Financial Instruments | 6 Months Ended |
31-May-14 |
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 May 31, 2014 and November 30, 2013, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, receivables, net 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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| | | May 31, 2014 | | November 30, 2013 |
| Fair Value | | Carrying | | Fair | | Carrying | | Fair |
(In thousands) | Hierarchy | | Amount | | Value | | Amount | | Value |
ASSETS | | | | | | | | | |
Rialto Investments: | | | | | | | | | |
Loans receivable, net | Level 3 | | $ | 203,190 | | | 204,601 | | | 278,392 | | | 305,810 | |
|
Investments held-to-maturity | Level 3 | | $ | 16,658 | | | 16,532 | | | 16,070 | | | 15,952 | |
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Lennar Financial Services: | | | | | | | | | |
Loans held-for-investment, net | Level 3 | | $ | 26,787 | | | 26,879 | | | 26,356 | | | 26,095 | |
|
Investments held-to-maturity | Level 2 | | $ | 56,806 | | | 57,016 | | | 62,344 | | | 62,580 | |
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LIABILITIES | | | | | | | | | |
Lennar Homebuilding senior notes and other debts | Level 2 | | $ | 4,683,438 | | | 5,624,954 | | | 4,194,432 | | | 4,971,500 | |
payable |
Rialto Investments notes and other debts payable | Level 2 | | $ | 577,916 | | | 583,677 | | | 441,883 | | | 438,373 | |
|
Lennar Financial Services notes and other debts payable | Level 2 | | $ | 465,875 | | | 465,875 | | | 374,166 | | | 374,166 | |
|
Lennar Multifamily notes payable | Level 2 | | $ | — | | | — | | | 13,858 | | | 13,858 | |
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The following methods and assumptions are used by the Company in estimating fair values: |
Lennar Homebuilding and Lennar Multifamily—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, net 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 and other debts payable, the fair value is calculated based on discounted cash flows using the Company’s weighted average borrowing rate and for the warehouse repurchase financing agreements fair values approximate their carrying value due to their short maturities. |
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 May 31, 2014 | | Fair Value at November 30, 2013 | | | | | | |
Hierarchy | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Financial Services: | | | | | | | | | | | |
Loans held-for-sale (1) | Level 2 | | $ | 467,786 | | | 414,231 | | | | | | | |
| | | | | |
Mortgage loan commitments | Level 2 | | $ | 15,033 | | | 7,335 | | | | | | | |
| | | | | |
Forward contracts | Level 2 | | $ | (6,315 | ) | | 1,444 | | | | | | | |
| | | | | |
Mortgage servicing rights | Level 3 | | $ | 18,242 | | | 11,455 | | | | | | | |
| | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Investments available-for-sale | Level 3 | | $ | 20,416 | | | 40,032 | | | | | | | |
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Rialto Investments Financial Assets: | | | | | | | | | | | |
Loans held-for-sale (2) | Level 3 | | $ | 45,065 | | | 44,228 | | | | | | | |
| | | | | |
Credit default swaps | Level 2 | | $ | 1,219 | | | 788 | | | | | | | |
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Rialto Investments Financial Liabilities: | | | | | | | | | | | |
Interest rate swaps and swap futures | Level 1 | | $ | 425 | | | 31 | | | | | | | |
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Credit default swaps | Level 2 | | $ | 646 | | | 318 | | | | | | | |
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-1 | The aggregate fair value of Lennar Financial Services loans held-for-sale of $467.8 million at May 31, 2014 exceeds their aggregate principal balance of $445.4 million by $22.4 million. The aggregate fair value of loans held-for-sale of $414.2 million at November 30, 2013 exceeds their aggregate principal balance of $399.0 million by $15.3 million. | | | | | | | | | | | | | |
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-2 | The aggregate fair value of Rialto Investments loans held-for-sale of $45.1 million at May 31, 2014 exceeds their aggregate principal balance of $44.4 million by $0.7 million. The aggregate fair value of loans held-for-sale of $44.2 million at November 30, 2013 exceeds their aggregate principal balance of $44.0 million by $0.2 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 May 31, 2014 and November 30, 2013. 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 May 31, 2014 and November 30, 2013. |
Lennar Financial Services forward contracts— Fair value is based on quoted market prices for similar financial instruments. |
Lennar Financial Services mortgage servicing rights — Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis, at the time of securitization or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of May 31, 2014, the key assumptions used in determining the fair value include a 12.3% mortgage prepayment rate, a 4.5% delinquency rate and a 12.0% discount rate. |
Lennar Homebuilding investments available-for-sale— The fair value of these investments is based on third party valuations and/or estimated by the Company on the basis of discounted cash flows. |
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 pricing 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 swaps and swap futures— The fair value of interest rate swaps and 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 (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 (losses) of Rialto financial instruments measured at fair value are recognized in the Rialto segment's operating earnings. Gains (losses) related to the Lennar Homebuilding investments available-for-sale during the six months ended May 31, 2014 and 2013 were deferred as a result of the Company's continuing involvement in the underlying real estate collateral, thus no gains (losses) were recognized during the six months ended May 31, 2014 and 2013. The changes in fair values for Level 1 and Level 2 financial instruments measured on a recurring basis that are included in operating earnings are shown, by financial instrument and financial statement line item below: |
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| Three Months Ended | | Six Months Ended | | |
| May 31, | | May 31, | | |
(In thousands) | 2014 | | 2013 | | 2014 | | 2013 | | |
Changes in fair value included in Lennar Financial Services revenues: | | | | | | | | | |
Loans held-for-sale | $ | 8,392 | | | (6,624 | ) | | 7,152 | | | (17,404 | ) | | |
| |
Mortgage loan commitments | $ | 4,904 | | | (6,189 | ) | | 7,698 | | | (6,894 | ) | | |
| |
Forward contracts | $ | (2,038 | ) | | 17,549 | | | (7,759 | ) | | 17,991 | | | |
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Changes in fair value included in Rialto Investments revenues: | | | | | | | | | |
Financial Assets: | | | | | | | | | |
Credit default swaps | $ | (369 | ) | | — | | | 431 | | | — | | | |
| |
Financial Liabilities: | | | | | | | | | |
Interest rate swaps and swap futures | $ | 42 | | | — | | | (394 | ) | | — | | | |
| |
Credit default swaps | $ | 500 | | | — | | | (328 | ) | | — | | | |
| |
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 Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge its 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 and loan sales transactions is managed by limiting the Company’s counterparties to investment banks, federally regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s 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 option contracts. At May 31, 2014, the segment had open commitments amounting to $666.0 million to sell MBS with varying settlement dates through August 2014. |
The following table represents a reconciliation of the beginning and ending balance for the Financial Services Level 3 recurring fair value measurements (mortgage servicing rights) included in the Lennar Financial Services segment’s other assets: |
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| Three Months Ended | | Six Months Ended | | |
| May 31, | | May 31, | | |
| 2014 | | 2013 | | 2014 | | 2013 | | |
Mortgage servicing rights, beginning of period | $ | 11,955 | | | 5,399 | | | 11,455 | | | 4,749 | | | |
| |
Purchases and retention of mortgage servicing rights (1) | 6,808 | | | 623 | | | 7,968 | | | 1,273 | | | |
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Changes in fair value (2) | (521 | ) | | 1,285 | | | (1,181 | ) | | 1,285 | | | |
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Mortgage servicing rights, end of period | $ | 18,242 | | | 7,307 | | | 18,242 | | | 7,307 | | | |
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-1 | For both the three and six months ended May 31, 2014, purchases and retention of mortgage servicing rights include the $5.9 million acquisition of a portfolio of mortgage servicing rights. | | | | | | | | | | | | | |
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-2 | Amount represents changes in fair value included in Lennar Financial Services revenues. | | | | | | | | | | | | | |
The following table represents a reconciliation of the beginning and ending balance for the Lennar Homebuilding 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 | | Six Months Ended | | |
| May 31, | | May 31, | | |
(In thousands) | 2014 | | 2013 | | 2014 | | 2013 | | |
Investments available-for-sale, beginning of period | $ | 59,880 | | | 31,818 | | | 40,032 | | | 19,591 | | | |
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Purchases and other (1) | 5,280 | | | — | | | 21,274 | | | 12,227 | | | |
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Sales | (44,579 | ) | | — | | | (44,579 | ) | | — | | | |
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Changes in fair value (2) | 222 | | | 1,520 | | | 5,150 | | | 1,520 | | | |
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Settlements (3) | (387 | ) | | — | | | (1,461 | ) | | — | | | |
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Investments available-for-sale, end of period | $ | 20,416 | | | 33,338 | | | 20,416 | | | 33,338 | | | |
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-1 | Represents investments in community development district bonds that mature at various dates between 2037 and 2039. | | | | | | | | | | | | | |
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-2 | 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 the three and six months ended May 31, 2014 related to investments in community development district bonds, which were in default by the borrower and regarding which the Company redeemed the bonds. | | | | | | | | | | | | | |
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 | | Six Months Ended | | | | | | | | |
| May 31, | | May 31, | | | | | | | | |
(In thousands) | 2014 | | 2014 | | | | | | | | |
Rialto Investments loans held-for-sale, beginning of period | $ | 86,857 | | | 44,228 | | | | | | | | | |
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Loan originations | 396,648 | | | 692,156 | | | | | | | | | |
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Origination loans sold, including those not settled | (438,498 | ) | | (691,536 | ) | | | | | | | | |
Interest and principal paydowns | 370 | | | (24 | ) | | | | | | | | |
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Changes in fair value (1) | (312 | ) | | 241 | | | | | | | | | |
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Rialto Investments loans held-for-sale, end of period | $ | 45,065 | | | 45,065 | | | | | | | | | |
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-1 | Amount represents changes in fair value included in Rialto Investments revenues. | | | | | | | | | | | | | |
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 values 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 Three Months Ended May 31, 2014 | | Total Losses (1) | | | | | | |
Hierarchy | | | | | | |
(In thousands) | | | | | | | | | | | |
Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (2) | Level 3 | | $ | 10,007 | | | (1,032 | ) | | | | | | |
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REO - held-and-used, net (3) | Level 3 | | $ | 27,998 | | | (7,242 | ) | | | | | | |
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-1 | Represents losses from acquisitions of real estate through foreclosure including REO impairments recorded during the three months ended May 31, 2014. | | | | | | | | | | | | | |
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-2 | REO held-for-sale, assets are initially recorded at fair value less estimated costs to sell at the time of transfer. Upon transfer, the REO held-for-sale, had a carrying value of $6.6 million and a fair value of $6.2 million. The fair value of REO held-for-sale, is based upon the appraised value at the time of transfer or management’s best estimate. The losses upon transfer of REO held-for-sale, were $0.4 million. As part of management’s periodic valuations of its REO held-for-sale, during the three months ended May 31, 2014, REO held-for-sale, with an aggregate value of $4.4 million were written down to their fair value of $3.8 million, resulting in impairments of $0.6 million. These losses and impairments are included within Rialto Investments other income, net, in the Company’s condensed consolidated statement of operations for the three months ended May 31, 2014. | | | | | | | | | | | | | |
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-3 | 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 $32.4 million and a fair value of $25.7 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 $6.6 million. As part of management’s periodic valuations of its REO held-and-used, net, during the three months ended May 31, 2014, REO held-and-used, net, with an aggregate value of $2.9 million were written down to their fair value of $2.3 million, resulting in impairments of $0.6 million. These losses and impairments are included within Rialto Investments other income, net, in the Company’s condensed consolidated statement of operations for the three months ended May 31, 2014. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value Three Months Ended | | Total Losses (1) | | | | | | |
Hierarchy | May 31, | | | | | | |
| 2013 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Finished homes and construction in progress (2) | Level 3 | | $ | 9,323 | | | (2,934 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (3) | Level 3 | | $ | 11,573 | | | (4,573 | ) | | | | | | |
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REO - held-and-used, net (4) | Level 3 | | $ | 8,949 | | | (2,407 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments or losses from acquisitions of real estate through foreclosure including REO impairments recorded during the three months ended May 31, 2013. | | | | | | | | | | | | | |
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-2 | Finished homes and construction in progress with an aggregate carrying value of $12.3 million were written down to their fair value of $9.3 million, resulting in valuation adjustments of $2.9 million, which were included in Lennar Homebuilding costs and expenses in the Company’s statement of operations for the three months ended May 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 $1.8 million and a fair value of $0.7 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 $1.1 million. As part of management's periodic valuations of its REO held-for-sale during the three months ended May 31, 2013, REO held-for-sale with an aggregate value of $14.3 million were written down to their fair value of $10.8 million, resulting in impairments of $3.5 million. These losses and impairments are included within Rialto Investments other income, net in the Company's condensed consolidated statement of operations for the three months ended May 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 $10.6 million and a fair value of $8.5 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 $2.1 million. As part of management's periodic valuations of its REO held-and-used, net, during the three months ended May 31, 2013, REO held-and-used, net, with an aggregate value of $0.7 million were written down to their fair value of $0.4 million, resulting in impairments of $0.3 million. These losses and impairments are included within the Rialto Investments other income, net in the Company’s condensed consolidated statement of operations for the three months ended May 31, 2013. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value | | Total Losses (1) | | | | | | |
Hierarchy | Six Months Ended | | | | | | |
| May 31, | | | | | | |
| 2014 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Land and land under development (2) | Level 3 | | $ | 6,143 | | | (870 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (3) | Level 3 | | $ | 33,967 | | | (2,823 | ) | | | | | | |
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REO - held-and-used, net (4) | Level 3 | | $ | 44,677 | | | (7,828 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments or losses from acquisitions of real estate through foreclosure including REO impairments recorded during the six months ended May 31, 2014. | | | | | | | | | | | | | |
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-2 | Land and land under development with an aggregate carrying value of $7.0 million were written down to their fair value of $6.1 million, resulting in valuation adjustments of $0.9 million, which were included in Lennar Homebuilding costs and expenses in the Company's condensed consolidated statement of operations for the six months ended May 31, 2014. | | | | | | | | | | | | | |
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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 transfer. Upon transfer, the REO held-for-sale, had a carrying value of $13.1 million and a fair value of $12.3 million. The fair value of REO held-for-sale, is based upon the appraised value at the time of transfer or management’s best estimate. The losses upon transfer of REO held-for-sale, were $0.8 million. As part of management’s periodic valuations of its REO held-for-sale, during the six months ended May 31, 2014, REO held-for-sale, with an aggregate value of $23.7 million were written down to their fair value of $21.7 million, resulting in impairments of $2.0 million. These losses and impairments are included within Rialto Investments other income, net in the Company’s condensed consolidated statement of operations for the six months ended May 31, 2014. | | | | | | | | | | | | | |
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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 $40.1 million and a fair value of $33.7 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 $6.3 million. As part of management’s periodic valuations of its REO held-and-used, net, during the six months ended May 31, 2014, REO held-and-used, net, with an aggregate value of $12.4 million were written down to their fair value of $10.9 million, resulting in impairments of $1.5 million. These losses and impairments are included within Rialto Investments other income, net in the Company’s condensed consolidated statement of operations for the six months ended May 31, 2014. | | | | | | | | | | | | | |
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Non-financial assets | Fair Value | | Fair Value | | Total Losses (1) | | | | | | |
Hierarchy | Six Months Ended | | | | | | |
| May 31, | | | | | | |
| 2013 | | | | | | |
(In thousands) | | | | | | | | | | | |
Lennar Homebuilding: | | | | | | | | | | | |
Finished homes and construction in progress (2) | Level 3 | | $ | 12,264 | | | (4,189 | ) | | | | | | |
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Rialto Investments: | | | | | | | | | | | |
REO - held-for-sale (3) | Level 3 | | $ | 20,020 | | | (4,844 | ) | | | | | | |
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REO - held-and-used, net (4) | Level 3 | | $ | 27,160 | | | (1,466 | ) | | | | | | |
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-1 | Represents total losses due to valuation adjustments or losses from acquisitions of real estate through foreclosure including REO impairments recorded during the six months ended May 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 $12.3 million, resulting in valuation adjustments of $4.2 million, which were included in Lennar Homebuilding costs and expenses in the Company’s condensed consolidated statement of operations for the six months ended May 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 $2.0 million and a fair value of $1.3 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 $0.7 million. As part of management's periodic valuations of its REO held-for-sale during the six months ended May 31, 2013, REO held-for-sale with an aggregate value of $22.9 million were written down to their fair value of $18.7 million, resulting in impairments of $4.2 million. These losses and impairments are included within Rialto Investments other income, net in the Company's condensed consolidated statement of operations for the six months ended May 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 $25.8 million and a fair value of $24.7 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 $1.1 million. As part of management's periodic valuations of its REO held-and-used, net, during the six months ended May 31, 2013, REO held-and-used, net, with an aggregate value of $2.8 million were written down to their fair value of $2.4 million, resulting in impairments of $0.4 million. These losses and impairments are included within the Rialto Investments other income, net in the Company’s condensed consolidated statement of operations for the six months ended May 31, 2013. | | | | | | | | | | | | | |
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. The Company discloses its accounting policy related to inventories and its review for indicators of impairments in the Summary of Significant Accounting Policies in its Form 10-K for the year ended November 30, 2013. |
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. |
There were 578 and 492 active communities, excluding unconsolidated entities, as of May 31, 2014 and 2013, respectively. In the six months ended May 31, 2014, the Company reviewed its communities for potential indicators of impairments and identified 33 communities with 1,778 homesites and a corresponding carrying value of $138.8 million as having potential indicators of impairment. Of those communities identified, the Company recorded no impairments for the six months ended May 31, 2014. |
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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 six months ended May 31, 2014, the capitalization rates used to estimate fair value ranged from 9% 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. |