Financial Instruments | 9 Months Ended |
Aug. 31, 2013 |
Fair Value Disclosures [Abstract] | |
Financial Instruments | Financial Instruments |
The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at August 31, 2013 and November 30, 2012, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, defeasance cash to retire notes payable, receivables, net and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities of these instruments. |
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| | | August 31, 2013 | | November 30, 2012 |
| Fair Value | | Carrying | | Fair | | Carrying | | Fair |
(In thousands) | Hierarchy | | Amount | | Value | | Amount | | Value |
ASSETS | | | | | | | | | |
Rialto Investments: | | | | | | | | | |
Loans receivable, net | Level 3 | | $ | 328,667 | | | 349,079 | | | 436,535 | | | 450,281 | |
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Investments held-to-maturity | Level 3 | | $ | 15,791 | | | 15,673 | | | 15,012 | | | 14,904 | |
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Lennar Financial Services: | | | | | | | | | |
Loans held-for-investment, net | Level 3 | | $ | 25,264 | | | 25,910 | | | 23,982 | | | 24,949 | |
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Investments held-to-maturity | Level 2 | | $ | 54,019 | | | 54,012 | | | 63,924 | | | 63,877 | |
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LIABILITIES | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | |
Senior notes and other debts payable | Level 2 | | $ | 4,624,614 | | | 5,306,477 | | | 4,005,051 | | | 5,035,670 | |
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Rialto Investments: | | | | | | | | | |
Notes and other debts payable | Level 2 | | $ | 346,627 | | | 339,178 | | | 574,480 | | | 568,702 | |
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Lennar Financial Services: | | | | | | | | | |
Notes and other debts payable | Level 2 | | $ | 290,283 | | | 290,283 | | | 457,994 | | | 457,994 | |
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The following methods and assumptions are used by the Company in estimating fair values: |
Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates. |
Rialto Investments—The fair values for loans receivable is based on discounted cash flows, or the fair value of the collateral less estimated cost to sell. The fair value for investments held-to-maturity is based on discounted cash flows. For notes payable, the fair value of the zero percent interest notes guaranteed by the FDIC was calculated based on a 6-month treasury yield, and the fair value of other notes payable was calculated based on discounted cash flows using the Company’s weighted average borrowing rate. |
Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information. |
Fair Value Measurements: |
GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows: |
Level 1: Fair value determined based on quoted prices in active markets for identical assets. |
Level 2: Fair value determined using significant other observable inputs. |
Level 3: Fair value determined using significant unobservable inputs. |
The Company’s financial instruments measured at fair value on a recurring basis are summarized below: |
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Financial Instruments | Fair Value | | Fair Value at | | Fair Value at | | | | | | |
Hierarchy | August 31, | November 30, | | | | | | |
| 2013 | 2012 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Financial Services: | | | | | | | | | | | |
Loans held-for-sale (1) | Level 2 | | $ | 344,607 | | | 502,318 | | | | | | | |
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Mortgage loan commitments | Level 2 | | $ | 10,764 | | | 12,713 | | | | | | | |
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Forward contracts | Level 2 | | $ | 1,821 | | | (2,570 | ) | | | | | | |
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Lennar Homebuilding: | | | | | | | | | | | |
Investments available-for-sale | Level 3 | | $ | 43,371 | | | 19,591 | | | | | | | |
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Rialto Investments Financial Assets: | | | | | | | | | | | |
Loans held-for-sale (2) | Level 3 | | $ | 244,666 | | | — | | | | | | | |
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Interest rate swap futures | Level 1 | | $ | 607 | | | — | | | | | | | |
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Credit default swaps | Level 2 | | $ | 9,093 | | | — | | | | | | | |
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Rialto Investments Financial Liabilities: | | | | | | | | | | | |
Interest rate swap futures | Level 1 | | $ | (701 | ) | | — | | | | | | | |
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-1 | The aggregate fair value of Lennar Financial Services loans held-for-sale of $344.6 million at August 31, 2013 exceeds their aggregate principal balance of $334.8 million by $9.8 million. The aggregate fair value of loans held-for-sale of $502.3 million at November 30, 2012 exceeds their aggregate principal balance of $479.1 million by $23.2 million. | | | | | | | | | | | | | |
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-2 | The aggregate fair value of Rialto Investments loans held-for-sale of $244.7 million at August 31, 2013 are below their aggregate principal balance of $245.2 million by $0.6 million. | | | | | | | | | | | | | |
The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values: |
Lennar Financial Services loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of August 31, 2013 and November 30, 2012. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. |
Lennar Financial Services mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets as of August 31, 2013 and November 30, 2012. |
Lennar Financial Services forward contracts— Fair value is based on quoted market prices for similar financial instruments. |
Lennar Homebuilding investments available-for-sale— The fair value of these investments are based on third party valuations. |
Rialto Investments loans held-for-sale— The fair value of loans held-for-sale is calculated from model-based techniques that use discounted cash flow assumptions and the Company’s own estimates of CMBS spreads, market interest rate movements and the underlying loan credit quality. Loan values are calculated by allocating the change in value of an assumed CMBS capital structure to each loan. The value of an assumed CMBS capital structure is calculated, generally, by discounting the cash flows associated with each CMBS class at market interest rates and at the Company’s own estimate of CMBS spreads. The Company estimates CMBS spreads by observing the pricings of recent CMBS offerings, secondary CMBS markets, changes in the CMBX index, and general capital and commercial real estate market conditions. Considerations in estimating CMBS spreads include comparing the Company’s current loan portfolio with comparable CMBS offerings containing loans with similar duration, credit quality and collateral composition. These methods use unobservable inputs in estimating a discount rate that is used to assign a value to each loan. While the cash payments on the loans are contractual, the discount rate used and assumptions regarding the relative size of each class in the CMBS capital structure can significantly impact the valuation. Therefore, the estimates used could differ materially from the fair value determined when the loans are sold to a securitization trust. |
Rialto Investments interest rate swap futures— The fair value of interest rate swap futures (derivatives) is based on quoted market prices for identical investments traded in active markets. |
Rialto Investments credit default swaps— The fair value of credit default swaps (derivatives) is based on quoted market prices for similar investments traded in active markets. |
Gains and losses of Lennar Financial Services financial instruments measured at fair value from initial measurement and subsequent changes in fair value are recognized in the Lennar Financial Services segment’s operating earnings. Gains and losses related to the Lennar Homebuilding investments available-for-sale during the three and nine months ended August 31, 2013 were deferred as a result of the Company's continuing involvement in the underlying real estate collateral. There were no gains or losses recognized for the Lennar Homebuilding investments available-for-sale during the three and nine months ended August 31, 2012. The changes in fair values that are included in operating earnings are shown, by financial instrument and financial statement line item below: |
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| Three Months Ended | | Nine Months Ended | | |
| August 31, | | August 31, | | |
(In thousands) | 2013 | | 2012 | | 2013 | | 2012 | | |
Changes in fair value included in Lennar Financial Services revenues: | | | | | | | | | |
Loans held-for-sale | $ | 3,982 | | | 5,403 | | | (13,422 | ) | | 7,694 | | | |
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Mortgage loan commitments | $ | 4,944 | | | 281 | | | (1,950 | ) | | 7,466 | | | |
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Forward contracts | $ | (13,600 | ) | | 1,478 | | | 4,391 | | | (2,552 | ) | | |
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Changes in fair value included in Rialto Investments revenues: | | | | | | | | | |
Financial Assets: | | | | | | | | | |
Loans held-for-sale | $ | (1,086 | ) | | — | | | (1,086 | ) | | — | | | |
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Interest rate swap futures | $ | 607 | | | — | | | 607 | | | — | | | |
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Credit default swaps | $ | 1,343 | | | — | | | 1,343 | | | — | | | |
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Financial Liabilities: | | | | | | | | | |
Interest rate swap futures | $ | (701 | ) | | — | | | (701 | ) | | — | | | |
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Interest income on Lennar Financial Services loans held-for-sale and Rialto Investments loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded as revenues in the Lennar Financial Services’ statement of operations and Rialto Investments statement of operations, respectively. |
The following table represents a reconciliation of the beginning and ending balance for the Company’s Level 3 recurring fair value measurements (investments available-for-sale) included in the Lennar Homebuilding segment’s other assets: |
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| Three Months Ended | | Nine Months Ended | | |
(In thousands) | August 31, 2013 | | August 31, 2012 | | August 31, 2013 | | August 31, 2012 | | |
Investments available-for-sale, beginning of period | $ | 33,338 | | | 24,306 | | | 19,591 | | | 42,892 | | | |
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Purchases and other (1) | 13,291 | | | — | | | 25,518 | | | 20,998 | | | |
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Sales | (2,486 | ) | | (4,092 | ) | | (2,486 | ) | | (10,528 | ) | | |
Changes in fair value (2) | (772 | ) | | (1,169 | ) | | 748 | | | — | | | |
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Settlements (3) | — | | | — | | | — | | | (34,317 | ) | | |
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Investments available-for-sale, end of period | $ | 43,371 | | | 19,045 | | | 43,371 | | | 19,045 | | | |
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-1 | Represents investments in community development district bonds that mature at various dates between 2022 and 2042. | | | | | | | | | | | | | |
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-2 | Amount represents changes in fair value during both three and nine months ended August 31, 2013. The changes in fair value were not included in other comprehensive income because the changes in fair value were deferred as a result of the Company's continuing involvement in the underlying real estate collateral. | | | | | | | | | | | | | |
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-3 | The investments available-for-sale that were settled during both the three and nine months ended August 31, 2013 and 2012 related to investments in community development district bonds, which were in default by the borrower and regarding which the Company foreclosed on the underlying real estate collateral. Therefore, these investments were reclassified from other assets to land and land under development. | | | | | | | | | | | | | |
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The following table represents a reconciliation of the beginning and ending balance for Rialto Investments Level 3 recurring fair value measurements (loans held-for-sale): |
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| Three Months Ended | | Nine Months Ended | | |
(In thousands) | 31-Aug-13 | | 31-Aug-12 | | 31-Aug-13 | | 31-Aug-12 | | |
Rialto Investments loans held-for-sale, beginning of period | $ | — | | | — | | | — | | | — | | | |
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Loan originations | 245,223 | | | — | | | 245,223 | | | — | | | |
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Interest | 529 | | | — | | | 529 | | | — | | | |
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Changes in fair value | (1,086 | ) | | — | | | (1,086 | ) | | — | | | |
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Rialto Investments loans held-for-sale, end of period | $ | 244,666 | | | — | | | 244,666 | | | — | | | |
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The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs and Rialto Investments real estate owned assets. The fair value included in the tables below represent only those assets whose carrying value were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below: |
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Non-financial assets | Fair Value | | Fair Value | | Total Gains (Losses) (1) | | | | | | |
Hierarchy | Three Months Ended | | | | | | |
| August 31, | | | | | | |
| 2013 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Investments in unconsolidated entities (2) | Level 3 | | $ | 20,024 | | | (861 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (3) | Level 3 | | $ | 14,833 | | | 2,464 | | | | | | | |
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REO - held-and-used, net (4) | Level 3 | | $ | 16,204 | | | (4,836 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended August 31, 2013. | | | | | | | | | | | | | |
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-2 | Lennar Homebuilding investments in unconsolidated entities with an aggregate carrying value of $20.9 million were written down to their fair value of $20.0 million, resulting in valuation adjustments of $0.9 million, which were included in other income, net in the Company’s statement of operations for the three months ended August 31, 2013. | | | | | | | | | | | | | |
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-3 | REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $12.2 million and a fair value of $14.8 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $2.6 million. As part of management’s periodic valuations of its REO, held-for-sale, during the three months ended August 31, 2013, REO, held-for-sale, with an aggregate value of $0.2 million were written down to their fair value of zero, resulting in impairments of $0.2 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2013. | | | | | | | | | | | | | |
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-4 | REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $13.9 million and a fair value of $14.2 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $0.3 million. As part of management’s periodic valuations of its REO, held-and-used, net, during the three months ended August 31, 2013, REO, held-and-used, net, with an aggregate value of $7.2 million were written down to their fair value of $2.1 million, resulting in impairments of $5.1 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2013. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value | | Total Gains (Losses) (1) | | | | | | |
Hierarchy | Three Months Ended | | | | | | |
| August 31, | | | | | | |
| 2012 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Finished homes and construction in progress (2) | Level 3 | | $ | 8,049 | | | (4,651 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (3) | Level 3 | | $ | 10,101 | | | (2,682 | ) | | | | | | |
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REO - held-and-used, net (4) | Level 3 | | $ | 53,292 | | | (2,006 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the three months ended August 31, 2012. | | | | | | | | | | | | | |
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-2 | Finished homes and construction in progress with an aggregate carrying value of $12.7 million were written down to their fair value of $8.0 million, resulting in valuation adjustments of $4.7 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended August 31, 2012. | | | | | | | | | | | | | |
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-3 | REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO held-for-sale had a carrying value of $8.3 million and a fair value of $6.4 million. The fair value of REO held-for-sale is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO held-for-sale were $1.9 million. As part of management's periodic valuations of its REO held-for-sale during the three months ended August 31, 2012, REO held-for-sale with an aggregate value of $4.5 million were written down to their fair value of $3.7 million, resulting in impairments of $0.8 million. These losses and impairments are included within Rialto Investments other income (expense), net in the Company's statement of operations for the three months ended August 31, 2012. | | | | | | | | | | | | | |
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-4 | REO held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO held-and-used, net, had a carrying value of $45.1 million and a fair value of $45.0 million. The fair value of REO held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO held-and-used, net, were $0.1 million. As part of management's periodic valuations of its REO held-and-used, net, during the three months ended August 31, 2012, REO held-and-used, net, with an aggregate value of $10.2 million were written down to their fair value of $8.3 million, resulting in impairments of $1.9 million. These losses and impairments are included within the Rialto Investments other income (expense), net, in the Company’s statement of operations for the three months ended August 31, 2012. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value | | Total Gains (Losses) (1) | | | | | | |
Hierarchy | Nine Months Ended | | | | | | |
| August 31, | | | | | | |
| 2013 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Finished homes and construction in progress (2) | Level 3 | | $ | 12,247 | | | (4,207 | ) | | | | | | |
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Investments in unconsolidated entities (3) | Level 3 | | $ | 20,024 | | | (897 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (4) | Level 3 | | $ | 34,853 | | | (2,380 | ) | | | | | | |
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REO - held-and-used, net (5) | Level 3 | | $ | 43,364 | | | (6,302 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the nine months ended August 31, 2013. | | | | | | | | | | | | | |
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-2 | Finished homes and construction in progress with an aggregate carrying value of $16.5 million were written down to their fair value of $12.2 million, resulting in valuation adjustments of $4.2 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the nine months ended August 31, 2013. | | | | | | | | | | | | | |
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-3 | Lennar Homebuilding investments in unconsolidated entities with an aggregate carrying value of $20.9 million were written down to their fair value of $20.0 million, resulting in valuation adjustments of $0.9 million, which were included in other income, net in the Company’s statement of operations for the nine months ended August 31, 2013. | | | | | | | | | | | | | |
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-4 | REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $14.2 million and a fair value of $16.2 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-for-sale, were $2.0 million. As part of management’s periodic valuations of its REO, held-for-sale, during the nine months ended August 31, 2013, REO, held-for-sale, with an aggregate value of $23.0 million were written down to their fair value of $18.7 million, resulting in impairments of $4.4 million. These gains and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2013. | | | | | | | | | | | | | |
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-5 | REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $39.7 million and a fair value of $38.9 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO, held-and-used, net, were $0.8 million. As part of management’s periodic valuations of its REO, held-and-used, net, during the nine months ended August 31, 2013, REO, held-and-used, net, with an aggregate value of $10.0 million were written down to their fair value of $4.5 million, resulting in impairments of $5.5 million. These losses and impairments are included within Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2013. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value | | Total Gains (Losses) (1) | | | | | | |
Hierarchy | Nine Months Ended | | | | | | |
| August 31, | | | | | | |
| 2012 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Finished homes and construction in progress (2) | Level 3 | | $ | 10,810 | | | (9,080 | ) | | | | | | |
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Land and land under development (3) | Level 3 | | $ | 13,318 | | | (332 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (4) | Level 3 | | $ | 23,967 | | | (4,870 | ) | | | | | | |
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REO - held-and-used, net (5) | Level 3 | | $ | 173,665 | | | (1,051 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments, total gains from acquisitions of real estate through foreclosure and REO impairments recorded during the nine months ended August 31, 2012. | | | | | | | | | | | | | |
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-2 | Finished homes and construction in progress with an aggregate carrying value of $19.9 million were written down to their fair value of $10.8 million, resulting in valuation adjustments of $9.1 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the nine months ended August 31, 2012. | | | | | | | | | | | | | |
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-3 | Land and land under development with an aggregate carrying value of 13.6 million were written down to their fair value of $13.3 million, resulting in valuation adjustments of $0.3 million, which were included in Lennar Homebuilding costs and expenses in the Company's statements of operations for the nine months ended August 31, 2012. | | | | | | | | | | | | | |
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-4 | REO, held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-for-sale, had a carrying value of $10.2 million and a fair value of $7.8 million. The fair value of REO, held-for-sale, is based upon the appraised value at the time of foreclosure or management’s best estimate. The losses upon acquisition of REO, held-for-sale, were $2.4 million. As part of management's periodic valuations of its REO, held-for-sale, during the nine months ended August 31, 2012, REO, held-for-sale, with an aggregate value of $18.6 million were written down to their fair value of $16.2 million, resulting in impairments of $2.4 million. These losses and impairments are included within Rialto Investments other income (expense), net in the Company's statement of operations for the nine months ended August 31, 2012. | | | | | | | | | | | | | |
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-5 | REO, held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. Upon acquisition, the REO, held-and-used, net, had a carrying value of $150.5 million and a fair value of $154.6 million. The fair value of REO, held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. The gains upon acquisition of REO, held-and-used, net, were $4.1 million. As part of management's periodic valuations of its REO, held-and-used, net, during the nine months ended August 31, 2012, REO, held-and-used, net, with an aggregate value of $24.2 million were written down to their fair value of $19.0 million, resulting in impairments of $5.2 million. These gains and impairments are included within the Rialto Investments other income (expense), net, in the Company’s statement of operations for the nine months ended August 31, 2012. | | | | | | | | | | | | | |
Finished homes and construction in progress are included within 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. Construction overhead and selling expenses are expensed as incurred. Homes held-for-sale are classified as inventories until delivered. Land, land development, amenities and other costs are accumulated by specific area and allocated to homes within the respective areas. The Company reviews its 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 512 and 442 active communities, excluding unconsolidated entities, as of August 31, 2013 and 2012, 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 its review for indicators of impairment on a community level, the Company evaluates, 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. The Company pays 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, the Company identifies communities whose carrying values exceed their undiscounted cash flows. |
The Company estimates the fair value of its 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. For example, any increase and or decrease in construction costs in addition to change in product type in many communities has impacted future estimated cash flows. |
Each of the homebuilding markets in which the Company operates is unique, as homebuilding has historically been a local business driven by local market conditions and demographics. Each of the Company’s homebuilding markets has specific supply and demand relationships reflective of local economic conditions. The Company’s projected cash flows are impacted by many assumptions. Some of the most critical assumptions in the Company’s cash flow model are projected absorption pace for home sales, sales prices and costs to build and deliver homes on a community by community basis. |
In order to arrive at the assumed absorption pace for home sales included in the Company’s cash flow model, the Company analyzes its historical absorption pace in the community as well as other comparable communities in the geographical area. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on population demographics, unemployment rates and availability of competing product in the geographic area where the community is located. When analyzing the Company’s historical absorption pace for home sales and corresponding internal and external market studies, the Company places greater emphasis on more current metrics and trends such as the absorption pace realized in its most recent quarters as well as forecasted population demographics, unemployment rates and availability of competing product. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a trend and adjusts its historical information accordingly in order to develop assumptions on the projected absorption pace in the cash flow model for a community. |
In order to determine the assumed sales prices included in its cash flow models, the Company analyzes the historical sales prices realized on homes it delivered in the community and other comparable communities in the geographical area as well as the sales prices included in its current backlog for such communities. In addition, the Company considers internal and external market studies and trends, which generally include, but are not limited to, statistics on sales prices in neighboring communities and sales prices on similar products in non-neighboring communities in the geographic area where the community is located. When analyzing its historical sales prices and corresponding market studies, the Company also places greater emphasis on more current metrics and trends such as future forecasted sales prices in neighboring communities as well as future forecasted sales prices for similar products in non-neighboring communities. Generally, if the Company notices a variation from historical results over a span of two fiscal quarters, the Company considers such variation to be the establishment of a trend and adjusts its historical information accordingly in order to develop assumptions on the projected sales prices in the cash flow model for a community. |
In order to arrive at the Company’s assumed costs to build and deliver homes, the Company generally assumes a cost structure reflecting contracts currently in place with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. Costs assumed in the cash flow model for the Company’s communities are generally based on the rates the Company is currently obligated to pay under existing contracts with its vendors adjusted for any anticipated cost reduction initiatives or increases in cost structure. |
Since the estimates and assumptions included in the Company’s cash flow models are based upon historical results and projected trends, the Company does not anticipate unexpected changes in market conditions or strategies that may lead the Company to incur additional impairment charges in the future. |
Using all available information, the Company calculates its 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 the Company believes 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. The Company generally uses a discount rate of approximately 20%, subject to the perceived risks associated with the community’s cash flow streams relative to its inventory. |
The Company estimates 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 assumptions change. For example, further market deterioration or changes in assumptions may lead to the Company incurring additional impairment charges on previously impaired inventory, as well as on inventory not currently impaired but for which indicators of impairment may arise if further market deterioration occurs. |
In the nine months ended August 31, 2013, the Company reviewed its communities for potential indicators of impairments and identified 31 communities with 954 homesites and a corresponding carrying value of $69.3 million as having potential indicators of impairment. Of those communities identified, the Company recorded impairments on 99 homesites in 3 communities with a corresponding carrying value of $16.5 million. The table below summarizes the most significant unobservable inputs used in the Company's discounted cash flow model to determine the fair value of its communities (primarily one community) for which the Company recorded valuation adjustments during the nine months ended August 31, 2013: |
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Unobservable inputs | Range | | | | | | | | | |
Average selling price | | $163,000 | | - | $279,000 | | | | | | | | | |
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Absorption rate per quarter (homes) | 2 | | - | 34 | | | | | | | | | |
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Discount rate | 20% | | | | | | | | | |
The Company evaluates its investments 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 value of the Company’s investment in the unconsolidated entity 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 the Company’s investment in unconsolidated entities includes certain critical assumptions made by management: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. |
The Company’s assumptions on the projected future distributions from the unconsolidated entities are dependent on market conditions. Specifically, distributions are dependent on cash to be generated from the sale of inventory by the unconsolidated entities. Such inventory is also reviewed for potential impairment by the unconsolidated entities. The unconsolidated entities generally use a discount rate of approximately 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, the Company’s proportionate share is reflected in the Company’s homebuilding equity in earnings (loss) from unconsolidated entities with a corresponding decrease to its investment in unconsolidated entities. In certain instances, the Company may be required to record additional losses relating to its investment in unconsolidated entities, if the Company’s investment in the unconsolidated entity, or a portion thereof, is deemed to be other than temporarily impaired. These losses are included in Lennar Homebuilding other income, net. |
Additionally, the Company considers various qualitative factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include age of the venture, intent and ability for the Company to recover its investment in the entity, financial condition and long-term prospects of the 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 investment, 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 Company believes that the decline in the fair value of the investment is temporary, then no impairment is recorded. |
REO represents real estate that the Rialto segment has taken control or has effective control of in partial or full satisfaction of loans receivable. At the time of acquisition of a property through foreclosure of a loan, REO is recorded at fair value less estimated costs to sell if classified as held-for-sale or at fair value if classified as held-and-used, which becomes the property’s new basis. The fair values of these assets are determined in part by placing reliance on third party appraisals of the properties and/or internally prepared analyses of recent offers or prices on comparable properties in the proximate vicinity. The third party appraisals and internally developed analyses are significantly impacted by the local market economy, market supply and demand, competitive conditions and prices on comparable properties, adjusted for date of sale, location, property size, and other factors. Each REO is unique and is analyzed in the context of the particular market where the property is located. In order to establish the significant assumptions for a particular REO, the Company analyzes historical trends, including trends achieved by our local homebuilding operations, if applicable, and current trends in the market and economy impacting the REO. Using available trend information, the Company then calculates its best estimate of fair value, which can include projected cash flows discounted at a rate the Company believes a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. These methods use unobservable inputs to develop fair value for the Company’s REO. Due to the volume and variance of unobservable inputs, resulting from the uniqueness of each of the Company's REO, the Company does not use a standard range of unobservable inputs with respect to its evaluation of REO. However, for operating properties within REO, the Company may also use estimated cash flows multiplied by a capitalization rate to determine the fair value of the property. For the three and nine months ended August 31, 2013, the capitalization rates used to estimate fair value ranged from 8% to 12% and varied based on the location of the asset, asset type and occupancy rates for the operating properties. |
Changes in economic factors, consumer demand and market conditions, among other things, could materially impact estimates used in the third party appraisals and/or internally prepared analyses of recent offers or prices on comparable properties. Thus, estimates can differ significantly from the amounts ultimately realized by the Rialto segment from disposition of these assets. The amount by which the recorded investment in the loan is less than the REO’s fair value (net of estimated cost to sell if held-for-sale), is recorded as an unrealized gain on foreclosure in the Company’s statement of operations. The amount by which the recorded investment in the loan is greater than the REO’s fair value (net of estimated cost to sell if held-for-sale) is initially recorded as an impairment in the Company’s statement of operations. |