting fees derived from the real estate investment funds managed by the Rialto segment, fees for sub-advisory services, other income (expense), net and equity in earnings (loss) from unconsolidated entities, less the costs incurred by the segment for managing portfolios, costs related to RMF and other general and administrative expenses.
Operations of the Lennar Multifamily segment include revenues generated from the sales of land, revenue from construction activities and management fees generated from joint ventures and equity in earnings (loss) from unconsolidated entities, less the cost of sales of land, expenses related to construction activities and general and administrative expenses.
Each reportable segment follows the same accounting policies described in Note 1 – “Summary of Significant Accounting Policies” to the consolidated financial statements in the Company’s Form 10-K for the year ended November 30, 2015. Operational results of each segment are not necessarily indicative of the results that would have occurred had the segment been an independent, stand-alone entity during the periods presented.
Financial information relating to the Company’s operations was as follows:
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Homebuilding East
$
3,614,986

 
3,140,604

Homebuilding Central
1,529,601

 
1,421,195

Homebuilding West
4,445,575

 
4,157,616

Homebuilding Houston
525,167

 
481,386

Homebuilding Other
841,342

 
858,000

Rialto
1,171,987

 
1,505,500

Lennar Financial Services
1,423,679

 
1,425,837

Lennar Multifamily
518,089

 
415,352

Corporate and unallocated
777,375

 
1,014,019

Total assets
$
14,847,801

 
14,419,509


 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Homebuilding East
$
954,298

 
838,235

 
1,613,352

 
1,448,918

Homebuilding Central
419,311

 
302,509

 
694,530

 
513,017

Homebuilding West
718,059

 
627,361

 
1,269,398

 
1,010,134

Homebuilding Houston
189,676

 
189,647

 
328,297

 
320,904

Homebuilding Other
169,541

 
158,060

 
331,789

 
264,497

Lennar Financial Services
175,940

 
169,885

 
299,896

 
294,712

Rialto
44,838

 
67,931

 
88,549

 
109,128

Lennar Multifamily
74,152

 
38,976

 
113,668

 
75,433

Total revenues (1)
$
2,745,815

 
2,392,604

 
4,739,479

 
4,036,743

Operating earnings (loss):
 
 
 
 
 
 
 
Homebuilding East
$
142,938

 
131,566

 
227,644

 
218,099

Homebuilding Central
45,679

 
30,715

 
66,002

 
45,767

Homebuilding West
113,807

 
102,332

 
202,641

 
184,825

Homebuilding Houston
23,083

 
22,738

 
35,955

 
39,753

Homebuilding Other
17,189

 
5,438

 
31,092

 
11,989

Lennar Financial Services
44,088

 
39,053

 
59,019

 
54,580

Rialto
(18,086
)
 
6,881

 
(16,476
)
 
9,689

Lennar Multifamily
14,943

 
(8,706
)
 
27,125

 
(14,388
)
Total operating earnings
383,641

 
330,017

 
633,002

 
550,314

Corporate general and administrative expenses
55,802

 
50,207

 
103,470

 
93,861

Earnings before income taxes
$
327,839

 
279,810

 
529,532

 
456,453


(1)
Total revenues were net of sales incentives of $146.1 million ($21,800 per home delivered) and $249.8 million ($21,700 per home delivered) for the three and six months ended May 31, 2016, respectively, compared to $128.8 million ($21,500 per home delivered) and $222.5 million ($21,600 per home delivered) for the three and six months ended May 31, 2015, respectively.(7)
Lennar Financial Services Segment
The assets and liabilities related to the Lennar Financial Services segment were as follows:
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Cash and cash equivalents
$
105,596

 
106,777

Restricted cash
13,625

 
13,961

Receivables, net (1)
217,692

 
242,808

Loans held-for-sale (2)
862,289

 
843,252

Loans held-for-investment, net
30,671

 
30,998

Investments held-to-maturity
35,307

 
40,174

Investments available-for-sale (3)
49,083

 
42,827

Goodwill
39,439

 
38,854

Other (4)
69,977

 
66,186

 
$
1,423,679

 
1,425,837

Liabilities:
 
 
 
Notes and other debts payable
$
854,055

 
858,300

Other (5)
225,443

 
225,678

 
$
1,079,498

 
1,083,978

(1)
Receivables, net primarily related to loans sold to investors for which the Company had not yet been paid as of May 31, 2016 and November 30, 2015, respectively.
(2)
Loans held-for-sale related to unsold loans carried at fair value.
(3)
Investments available-for-sale are carried at fair value with changes in fair value recorded as a component of accumulated other comprehensive income.
(4)
As of May 31, 2016 and November 30, 2015, other assets included mortgage loan commitments carried at fair value of $18.9 million and $13.1 million, respectively, and mortgage servicing rights carried at fair value of $18.2 million and $16.8 million, respectively. In addition, other assets also included forward contracts carried at fair value of $0.5 million as of November 30, 2015.
(5)
As of May 31, 2016 and November 30, 2015, other liabilities included $58.2 million and $65.0 million, respectively, of certain of the Company’s self-insurance reserves related to construction defects, general liability and workers’ compensation. Other liabilities also included forward contracts carried at fair value of $1.6 million as of May 31, 2016.
At May 31, 2016, the Lennar Financial Services segment warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
600,000

364-day warehouse repurchase facility that matures August 2016
300,000

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

Total
$
1,350,000


(1)
Subsequent to May 31, 2016, the warehouse repurchase facility maturity date was extended to June 2017.
(2)
Maximum aggregate commitment includes an uncommitted amount of $250 million.
The Lennar Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature. Borrowings under the facilities and their prior year predecessors were $854.1 million and $858.3 million at May 31, 2016 and November 30, 2015, respectively, and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $901.9 million and $916.9 million at May 31, 2016 and November 30, 2015, respectively. If the facilities are not renewed or replaced, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale to investors and by collecting on receivables on loans sold but not yet paid. Without the facilities, the Lennar Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Substantially, all of the loans the Lennar Financial Services segment originates are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis. After the loans are sold, the Company retains potential liability for possible claims by purchasers that it breached certain limited industry-standard representations and warranties in the loan sale agreements. Over the last several years there has been an industry-wide effort by purchasers to defray their losses by purporting to have found inaccuracies related to sellers’ representations and warranties in particular loan sale agreements.
Mortgage investors could seek to have the Company buy back mortgage loans or compensate them for losses incurred on mortgage loans that the Company has sold based on claims that the Company breached its limited representations or warranties. The Company’s mortgage operations have established accruals for possible losses associated with mortgage loans previously originated and sold to investors. The Company establishes accruals for such possible losses based upon, among other things, an analysis of repurchase requests received, an estimate of potential repurchase claims not yet received and actual past repurchases and losses through the disposition of affected loans as well as previous settlements. While the Company believes that it has adequately reserved for known losses and projected repurchase requests, given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, if either actual repurchases or the losses incurred resolving those repurchases exceed the Company’s expectations, additional recourse expense may be incurred. Loan origination liabilities are included in Lennar Financial Services’ liabilities in the Company's condensed consolidated balance sheets.
The activity in the Company’s loan origination liabilities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Loan origination liabilities, beginning of period
$
20,108

 
12,476

 
19,492

 
11,818

Provision for losses
1,110

 
1,225

 
1,898

 
2,027

Payments/settlements
(224
)
 
(41
)
 
(396
)
 
(185
)
Loan origination liabilities, end of period
$
20,994

 
13,660

 
20,994

 
13,660

(8)
Rialto Segment
The assets and liabilities related to the Rialto segment were as follows:
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Cash and cash equivalents
$
103,622

 
150,219

Restricted cash (1)
8,579

 
15,061

Receivables, net (2)

 
154,948

Loans held-for-sale (3)
199,415

 
316,275

Loans receivable, net
163,805

 
164,826

Real estate owned - held-for-sale
180,547

 
183,052

Real estate owned - held-and-used, net
125,406

 
153,717

Investments in unconsolidated entities
238,740

 
224,869

Investments held-to-maturity
60,076

 
25,625

Other
91,797

 
116,908

 
$
1,171,987

 
1,505,500

Liabilities:
 
 
 
Notes and other debts payable
$
543,310

 
771,728

Other
53,318

 
94,496

 
$
596,628

 
866,224


(1)
Restricted cash primarily consists of upfront deposits and application fees RMF receives before originating loans and is recognized as income once the loan has been originated as well as cash held in escrow by the Company’s loan servicer provider on behalf of customers and lenders and is disbursed in accordance with agreements between the transacting parties.
(2)
Receivables, net primarily relate to loans sold but not settled as of November 30, 2015.
(3)
Loans held-for-sale relate to unsold loans originated by RMF carried at fair value.
Rialto costs and expenses included loan impairments of $4.4 million and $6.7 million for the three and six months ended May 31, 2016, respectively, and $1.6 million and $2.8 million for the three and six months ended May 31, 2015, respectively, primarily associated with the segment's FDIC loans portfolio (before noncontrolling interests). In addition, Rialto operating loss included a net loss attributable to noncontrolling interests of $4.3 million and $4.6 million for the three and six months ended May 31, 2016, respectively, and $0.7 million and $2.5 million for the three and six months ended May 31, 2015, respectively.
The following is a detail of Rialto other expense, net:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Realized gains on REO sales, net
$
5,492

 
4,544

 
9,238

 
7,674

Unrealized losses on transfer of loans receivable to REO and impairments, net
(5,396
)
 
(2,212
)
 
(5,549
)
 
(4,768
)
REO and other expenses
(12,123
)
 
(15,167
)
 
(26,958
)
 
(28,409
)
Rental and other income (loss) (1)
(7,558
)
 
11,963

 
2,993

 
24,359

Rialto other expense, net
$
(19,585
)
 
(872
)
 
(20,276
)
 
(1,144
)
(1)
Rental and other income (loss) for both the three and six months ended May 31, 2016, included a $16.0 million write-off of uncollectible receivables related to a hospital, which was acquired through the resolution of one of Rialto's loans from a 2010 portfolio. The hospital is managed by a third-party management company.
Loans Receivable
The following table represents loans receivable, net by type:
(In thousands)
May 31,
2016
 
November 30,
2015
Nonaccrual loans: FDIC and Bank Portfolios
$
68,813

 
88,694

Accrual loans
94,992

 
76,132

Loans receivable, net
$
163,805

 
164,826

The nonaccrual loan portfolios consist primarily of loans acquired at a discount. In 2010, the Rialto segment acquired indirectly 40% managing member equity interests in two limited liability companies ("LLCs") in partnership with the FDIC (“FDIC Portfolios”). The LLCs met the accounting definition of VIEs and since the Company was determined to be the primary beneficiary, the Company consolidated the LLCs. The Company was determined to be the primary beneficiary because it has the power to direct the activities of the LLCs that most significantly impact the LLCs' performance through Rialto's management and servicer contracts. At May 31, 2016, these consolidated LLCs had total combined assets and liabilities of $280.0 million and $11.3 million, respectively. At November 30, 2015, these consolidated LLCs had total combined assets and liabilities of $355.2 million and $11.3 million, respectively.
In addition in 2010, Rialto acquired 400 distressed residential and commercial real estate loans (“Bank Portfolios”) and over 300 REO properties from three financial institutions.
Based on the nature of these loans, the portfolios are managed by assessing the risks related to the likelihood of collection of payments from borrowers and guarantors, as well as monitoring the value of the underlying collateral. As of May 31, 2016 and November 30, 2015, management classified all loans receivable within the FDIC Portfolios and Bank Portfolios as nonaccrual loans as forecasted principal and interest cannot be reasonably estimated and accounted for these assets in accordance with ASC 310-10, Receivables.
Accrual loans as of May 31, 2016 included loans originated of which $18.1 million relates to a convertible land loan that matures in July 2016 and $76.9 million relates to floating and fixed rate commercial property loans maturing between October 2017 and October 2025.
The following tables represent nonaccrual loans in the FDIC Portfolios and Bank Portfolios accounted for under ASC 310-10 aggregated by collateral type:
May 31, 2016
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
100,848

 
47,375

 
132

 
47,507

Single family homes
24,090

 
4,630

 
3,940

 
8,570

Commercial properties
11,440

 
1,009

 
1,072

 
2,081

Other
59,749

 
272

 
10,383

 
10,655

Loans receivable
$
196,127

 
53,286

 
15,527

 
68,813

November 30, 2015
 
 
 
Recorded Investment
 
 
(In thousands)
Unpaid
Principal  Balance
 
With
Allowance
 
Without
Allowance
 
Total  Recorded
Investment
Land
$
145,417

 
59,740

 
1,165

 
60,905

Single family homes
39,659

 
8,344

 
3,459

 
11,803

Commercial properties
13,458

 
1,368

 
1,085

 
2,453

Other
78,279

 

 
13,533

 
13,533

Loans receivable
$
276,813

 
69,452

 
19,242

 
88,694


The average recorded investment in impaired loans was approximately $79 million and $115 million for the six months ended May 31, 2016 and 2015, respectively.
In order to assess the risk associated with each risk category, management evaluates the forecasted cash flows and the value of the underlying collateral securing the loans receivable on a quarterly basis or when an event occurs that suggests a decline in the collateral’s fair value.
Allowance for Loan Losses
The allowance for loan losses is a valuation reserve established through provisions for loan losses charged against Rialto’s operating earnings. For nonaccrual loans, the risk relates to a decline in the value of the collateral securing the outstanding obligation. If the recorded investment in the nonaccrual loan exceeds its fair value, an impairment is recognized through an allowance for loan losses. The activity in the Company's allowance rollforward related to nonaccrual loans was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Allowance on nonaccrual loans, beginning of the period
$
30,393

 
51,109

 
35,625

 
58,326

Provision for loan losses
4,382

 
1,585

 
6,721

 
2,809

Charge-offs
(5,589
)
 
(12,101
)
 
(13,160
)
 
(20,542
)
Allowance on nonaccrual loans, end of the period
$
29,186

 
40,593

 
29,186

 
40,593


Real Estate Owned
The acquisition of properties acquired through, or in lieu of, loan foreclosure are reported within the condensed consolidated balance sheets as REO held-and-used, net and REO held-for-sale. When a property is determined to be held-and-used, net, the asset is recorded at fair value and depreciated over its useful life using the straight line method. When certain criteria set forth in ASC 360, Property, Plant and Equipment, are met, the property is classified as held-for-sale. When a real estate asset is classified as held-for-sale, the property is recorded at the lower of its cost basis or fair value less estimated costs to sell. The fair value of REO held-for-sale is determined in part by placing reliance on third-party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity.
The following tables represent the activity in REO:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
REO - held-for-sale, beginning of period
$
177,221

 
185,511

 
183,052

 
190,535

Improvements
708

 
1,591

 
1,595

 
3,295

Sales
(17,441
)
 
(23,213
)
 
(33,951
)
 
(48,138
)
Impairments and unrealized losses
(4,799
)
 
(2,954
)
 
(8,347
)
 
(4,372
)
Transfers from held-and-used, net (1)
24,858

 
34,451

 
38,198

 
54,066

REO - held-for-sale, end of period
$
180,547

 
195,386

 
180,547

 
195,386

 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
REO - held-and-used, net, beginning of period
$
148,900

 
242,569

 
153,717

 
255,795

Additions
2,636

 
5,431

 
11,303

 
14,343

Improvements
(185
)
 
785

 
122

 
1,428

Impairments
(714
)
 

 
(803
)
 
(1,413
)
Depreciation
(373
)
 
(586
)
 
(735
)
 
(1,375
)
Transfers to held-for-sale (1)
(24,858
)
 
(34,451
)
 
(38,198
)
 
(54,066
)
Other

 

 

 
(964
)
REO - held-and-used, net, end of period
$
125,406

 
213,748

 
125,406

 
213,748

(1)
During the three and six months ended May 31, 2016 and 2015, the Rialto segment transferred certain properties from REO held-and-used, net to REO held-for-sale as a result of changes in the disposition strategy of the real estate assets.
For the three and six months ended May 31, 2016, the Company recorded net (losses) gains of ($0.7) million and $2.1 million, respectively, from acquisitions of REO through foreclosure. For both the three and six months ended May 31, 2015, the Company recorded net gains of $0.2 million from acquisitions of REO through foreclosure. These net gains (losses) are recorded in Rialto other expense, net.
Rialto Mortgage Finance - loans held-for-sale
During the six months ended May 31, 2016, RMF originated loans with a total principal balance of $670.3 million of which $654.0 million were recorded as loans held-for-sale and $16.3 million were recorded as accrual loans within loans receivable, net, and sold $766.4 million of loans into five separate securitizations. During the six months ended May 31, 2015, RMF originated loans with a total principal balance of $1.2 billion and sold $1.0 billion of loans into five separate securitizations. As of November 30, 2015, $151.8 million of the originated loans were sold into a securitization trust but not settled and thus were included as receivables, net.
Notes and Other Debts Payable
In November 2013, the Rialto segment originally issued $250 million aggregate principal amount of the 7.00% senior notes due 2018 ("7.00% Senior Notes"), at a price of 100% in a private placement. In March 2014, the Rialto segment issued an additional $100 million of the 7.00% Senior Notes, at a price of 102.25% of their face value in a private placement. Proceeds from the offerings, after payment of expenses, were approximately $347 million. Rialto used the net proceeds of the 7.00% Senior Notes to provide additional working capital for RMF, and to make investments in the funds that Rialto manages, as well as for general corporate purposes. In addition, Rialto used $100 million of the net proceeds to repay sums that had been advanced to RMF from Lennar to enable it to begin originating and securitizing commercial mortgage loans. Interest on the 7.00% Senior Notes is due semi-annually. At May 31, 2016 and November 30, 2015, the carrying amount, net of debt issuance costs, of the 7.00% Senior Notes was $348.3 million and $347.9 million, respectively. Under the indenture, Rialto is subject to certain covenants limiting, among other things, Rialto’s ability to incur indebtedness, to make investments, to make distributions to or enter into transactions with Lennar or to create liens, subject to certain exceptions and qualifications. Rialto also has quarterly and annual reporting requirements, similar to an SEC registrant, to holders of the 7.00% Senior Notes. The Company believes Rialto was in compliance with its debt covenants at May 31, 2016.
At May 31, 2016, Rialto warehouse facilities were as follows:
(In thousands)
Maximum Aggregate Commitment
364-day warehouse repurchase facility that matures August 2016 (1)
$
250,000

364-day warehouse repurchase facility that matures October 2016 (one year extension) (1)
400,000

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

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

Warehouse repurchase facility that matures August 2018 (two - one year extensions) (2)
100,000

Total
$
1,100,000

(1)
RMF uses these facilities to finance its loan origination and securitization activities.
(2)
In 2015, Rialto entered into a separate repurchase facility to finance the origination of floating rate accrual loans. Loans financed under this facility will be held as accrual loans within loans receivable, net. Borrowings under this facility were $53.8 million and $36.3 million as of May 31, 2016 and November 30, 2015, respectively.
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $57.3 million and $317.1 million as of May 31, 2016 and November 30, 2015, respectively and were secured by a 75% interest in the originated commercial loans financed. The facilities require immediate repayment of the 75% interest in the secured commercial loans when the loans are sold in a securitization and the proceeds are collected. These warehouse repurchase facilities are non-recourse to the Company and are expected to be renewed or replaced with other facilities when they mature.
In 2010, Rialto paid $310 million for the Bank Portfolios and for over 300 REO properties, of which $124 million was financed through a 5-year senior unsecured note provided by one of the selling institutions for which the maturity was subsequently extended. The remaining balance is due in December 2016. As of both May 31, 2016 and November 30, 2015, the outstanding amount related to the 5-year senior unsecured note was $30.3 million.
In May 2014, the Rialto segment issued $73.8 million principal amount of notes through a structured note offering (the “Structured Notes”) collateralized by certain assets originally acquired in the Bank Portfolios transaction at a price of 100%, with an annual coupon rate of 2.85%. Proceeds from the offering, after payment of expenses and hold backs for a cash reserve, were $69.1 million. In November 2014, the Rialto segment issued an additional $20.8 million of the Structured Notes at a price of 99.5%, with an annual coupon rate of 5.0%. Proceeds from the offering, after payment of expenses, were $20.7 million. The estimated final payment date of the Structured Notes is August 15, 2017. As of May 31, 2016 and November 30, 2015, the outstanding amount, net of debt issuance costs, related to the Structured Notes was $29.0 million and $31.3 million, respectively.
Investments
All of Rialto's investments in funds have the attributes of an investment company in accordance with ASC 946, Financial Services – Investment Companies, as amended by ASU 2013-08, Financial Services - Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, the attributes of which are different from the attributes that would cause a company to be an investment company for purposes of the Investment Company Act of 1940. As a result, the assets and liabilities of the funds in which Rialto has investments in are recorded at fair value with increases/decreases in fair value recorded in their respective statements of operations and the Company’s share is recorded in Rialto equity in earnings from unconsolidated entities in the Company's statement of operations.
The following table reflects Rialto's investments in funds that invest in and manage real estate related assets and other investments:
 
 
 
 
 
 
 
 
 
May 31,
2016
 
May 31,
2016
 
November 30,
2015
(Dollars in thousands)
Inception Year
 
Equity Commitments
 
Equity Commitments Called
 
Commitment to Fund by the Company
 
Funds Contributed by the Company
 
Investment
Rialto Real Estate Fund, LP
2010
 
$
700,006

 
$
700,006

 
$
75,000

 
$
75,000

 
$
63,182

 
68,570

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

 
1,305,000

 
100,000

 
100,000

 
97,417

 
99,947

Rialto Mezzanine Partners Fund, LP
2013
 
300,000

 
300,000

 
33,799

 
33,799

 
28,206

 
32,344

Rialto Capital CMBS Funds
2014
 
111,753

 
111,753

 
47,057

 
47,057

 
46,712

 
23,233

Rialto Real Estate Fund III
2015
 
818,248

 

 
100,000

 

 
1,685

 

Rialto Credit Partnership, LP
2016
 
220,000

 
8,900

 
19,999

 
809

 
797

 

Other investments
 
 
 
 
 
 
 
 
 
 
741

 
775

 
 
 
 
 
 
 
 
 
 
 
$
238,740

 
224,869


Rialto's share of earnings (loss) from unconsolidated entities was as follows:
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Rialto Real Estate Fund, LP
$
931

 
3,044

 
2,270

 
3,790

Rialto Real Estate Fund II, LP
2,470

 
2,286

 
1,748

 
3,179

Rialto Mezzanine Partners Fund, LP
701

 
451

 
1,425

 
926

Rialto Capital CMBS Funds
1,208

 
1,533

 
1,580

 
2,077

Rialto Real Estate Fund III
1,622

 

 
1,383

 

Rialto Credit Partnership, LP
(12
)
 

 
(12
)
 

Other investments
(56
)
 
14

 
(33
)
 
20

Rialto equity in earnings from unconsolidated entities
$
6,864

 
7,328

 
8,361

 
9,992


During the three and six months ended May 31, 2016, Rialto received $2.5 million and $7.4 million, respectively, of advance distributions with regard to Rialto's carried interests in its real estate funds in order to cover income tax obligations resulting from allocations of taxable income to Rialto's carried interests in these funds. During the three and six months ended May 31, 2015, Rialto received $4.8 million and $11.3 million of such advanced distributions. These advance distributions are not subject to clawbacks and are included in Rialto's revenues.
During 2015, Rialto adopted a Carried Interest Incentive Plan (the "Plan"), under which participating employees in the aggregate may receive up to 40% of the equity units of a limited liability company (a "Carried Interest Entity") that is entitled to distributions made by a fund or other investment vehicle (a "Fund") managed by a subsidiary of Rialto. As such, those employees receiving equity units in the Carried Interest Entity may benefit from distributions made by a Fund to the extent the Carried Interest Entity makes distributions to its equity holders. The units issued to employees are equity awards and are subject to vesting schedules and forfeiture or repurchase provisions in the case of a termination of employment.
Summarized condensed financial information on a combined 100% basis related to Rialto’s investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Cash and cash equivalents
$
122,120

 
188,147

Loans receivable
388,105

 
473,997

Real estate owned
597,915

 
506,609

Investment securities
1,231,257

 
1,092,476

Investments in partnerships
421,272

 
429,979

Other assets
42,889

 
30,340

 
$
2,803,558

 
2,721,548

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
24,702

 
29,462

Notes payable
524,416

 
374,498

Equity
2,254,440

 
2,317,588

 
$
2,803,558

 
2,721,548


Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
51,240

 
39,320

 
95,536

 
81,058

Costs and expenses
20,704

 
25,082

 
41,603

 
48,087

Other income, net (1)
26,710

 
55,477

 
11,548

 
61,351

Net earnings of unconsolidated entities
$
57,246

 
69,715

 
65,481

 
94,322

Rialto equity in earnings from unconsolidated entities
$
6,864

 
7,328

 
8,361

 
9,992


(1)
Other income, net, included realized and unrealized gains (losses) on investments.
At May 31, 2016 and November 30, 2015, the carrying value of Rialto's non-investment grade commercial mortgage-backed securities (“CMBS”) was $60.1 million and $25.6 million, respectively. These securities have discount rates ranging from 39% to 55% with coupon rates ranging from 2.2% to 4.0%, stated and assumed final distribution dates between November 2020 and February 2026, and stated maturity dates between November 2048 and March 2059. The Rialto segment reviews changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on its CMBS. Based on the Rialto segment’s assessment, no impairment charges were recorded during either the three and six months ended May 31, 2016 or 2015. The Rialto segment classified these securities as held-to-maturity based on its intent and ability to hold the securities until maturity.
In 2014, the Rialto segment invested $18 million in a private commercial real estate services company. The investment was carried at cost at both May 31, 2016 and November 30, 2015 and is included in Rialto's other assets.(9)
Lennar Multifamily Segment
The Company is actively involved, primarily through unconsolidated entities, in the development, construction and property management of multifamily rental properties. The Lennar Multifamily segment focuses on developing a geographically diversified portfolio of institutional quality multifamily rental properties in select U.S. markets.
The assets and liabilities related to the Lennar Multifamily segment were as follows:
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Cash and cash equivalents
$
5,067

 
8,041

Land under development
142,921

 
115,982

Consolidated inventory not owned
24,008

 
5,508

Investments in unconsolidated entities
304,171

 
250,876

Other assets
41,922

 
34,945

 
$
518,089

 
415,352

Liabilities:
 
 
 
Accounts payable and other liabilities
$
74,220

 
62,943

Liabilities related to consolidated inventory not owned
15,857

 
4,007

 
$
90,077

 
66,950


The unconsolidated entities in which the Lennar Multifamily segment has investments usually finance their activities with a combination of partner equity and debt financing. In connection with many of the loans to Lennar Multifamily unconsolidated entities, the Company (or entities related to them) has been required to give guarantees of completion and cost over-runs to the lenders and partners. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Additionally, the Company guarantees the construction costs of the project as construction cost over-runs would be paid by the Company. Generally, these payments would be increases to the Company's investment in the entities and would increase its share of funds the entities distribute after the achievement of certain thresholds. As of both May 31, 2016 and November 30, 2015, the fair value of the completion guarantees was immaterial. Additionally, as of May 31, 2016 and November 30, 2015, the Lennar Multifamily segment had $39.5 million and $37.9 million, respectively, of letters of credit outstanding primarily for credit enhancements for the bank debt of certain of its unconsolidated entities and deposits on land purchase contracts. These letters of credit outstanding are included in the disclosure in Note 11 related to the Company's performance and financial letters of credit. As of May 31, 2016 and November 30, 2015, Lennar Multifamily segment's unconsolidated entities had non-recourse debt with completion guarantees of $578.7 million and $466.7 million, respectively.
In many instances, the Lennar Multifamily segment is appointed as the construction, development and property manager for certain of its Lennar Multifamily unconsolidated entities and receives fees for performing this function. During the three and six months ended May 31, 2016, the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $9.3 million and $17.4 million, respectively. During the three and six months ended May 31, 2015, the Lennar Multifamily segment recorded fee income, net of deferrals, from its unconsolidated entities of $3.9 million and $8.4 million, respectively.
The Lennar Multifamily segment also provides general contractor services for construction of some of the rental properties owned by unconsolidated entities in which the Company has an investment. During the three and six months ended May 31, 2016, the Lennar Multifamily segment provided general contractor services totaling $53.5 million and $84.9 million, respectively, which were partially offset by costs related to those services of $51.7 million and $82.3 million, respectively. During the three and six months ended May 31, 2015, the Lennar Multifamily segment provided general contractor services totaling $35.1 million and $67.0 million, respectively, which were partially offset by costs related to those services of $33.7 million and $65.1 million, respectively.
In 2015, the Lennar Multifamily segment completed the initial closing of the Lennar Multifamily Venture (the "Venture") for the development, construction and property management of class-A multifamily assets with $1.1 billion of commitments. During the six months ended May 31, 2016, the Venture received an additional $300 million of equity commitments, increasing its total equity commitments to $1.4 billion, including a $504 million co-investment commitment by Lennar comprised of cash, undeveloped land and preacquisition costs. As of May 31, 2016, $500.0 million of the $1.4 billion in equity commitments had been called, of which the Company has contributed $179.5 million representing its pro-rata portion of the called equity, resulting in a remaining equity commitment of $324.5 million. During the six months ended May 31, 2016, $224.6 million in equity commitments was called, of which the Company contributed its portion of $90.1 million. During the six months ended
May 31, 2016, the Company received distributions of $43.6 million as a return of capital from the Venture. As of May 31, 2016 and November 30, 2015, the carrying value of the Company's investment in the Venture was $172.5 million and $122.5 million, respectively. Subsequent to May 31, 2016, the Venture received an additional $550 million of equity commitments, increasing its total equity commitments to approximately $2 billion.
Summarized condensed financial information on a combined 100% basis related to Lennar Multifamily's investments in unconsolidated entities that are accounted for by the equity method was as follows:
Balance Sheets
(In thousands)
May 31,
2016
 
November 30,
2015
Assets:
 
 
 
Cash and cash equivalents
$
58,962

 
39,579

Operating properties and equipment
1,748,003

 
1,398,244

Other assets
41,778

 
25,925

 
$
1,848,743

 
1,463,748

Liabilities and equity:
 
 
 
Accounts payable and other liabilities
$
241,079

 
179,551

Notes payable
578,662

 
466,724

Equity
1,029,002

 
817,473

 
$
1,848,743

 
1,463,748


Statements of Operations
 
Three Months Ended
 
Six Months Ended
 
May 31,
 
May 31,
(In thousands)
2016
 
2015
 
2016
 
2015
Revenues
$
9,649

 
3,075

 
17,963

 
5,169

Costs and expenses
14,058

 
5,081

 
25,730

 
8,075

Other income, net
30,272

 

 
70,394

 

Net earnings (loss) of unconsolidated entities
$
25,863

 
(2,006
)
 
62,627

 
(2,906
)
Lennar Multifamily equity in earnings (loss) from unconsolidated entities (1)
$
14,008

 
(422
)
 
33,694

 
(600
)
(1)
For the three months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $15.4 million share of a gain as a result of the sale of an operating property by one of its unconsolidated entities. For the six months ended May 31, 2016, Lennar Multifamily equity in earnings from unconsolidated entities included the segment's $35.8 million share of gains as a result of the sale of two operating properties by its unconsolidated entities.