filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with "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 in SEC filings or otherwise.
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.
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 Ended November 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 to CalAtlantic | — | 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 ended November 30, 2018, Homebuilding revenue included $7.0 billion of revenues, and earnings before income taxes included $491.3 million of pre-tax earnings from CalAtlantic 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
expenses and transaction costs and were included within the acquisition and integration costs related to CalAtlantic line item in the consolidated statement of operations for the year ended November 30, 2018.
2019 versus 2018
In July 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 the SEC for the fiscal year ended November 30, 2018.
Revenues from home sales increased 9% in the year ended November 30, 2019 to $20.6 billion from $18.8 billion in the year ended November 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 ended November 30, 2019 from 45,563 homes in the year ended November 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 ended November 30, 2019 from $413,000 in the year ended November 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 ended November 30, 2019 compared to $3.7 billion, or 19.6% (21.8% excluding purchase accounting), in the year ended November 30, 2018. The gross margin percentage on home sales increased because the year ended November 30, 2018 included $414.6 million or 220 basis points of backlog/construction in progress write-up related to purchase accounting adjustments on CalAtlantic 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 ended November 30, 2019, compared to $1.6 billion in the year ended November 30, 2018. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 8.3% in the year ended November 30, 2019, from 8.5% in the year ended November 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 ended November 30, 2019, compared to earnings of $173.8 million in the year ended November 30, 2018. Homebuilding equity in loss from unconsolidated entities was $13.3 million in the year ended November 30, 2019, compared to Homebuilding equity in loss from unconsolidated entities of $90.2 million in the year ended November 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 ended November 30, 2019, compared to $60.1 million in the year ended November 30, 2018. Homebuilding other income (expense), net, totaled ($31.3) million in the year ended November 30, 2019, compared to $203.9 million in the year ended November 30, 2018. In the year ended November 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 ended November 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 ended November 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 ended November 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 ended November 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 ended November 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),
compared to operating earnings of $42.7 million in the year ended November 30, 2018. Operating earnings in the year ended November 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 ended November 30, 2018.
Operating earnings for the Lennar Other segment in the year ended November 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 ended November 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 ended November 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 ended November 30, 2019, compared to $343.9 million, or 1.7% as a percentage of total revenues, in the year ended November 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 ended November 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 ended November 30, 2019 and 2018. During the year ended November 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 in December 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 effective December 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.
At November 30, 2019 our homebuilding operating segments and Homebuilding Other consisted of homebuilding divisions located in:
East: Florida, New Jersey, North Carolina, Pennsylvania and South Carolina
Central: Georgia, Illinois, Indiana, Maryland, Minnesota, Tennessee and Virginia
Texas: Texas
West: Arizona, California, Colorado, Nevada, Oregon, Utah and Washington
Other: Urban divisions and other homebuilding related investments primarily in California, including FivePoint
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 | 6,193,868 | |||
| Sales 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 | ||||
| Texas: | ||||||
| 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 |
| 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 | 182,608 | ||||
| Texas: | ||||||
| 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 November 30, 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 November 30, 2019 included a one-time loss of $48.9 million from the consolidation of a previously unconsolidated 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. |
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 CalAtlantic acquisition. Of the homes acquired that were in backlog, 2,126 homes were in the East, 1,281 homes were in the Central, 877 homes were in Texas and 2,197 homes were in the West. |
| (3) | During the year ended November 30, 2019, we acquired 13 homes in backlog. |
Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for
financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.
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 February 12, 2018. Of the communities acquired, 177 were in the East, 135 were in the Central, 99 were in Texas and 131 were in the West. |
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 | $ | 4,236,158 | 20.6% | 3,688,814 | 19.6% |
(1) During the year ended November 30, 2018, gross margins on home sales included backlog/construction in progress write-up of $414.6 million related to purchase accounting on CalAtlantic 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 and New 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 ended November 30, 2019 increased compared to the same period last year primarily due to decreases in construction costs per home and purchase accounting adjustments on CalAtlantic homes that were in backlog/construction in progress when we acquired CalAtlantic, 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 ended November 30, 2019 increased compared to the same period last year primarily due to purchase accounting adjustments on CalAtlantic homes that were in backlog/construction in progress when we acquired CalAtlantic, 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 ended November 30, 2019 increased compared to the same period last year primarily due to decreases in construction costs per home and purchase accounting adjustments on CalAtlantic homes that were in backlog/construction in progress when we acquired CalAtlantic, which reduced the gross margin percentage on those deliveries in 2018.
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, except Colorado. The increase in revenues was partially offset by a decrease in the average sales price of homes delivered in Arizona, California and Oregon. 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 in Colorado 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 in Arizona, California and Oregon 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 ended November 30, 2019 increased compared to the same period last year primarily due to purchase accounting adjustments on CalAtlantic homes that were in backlog/construction in progress when we acquired CalAtlantic, 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 ended November 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 ended November 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 of November 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 select U.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 of November 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 of November 30, 2019 and 2018 was $829.5 million and $703.6 million, respectively. During the year ended November 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
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, 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 of November 30, 2019 and 2018, respectively. As of November 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 of November 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.
In March 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. In June 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 ended November 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 of November 30, 2019, $582.3 million of the $1.3 billion in equity had been called. As of November 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 of November 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 of November 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.
At November 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 between November 2020 and October 2026, and stated maturity dates between November 2049 and March 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 ended November 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. At November 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
At November 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 at November 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").
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 ended November 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 ended November 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 of CalAtlantic, 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 by Stone 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 due November 2019, (2) $500 million aggregate principal amount redemption of our 4.500% senior notes due June 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 due December 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.
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. |
At November 30, 2019, Homebuilding debt to total capital was lower compared to November 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. On November 30, 2018, we sold the Rialto 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 of November 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).
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) | $ | 303,668 | 311,735 | |||
| 2.95% senior notes due 2020 | 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 December 2021 (1) | 310,252 | 315,283 | ||||
| 4.125% senior notes due 2022 | 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 December 2023 | 396,553 | 395,759 | ||||
| 4.500% senior notes due 2024 | 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 CalAtlantic when it was acquired, and were subsequently exchanged in part for notes of Lennar Corporation as follows: $267.7 million principal amount of 6.625% senior notes due 2020, $397.6 million principal amount of 8.375% senior notes due 2021, $292.0 million principal amount of 6.25% senior notes due 2021, $240.8 million principal amount of 5.375% senior notes due 2022, $421.4 million principal amount of 5.875% senior notes due 2024, $395.5 million principal amount of 5.25% senior notes due 2026 and $347.3 million principal amount of 5.00% senior notes due 2027. As part of purchase accounting, the senior notes have been recorded at their fair value as of the date of acquisition (February 12, 2018). |
The carrying amounts of the senior notes listed above are net of debt issuance costs of $22.9 million and $31.2 million, as of November 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 ended November 30, 2019, compared to $9.1 billion with an average rate of interest incurred of 4.8% for the year ended November 30, 2018. Interest incurred related to Homebuilding debt for the year ended November 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.
In November 2019, we redeemed $600 million aggregate principal amount of our 4.50% senior notes due November 2019. The redemption price, which was paid in cash, was 100% of the principal amount plus accrued but unpaid interest.
In June 2019, we redeemed $500 million aggregate principal amount of our 4.500% senior notes due June 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 of Lennar Corporation, as a separate entity, to others. At any time when a guarantor subsidiary is no longer guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes, either directly or by guaranteeing other subsidiaries’ obligations as guarantors of Lennar Corporation’s debt, the guarantor subsidiary’s guarantee of the Guaranteed Notes will be suspended. Therefore, if the guarantor subsidiaries cease guaranteeing Lennar Corporation’s obligations under our
Credit Facility and our letter of credit facilities and are not guarantors of any new debt, the guarantor subsidiaries’ guarantees of the Guaranteed Notes will be suspended until such time, if any, as they again are guaranteeing at least $75 million of Lennar Corporation’s debt other than the Guaranteed Notes.
If our guarantor subsidiaries are guaranteeing revolving credit lines totaling at least $75 million, we will treat the guarantees of the Guaranteed Notes as remaining in effect even during periods when Lennar Corporation’s borrowings under the revolving credit lines are less than $75 million. A subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed of.
In April 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 to April 2024, with $50 million maturing in June 2020. In September 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 of November 30, 2019. As of both November 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 at November 30, 2019.
Under the amended Credit Facility agreement executed in April 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 to February 28, 2019, if positive, and 50% of the net cash proceeds from any equity offerings from and after February 28, 2019, minus the lesser of 50% of the amount paid after April 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 at November 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 of November 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 at November 30, 2019 and 2018, respectively. Our financial letters of credit outstanding were $184.1 million and $165.4 million at November 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, at November 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.
At November 30, 2019, the Financial Services segment warehouse facilities used to fund residential mortgages were as follows:
| (In thousands) | Maximum Aggregate 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 November 30, 2019, the maturity date was extended to March 2020 and the maximum aggregate commitment was decreased to $300 million. As of November 30, 2019, the maximum aggregate commitment includes an uncommitted amount of $500 million. |
| (2) | Maximum aggregate commitment includes an uncommitted amount of $300 million. |
| (3) | Maximum aggregate commitment includes an uncommitted amount of $400 million. |
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 at November 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 at November 30, 2019 and 2018, respectively. The combined effective interest rate on the facilities at November 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 ended November 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 ended November 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 of November 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.
At November 30, 2019, RMF warehouse facilities were as follows:
| (In thousands) | Maximum Aggregate Commitment | ||
| 364-day warehouse repurchase facility that matures December 2019 (1) | $ | 250,000 | |
| 364-day warehouse repurchase facility that matures December 2019 (1) | 200,000 | ||
| 364-day warehouse repurchase facility that matures December 2019 (1) | 200,000 | ||
| 364-day warehouse repurchase facility that matures November 2020 | 200,000 | ||
| Total - Loans origination and securitization business | $ | 850,000 | |
| Warehouse repurchase facility that matures December 2019 (two - one year extensions) (2) | 50,000 | ||
| Total | $ | 900,000 |
| (1) | Subsequent to November 30, 2019, the maturity date was extended to December 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 $11.4 million as of November 30, 2019. There were no borrowings under this facility as of November 30, 2018. |
Borrowings under the facilities that finance RMF's loan originations and securitization activities were $216.9 million and $178.8 million as of November 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.
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 ended November 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.
In January 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 ended November 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 ended November 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 ended November 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 ended November 30, 2019 and 2018, our Class A and Class B common stockholders received an aggregate per share annual dividend of $0.16. On January 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
At November 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 at November 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.
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.
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) | $ | 1,009,035 | 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 November 30, 2019, other income was primarily attributable to a $64.9 million gain on the settlement of contingent consideration recorded by one Homebuilding unconsolidated entity, of which our pro-rata share was $25.9 million. During the year ended November 30, 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 in Homebuilding’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 ($62.0) million investment balance for one unconsolidated entity as it was reclassed to other liabilities as of November 30, 2018. |
| (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 ended November 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 ended November 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 $13.0 million and $12.4 million, as of November 30, 2019 and 2018, respectively. The decrease in debt was primarily related to the consolidation of a previously unconsolidated entity during the year ended November 30, 2019. |
As of November 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 of November 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
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 of November 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) | $ | 1,009,035 | 870,201 |
| (1) | Does not include the ($62.0) million investment balance for one unconsolidated entity as it was reclassed to other liabilities as of November 30, 2018. |
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 November 30, 2019 and 2018, our maximum recourse exposure was primarily 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. |
During the year ended November 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 both November 30, 2019 and 2018, the fair values of the repayment, maintenance and completion guarantees were not material. We believe that as of November 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 both November 30, 2019 and 2018, we had no liabilities accrued for unpaid guarantees of joint venture indebtedness on our consolidated balance sheets.
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 | |||||||||||||||||||
| (In thousands) | Total JV 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 November 30, 2019:
| (Dollars in thousands) | Lennar’s Investment | Total JV Assets | Maximum Recourse Debt Exposure to Lennar | Total Debt Without Recourse to Lennar | Total JV Debt | Total JV Equity | JV Debt to Total Capital Ratio | ||||||||||||||
| 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 Fields El Toro and E.L. Urban Communities which are in Homebuilding Other and Hawk Land Investors, LLC which is in Homebuilding East. |
Multifamily - Investments in Unconsolidated Entities
At November 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 at November 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 select U.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners’ capital. Each joint venture is governed by an operating agreement that provides significant substantive participating voting rights on major decisions to our partners.
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 of November 30, 2019. There are 27 completed and operating multifamily assets with 7,950 apartments. During the year ended November 30, 2019, $184.7 million in equity commitments were called, of which we contributed $44.7 million. During the year ended November 30, 2019, we received $35.5 million of distributions as a return of capital from LMV I. As of November 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 of November 30, 2019 and 2018, the carrying value of our investment in LMV I was $371.0 million and $383.4 million, respectively.
In March 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. In June 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 ended November 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 of November 30, 2019, $582.3 of the $1.3 billion in equity had been called. As of November 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 of November 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 at November 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.
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 | 61,571 | |||
| Operating 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 $26.8 million and $15.7 million, for the years ended November 30, 2019 and 2018, respectively. |
The following table summarizes the principal maturities of our Multifamily unconsolidated entities debt as per current debt arrangements as of November 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 | |||||||||||||||||||
| (In thousands) | Total JV 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 | ) |
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 November 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 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, 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. |
| (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 our Rialto Management Group on November 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 at November 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 ended November 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 on November 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.
| (In thousands) | Hypothetical Carried Interest | Paid as Advanced Tax Distribution | Paid as Carried Interest | Hypothetical Carried Interest, Net (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 Rialto 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. |
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 Rialto 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.
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, at November 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) at November 30, 2019 and 2018:
| Controlled Homesites | ||||||||||||||
| November 30, 2019 | Optioned | JVs | Total | Owned Homesites | Total 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 | ||||||||||||||
| November 30, 2018 | Optioned | JVs | Total | Owned Homesites | Total 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 ended November 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 of November 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 of November 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 at November 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 of November 30, 2019 and 2018, respectively.
Contractual Obligations and Commercial Commitments
The following table summarizes certain of our contractual obligations at November 30, 2019:
| Payments Due by Period | |||||||||||||||
| (In thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 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) | $ | 11,450,390 | 3,171,657 | 3,683,567 | 1,977,097 | 2,618,069 |
| (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 November 30, 2019. |
| (3) | Amounts include $18.5 million and $205.7 million remaining equity commitment to fund the LMV I and LMV II, respectively, for future expenditures related to the construction and development of the projects and $13.1 million of commitments to Rialto funds. |
| (4) | Total contractual obligations exclude our gross unrecognized tax benefits and accrued interest and penalties totaling $68.2 million as of November 30, 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. At November 30, 2019, we had access to 104,210 homesites through option contracts with third parties and unconsolidated entities in which we have investments. At November 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.
At November 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, at November 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 of November 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 at November 30, 2019. Loans in process for which interest rates were committed to the borrowers totaled approximately $542 million as of November 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. At November 30, 2019, we had open commitments amounting to $1.7 billion to sell MBS with varying settlement dates through February 2020 and there were no open futures contracts.
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 in the 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 of CalAtlantic. 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
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 of November 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
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
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.
At November 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. At November 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. At November 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.
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
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.
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