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Lennar 10-K 2010
Form 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended November 30, 2009

 

Commission file number 1-11749

 

LOGO

 

Lennar Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   95-4337490

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code (305) 559-4000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Class A Common Stock, par value 10¢

  New York Stock Exchange

Class B Common Stock, par value 10¢

  New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

 

NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  þ  NO  ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  ¨  NO  þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  þ  NO  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  ¨  NO  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  þ    Accelerated filer  ¨        Non-accelerated filer  ¨    Smaller reporting company  ¨
      (Do not check if a smaller reporting company)   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YES  ¨  NO  þ

 

The aggregate market value of the registrant’s Class A and Class B common stock held by non-affiliates of the registrant (140,089,269 Class A shares and 9,653,835 Class B shares) as of May 31, 2009, based on the closing sale price per share as reported by the New York Stock Exchange on such date, was $1,401,660,022.

 

As of December 31, 2009, the registrant had outstanding 153,610,871 shares of Class A common stock and 31,283,959 shares of Class B common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Related Section

  

Documents

III

   Definitive Proxy Statement to be filed pursuant to Regulation 14A on or before March 30, 2010.

 

 

 


PART I

 

Item 1.    Business.

 

Overview of Lennar Corporation

 

We are one of the nation’s largest homebuilders and a provider of financial services. Our homebuilding operations include the construction and sale of single-family attached and detached homes, and to a lesser extent multi-level residential buildings, as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which we have investments. We have grouped our homebuilding activities into four reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West and Homebuilding Houston. Information about homebuilding activities in states in which our homebuilding activities are not economically similar to those in other states in the same geographic area is grouped under “Homebuilding Other.” Our reportable homebuilding segments and Homebuilding Other have operations located in:

 

East: Florida, Maryland, New Jersey and Virginia

Central: Arizona, Colorado and Texas (1)

West: California and Nevada

Houston: Houston, Texas

Other: Illinois, Minnesota, New York, North Carolina and South Carolina

          (1)   Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

 

We have one Financial Services reportable segment that provides primarily mortgage financing, title insurance and closing services for both buyers of our homes and others. Substantially all of the loans that we originate are sold in the secondary mortgage market on a servicing released, non-recourse basis; although, we remain liable for certain limited representations and warranties related to loan sales. Our Financial Services segment operates generally in the same states as our homebuilding operations, as well as in other states. For financial information about both our homebuilding and financial services operations, you should review Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is Item 7 of this Report, and our consolidated financial statements and the notes to our consolidated financial statements, which are included in Item 8 of this Report.

 

A Brief History of Our Company

 

Our company was founded as a local Miami homebuilder in 1954. We completed our initial public offering in 1971, and listed our common stock on the New York Stock Exchange in 1972. During the 1980s and 1990s, we entered and expanded operations in some of our current major homebuilding markets including California, Florida and Texas through both organic growth and acquisitions such as Pacific Greystone Corporation in 1997, amongst others. In 1997, we completed the spin-off of our commercial real estate business to LNR Property Corporation. In 2000, we acquired U.S. Home Corporation, which expanded our operations into New Jersey, Maryland, Virginia, Minnesota and Colorado and strengthened our position in other states. From 2002 through 2005, we acquired several regional homebuilders, which brought us into new markets and strengthened our position in several existing markets. We are a national homebuilder that operates in various states with deliveries of 11,478 new homes in 2009.

 

Recent Business Developments

 

Overview

 

During 2009, we continued to adapt our business in light of the current economic landscape. Despite high unemployment rates, increased foreclosures and tightening credit standards, recent demand trends in the communities in which we are selling homes indicate that the markets may be stabilizing as more confident homebuyers are taking advantage of increased affordability resulting from declining home prices, historically low interest rates and government stimulus programs.

 

We ended the year with $1.3 billion in cash and a homebuilding debt-to-total capital ratio, net of homebuilding cash, of 36.9%. Additionally, as a result of tax legislation that was enacted in our fourth quarter, we will receive a tax refund of approximately $320 million in early 2010. We extended our debt maturities by issuing $400 million of senior notes maturing in 2017 and retiring $448 million of senior notes and other debt. We also issued $225 million of stock under our $275 million equity draw down program. During 2009, we continued to reduce the number of unconsolidated joint ventures in which we have investments to 62 at the end of 2009 from 116 at the end of 2008 and our maximum recourse debt related to those investments to $288 million at the end of 2009 from $520 million at the end of 2008.

 

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In late 2008, we experienced higher cancellation rates resulting in an increase in completed, unsold inventory. In the first half of 2009, we were able to convert this inventory into cash by offering higher sales incentives. Additionally, in 2009 we continued focusing on refining our product offering, reducing the number of floor plans and targeting first time and value oriented homebuyers. Our more efficient product offerings have significantly reduced our construction costs and allowed us to meet our customers’ demands. These cost savings, combined with reduced sales incentives, improved our gross margins throughout the second half of 2009.

 

As demand in some of our markets showed signs of stabilization and our balance sheet strengthened, we increased our land purchases in the second half of the year in premium locations that should generate high returns once we start delivering those homes, as well as investing in strategic land-buying opportunities, such as purchasing land from distressed land sellers and banks.

 

During 2009, one of our more significant joint ventures, LandSource Communities Development LLC (“LandSource”), which filed for bankruptcy in 2008, was reorganized into a new company named Newhall Land Development, LLC, (“Newhall”). The reorganized company emerged from Chapter 11 free of its previous bank debt. As part of the reorganization, we invested $140 million in exchange for approximately a 15% equity interest in the reorganized Newhall, ownership in several communities that were formerly owned by LandSource, the settlement and release of any claims that might have been asserted against us and certain other claims LandSource had against third parties.

 

We are also looking to invest in distressed real estate opportunities through Rialto Capital Management (“Rialto”). We may participate in investments Rialto may make, whether through a fund formed by Rialto or as a direct participant in particular investments. Rialto is actively evaluating investment opportunities in various types of residential and commercial real estate assets and/or loans and is currently bidding on pools of distressed real estate assets and/or loans.

 

During 2009, Rialto became a sub-advisor to AllianceBernstein L.P. with regard to a fund formed under the Federal government’s Public-Private Investment Program (“PPIP”) to purchase real estate related securities from banks and other financial institutions. We committed to invest $75 million of the total equity commitments of approximately $1.1 billion made by private investors in this fund, and the U.S. Treasury committed to a matching amount of approximately $1.1 billion of equity in the fund, as well as agreed to extend up to approximately $2.2 billion of financing. Subsequent to November 30, 2009, we invested $23 million in the PPIP fund, which is focused on acquiring securities backed by real estate loans.

 

Inventory Impairments and Valuation Adjustments related to Investments in Unconsolidated Entities

 

We continued evaluating our balance sheet quarterly for impairment on an asset-by-asset basis during fiscal 2009. Based on our evaluation and assessment, during the years ended November 30, 2009, 2008 and 2007, we recorded the following inventory impairments:

 

     Years Ended November 30,
     2009    2008    2007
     (In thousands)

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

   $ 180,239    195,518    747,843

Valuation adjustments to land we intend to sell or have sold to third parties (1)

     95,314    47,791    1,167,294

Write-offs of option deposits and pre-acquisition costs

     84,372    97,172    529,981
                

Total inventory impairments

   $ 359,925    340,481    2,445,118
                

 

(1)   The $1.2 billion of valuation adjustments recorded in 2007 to land we intend to sell or have sold to third parties included $740.4 million of valuation adjustments related to a portfolio of land we sold to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., which was formed in November 2007 and in which we have a 20% ownership interest.

 

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During the years ended November 30, 2009, 2008 and 2007, we recorded the following valuation adjustments related to our investments in unconsolidated entities:

 

     Years Ended November 30,
     2009    2008    2007
     (In thousands)

Our share of valuation adjustments related to assets of unconsolidated entities

   $ 101,893    32,245    364,162

Valuation adjustments to our investments in unconsolidated entities

     88,972    172,790    132,206
                

Total valuation adjustments to our investments in unconsolidated entities

   $ 190,865    205,035    496,368
                

 

The inventory impairments and valuation adjustments to our investments in unconsolidated entities recorded above were estimated based on market conditions and assumptions made by management at the time the valuation adjustments were recorded, which may differ materially from actual results if market conditions or our assumptions change.

 

Investments in Unconsolidated Entities

 

For a number of years, we created and participated in joint ventures that acquired and developed land for our homebuilding operations, for sale to third parties or for use in their own homebuilding operations. Through these joint ventures, we reduced the amount we had to invest in order to assure access to potential future homesites, thereby mitigating certain risks associated with land acquisitions, and, in some instances, we obtained access to land to which we could not otherwise have obtained access or could not have obtained access on as favorable terms. Although these ventures served their initial intended purpose of risk mitigation, as the homebuilding market deteriorated and asset impairments resulted in the loss of equity, some of our joint venture partners became financially unable or unwilling to fulfill their obligations. During 2009, we continued reevaluating all of our joint venture arrangements, with particular focus on those ventures with recourse indebtedness, and reduced the number of joint ventures in which we were participating and the recourse indebtedness of those joint ventures. As of November 30, 2009, we had reduced the number of unconsolidated joint ventures in which we were participating to 62 from 261 joint ventures at November 30, 2006 and reduced our net recourse exposure related to unconsolidated joint ventures to $194.6 million from $1,102.9 million at November 30, 2006.

 

Homebuilding Operations

 

Overview

 

We primarily sell single-family attached and detached homes, and to a lesser extent, multi-level residential buildings, in communities targeted to first-time, move-up and active adult homebuyers. The average sales price of a Lennar home was $243,000 in fiscal 2009, compared to $270,000 in fiscal 2008 and $297,000 in fiscal 2007. We operate primarily under the Lennar brand name.

 

Through our own efforts and unconsolidated entities in which we have investments, we are involved in all phases of planning and building in our residential communities including land acquisition, site planning, preparation and improvement of land and design, construction and marketing of homes. For additional information about our investments in and relationships with unconsolidated entities, see Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of this Report.

 

Management and Operating Structure

 

We balance a local operating structure with centralized corporate level management. Decisions related to our overall strategy, acquisitions of land and businesses, risk management, financing, cash management and information systems are centralized at the corporate level. Our local operating structure consists of divisions, which are managed by individuals who generally have significant experience in the homebuilding industry and, in most instances, in their particular markets. They are responsible for operating decisions regarding land identification, entitlement and development, the management of inventory levels for our current volume levels, community development, home design, construction and marketing our homes.

 

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Diversified Program of Property Acquisition

 

We generally acquire land for development and for the construction of homes that we sell to homebuyers. Land is subject to specified underwriting criteria and is acquired through our diversified program of property acquisition which may consist of the following:

 

   

Acquiring land directly from individual land owners/developers or homebuilders;

 

   

Acquiring local or regional homebuilders that own, or have options to purchase, land in strategic markets;

 

   

Acquiring land through option contracts, which generally enables us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the option;

 

   

Acquiring parcels of land through joint ventures, primarily to reduce and share our risk, among other factors, by limiting the amount of our capital invested in land, while increasing our access to potential future homesites and allowing us to participate in strategic ventures; and

 

   

Acquiring distressed assets from banks, government sponsored enterprises and opportunity funds.

 

At November 30, 2009, we owned 82,703 homesites and had access through option contracts to an additional 21,173 homesites, of which 7,423 were through option contracts with third parties and 13,750 were through option contracts with unconsolidated entities in which we have investments. At November 30, 2008, we owned 74,681 homesites and had access through option contracts to an additional 38,589 homesites, of which 12,718 were through option contracts with third parties and 25,871 were through option contracts with unconsolidated entities in which we have investments.

 

Construction and Development

 

We generally supervise and control the development of land and the design and building of our residential communities with a relatively small labor force. We hire subcontractors for site improvements and virtually all of the work involved in the construction of homes. Arrangements with our subcontractors generally provide that our subcontractors will complete specified work in accordance with price schedules and applicable building codes and laws. The price schedules may be subject to change to meet changes in labor and material costs or for other reasons. We believe that the sources and availability of raw materials to our subcontractors are adequate for our current and planned levels of operation. We generally do not own heavy construction equipment. We finance construction and land development activities primarily with cash generated from operations, debt issuances and equity offerings.

 

Marketing

 

We offer a diversified line of homes for first-time, move-up and active adult homebuyers available in a variety of environments ranging from urban infill communities to golf course communities. We sell our homes primarily from models that we have designed and constructed. During 2009, the homes we delivered had an average sales price of $243,000.

 

We employ sales associates who are paid salaries, commissions or both to complete on-site sales of homes. We also sell homes through independent brokers. We advertise our communities through newspapers, radio advertisements and other local and regional publications, on billboards and on the Internet, including our website, www.lennar.com. In addition, we advertise our active adult communities in areas where prospective active adult homebuyers live.

 

Quality Service

 

We strive to continually improve homeowner customer satisfaction throughout the pre-sale, sale, construction, closing and post-closing periods. Through the participation of sales associates, on-site construction supervisors and customer care associates, all working in a team effort, we strive to create a quality homebuying experience for our customers, which we believe leads to enhanced customer retention and referrals.

 

The quality of our homes is substantially affected by the efforts of on-site management and others engaged in the construction process, by the materials we use in particular homes or by other similar factors. To the extent bonuses have been paid, management incentive programs have consistently been contingent upon achieving certain customer satisfaction standards.

 

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We warrant our new homes against defective materials and workmanship for a minimum period of one year after the date of closing. Although we subcontract virtually all segments 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 the homebuyers for the correction of any deficiencies.

 

Deliveries

 

The table below indicates the number of deliveries for each of our homebuilding segments and Homebuilding Other during our last three fiscal years:

 

     2009    2008    2007

East

   3,817    4,957    9,840

Central

   1,796    2,442    7,020

West

   2,480    4,031    8,739

Houston

   2,150    2,736    4,380

Other

   1,235    1,569    3,304
              

Total

   11,478    15,735    33,283
              

 

Of the total home deliveries listed above, 56, 391 and 1,701, respectively, represent deliveries from unconsolidated entities for the years ended November 30, 2009, 2008 and 2007.

 

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 contracts if they fail to qualify for financing or under certain other circumstances. We experienced a cancellation rate of 18% in 2009, compared to 26% and 30%, respectively, in 2008 and 2007. Substantially all homes currently in backlog will be delivered in fiscal year 2010. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners.

 

The table below indicates the backlog dollar value for each of our homebuilding segments and Homebuilding Other as of the end of our last three fiscal years:

 

     2009    2008    2007
     (In thousands)

East

   $ 179,175      202,791    587,100

Central

     36,158      23,736    67,344

West

     143,868      108,779    408,280

Houston

     60,876      57,785    128,340

Other

     59,494      63,179    193,073
                  

Total

   $ 479,571    $ 456,270    1,384,137
                  

 

Of the dollar value of homes in backlog listed above, $7.2 million, $12.5 million and $182.7 million, respectively, represent the backlog dollar value from unconsolidated entities at November 30, 2009, 2008 and 2007.

 

Financial Services Operations

 

Mortgage Financing

 

We primarily originate conforming conventional, FHA-insured, VA-guaranteed residential mortgage loan products and other products to our homebuyers and others through our financial services subsidiaries, Universal American Mortgage Company, LLC and Eagle Home Mortgage, LLC, located generally in the same states as our homebuilding operations as well as other states. In 2009, our financial services subsidiaries provided loans to 87% of our homebuyers who obtained mortgage financing in areas where we offered services. Because of the availability of mortgage loans from our financial services subsidiaries, as well as independent mortgage lenders, we believe most creditworthy purchasers of our homes have access to financing.

 

During 2009, we originated approximately 17,900 mortgage loans totaling $4.0 billion, compared to 18,300 mortgage loans totaling $4.3 billion during 2008. Substantially all of the loans we originate are sold in the

 

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secondary mortgage market on a servicing released, non-recourse basis; although, we remain liable for certain limited representations. Therefore, we have little direct exposure related to the residential mortgages we sell.

 

We have a corporate risk management policy under which we hedge our interest rate risk on rate-locked loan commitments and loans held-for-sale to mitigate exposure to interest rate fluctuations. We finance our mortgage loan activities with borrowings under our financial services warehouse facilities or from our operating funds. Two of our warehouse repurchase facilities with a maximum aggregate commitment of $200 million and $100 million, respectively, mature in June 2010, and the other warehouse facility with a maximum aggregate commitment of $125 million matures in July 2010. We expect the facilities to be renewed or replaced with other facilities when they mature.

 

Title Insurance and Closing Services

 

We provide title insurance and closing services to our homebuyers and others. During 2009, we provided title and closing services for approximately 120,500 real estate transactions, and issued approximately 92,500 title insurance policies through our underwriter, North American Title Insurance Company. Title and closing services are provided by agency subsidiaries in Arizona, California, Colorado, District of Columbia, Florida, Illinois, Maryland, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Texas, Virginia and Wisconsin. Title insurance services are provided in these same states, as well as in Alabama, Delaware, Georgia North Carolina, South Carolina and Tennessee.

 

Seasonality

 

We have historically experienced variability in our results of operations from quarter-to-quarter due to the seasonal nature of the homebuilding business.

 

Competition

 

The residential homebuilding industry is highly competitive. We compete for homebuyers in each of the market regions where we operate with numerous national, regional and local homebuilders, as well as with resales of existing homes and with the rental housing market. In recent years, lenders’ efforts to sell foreclosed homes have become an increasingly competitive factor within the homebuilding industry. We compete for homebuyers on the basis of a number of interrelated factors including location, price, reputation, amenities, design, quality and financing. In addition to competition for homebuyers, we also compete with other homebuilders for desirable properties, raw materials and reliable, skilled labor. We compete for land buyers with third parties in our efforts to sell land to homebuilders and others. We believe we are competitive in the market regions where we operate primarily due to our:

 

   

Balance sheet, where we continue to focus on inventory management and liquidity;

 

   

Access to land, particularly in land-constrained markets;

 

   

Pricing to current market conditions through sales incentives offered to homebuyers; and

 

   

Production of value-engineered homes for first-time and valued-oriented homebuyers.

 

Our financial services operations compete with other mortgage lenders, including national, regional and local mortgage bankers and brokers, banks, savings and loan associations and other financial institutions, in the origination and sale of mortgage loans. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer. We compete with other title insurance agencies and underwriters for closing services and title insurance. Principal competitive factors include service and price.

 

Regulation

 

Homes and residential communities that we build must comply with state and local laws and regulations relating to, among other things, zoning, construction permits or entitlements, construction material requirements, density requirements, and requirements relating to building design and property elevation, building codes and handling of waste. These include laws requiring the use of construction materials that reduce the need for energy-consuming heating and cooling systems. These laws and regulations are subject to frequent change and often increase construction costs. In some instances, we must comply with laws that require commitments from us to provide roads and other offsite infrastructure to be in place prior to the commencement of new construction. These laws and regulations are usually administered by counties and municipalities and may result in fees and

 

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assessments or building moratoriums. In addition, certain new development projects are subject to assessments for schools, parks, streets and highways and other public improvements, the costs of which can be substantial.

 

The residential homebuilding industry is also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. These environmental laws include such areas as storm water and surface water management, soil, groundwater and wetlands protection, subsurface conditions and air quality protection and enhancement. Environmental laws and existing conditions may result in delays, may cause us to incur substantial compliance and other costs and may prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas.

 

In recent years, several cities and counties in which we have developments have submitted to voters “slow growth” initiatives and other ballot measures that could impact the affordability and availability of land suitable for residential development within those localities. Although many of these initiatives have been defeated, we believe that if similar initiatives were approved, residential construction by us and others within certain cities or counties could be seriously impacted.

 

In order to make it possible for some of our homebuyers to obtain FHA-insured or VA-guaranteed mortgages, we must construct the homes they buy in compliance with regulations promulgated by those agencies.

 

Various states have statutory disclosure requirements relating to the marketing and sale of new homes. These disclosure requirements vary widely from state-to-state. In addition, some states require that each new home be registered with the state at or before the time title is transferred to a buyer (e.g., the Texas Residential Construction Commission Act).

 

In some states, we are required to be registered as a licensed contractor and comply with applicable rules and regulations. In various states, our new home consultants are required to be registered as licensed real estate agents and to adhere to the laws governing the practices of real estate agents.

 

Our mortgage and title subsidiaries must comply with applicable real estate laws and regulations. The subsidiaries are licensed in the states in which they do business and must comply with laws and regulations in those states. These laws and regulations include provisions regarding capitalization, operating procedures, investments, lending and privacy disclosures, forms of policies and premiums.

 

A subsidiary of Newhall, of which we currently, indirectly own 15%, provides water to a portion of Los Angeles County, California. This subsidiary is subject to extensive regulation by the California Public Utilities Commission.

 

Compliance Policy

 

We have a Code of Business and Ethics that requires every associate (i.e., employee) and officer to at all times deal fairly with the Company’s customers, subcontractors, suppliers, competitors and associates, and states that all our associates, officers and directors are expected to comply at all times with all applicable laws, rules and regulations. Despite this, there are instances in which subcontractors or others through which we do business engage in practices that do not comply with applicable regulations and guidelines. There have been instances in which some of our associates were aware of these practices and did not take steps to prevent them. When we learn of practices relating to homes we build or financing we provide that do not comply with applicable regulations or guidelines, we move actively to stop the non-complying practices as soon as possible and we have taken disciplinary action with regard to our associates who were aware of the practices, including in some instances terminating their employment. Our Code of Business and Ethics also has procedures in place that allows whistleblowers to submit their concerns regarding our operations, financial reporting, business integrity or any other related matter anonymously to the Audit Committee of our Board of Directors and/or to the non-management directors of our Board of Directors, thus ensuring their protection from retaliation.

 

Associates

 

At December 31, 2009, we employed 3,835 individuals of whom 2,184 were involved in our homebuilding operations and 1,651 were involved in our financial services operations, compared to November 30, 2008, when we employed 4,913 individuals of whom 3,055 were involved in our homebuilding operations and 1,858 were involved in our financial services operations. We do not have collective bargaining agreements relating to any of our associates. However, we subcontract many phases of our homebuilding operations and some of the subcontractors we use have associates who are represented by labor unions.

 

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Relationship with LNR Property Corporation

 

In 1997, we transferred our commercial real estate investment and management business to LNR Property Corporation (“LNR”), and spun-off LNR to our stockholders. As a result, LNR became a publicly-traded company, and the family of Stuart A. Miller, our President, Chief Executive Officer and a Director, which had voting control of us, became the controlling shareholder of LNR.

 

Since the spin-off, we have entered into a number of joint ventures and other transactions with LNR. Many of the joint ventures were formed to acquire and develop land, part of which was subsequently sold to us or other homebuilders for residential building and part of which was subsequently sold to LNR for commercial development. In February 2005, LNR was acquired by a privately-owned entity. Although Mr. Miller’s family was required to purchase a 20.4% financial interest in that privately-owned entity, this interest is non-voting and neither Mr. Miller nor anyone else in his family is an officer or director, or otherwise is involved in the management, of LNR or its parent. Nonetheless, because the Miller family has a 20.4% financial, non-voting, interest in LNR’s parent, significant transactions with LNR, or entities in which it has an interest, have historically been and continued to be reviewed and approved by the Independent Directors Committee of our Board of Directors.

 

LandSource/Newhall Transactions

 

In January 2004, a company of which we and LNR each owned 50% acquired The Newhall Land and Farming Company for approximately $1 billion, including $200 million we contributed and $200 million that LNR contributed (the remainder came from borrowings and sales of properties to LNR). Subsequently, we and LNR each transferred our interests in most of our joint ventures to the jointly-owned company that had acquired The Newhall Land and Farming Company, and that company was renamed LandSource Communities Development LLC (“LandSource”).

 

In February 2007, LandSource admitted MW Housing Partners as a new strategic partner. As part of the transaction, the joint venture obtained $1.6 billion of non-recourse financing, which consisted of a $200 million five-year Revolving Credit Facility, a $1.1 billion six-year Term Loan B Facility and a $244 million seven-year Second Lien Term Facility. The transaction resulted in a cash distribution to us of $707.6 million. Our resulting ownership of LandSource was 16%. As a result of the recapitalization, we recognized a pretax financial statement gain of $175.9 million in 2007.

 

In June 2008, LandSource and a number of its subsidiaries commenced proceedings under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In November 2008, our land purchase options with LandSource were terminated, thus, in 2008 we recognized a deferred profit of $101.3 million (net of $31.8 million of write-offs of option deposits and pre-acquisition costs and other write-offs) related to the 2007 recapitalization of LandSource.

 

In July 2009, the United States Bankruptcy Court for the District of Delaware confirmed the plan of reorganization for LandSource. As a result of the bankruptcy proceedings, LandSource was reorganized into a new company named Newhall Land Development, LLC, (“Newhall”). The reorganized company emerged from Chapter 11 free of its previous bank debt. As part of the reorganization, we invested $140 million in exchange for approximately a 15% equity interest in the reorganized Newhall, ownership in several communities that were formerly owned by LandSource, the settlement and release of any claims that might have been asserted against us and certain other claims LandSource had against third parties.

 

Relationship with Rialto Capital Management

 

Over the last three years we have had a correction in housing values, which resulted in a significant drop in consumer spending and impairment in housing values. Currently, the FDIC, many banks and financial institutions have billions of dollars of underperforming and illiquid assets on their balance sheets, which have significantly curtailed their lending capacity. In 2007, Rialto was formed by Jeffrey Krasnoff, who was the co-founder of LNR Property Corporation, to focus on acquisitions of distressed debt and other real estate assets utilizing Rialto’s abilities to source, underwrite, price, turnaround and ultimately monetize such assets in markets across the Untied States. We might participate in investments Rialto may make, whether through a fund formed by Rialto or as a direct participant in particular investments. We will participate in profits generated by Rialto and receive fees related to those investments. In addition, this may give us access to assets for use in our homebuilding operations.

 

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Rialto’s first venture was to become a sub-advisor to AllianceBernstein L.P. with regard to Alliance Bernstein Legacy Securities Master Fund LLC, a fund formed under the Federal government’s PPIP to purchase real estate related securities from banks and other financial institutions. We committed to invest $75 million of the total of approximately $1.1 billion of equity commitments made by private investors in this fund, and the U.S. Treasury committed to a matching amount of approximately $1.1 billion of equity in the fund, as well as agreeing to extend up to approximately $2.2 billion of financing. Subsequent to November 30, 2009, we invested $23 million in the PPIP fund, which is focused on acquiring securities backed by real estate loans.

 

NYSE Certification

 

We submitted our 2008 Annual CEO Certification to the New York Stock Exchange on April 17, 2009. The certification was not qualified in any respect.

 

Available Information

 

Our corporate website is www.lennar.com. We make available on our website, free of charge, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the Securities and Exchange Commission. Information on our website is not part of this document.

 

Our website also includes printable versions of our Corporate Governance Guidelines, our Code of Business Conduct and Ethics and the charters for each of our Audit, Compensation and Nominating and Corporate Governance Committees of our Board of Directors. Each of these documents is also available in print to any stockholder who requests a copy by addressing a request to:

 

Lennar Corporation

Attention: Office of the General Counsel

700 Northwest 107th Avenue

Miami, Florida 33172

 

Item 1A.    Risk Factors.

 

The following are what we believe to be the principal risks that could cause a material adverse effect upon our business, financial condition, results of operations, cash flows, strategies and prospects.

 

Homebuilding Market and Economic Risks

 

The homebuilding industry has experienced a significant downturn. A continuing decline in demand for new homes coupled with an increase in the inventory of available new homes and alternatives to new homes could adversely affect our sales volume and pricing even more than has occurred to date.

 

The homebuilding industry has experienced a significant downturn. As a result, we have experienced a significant decline in demand for newly built homes in almost all of our markets. Homebuilders’ inventories of unsold new homes have increased as a result of increased cancellation rates on pending contracts as new homebuyers sometimes find it more advantageous to forfeit a deposit than to complete the purchase of the home. In addition, an oversupply of alternatives to new homes, such as rental properties and used homes (including foreclosed homes), has depressed prices and reduced margins. This combination of lower demand and higher inventories affects both the number of homes we can sell and the prices at which we can sell them. In 2008 and 2009, we experienced periods of significant decline in our sales results, significant reductions in our margins as a result of higher levels of sales incentives and price concessions, and a higher than normal cancellation rate. We have no basis for predicting how long demand and supply will remain out of balance in markets where we operate or whether sales volumes or pricing will return to prior levels.

 

Demand for new homes is sensitive to economic conditions over which we have no control, such as the availability of mortgage financing and the level of employment.

 

Demand for new homes is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, the availability of financing and interest rate levels. During 2008 and 2009, the mortgage lending industry experienced significant instability. As a result of increased default rates,

 

10


particularly (but not entirely) with regard to sub-prime and other non-conforming loans, many lenders have reduced their willingness to make, and tightened their credit requirements with regard to, residential mortgage loans. Fewer loan products, stricter loan qualification standards and higher down payment requirements have made it more difficult for some borrowers to finance the purchase of our homes. Although our finance company subsidiaries offer mortgage loans to potential buyers of most of the homes we build, we may no longer be able to offer financing terms that are attractive to our potential buyers. Lack of availability of mortgage financing at acceptable rates reduces demand for the homes we build, including in some instances causing potential buyers to cancel contracts they have signed.

 

There has also been a substantial loss of jobs in the United States during 2008 and 2009. People who are not employed or are concerned about loss of their jobs are unlikely to purchase new homes and may be forced to try to sell the homes they own. Therefore, the current employment situation can adversely affect us both by reducing demand for the homes we build and by increasing the supply of homes for sale.

 

Mortgage defaults by homebuyers who financed homes using non-traditional financing products are increasing the number of homes available for resale.

 

During the period of high demand in the homebuilding industry, many homebuyers financed their purchases using non-traditional adjustable rate or interest only mortgages or other mortgages, including sub-prime mortgages that involved, at least during initial years, monthly payments that were significantly lower than those required by conventional fixed rate mortgages. As a result, new homes became more affordable. However, as monthly payments for these homes have increased either as a result of increasing adjustable interest rates or as a result of principal payments coming due, some of these homebuyers have defaulted on their payments and had their homes foreclosed, which has increased the inventory of homes available for resale. This is likely to continue. Foreclosure sales and other distress sales may result in further declines in market prices for homes. In an environment of declining home prices, many homebuyers may delay purchases of homes in anticipation of lower prices in the future. In addition, as lenders perceive deterioration in credit quality among homebuyers, lenders have been eliminating some of the available non-traditional and sub-prime financing products and increasing the qualifications needed for mortgages or adjusting their terms to address increased credit risk. In general, to the extent mortgage rates increase or lenders make it more difficult for prospective buyers to finance home purchases, it becomes more difficult or costly for customers to purchase our homes, which has an adverse effect on our sales volume.

 

We have had to take significant write-downs of the carrying values of the land we own and of our investments in unconsolidated entities, and a continuing decline in land values could result in additional write-downs.

 

Some of the land we currently own was purchased at high prices and have been written down to fair value as a result of current market conditions. Also, we obtained options to purchase land at prices that no longer are attractive, and in connection with those options we made non-refundable deposits and, in some instances, incurred pre-acquisition costs. When demand fell, we were required to take significant write-downs of the carrying value of our land inventory and we elected not to exercise high price options, even though that required us to forfeit deposits and write-off pre-acquisition costs.

 

Additionally, as a result of these market conditions, we recorded significant valuation adjustments to our investments in unconsolidated entities and recorded our share of valuation adjustments relative to assets of our unconsolidated entities.

 

The combination of land inventory impairments, write-offs of option deposits and pre-acquisition costs and valuation adjustments relating to our investments in unconsolidated entities had a material negative effect on our operating results for fiscal 2007, 2008 and 2009, contributing to most of our net loss in fiscal 2008 and 2009. If market conditions continue to deteriorate, some of our assets may be subject to further write-downs in the future, decreasing the assets reflected on our balance sheet and adversely affecting our stockholders’ equity.

 

Inflation can adversely affect us, particularly in a period of declining home sale prices.

 

Inflation can have a long-term impact on us because increasing costs of land, materials and labor require us to attempt to increase the sale prices of homes in order to maintain satisfactory margins. Although an excess of supply over demand for new homes, such as the one we are currently experiencing, requires that we reduce prices, rather than increase them, it does not necessarily result in reductions, or prevent increases, in the costs of materials and labor. Under those circumstances, the effect of cost increases is to reduce the margins on the homes we sell. That makes it more difficult for us to recover the full cost of previously purchased land, and has contributed to the significant reductions in the value of our land inventory.

 

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We face significant competition in our efforts to sell new homes.

 

The homebuilding industry is highly competitive. We compete in each of our markets with numerous national, regional and local homebuilders. This competition with other homebuilders could reduce the number of homes we deliver or cause us to accept reduced margins in order to maintain sales volume.

 

We also compete with the resale of existing homes, including foreclosed homes, sales by housing speculators and available rental housing. As demand for homes has slowed, competition, including competition with homes purchased for speculation rather than as places to live and competition with foreclosed homes, has created increased downward pressure on the prices at which we are able to sell homes, as well as upon the number of homes we can sell.

 

Operational Risks

 

Homebuilding is subject to warranty and liability claims in the ordinary course of business that can be significant.

 

As a homebuilder, we are subject to home warranty and construction defect claims arising in the ordinary course of business. We are also subject to liability claims for injuries that occur in the course of construction activities. We record warranty and other reserves for the homes we sell based on historical experience in our markets and our judgment of the qualitative risks associated with the types of homes we built. We have, and many of our subcontractors have, general liability, property, errors and omissions, workers compensation and other business insurance. These insurance policies protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and other coverage limits. However, because of the uncertainties inherent in these matters, we cannot provide assurance that our insurance coverage or our subcontractors’ insurance and financial resources will be adequate to address all warranty, construction defect and liability claims in the future. Additionally, the coverage offered and the availability of general liability insurance for construction defects are currently limited and costly. As a result, an increasing number of our subcontractors are unable to obtain insurance, and we have in many cases waived our customary insurance requirements. There can be no assurance that coverage will not be further restricted and become even more costly.

 

Performance of subcontractors and quality and suitability of building materials.

 

We rely on subcontractors to perform the actual construction of our homes, and in many cases, to select and obtain raw materials. Despite our detailed specifications and quality control procedures, in some cases, improper construction processes or defective materials, such as Chinese drywall, were used in the construction of our homes. When we find these issues, we repair them in accordance with our warranty obligations. Defective products widely used by the homebuilding industry can result in the need to perform extensive repairs to large numbers of homes. The cost to the Company in complying with our warranty obligations in these cases may be significant if we are unable to recover the cost of repair from subcontractors, materials suppliers and insurers.

 

Natural disasters and severe weather conditions could delay deliveries, increase costs and decrease demand for new homes in affected areas.

 

Many of our homebuilding operations are conducted in areas that are subject to natural disasters and severe weather. The occurrence of natural disasters or severe weather conditions can delay new home deliveries, increase costs by damaging inventories and negatively impact the demand for new homes in affected areas. Furthermore, if our insurance does not fully cover business interruptions or losses resulting from these events, our results of operations, liquidity or capital resources could be adversely affected.

 

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

 

Increased costs or shortages of skilled labor and/or lumber, framing, concrete, steel and other building materials could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may be well in advance of the construction of the home. Sustained increases in construction costs may, over time, erode our margins, particularly if pricing competition restricts our ability to pass on any additional costs of materials or labor, thereby decreasing our margins.

 

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Reduced numbers of home sales could lead us to absorb additional costs.

 

We incur many costs even before we begin to build homes in a community. These include costs of preparing land and installing roads, sewage and other utilities, as well as taxes and other costs related to ownership of the land on which we plan to build homes. Reducing the rate at which we build homes extends the length of time it takes us to recover these costs. Also, we frequently acquire options to purchase land and make deposits that will be forfeited if we do not exercise the options within specified periods. Because of current market conditions, we have had to terminate a number of these options, resulting in significant forfeitures of deposits we made with regard to the options, and in some instances, pre-acquisition costs we incurred with regard to properties that were the subject of options we terminated.

 

If our financial performance further declines, we may not be able to maintain compliance with the covenants in our credit facilities and senior debt securities.

 

Our $1.1 billion Credit Facility imposes certain restrictions on our operations. The most significant restrictions relate to debt incurrence, sales of assets other than in the ordinary course of business, cash distributions and investments by us and certain of our subsidiaries. In addition, our Credit Facility requires compliance with certain financial covenants, including a minimum adjusted consolidated tangible net worth requirement and a maximum permitted leverage ratio. Also, because we currently do not have investment grade debt ratings, we can only borrow up to specified percentages of the book values of various types of our assets, referred to in the credit agreement as our borrowing base. Our unrestricted cash in excess of $750 million is excluded from our borrowing base. Because of these limitations, we were unable to borrow under the Credit Facility for a majority of 2009.

 

While we currently are in compliance with the financial covenants in the Credit Facility agreement, it is possible that in fiscal 2010 we will not be in compliance with our covenants if we have significant valuation adjustments and other write-offs during the year, issue debt and/or make significant investments in strategic joint ventures. If we are not in compliance and are unable to obtain a waiver or amendment to the Credit Facility, then it would constitute a default with regard to our Credit Facility, which would give the lenders the right to terminate the Credit Facility and require us to replace or cash collateralize $177.9 million of letters of credit outstanding under the Credit Facility as of November 30, 2009. If our lenders required us to replace or cash collateralize the letters of credit outstanding under the Credit Facility and we were unable to do so, that might entitle the holders of $2.2 billion of debt securities we have sold into the capital markets to cause the sums evidenced by those debt securities to become due immediately. We would not be able to repay those amounts without selling substantial assets, which we might have to do at prices well below the fair values, and the carrying values, of the assets. Such forced sales would have a material adverse effect on our business and financial condition.

 

We may be unable to obtain suitable financing and bonding for the development of our communities.

 

Our business depends upon our ability to finance the development of our residential communities and to provide bonds to ensure the completion of our projects. We have in the past used our Credit Facility to finance development activities and we currently use it to provide or secure some of the bonds we need. In addition, we have from time-to-time raised funds by selling debt securities into public and private capital markets, although this is expensive, and could be difficult, to do under current market conditions. The willingness of lenders to make funds available to us has been affected both by factors relating to us as a borrower, and by a decrease in the willingness of banks and other lenders to lend to homebuilders generally. If we were unable to finance the development of our communities, or if we were unable to provide required surety bonds for our projects, our business operations and revenues could suffer materially.

 

Our ability to continue to grow our business and operations in a profitable manner depends to a significant extent upon our ability to access capital on favorable terms.

 

Our ability to access capital on favorable terms has been an important factor in growing our business and operations in a profitable manner. In 2007 and 2008, each of the principal credit rating agencies lowered our credit ratings, and we no longer have investment grade ratings. This makes it more costly, and could make it more difficult, for us to access the debt capital markets for funds we may require in order to implement our business plans and achieve our growth objectives. If we are subject to a further downgrade, it would exacerbate such difficulties.

 

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Increased debt costs will make it more difficult for us to have positive net income.

 

In April 2009, we sold $400 million principal amount of 12.25% senior notes due 2017. During fiscal 2009, we retired approximately $448 million principal amount of senior notes and other debt. The annual interest cost of the debt we retired was approximately $29 million, while the annual interest cost of the notes we sold in April 2009 is approximately $49 million. Thus, during the year we increased the annual interest cost of our outstanding debt securities by approximately $20 million. This affected our results of operations in fiscal 2009 and will affect our results in 2010 and subsequent years. It could make it more difficult for us to achieve positive net income.

 

The repurchase warehouse credit facilities of our Financial Services segment will expire in 2010.

 

Our Financial Services segment has two warehouse repurchase facilities with a maximum aggregate commitment of $200 million and $100 million, respectively, that mature in June 2010 and another warehouse repurchase facility with a maximum aggregate commitment of $125 million that matures in July 2010. The Financial Services segment uses these facilities to finance its mortgage lending activities until the mortgage loans are sold to investors and expects both facilities to be renewed or replaced with other facilities when they mature. If we are unable to renew or replace these facilities when they mature, it could seriously impede the activities of our Financial Services segment.

 

We conduct some of our operations through unconsolidated joint ventures with independent third parties in which we do not have a controlling interest and we can be adversely impacted by joint venture partners’ failure to fulfill their obligations.

 

For a number of years, we created and participated in joint ventures that acquired and developed land for our homebuilding operations, for sale to third parties or for use in their own homebuilding operations. Through these joint ventures, we reduced the amount we had to invest in order to assure access to potential future homesites, and, in some instances, we obtained access to land to which we could not otherwise have obtained access or could not have obtained access on as favorable terms. However, as the homebuilding market deteriorated beginning in 2006, many of our joint venture partners became financially unable or unwilling to fulfill their obligations.

 

Most joint ventures borrowed money to help finance their activities, and although recourse on the loans was generally limited to the joint ventures and their properties, frequently we and our joint venture partners were required to provide maintenance guarantees (guarantees that the values of the joint ventures’ assets would be at least specified percentages of their borrowings) or limited repayment guarantees.

 

Our joint venture strategy depends in large part on the ability of our joint venture partners to perform their obligations under our agreements with them. If a joint venture partner does not perform its obligations, we may be required to make significant financial expenditures or otherwise undertake the performance of obligations not satisfied by our partner at significant cost to us. Also, when we have guaranteed joint venture obligations, we have been given the right to be reimbursed by our joint venture partners for any amounts by which we pay more than our pro rata share of the joint ventures’ obligations. However, particularly if our joint venture partners are having financial problems, we may have difficulty collecting the sums they owe us, and therefore, we may be required to pay a disproportionately large portion of the guaranteed amounts. In addition, because we lack a controlling interest in these joint ventures, we are usually unable to require that they sell assets, return invested capital or take any other action without the consent of at least one of our joint venture partners. As a result, without joint venture partner consent, we may be unable to liquidate our joint venture investments to generate cash. Even if we are able to liquidate joint venture investments, the amounts received upon liquidation may be insufficient to cover the costs we have incurred in satisfying joint venture obligations.

 

During 2007, 2008 and 2009, we have significantly reduced the number of joint ventures in which we participate and our exposure to recourse indebtedness of such joint ventures. However, the risks to us from joint ventures in which we are a participant are likely to continue at least as long as the value of residential properties continues to decline.

 

The unconsolidated entities in which we have investments may not be able to modify the terms of their debt arrangements.

 

Some of the unconsolidated entities’ debt arrangements contain financial covenants they may not be able to meet. Additionally, certain joint venture loan agreements have minimum number of homesite takedown requirements in which the joint ventures are required to sell a minimum number of homesites over a stated

 

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amount of time. Due to the deterioration of the homebuilding market, many of the joint ventures are in the process of repaying, refinancing, renegotiating or extending their loans. This action may be required, for example, in the case of an expired maturity date or a failure to comply with the loan’s covenants. There can be no assurance that the joint ventures will be able to finance, refinance, renegotiate or extend, on terms we and our joint venture partners deem acceptable, all of the joint venture loans that are currently being renegotiated. If joint ventures are unsuccessful in these efforts, we could be required to provide at least a portion of the funds the joint ventures need to be able to repay the loans.

 

We could be adversely impacted by the loss of key management personnel.

 

Our future success depends, to a significant degree, on the efforts of our senior management. Our operations could be adversely affected if key members of senior management cease to be active in our company. As a result of a decline in our stock price, previous retention mechanisms, such as equity awards, have diminished in value.

 

If our ability to resell mortgages to investors is impaired, we may be required to broker loans or fund them ourselves.

 

Substantially all of the loans we originate are sold within a short period in the secondary mortgage market on a servicing released, non-recourse basis; although, we remain liable for certain limited representations and warranties related to loan sales. If there is a decline in the secondary mortgage market, our ability to sell mortgages could be adversely impacted and we could be required to fund our commitments to our homebuyers with our own financial resources or require our homebuyers to find other sources of financing. If we became unable to sell loans into the secondary mortgage market or directly to the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), we would either have to curtail our origination of mortgage loans, which among other things, could significantly reduce our ability to sell homes, or to commit our own funds to long term investments in mortgage loans, which could, among other things, delay the time when we recognize revenues from home sales on our statements of operations.

 

Our Financial Services segment is adversely affected by reduced demand for our homes.

 

A majority of the mortgage loans made by our Financial Services segment are made to buyers of homes we build. Therefore, a decrease in the demand for our homes adversely affects the financial results of this segment of our business.

 

If housing markets improve, we may not be able to acquire land suitable for residential homebuilding at reasonable prices, which could increase our costs and reduce our revenues, earnings and margins.

 

Our long-term ability to build homes depends upon our acquiring land suitable for residential building at reasonable prices in locations where we want to build. For a number of years, we experienced an increase in competition for suitable land as a result of land constraints in many of our markets, which increased the price we had to pay to acquire land. Then, when demand for new homes began to drop beginning in 2006, we started to reduce our land inventory to bring it in line with the reduced rate at which we were absorbing land into our operations. While the current reduced demand for new homes is making it possible to purchase land at prices far below those we were required to pay prior to 2006, in the long term, competition for suitable land is likely to increase again, and as available land is developed, the cost of acquiring additional suitable land could rise, and in some areas suitable land might not be available at reasonable prices. Any land shortages or any decrease in the supply of suitable land at reasonable prices could limit our ability to develop new communities or result in increased land costs that we are not able to pass through to our customers. This could adversely impact our revenues, earnings and margins.

 

Regulatory Risks

 

Federal laws and regulations that adversely affect liquidity in the secondary mortgage market could hurt our business.

 

Changes in federal laws and regulations could have the effect of curtailing the activities of Fannie Mae and Freddie Mac. These organizations provide significant liquidity to the secondary mortgage market. Any curtailment of their activities could increase mortgage interest rates and increase the effective cost of our homes, which could reduce demand for our homes and adversely affect our results of operations.

 

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Our homebuyers’ ability to qualify for and obtain affordable mortgages could be impacted by changes in government sponsored entities and private mortgage insurance companies supporting the mortgage market.

 

Changes made by Fannie Mae, Freddie Mac, FHA/VA sponsored mortgage programs, as well as changes made by private mortgage insurance companies, could result in a reduction in the ability for homebuyers to qualify for mortgages due to tighter lending standards such as higher income requirements, larger down payments, increased reserves and higher credit scores. Higher income requirements could reduce the amount that homebuyers can qualify for when buying new homes. Larger down payment requirements and increased asset reserve thresholds could prevent or delay some homebuyers from entering the market. Increased credit score requirements could also eliminate a segment of potential homebuyers.

 

Government entities in regions where we operate have adopted or may adopt, slow or no growth initiatives, which could adversely affect our ability to build or timely build in these areas.

 

Some state and local governments in areas where we operate have approved, and others where we operate may approve, various slow growth or no growth homebuilding initiatives and other ballot measures that could negatively impact the availability of land and building opportunities within those jurisdictions. Approval of slow growth, no growth or similar initiatives (including the effect of these initiatives on existing entitlements and zoning) could adversely affect our ability to build or timely build and sell homes in the affected markets and/or create additional administrative and regulatory requirements and costs, which, in turn, could have an adverse effect on our future revenues and earnings.

 

Compliance with federal, state and local regulations related to our business could create substantial costs both in time and money, and some regulations could prohibit or restrict some homebuilding ventures.

 

We are subject to extensive and complex laws and regulations that affect the land development and homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design, elevation of properties, water and waste disposal and use of open spaces. In addition, we are subject to laws and regulations related to workers’ health and safety. We also are subject to a variety of local, state and federal laws and regulations concerning the protection of health and the environment. In some of the markets where we operate, we are required by law to pay environmental impact fees, use energy-saving construction materials and give commitments to municipalities to provide certain infrastructure such as roads and sewage systems. We generally are required to obtain permits, entitlements and approvals from local authorities to commence and carry out residential development or home construction. Such permits, entitlements and approvals may, from time-to-time, be opposed or challenged by local governments, neighboring property owners or other interested parties, adding delays, costs and risks of non-approval to the process. Our obligation to comply with the laws and regulations under which we operate, and our need to ensure that our associates, subcontractors and other agents comply with these laws and regulations, could result in delays in construction and land development, cause us to incur substantial costs and prohibit or restrict land development and homebuilding activity in certain areas in which we operate.

 

We can be injured by failures of persons who act on our behalf to comply with applicable regulations and guidelines.

 

Although we expect all of our associates (i.e., employees), officers and directors to comply at all times with all applicable laws, rules and regulations, there are instances in which subcontractors or others through whom we do business engage in practices that do not comply with applicable regulations or guidelines. Sometimes our associates have been aware of these practices but did not take steps to prevent them. When we learn of practices relating to homes we build or financing we provide that do not comply with applicable regulations or guidelines, we move actively to stop the non-complying practices as soon as possible and we have taken disciplinary action with regard to our associates who were aware of the practices, including in some instances terminating their employment. However, regardless of the steps we take after we learn of practices that do not comply with applicable regulations or guidelines, we can in some instances be subject to fines or other governmental penalties, and our reputation can be injured, due to the practices’ having taken place.

 

Tax law changes could make home ownership more expensive or less attractive.

 

Significant expenses of owning a home, including mortgage interest expense and real estate taxes, generally are deductible expenses for the purpose of calculating an individual’s federal, and in some cases state, taxable income. If the government were to make changes to income tax laws that eliminate or substantially reduce these income tax deductions, the after-tax cost of owning a home would increase substantially. This could adversely impact demand for, and/or sales prices of, new homes.

 

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Other Risks

 

We have a stockholder who can exercise significant influence over matters that are brought to a vote of our stockholders.

 

Stuart A. Miller, our President, Chief Executive Officer and a Director, has voting control, through personal holdings and family-owned entities, of Class A and Class B common stock that enables Mr. Miller to cast approximately 46% of the votes that may be cast by the holders of our outstanding Class A and Class B common stock combined. That effectively gives Mr. Miller the power to control the election of our directors and the approval of matters that are presented to our stockholders. Mr. Miller’s voting power might discourage someone from acquiring us or from making a significant equity investment in us, even if we needed the investment to meet our obligations and to operate our business. Also, because of his voting power, Mr. Miller may be able to authorize actions that are contrary to our other stockholders’ desires.

 

We may not be able to benefit from net operating loss (“NOL”) carryforwards.

 

We suffered significant losses in 2007, 2008 and 2009 for both tax and financial statement purposes. We were able to carry back 100% of our 2007 tax loss and most of our 2008 tax loss. However, for our 2009 fiscal year the legislation enacted in November 2009 that expanded the NOL carryback to 5 years only allows 50% of taxable income earned in 2004 to be offset with 2009 loss. As such, we will only receive tax benefits with regard to the remainder of the losses that were not carried back, if we have taxable income in the 20 year NOL carryforward period. Additionally, we have fully reserved against all our deferred tax assets, including our NOL carryforward that we were carrying on our financial statements, due to the possibility that we may not have taxable income that will enable us to benefit from them. However, these deferred tax assets will be available to us if we have sufficient future taxable income to take advantage of them.

 

Trading in our shares could substantially reduce our ability to use tax loss carryforwards.

 

Under the Internal Revenue Code, if there is a greater than 50% change of ownership of our stock during any three-year period caused by more than 5% shareholders, the ability to utilize NOL carryforwards are limited to the market value of the Company times the long term federal tax exempt rate. This change of ownership limitation can occur as a result of purchases and sales in the market by persons who become owners of more than 5% of our stock, even without becoming a new majority owner. During the past three years, there have not been any significant changes in our holdings by 5% shareholders. However, it is possible that as a result of future stock trading, within a three year period buyers could acquire in the market 5% or greater ownership interests in our stock totaling more than 50%. If that occurred, our ability to apply our tax loss carryforwards could become limited.

 

Item 1B.    Unresolved Staff Comments.

 

Not applicable.

 

Executive Officers of Lennar Corporation

 

The following individuals are our executive officers as of January 29, 2010:

 

Name

  

Position

   Age

Stuart A. Miller

  

President and Chief Executive Officer

   52

Jonathan M. Jaffe

  

Vice President and Chief Operating Officer

   50

Richard Beckwitt

  

Executive Vice President

   50

Bruce E. Gross

  

Vice President and Chief Financial Officer

   51

Diane J. Bessette

  

Vice President and Treasurer

   49

Mark Sustana

  

Secretary and General Counsel

   48

David M. Collins

  

Controller

   40

 

Mr. Miller has served as our President and Chief Executive Officer since 1997 and is one of our Directors. Before 1997, Mr. Miller held various executive positions with us.

 

Mr. Jaffe has served as Vice President since 1994 and has served as our Chief Operating Officer since December 2004. Before that time, Mr. Jaffe served as a Regional President in our Homebuilding operations. Additionally, prior to his appointment as Chief Operating Officer, Mr. Jaffe was one of our Directors from 1997 through June 2004.

 

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Mr. Beckwitt has served as our Executive Vice President since March 2006. In this position, Mr. Beckwitt is involved in all operational aspects of our company. Mr. Beckwitt served on the Board of Directors of D.R. Horton, Inc. from 1993 to November 2003. From 1993 to March 2000, he held various executive officer positions at D.R. Horton, including President of the company. From March 2000 to April 2003, Mr. Beckwitt was the owner and principal of EVP Capital, L.P., (a venture capital and real estate advisory company). Mr. Beckwitt retired in May 2003 to design and personally construct a second home in Maine.

 

Mr. Gross has served as Vice President and our Chief Financial Officer since 1997. Before that, Mr. Gross was Senior Vice President, Controller and Treasurer of Pacific Greystone Corporation.

 

Ms. Bessette joined us in 1995 and served as our Controller from 1997 to 2008. Since February 2008, she has served as our Treasurer. She was appointed a Vice President in 2000.

 

Mr. Sustana has served as our Secretary and General Counsel since 2005. Before joining Lennar, Mr. Sustana held various legal positions at GenTek, Inc., a manufacturer of communication products, industrial components and performance chemicals.

 

Mr. Collins joined us in 1998 and has served as our Controller since February 2008. Before becoming Controller, Mr. Collins served as our Executive Director of Financial Reporting.

 

Item 2.    Properties.

 

We lease and maintain our executive offices in an office complex in Miami, Florida. Our homebuilding and financial services offices are located in the markets where we conduct business, primarily in leased space. We believe that our existing facilities are adequate for our current and planned levels of operation.

 

Because of the nature of our homebuilding operations, significant amounts of property are held as inventory in the ordinary course of our homebuilding business. We discuss these properties in the discussion of our homebuilding operations in Item 1 of this Report.

 

Item 3.    Legal Proceedings.

 

We are party to various claims and lawsuits which arise in the ordinary course of business, but we do not consider the volume of our claims and lawsuits unusual given the number of homes we deliver and the fact that the lawsuits often relate to homes delivered several years before the lawsuits are commenced. Although the specific allegations in the lawsuits differ, they most commonly involve claims that we failed to construct homes in particular communities in accordance with plans and specifications or applicable construction codes and seek reimbursement for sums allegedly needed to remedy the alleged deficiencies, assert contract issues or relate to personal injuries. Lawsuits of these types are common within the homebuilding industry. We are a plaintiff in many cases in which we seek contribution from our subcontractors for home repair costs. The costs incurred by us in construction defect lawsuits are offset by warranty reserves, our third party insurers, subcontractor insurers and indemnity contributions from subcontractors. We do not believe that the ultimate resolution of these claims or lawsuits will have a material adverse effect on our business, financial position, results of operations or cash flows. From time-to-time, we also receive notices from environmental agencies regarding alleged violations of environmental laws. We typically settle these matters before they reach litigation for amounts that are not material to us.

 

In April 2008, we were named as a nominal defendant in a derivative suit in the United States District Court for the Southern District of Florida, Miami Division, entitled Doris Staehr, Derivatively on Behalf of Lennar Corporation v. Stuart A. Miller, et al., Case No. 08-20990-CIV, in which the plaintiff purports to assert claims for our benefit against some of our current and former officers and directors, primarily relating to allegedly inadequate or incorrect disclosures about the likelihood of a decline in the housing market and the effects it would have on us. Because the suit is allegedly brought for our benefit, it does not seek any damages from us. In August 2008, we moved to dismiss the suit on the ground that the plaintiff failed to make a demand on our directors that under most circumstances is a prerequisite to a derivative suit. The director defendants moved to dismiss for that and other reasons. In March 2009, the Court issued an order requiring the plaintiff to replead her complaint to avoid confusion regarding the theories upon which she predicated her claims, and denied the motions to dismiss as moot. In April 2009, the plaintiff filed an amended complaint. In May 2009, we again moved to dismiss for failure to make a pre-suit demand on our directors. The director defendants also filed another motion to dismiss. After those motions were fully briefed, the Court asked the parties to file supplemental briefs discussing the decision in In Re Citigroup Inc. Shareholder Derivative Litigation, 2009 WL 2610746 (S.D.N.Y. 2009), in which another court held that stockholders cannot bring a derivative claim for

 

18


federal securities fraud based on alleged failure of disinterested directors to have disclosed facts of which they were aware when they made the decisions with which the litigation is concerned. The parties have filed the supplemental briefs and are now awaiting a decision from the Court on the motions to dismiss.

 

Item 4.    Submission of Matters to a Vote of Security Holders.

 

Not applicable.

 

19


PART II

 

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our Class A and Class B common stock are listed on the New York Stock Exchange under the symbols “LEN” and “LEN.B,” respectively. The following table shows the high and low sales prices for our Class A and Class B common stock for the periods indicated, as reported by the NYSE, and cash dividends declared per share:

 

    

Class A Common Stock
High/Low Prices

   Cash Dividends
Per Class A Share
 

Fiscal Quarter

  

2009

  

2008

   2009     2008  

First

   $11.56 –   5.54    $21.64 – 11.98    4 ¢    16 ¢ 

Second

   $11.25 –   5.72    $22.73 – 13.40    4 ¢    16 ¢ 

Third

   $15.92 –   7.28    $17.22 –   9.33    4 ¢    16 ¢ 

Fourth

   $17.66 – 12.05    $16.90 –   3.42    4 ¢    4 ¢ 
    

Class B Common Stock
High/Low Prices

   Cash Dividends
Per Class B Share
 

Fiscal Quarter

  

2009

  

2008

   2009     2008  

First

   $  8.99 – 4.09    $20.10 – 11.14    4 ¢    16 ¢ 

Second

   $  8.93 – 4.36    $20.92 – 12.41    4 ¢    16 ¢ 

Third

   $12.49 – 5.58    $15.43 –   8.46    4 ¢    16 ¢ 

Fourth

   $13.87 – 9.18    $15.34 –   2.26    4 ¢    4 ¢ 

 

As of December 31, 2009, the last reported sale price of our Class A common stock was $12.77 and the last reported sale price of our Class B common stock was $9.84. As of December 31, 2009, there were approximately 1,000 and 720 holders of record, respectively, of our Class A and Class B common stock.

 

On January 12, 2010, our Board of Directors declared a quarterly cash dividend of $0.04 per share for both our Class A and Class B common stock, which is payable on February 12, 2010 to holders of record at the close of business on January 26, 2010. We regularly evaluate with our Board of Directors the decision whether to declare a dividend and the amount of the dividend.

 

In June 2001, our Board of Directors authorized a stock repurchase program to permit future purchases of up to 20 million shares of our outstanding common stock. During the three months and year ended November 30, 2009, there were no shares repurchased under this program.

 

The information required by Item 201(d) of Regulation S-K is provided in Item 12 of this Report.

 

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Performance Graph

 

The following graph compares the five-year cumulative total return of our Class A common stock with the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Total Market Index. The graph assumes $100 invested on November 30, 2004 in our Class A common stock, the Dow Jones U.S. Home Construction Index and the Dow Jones U.S. Total Market Index, and the reinvestment of all dividends.

 

Comparison of Five - Year Cumulative Total Return

Fiscal Year Ended November 30

(2004=$100)

LOGO

 

     2004    2005    2006    2007    2008    2009

Lennar Corporation

   $ 100    130    119    33    15    28

Dow Jones U.S. Home Construction Index

   $ 100    135    108    45    31    38

Dow Jones U.S. Total Market Index

   $ 100    110    126    136    83    106

 

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Item 6.    Selected Financial Data.

 

The following table sets forth our selected consolidated financial and operating information as of or for each of the years ended November 30, 2005 through 2009. The information presented below is based upon our historical financial statements, except for the results of operations of a subsidiary of the Financial Services segment’s title company that was sold in May 2005, which have been classified as discontinued operations.

 

     At or for the Years Ended November 30,  
     2009     2008     2007     2006     2005  
     (Dollars in thousands, except per share amounts)  

Results of Operations:

          

Revenues:

          

Homebuilding

   $ 2,834,285      4,263,038      9,730,252      15,623,040      13,304,599   

Financial services

   $ 285,102      312,379      456,529      643,622      562,372   

Total revenues

   $ 3,119,387      4,575,417      10,186,781      16,266,662      13,866,971   

Operating earnings (loss) from continuing operations:

          

Homebuilding (1)

   $ (647,381   (400,786   (2,913,999   986,153      2,277,091   

Financial services (2)

   $ 35,982      (30,990   6,120      149,803      104,768   

Corporate general and administrative expenses

   $ (120,093   (129,752   (173,202   (193,307   (187,257

Loss on redemption of 9.95% senior notes

   $ —        —        —        —        (34,908

Earnings (loss) from continuing operations before income taxes

   $ (731,492   (561,528   (3,081,081   942,649      2,159,694   

Earnings from discontinued operations before income taxes (3)

   $ —        —        —        —        17,261   

Earnings (loss) from continuing operations (4)

   $ (417,147   (1,109,085   (1,941,081   593,869      1,344,410   

Earnings from discontinued operations

   $ —        —        —        —        10,745   

Net earnings (loss)

   $ (417,147   (1,109,085   (1,941,081   593,869      1,355,155   

Diluted earnings (loss) per share:

          

Earnings (loss) from continuing operations

   $ (2.45   (7.00   (12.31   3.69      8.17   

Earnings from discontinued operations

   $ —        —        —        —        0.06   

Net earnings (loss)

   $ (2.45   (7.00   (12.31   3.69      8.23   

Cash dividends declared per share—Class A common stock

   $ 0.16      0.52      0.64      0.64      0.573   

Cash dividends declared per share—Class B common stock

   $ 0.16      0.52      0.64      0.64      0.573   

Financial Position:

          

Total assets

   $ 7,314,791      7,424,898      9,102,747      12,408,266      12,541,225   

Debt:

          

Homebuilding

   $ 2,761,352      2,544,935      2,295,436      2,613,503      2,592,772   

Financial services

   $ 217,557      225,783      541,437      1,149,231      1,269,782   

Stockholders’ equity

   $ 2,443,479      2,623,007      3,822,119      5,701,372      5,251,411   

Shares outstanding (000s)

     184,896      160,558      159,887      158,155      157,559   

Stockholders’ equity per share

   $ 13.22      16.34      23.91      36.05      33.33   

Homebuilding Data (including unconsolidated entities):

          

Number of homes delivered

     11,478      15,735      33,283      49,568      42,359   

New orders

     11,510      13,391      25,753      42,212      43,405   

Backlog of home sales contracts

     1,631      1,599      4,009      11,608      18,565   

Backlog dollar value

   $ 479,571      456,270      1,384,137      3,980,428      6,884,238   

 

(1)  

Homebuilding operating earnings (loss) from continuing operations include $359.9 million, $340.5 million, $2,445.1 million, $501.8 million and $20.5 million, respectively, of valuation adjustments for the years ended November 30, 2009, 2008, 2007, 2006 and 2005. In addition, it includes $101.9 million, $32.2 million, $364.2 million and $126.4 million, respectively, of our share of valuation adjustments related to assets of our investments in unconsolidated entities for the years ended November 30, 2009, 2008, 2007 and

 

22


 

2006, and $89.0 million, $172.8 million, $132.2 million and $14.5 million, respectively of valuation adjustments to our investments in unconsolidated entities for the years ended November 30, 2009, 2008, 2007 and 2006. During the year ended November 30, 2007, homebuilding operating earnings (loss) from continuing operations also includes $190.2 million of goodwill impairments. There were no other material valuation adjustments for the year ended November 30, 2005.

(2)   Financial Services operating loss from continuing operations for the year ended November 30, 2008 includes a $27.2 million impairment of the Financial Services segment’s goodwill.
(3)   Earnings from discontinued operations before income taxes include a gain of $15.8 million for the year ended November 30, 2005 related to the sale of a subsidiary of the Financial Services segment’s title company.
(4)   Earnings (loss) from continuing operations for the year ended November 30, 2009 primarily includes a reversal of our deferred tax asset valuation allowance of $351.8 million, primarily due to a change in tax legislation, which allowed us to carryback our fiscal year 2009 tax loss to recover previously paid income taxes. Earnings (loss) from continuing operations for the year ended November 30, 2008 include a $730.8 million valuation allowance recorded against our deferred tax assets.

 

23


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

 

Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Annual Report on Form 10-K, are “forward-looking statements,” as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operations, cash flows, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described under the caption “Risk Factors” in Item 1A of this Report. We do not undertake any obligation to update forward-looking statements, except as required by Federal securities laws.

 

Outlook

 

Despite high unemployment rates, increased foreclosures and tightening credit standards, recent demand trends in the communities in which we are selling homes indicate that the markets may be stabilizing as more confident homebuyers are taking advantage of increased affordability resulting from declining home prices, historically low interest rates and government stimulus programs. We are optimistic that homebuyers have recognized that the residential housing market is improving and will continue to take advantage of the government stimulus, which includes new tax legislation that extended the homebuyer tax credit through April 30, 2010 and expanded it to include other than first time homebuyers.

 

We ended the year with $1.3 billion in cash and a homebuilding debt-to-total capital ratio, net of homebuilding cash, of 36.9%. Additionally, as a result of tax legislation that was enacted in our fourth quarter, we will receive a tax refund of approximately $320 million in early 2010. We extended our debt maturities by issuing $400 million of senior notes maturing in 2017 and retiring $448 million of senior notes and other debt. We also issued $225 million of stock under our $275 million equity draw down program. These transactions provide us additional financial flexibility and capital for new investment opportunities such as adding new communities with high return expectations, investing in long-term, strategic joint ventures (similar to Newhall) and investing in distressed opportunities.

 

We continue to focus on the basics of our homebuilding operations as we strategically position our company for a potential return to profitability in 2010. In late 2008, we experienced higher cancellation rates resulting in an increase in completed, unsold inventory. In early 2009 we were able to convert our completed, unsold inventory into cash by offering higher sales incentives. Additionally, in 2009 we continued focusing on refining our product offering, reducing the number of floor plans and targeting first time and value oriented homebuyers. These more efficient product offerings have significantly reduced our construction costs and allowed us to meet our customers’ demands. These cost savings, combined with reduced sales incentives, improved our gross margins throughout the second half of 2009. We also reduced S,G&A expenses by right-sizing our overhead levels which should allow for leveraging additional volume. Our homebuilding divisions are focused on operating at profitable levels and generating positive cash flow in 2010.

 

Results of Operations

 

Overview

 

Our net loss in 2009 was $417.1 million, or $2.45 per basic and diluted share, compared to a net loss of $1,109.1 million, or $7.00 per basic and diluted share, in 2008. Our net loss in 2009 was reduced by the benefit for income taxes of $314.3 million. The current year net loss was attributable to the challenging market conditions that have persisted during 2009 and has impacted all of our homebuilding operations. Our gross margin percentage decreased in 2009, compared to 2008, primarily due to an increase in valuation adjustments as a percentage of home sales revenue and a decrease in the average sales price of homes delivered during 2009, compared to 2008.

 

24


The following table sets forth financial and operational information for the years indicated related to our operations.

 

     Years Ended November 30,  
             2009                     2008                     2007          
     (Dollars in thousands, except average sales price)  

Homebuilding revenues:

      

Sales of homes

   $ 2,776,850      4,150,717      9,462,940   

Sales of land

     57,435      112,321      267,312   
                    

Total homebuilding revenues

     2,834,285      4,263,038      9,730,252   
                    

Homebuilding costs and expenses:

      

Cost of homes sold

     2,524,850      3,641,090      8,892,268   

Cost of land sold

     236,277      245,536      1,928,451   

Selling, general and administrative

     449,259      655,255      1,368,358   
                    

Total homebuilding costs and expenses

     3,210,386      4,541,881      12,189,077   
                    

Homebuilding operating margins

     (376,101   (278,843   (2,458,825

Equity in loss from unconsolidated entities

     (130,917   (59,156   (362,899

Other expense, net

     (98,425   (172,387   (50,221

Other interest expense

     (70,850   (27,594   (25,808

Minority interest income (expense), net

     28,912      4,097      (1,927

Gain on recapitalization of unconsolidated entity

     —        133,097      175,879   

Goodwill impairments

     —        —        (190,198
                    

Homebuilding operating loss

   $ (647,381   (400,786   (2,913,999
                    

Financial services revenues

     285,102      312,379      456,529   

Financial services costs and expenses (1)

     249,120      343,369      450,409   
                    

Financial services operating earnings (loss)

   $ 35,982      (30,990   6,120   
                    

Total operating loss

     (611,399   (431,776   (2,907,879

Corporate general and administrative expenses

     (120,093   (129,752   (173,202
                    

Loss before income taxes

   $ (731,492   (561,528   (3,081,081
                    

Gross margin on home sales

     9.1   12.3   6.0
                    

SG&A expenses as a % of revenues from home sales

     16.2   15.8   14.5
                    

Operating margin as a % of revenues from home sales

     (7.1 )%    (3.5 )%    (8.4 )% 
                    

Gross margin on home sales excluding valuation adjustments (2)

     15.6   17.0   13.9
                    

Operating margin as a % of revenues from home sales excluding valuation adjustments (2)

     (0.6 )%    1.2   (0.5 )% 
                    

Average sales price

   $ 243,000      270,000      297,000   
                    

 

(1)   Financial Services costs and expenses for the year ended November 30, 2008 include a $27.2 million impairment of goodwill.
(2)   Gross margin on home sales excluding valuation adjustments and operating margin as a percentage of revenues from home sales excluding valuation adjustments are non-GAAP financial measures disclosed by certain of our competitors and have been presented because we find it useful in evaluating our performance and believe that it helps readers of our financial statements compare our operations with those of our competitors. See the Non-GAAP Financial Measure section.

 

2009 versus 2008

 

Revenues from home sales decreased 33% in the year ended November 30, 2009 to $2.8 billion from $4.2 billion in 2008. Revenues were lower primarily due to a 26% decrease in the number of home deliveries, excluding unconsolidated entities, and a 10% decrease in the average sales price of homes delivered in 2009. New home deliveries, excluding unconsolidated entities, decreased to 11,422 homes in the year ended November 30, 2009 from 15,344 homes last year. In the year ended November 30, 2009, new home deliveries were lower in each of our homebuilding segments and Homebuilding Other, compared to 2008. The average sales price of homes delivered decreased to $243,000 in the year ended November 30, 2009 from $270,000 in 2008. Sales incentives offered to homebuyers were $44,800 per home delivered in the year ended November 30, 2009, compared to $48,700 per home delivered last year.

 

25


Gross margins on home sales were $252.0 million, or 9.1%, in the year ended November 30, 2009, which included $180.2 million of valuation adjustments, compared to gross margins on home sales of $509.6 million, or 12.3%, in the year ended November 30, 2008, which included $195.5 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $432.2 million, or 15.6%, in the year ended November 30, 2009, compared to $705.1 million, or 17.0%, in 2008. Gross margin percentage on home sales, excluding valuation adjustments, decreased compared to last year, due primarily to reduced sales prices. Gross margins on home sales excluding valuation adjustments is a Non-GAAP financial measure, which is discussed in the Non-GAAP Financial Measure section.

 

Homebuilding interest expense was $147.4 million in the year ended November 30, 2009 ($67.4 million was included in cost of homes sold, $9.2 million in cost of land sold and $70.9 million in other interest expense), compared to $130.4 million in the year ended November 30, 2008 ($99.3 million was included in cost of homes sold, $3.4 million in cost of land sold and $27.6 million in other interest expense). Despite a decrease in deliveries during the year ended November 30, 2009, compared to last year, interest expense increased primarily due to the interest related to the $400 million 12.25% senior notes due 2017 issued during the second quarter of 2009, as well as a reduction in qualifying assets eligible for interest capitalization as a result of a decrease in inventories from prior year.

 

Our homebuilding debt to total capital ratio as of November 30, 2009 was 53.1%, compared to 49.2% as of November 30, 2008. Our net homebuilding debt to total capital ratio as of November 30, 2009 was 36.9% compared to 35.7% as of November 30, 2008. The net homebuilding debt to total capital ratio consists of net homebuilding debt (homebuilding debt less homebuilding cash and cash equivalents) divided by total capital (net homebuilding debt plus stockholders’ equity).

 

Selling, general and administrative expenses were reduced by $206.0 million, or 31%, in the year ended November 30, 2009, compared to last year, primarily due to reductions in associate headcount, variable selling expenses and fixed costs. As a percentage of revenues from home sales, selling, general and administrative expenses increased to 16.2% in the year ended November 30, 2009, from 15.8% in 2008, due to lower revenues.

 

Losses on land sales totaled $178.8 million in the year ended November 30, 2009, which included $108.9 million of valuation adjustments and $84.4 million of write-offs of deposits and pre-acquisition costs related to homesites under option that we do not intend to purchase. In the year ended November 30, 2008, losses on land sales totaled $133.2 million, which included $47.8 million of valuation adjustments and $97.2 million of write-offs of deposits and pre-acquisition costs related to homesites that were under option.

 

Equity in loss from unconsolidated entities was $130.9 million in the year ended November 30, 2009, which included $101.9 million of our share of valuation adjustments related to assets of unconsolidated entities in which we have investments, compared to equity in loss from unconsolidated entities of $59.2 million in the year ended November 30, 2008, which included $32.2 million of our share of valuation adjustments related to assets of unconsolidated entities in which we have investments.

 

Other expense, net totaled $98.4 million in the year ended November 30, 2009, which included $89.0 million of valuation adjustments to our investments in unconsolidated entities and $9.7 million of write-offs of notes and other receivables, compared to other expense, net of $172.4 million in the year ended November 30, 2008, which included $172.8 million of valuation adjustments to our investments in unconsolidated entities and $25.0 million of write-offs of notes and other receivables.

 

Minority interest income, net was $28.9 million in the year ended November 30, 2009, which included $13.6 million of minority interest income as a result of $27.2 million of valuation adjustments to inventories of 50%-owned consolidated joint ventures, compared to minority interest income, net of $4.1 million in the year ended November 30, 2008.

 

Sales of land, equity in loss from unconsolidated entities, other expense, net and minority interest income, net may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.

 

Operating earnings for our Financial Services segment was $36.0 million in the year ended November 30, 2009, compared to an operating loss of $31.0 million last year. The increase in profitability in our Financial Services segment was primarily due to lower fixed costs as a result of successful cost reduction initiatives implemented throughout the downturn. In addition, in the year ended November 30, 2008, there was a $27.2 million write-off of goodwill related to the segment’s mortgage operations, compared to no write-off in the year ended November 30, 2009.

 

26


Corporate general and administrative expenses were reduced by $9.7 million, or 7%, for the year ended November 30, 2009, compared to 2008. As a percentage of total revenues, corporate general and administrative expenses increased to 3.8% in the year ended November 30, 2009, from 2.8% last year, due to lower revenues.

 

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on available evidence, it is more likely than not that such assets will not be realized. As a result of our net operating loss during the year ended November 30, 2009, we generated deferred tax assets of $269.6 million and recorded a non-cash valuation allowance against the entire amount of the deferred tax assets. In addition, we recorded a reversal of our deferred tax asset valuation allowance of $351.8 million during the fourth quarter of 2009, primarily due to a change in tax legislation, which allowed us to carry back our fiscal year 2009 tax loss to recover previously paid income taxes.

 

At November 30, 2009, we owned 82,703 homesites and had access to an additional 21,173 homesites through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At November 30, 2009, 2% of the homesites we owned were subject to home purchase contracts. Our backlog of sales contracts was 1,631 homes ($479.6 million) at November 30, 2009, compared to 1,599 homes ($456.3 million) at November 30, 2008.

 

2008 versus 2007

 

Revenues from home sales decreased 56% in the year ended November 30, 2008 to $4.2 billion from $9.5 billion in 2007. Revenues were lower primarily due to a 51% decrease in the number of home deliveries, excluding unconsolidated entities, and a 9% decrease in the average sales price of homes delivered in 2008. New home deliveries, excluding unconsolidated entities, decreased to 15,344 homes in the year ended November 30, 2008 from 31,582 homes in 2007. In the year ended November 30, 2008, new home deliveries were lower in each of our homebuilding segments and Homebuilding Other, compared to 2007. The average sales price of homes delivered decreased to $270,000 in the year ended November 30, 2008 from $297,000 in 2007, due to reduced pricing. Sales incentives offered to homebuyers were $48,700 and $48,000 per home delivered, respectively, in the years ended November 30, 2008 and 2007.

 

Gross margins on home sales were $509.6 million, or 12.3%, in the year ended November 30, 2008, which included $195.5 million of valuation adjustments, compared to gross margins on home sales of $570.7 million, or 6.0%, in the year ended November 30, 2007, which included $747.8 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $705.1 million, or 17.0%, in the year ended November 30, 2008, compared to $1,318.5 million, or 13.9%, in 2007. Gross margin percentage on home sales, excluding valuation adjustments, improved compared to 2007 primarily due to our lower inventory basis and continued focus on repositioning our product and reducing construction costs. Gross margins on home sales excluding valuation adjustments is a non-GAAP financial measure which is discussed in the Non-GAAP Financial Measure section.

 

Homebuilding interest was $130.4 million in 2008 ($99.3 million was included in cost of homes sold, $3.4 million in cost of land sold and $27.6 million in other interest expense), compared to $203.7 million in 2007 ($168.5 million was included in cost of homes sold, $9.4 million in cost of land sold and $25.8 million in other interest expense). The decrease in interest expense was due to lower interest costs resulting from lower average debt during 2008, as well as decreased deliveries during 2008, compared to 2007.

 

Our homebuilding debt to total capital ratio as of November 30, 2008 was 49.2%, compared to 37.5% as of November 30, 2007. Our net homebuilding debt to total capital ratio as of November 30, 2008 was 35.7% compared to 30.2% as of November 30, 2007. The net homebuilding debt to total capital ratio consists of net homebuilding debt (homebuilding debt less homebuilding cash and cash equivalents) divided by total capital (net homebuilding debt plus stockholders’ equity).

 

Selling, general and administrative expenses were reduced by $713.1 million, or 52%, in the year ended November 30, 2008, compared to 2007, primarily due to the consolidation of divisions, which resulted in reductions in associate headcount, variable selling expense and fixed costs. As a percentage of revenues from home sales, selling, general and administrative expenses increased to 15.8% in the year ended November 30, 2008, from 14.5% in 2007, due to lower revenues.

 

Losses on land sales totaled $133.2 million in the year ended November 30, 2008, which included $47.8 million of valuation adjustments and $97.2 million of write-offs of deposits and pre-acquisition costs related to

 

27


homesites that were under option. In the year ended November 30, 2007, losses on land sales totaled $1,661.1 million, which included $1,167.3 million of valuation adjustments and $530.0 million of write-offs of deposits and pre-acquisition costs related to homesites that were under option.

 

Equity in loss from unconsolidated entities was $59.2 million in the year ended November 30, 2008, which included $32.2 million of our share of valuation adjustments related to assets of unconsolidated entities in which we have investments, compared to equity in loss from unconsolidated entities of $362.9 million in the year ended November 30, 2007, which included $364.2 million of our share of valuation adjustments related to assets of unconsolidated entities in which we have investments.

 

Other expense, net totaled $172.4 million in the year ended November 30, 2008, which included $172.8 million of valuation adjustments to our investments in unconsolidated entities and $25.0 million of write-offs of notes and other receivables, compared to other expense, net of $50.2 million in the year ended November 30, 2007, which included $132.2 million of valuation adjustments to our investments in unconsolidated entities.

 

Minority interest income (expense), net was $4.1 million in the year ended November 30, 2008, compared to minority interest income (expense), net of ($1.9) million in the year ended November 30, 2007.

 

Due to the termination of our rights to purchase certain assets from our LandSource unconsolidated joint venture, we recognized deferred profit of $101.3 million in the year ended November 30, 2008 (net of $31.8 million of write-offs of option deposits and pre-acquisition costs and other write-offs) related to the 2007 recapitalization of LandSource.

 

Sales of land, equity in loss from unconsolidated entities, other expense, net and minority interest income (expense), net may vary significantly from period to period depending on the timing of land sales and other transactions entered into by us and unconsolidated entities in which we have investments.

 

Operating loss for the Financial Services segment was $31.0 million in the year ended November 30, 2008, compared to operating earnings of $6.1 million in 2007. The decline in profitability was primarily due to a goodwill impairment of $27.2 million related to the segment’s mortgage operations and fewer transactions in the segment’s title and mortgage operations.

 

Corporate general and administrative expenses were reduced by $43.5 million, or 25%, for the year ended November 30, 2008, compared to 2007. As a percentage of total revenues, corporate general and administrative expenses increased to 2.8% in the year ended November 30, 2008, from 1.7% in 2007, due to lower revenues.

 

A reduction of the carrying amounts of deferred tax assets by a valuation allowance is required, if based on available evidence, it is more likely than not that such assets will not be realized. As a result of our operational results for the year ended November 30, 2008, we incurred cumulative losses over the evaluation period we established. Accordingly, based on our evaluation of available evidence including our cumulative losses in the evaluation period, our current level of profits and losses and current market conditions, we recorded a $730.8 million non-cash valuation allowance against our deferred tax assets during the year ended November 30, 2008.

 

At November 30, 2008, we owned 74,681 homesites and had access to an additional 38,589 homesites through either option contracts with third parties or agreements with unconsolidated entities in which we have investments. At November 30, 2008, 2% of the homesites we owned were subject to home purchase contracts. Our backlog of sales contracts was 1,599 homes ($456.3 million) at November 30, 2008, compared to 4,009 homes ($1,384.1 million) at November 30, 2007. The lower backlog was attributable to challenged market conditions that persisted throughout 2008, which resulted in lower new orders in 2008, compared to 2007.

 

Non-GAAP Financial Measure

 

Gross margins on home sales excluding valuation adjustments is a non-GAAP financial measure, and is defined by us as sales of homes revenue less cost of homes sold excluding valuation adjustments recorded during the period. Management finds this to be an important and useful measure in evaluating our performance because it discloses the profit we generate on homes we actually delivered during the period, as our valuation adjustments relate to inventory that we did not deliver during the period. Gross margins on home sales excluding valuation adjustments also is important to our management, because it assists our management in making strategic decisions regarding our construction pace, product mix and product pricing based upon the profitability we generated on homes we actually delivered during previous periods. We believe investors also find gross margins

 

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on home sales excluding valuation adjustments to be important and useful because it discloses a profitability measure on homes we actually delivered in a period that can be compared to the profitability on homes we delivered in a prior period without regard to the variability of valuation adjustments recorded from period to period. In addition, to the extent that our competitors provide similar information, disclosure of our gross margins on home sales excluding valuation adjustments helps readers of our financial statements compare our ability to generate profits with regard to the homes we deliver in a period to our competitors’ ability to generate profits with regard to the homes they deliver in the same period.

 

Although management finds gross margins on home sales excluding valuation adjustments to be an important measure in conducting and evaluating our operations, this measure has limitations as an analytical tool as it is not reflective of the actual profitability generated by our company during the period. This is because it excludes charges we recorded relating to inventory that was impaired during the period. In addition, because gross margins on home sales excluding valuation adjustments is a financial measure that is not calculated in accordance with generally accepted accounting principles (“GAAP”), it may not be completely comparable to similarly titled measures of our competitors due to differences in methods of calculation and charges being excluded. Our management compensates for the limitations of using gross margins on home sales excluding valuation adjustments by using this non-GAAP measure only to supplement our GAAP results in order to provide a more complete understanding of the factors and trends affecting our operations. In order to analyze our overall performance and actual profitability relative to our homebuilding operations, we also compare our gross margins on home sales during the period, inclusive of valuation adjustments, with the same measure during prior comparable periods. Due to the limitations discussed above, gross margins on home sales excluding valuation adjustments should not be viewed in isolation as it is not a substitute for GAAP measures of gross margins.

 

The table set forth below reconciles our gross margins on home sales excluding valuation adjustments for the years ended November 30, 2009, 2008 and 2007 to our gross margins on home sales for the years ended November 30, 2009, 2008 and 2007:

 

     Years Ended November 30,
     2009    2008    2007
     (In thousands)

Sales of homes

   $ 2,776,850    4,150,717    9,462,940

Cost of homes sold

     2,524,850    3,641,090    8,892,268
                

Gross margins on home sales

     252,000    509,627    570,672

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     180,239    195,518    747,843
                

Gross margins on homes sales excluding valuation adjustments

   $ 432,239    705,145    1,318,515
                

 

Homebuilding Segments

 

Our Homebuilding operations construct and sell homes primarily for first-time, move-up and active adult homebuyers primarily under the Lennar brand name. In addition, our homebuilding operations also 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.

 

We have grouped our homebuilding activities into four reportable segments, which we refer to as Homebuilding East, Homebuilding Central, Homebuilding West and Homebuilding Houston. Information about homebuilding activities in states that do not have economic characteristics that are similar to those in other states in the same geographic is grouped under “Homebuilding Other.” Reference in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to homebuilding segments are to those reportable segments.

 

At November 30, 2009, our reportable homebuilding segments and Homebuilding Other consisted of homebuilding operations located in:

 

East: Florida, Maryland, New Jersey and Virginia.

Central: Arizona, Colorado and Texas. (1)

West: California and Nevada.

Houston: Houston, Texas.

Other: Illinois, Minnesota, New York, North Carolina and South Carolina.

          (1)   Texas in the Central reportable segment excludes Houston, Texas, which is its own reportable segment.

 

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The following tables set forth selected financial and operational information related to our homebuilding operations for the years indicated:

 

Selected Financial and Operational Data

 

     Years Ended November 30,
     2009    2008    2007
     (In thousands)

Revenues:

        

East:

        

Sales of homes

   $ 844,689    1,252,725    2,691,198

Sales of land

     27,569    23,033    63,452
                

Total East

     872,258    1,275,758    2,754,650
                

Central:

        

Sales of homes

     361,273    512,957    1,549,020

Sales of land

     5,910    20,153    56,819
                

Total Central

     367,183    533,110    1,605,839
                

West:

        

Sales of homes

     810,459    1,408,051    3,460,667

Sales of land

     15,778    32,112    83,045
                

Total West

     826,237    1,440,163    3,543,712
                

Houston:

        

Sales of homes

     429,127    542,288    815,250

Sales of land

     5,691    8,565    23,000
                

Total Houston

     434,818    550,853    838,250
                

Other:

        

Sales of homes

     331,302    434,696    946,805

Sales of land

     2,487    28,458    40,996
                

Total Other

     333,789    463,154    987,801
                

Total homebuilding revenues

   $ 2,834,285    4,263,038    9,730,252
                

 

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     Years Ended November 30,  
     2009     2008     2007  
     (In thousands)  

Operating earnings (loss):

      

East:

      

Sales of homes

   $ (70,878   (37,361   (366,153

Sales of land

     (92,968   (41,242   (400,830

Equity in loss from unconsolidated entities

     (5,660   (31,422   (58,069

Other expense, net

     (11,900   (37,633   (11,151

Other interest expense

     (24,847   (9,376   (9,759

Minority interest income (expense), net

     474      3,924      (923

Goodwill impairments

     —        —        (46,274
                    

Total East

     (205,779   (153,110   (893,159
                    

Central:

      

Sales of homes

     (39,309   (67,124   (110,663

Sales of land

     406      (11,330   (142,330

Equity in loss from unconsolidated entities

     (8,143   (1,310   (25,378

Other expense, net

     (13,371   (9,954   (12,938

Other interest expense

     (10,223   (5,369   (5,896

Minority interest income (expense), net

     94      (407   (85

Goodwill impairments

     —        —        (31,293
                    

Total Central

     (70,546   (95,494   (328,583
                    

West:

      

Sales of homes

     (80,294   (67,757   (347,018

Sales of land

     (48,125   (74,987   (950,316

Equity in loss from unconsolidated entities

     (114,373   (25,113   (274,267

Other expense, net

     (66,568   (100,597   (28,272

Other interest expense

     (21,710   (8,339   (10,132

Minority interest income (expense), net

     5,390      440      (723

Gain on recapitalization of unconsolidated entity

     —        133,097      175,879   

Goodwill impairments

     —        —        (43,955
                    

Total West

     (325,680   (143,256   (1,478,804
                    

Houston:

      

Sales of homes

     25,854      39,897      76,378   

Sales of land

     (3,424   807      1,151   

Equity in loss from unconsolidated entities

     (1,801   (920   (752

Other income (expense), net

     (900   (978   2,878   

Other interest expense

     (3,287   —        —     

Minority interest income, net

     —        —        22   
                    

Total Houston

     16,442      38,806      79,677   
                    

Other:

      

Sales of homes

     (32,632   (13,283   (50,230

Sales of land

     (34,731   (6,463   (168,814

Equity in loss from unconsolidated entities

     (940   (391   (4,433

Other expense, net

     (5,686   (23,226   (738

Other interest expense

     (10,783   (4,509   (21

Minority interest income (expense), net

     22,954      140      (218

Goodwill impairments

     —        —        (68,676
                    

Total Other

     (61,818   (47,732   (293,130
                    

Total homebuilding operating loss

   $ (647,381   (400,786   (2,913,999
                    

 

31


Summary of Homebuilding Data

 

Deliveries

 

                    For the Years Ended November 30,
                    Homes
                    2009    2008    2007

East

     3,817    4,957    9,840

Central

     1,796    2,442    7,020

West

     2,480    4,031    8,739

Houston

     2,150    2,736    4,380

Other

     1,235    1,569    3,304
                         

Total

     11,478    15,735    33,283
                         

 

Of the total home deliveries above, 56, 391 and 1,701, respectively, represent deliveries from unconsolidated entities for the years ended November 30, 2009, 2008 and 2007.

 

     For the Years Ended November 30,
     Dollar Value (In thousands)    Average Sales Price
     2009    2008    2007    2009    2008    2007

East

   $ 844,689    1,276,454    2,839,959      221,000    258,000    289,000

Central

     361,273    512,957    1,549,020      201,000    210,000    221,000

West

     856,285    1,519,219    3,764,510      345,000    377,000    431,000

Houston

     429,127    542,288    815,250      200,000    198,000    186,000

Other

     331,852    504,336    1,011,179      269,000    321,000    306,000
                                 

Total

   $ 2,823,226    4,355,254    9,979,918      246,000    277,000    300,000
                                 

 

Of the total dollar value of home deliveries above, $46.4 million, $204.5 million and $517.0 million, respectively, represent the dollar value of home deliveries from unconsolidated entities for the years ended November 30, 2009, 2008 and 2007. The home deliveries from unconsolidated entities had an average sales price of $828,000, $523,000 and $304,000, respectively, for the years ended November 30, 2009, 2008 and 2007.

 

Sales Incentives (1)

 

                    For the Years Ended November 30,
                    2009    (In thousands)
2008
   2007

East

   $ 190,600    260,118    543,727

Central

     65,448    97,136    231,603

West

     129,476    253,732    577,734

Houston

     72,480    67,408    67,637

Other

     54,030    68,124    95,133
                         

Total

   $ 512,034    746,518    1,515,834
                         
     For the Years Ended November 30,
     Average Sales Incentives Per Home
Delivered
   Sales Incentives as a % of Revenue
     2009    2008    2007    2009    2008    2007

East

   $ 49,900    53,400    60,800      18.4%    17.2%    16.9%

Central

     36,400    39,800    33,000      15.4%    15.9%    13.0%

West

     53,400    66,600    71,600      13.8%    15.3%    14.3%

Houston

     33,700    24,600    15,400      14.4%    11.1%    7.7%

Other

     43,800    45,900    30,100      14.0%    13.6%    9.1%
                                 

Total

   $ 44,800    48,700    48,000      15.6%    15.3%    13.9%
                                 

 

(1)   Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.

 

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New Orders (2)

 

                    Years Ended November 30,
                    Homes
                    2009    2008    2007

East

   3,710    3,953    7,492

Central

   1,840    2,280    5,055

West

   2,569    3,396    6,765

Houston

   2,130    2,416    3,621

Other

   1,261    1,346    2,820
                       

Total

   11,510    13,391    25,753
                       

 

Of the new orders above, 58, 174 and 1,091, respectively, represent new orders from unconsolidated entities for the years ended November 30, 2009, 2008 and 2007.

 

     Years Ended November 30,
     Dollar Value (In thousands)    Average Sales Price
     2009    2008    2007    2009    2008    2007

East

   $ 820,209    910,749    1,976,047    221,000    230,000    264,000

Central

     373,084    470,721    1,021,704    203,000    206,000    202,000

West

     892,002    1,249,733    2,857,727    347,000    368,000    422,000

Houston

     432,380    471,733    683,605    203,000    195,000    189,000

Other

     328,858    357,718    825,222    261,000    266,000    293,000
                               

Total

   $ 2,846,533    3,460,654    7,364,305    247,000    258,000    286,000
                               

 

Of the total dollar value of new orders above, $41.5 million, $97.5 million and $273.5 million, respectively, represent the dollar value of new orders from unconsolidated entities for the years ended November 30, 2009, 2008 and 2007. The new orders from unconsolidated entities had an average sales price of $716,000, $560,000 and $251,000, respectively, for the years ended November 30, 2009, 2008 and 2007.

__________

(2)    New orders represent the number of new sales contracts executed by homebuyers, net of cancellations, during the years ended November 30, 2009, 2008 and 2007.

 

Backlog

 

                    November 30,
                    Homes
                    2009    2008    2007

East

   682    787    1,797

Central

   167    123    285

West

   336    247    942

Houston

   249    269    589

Other

   197    173    396
                       

Total

   1,631    1,599    4,009
                       

 

Of the total homes in backlog above, 9 homes, 8 homes and 364 homes, respectively, represent homes in backlog from unconsolidated entities at November 30, 2009, 2008 and 2007.

 

     November 30,
     Dollar Value (In thousands)    Average Sales Price
     2009    2008    2007    2009    2008    2007

East

   $ 179,175    202,791    587,100    263,000    258,000    327,000

Central

     36,158    23,736    67,344    217,000    193,000    236,000

West

     143,868    108,779    408,280    428,000    440,000    433,000

Houston

     60,876    57,785    128,340    244,000    215,000    218,000

Other

     59,494    63,179    193,073    302,000    365,000    488,000
                               

Total

   $ 479,571    456,270    1,384,137    294,000    285,000    345,000
                               

 

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Of the total dollar value of homes in backlog above, $7.2 million, $12.5 million and $182.7 million, respectively, represent the dollar value of homes in backlog from unconsolidated entities at November 30, 2009, 2008 and 2007. The homes in backlog from unconsolidated entities had an average sales price of $804,000, $1,558,000 and $502,000, respectively, at November 30, 2009, 2008 and 2007.

 

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 experienced cancellation rates in our homebuilding segments and Homebuilding Other as follows:

 

     Years Ended November 30,  
     2009     2008     2007  

Cancellation Rates

      

East

   22   31   34

Central

   17   22   29

West

   15   24   29

Houston

   19   27   32

Other

   16   23   20
                  

Total

   18   26   30
                  

 

During the fourth quarter of 2009, our cancellation rate was 20%. Our cancellation rate during 2009 decreased to a historically normal level. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners, except for our multi-level residential buildings under construction for which revenue was recognized under percentage-of-completion accounting during 2007. In 2008 and 2009, we did not recognize revenues and expenses under percentage-of-completion accounting for our multi-level residential buildings under construction.

 

2009 versus 2008

 

East: Homebuilding revenues decreased in 2009, compared to 2008, primarily due to a decrease in the number of home deliveries and in the average sales price of homes delivered in all of the states in this segment. Gross margins on home sales were $36.2 million, or 4.3%, in 2009 including valuation adjustments of $73.7 million, compared to gross margins on home sales of $164.5 million, or 13.1%, in 2008 including $76.8 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $109.8 million, or 13.0%, in 2009, compared to $241.3 million, or 19.3%, in 2008. Gross margin percentage on home sales, excluding valuation adjustments, decreased compared to last year due to reduced pricing and higher sales incentives offered to homebuyers as a percentage of revenues from home sales (18.4% in 2009 and 17.2% in 2008).

 

Losses on land sales were $93.0 million in 2009 (including $64.1 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $37.0 million of valuation adjustments), compared to losses on land sales of $41.2 million in 2008 (including $19.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $23.3 million of valuation adjustments).

 

Central: Homebuilding revenues decreased in 2009, compared to 2008, primarily due to a decrease in the number of home deliveries in all of the states in this segment and a decrease in the average sales price of homes delivered in Arizona, partially offset by a slight increase in the average selling price in Colorado and Texas, excluding Houston. Gross margins on home sales were $29.2 million, or 8.1%, in 2009 including valuation adjustments of $13.6 million, compared to gross margins on home sales of $31.8 million, or 6.2%, in 2008 including $28.1 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $42.8 million, or 11.9%, in 2009, compared to $59.9 million, or 11.7%, in 2008. Sales incentives offered to homebuyers as a percentage of revenues from home sales were 15.4% in 2009 and 15.9% in 2008.

 

Gross profits on land sales were $0.4 million in 2009 (net of $0.1 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $1.3 million of valuation adjustments), compared to losses on land sales of $11.3 million in 2008 (including $6.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $12.4 million of valuation adjustments).

 

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West: Homebuilding revenues decreased in 2009, compared to 2008, primarily due to a decrease in the number of home deliveries and average sales price of homes delivered in all of the states in this segment. Gross margins on home sales were $92.8 million, or 11.5%, in 2009 including valuation adjustments of $64.1 million, compared to gross margins on home sales of $154.1 million, or 10.9%, in 2008 including $75.6 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $156.9 million, or 19.4%, in 2009, compared to $229.7 million, or 16.3%, in 2008. Gross margin percentage on home sales, excluding valuation adjustments, increased compared to last year primarily due to a decrease of sales incentives offered to homebuyers as a percentage of home sales revenues (13.8% in 2009, compared to 15.3% in 2008).

 

Losses on land sales were $48.1 million in 2009 (including $13.9 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $38.7 million of valuation adjustments), compared to losses on land sales of $75.0 million in 2008 (including $62.4 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $11.1 million of valuation adjustments).

 

Houston: Homebuilding revenues decreased in 2009, compared to 2008, primarily due to a decrease in the number of home deliveries in this segment. Gross margins on home sales were $75.3 million, or 17.5%, in 2009 including valuation adjustments of $1.1 million, compared to gross margins on home sales of $103.9 million, or 19.2%, in 2008 including $2.3 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $76.4 million, or 17.8%, in 2009, compared to $106.2 million, or 19.6%, in 2008. Gross margin percentage on home sales, excluding valuation adjustments, decreased compared to last year primarily due to higher sales incentives offered to homebuyers as a percentage of revenues from home sales (14.4% in 2009, compared to 11.1% in 2008).

 

Losses on land sales were $3.4 million in 2009 (including $2.5 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.7 million of valuation adjustments), compared to gross profits on land sales of $0.8 million in 2008 (net of $0.7 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.1 million of valuation adjustments).

 

Other: Homebuilding revenues decreased in 2009, compared to 2008, primarily due to a decrease in the number of home deliveries in all of the states in Homebuilding Other except in North and South Carolina combined, and a decrease in the average sales price of homes delivered in North and South Carolina combined and Minnesota. Gross margins on home sales were $18.5 million, or 5.6% in 2009 including valuation adjustments of $27.8 million, compared to gross margins on home sales of $55.3 million, or 12.7%, in 2008 including $12.7 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $46.2 million, or 14.0%, in 2009, compared to $68.0 million, or 15.7%, in 2008. Gross margin percentage on home sales, excluding valuation adjustments, decreased compared to last year due to reduced pricing and higher sales incentives offered to homebuyers as a percentage of revenues from home sales (14.0% in 2009, compared to 13.6% in 2008).

 

Losses on land sales were $34.7 million in 2009 (including $3.8 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $31.2 million of valuation adjustments), compared to losses on land sales of $6.5 million in 2008 (including $9.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.9 million of valuation adjustments).

 

2008 versus 2007

 

East: Homebuilding revenues decreased in 2008, compared to 2007, primarily due to a decrease in the number of home deliveries and in the average sales price of homes delivered in all of the states in this segment. Gross margins on home sales were $164.5 million, or 13.1%, in 2008 including valuation adjustments of $76.8 million, compared to gross margins on home sales of $89.0 million, or 3.3%, in 2007 including $279.1 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $241.3 million, or 19.3%, in 2008, compared to $368.0 million, or 13.7%, in 2007. Gross margin percentage on home sales increased compared to 2007 due to our lower inventory basis and continued focus on reducing costs. As a percentage of home sales revenues, sales incentives were 17.2% in 2008 and 16.9% in 2007.

 

Losses on land sales were $41.2 million in 2008 (including $19.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $23.3 million of valuation

 

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adjustments), compared to losses on land sales of $400.8 million in 2007 (including $119.6 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $307.5 million of valuation adjustments).

 

Central: Homebuilding revenues decreased in 2008, compared to 2007, primarily due to a decrease in the number of home deliveries in all of the states in this segment. Gross margins on home sales were $31.8 million, or 6.2%, in 2008 including valuation adjustments of $28.1 million, compared to gross margins on home sales of $102.0 million, or 6.6%, in 2007 including $91.4 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $59.9 million, or 11.7%, in 2008, compared to $193.3 million, or 12.5%, in 2007. Gross margin percentage on home sales decreased compared to 2007 primarily due to higher sales incentives offered to homebuyers (15.9% in 2008, compared to 13.0% in 2007).

 

Losses on land sales were $11.3 million in 2008 (including $6.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $12.4 million of valuation adjustments), compared to losses on land sales of $142.3 million in 2007 (including $56.3 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $79.1 million of valuation adjustments).

 

West: Homebuilding revenues decreased in 2008, compared to 2007, primarily due to a decrease in the number of home deliveries and average sales price of homes delivered in all of the states in this segment. Gross margins on home sales were $154.1 million, or 10.9%, in 2008 including valuation adjustments of $75.6 million, compared to gross margins on home sales of $119.1 million, or 3.4%, in 2007 including $331.8 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $229.7 million, or 16.3%, in 2008, compared to $451.0 million, or 13.0%, in 2007. Gross margin percentage on home sales increased compared to 2007 primarily due to our lower inventory basis and continued focus on reducing costs, despite higher sales incentives offered to homebuyers (15.3% in 2008, compared to 14.3% in 2007).

 

Losses on land sales were $75.0 million in 2008 (including $62.4 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $11.1 million of valuation adjustments), compared to losses on land sales of $950.3 million in 2007 (including $310.8 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $648.6 million of valuation adjustments).

 

Houston: Homebuilding revenues decreased in 2008, compared to 2007, primarily due to a decrease in the number of home deliveries in this segment. Gross margins on home sales were $103.9 million, or 19.2%, in 2008 including valuation adjustments of $2.3 million, compared to gross margins on home sales of $171.7 million, or 21.1%, in 2007 including $2.8 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $106.2 million, or 19.6%, in 2008, compared to $174.5 million, or 21.4%, in 2007. Gross margin percentage on home sales decreased compared to 2007 primarily due to higher sales incentives offered to homebuyers (11.1% in 2008, compared to 7.7% in 2007).

 

Gross profits on land sales were $0.8 million in 2008 (net of $0.7 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.1 million of valuation adjustments), compared to gross profits on land sales of $1.2 million in 2007 (net of $0.8 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $1.8 million of valuation adjustments).

 

Other: Homebuilding revenues decreased in 2008, compared to 2007, primarily due to a decrease in the number of home deliveries in all of the states in Homebuilding Other, and a decrease in the average sales price of homes delivered in all of the states in this segment except in Minnesota. Gross margins on home sales were $55.3 million, or 12.7%, in 2008 including valuation adjustments of $12.7 million, compared to gross margins on home sales of $88.9 million, or 9.4%, in 2007 including $42.8 million of valuation adjustments. Gross margins on home sales excluding valuation adjustments were $68.0 million, or 15.7%, in 2008, compared to $131.7 million, or 13.9%, in 2007. Gross margin percentage on home sales increased compared to 2007 primarily due to our lower inventory basis and continued focus on reducing costs, despite higher sales incentives offered to homebuyers (13.6% in 2008, compared to 9.1% in 2007).

 

Losses on land sales were $6.5 million in 2008 (including $9.0 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $0.9 million of valuation adjustments), compared to losses on land sales of $168.8 million in 2007 (including $42.4 million of write-offs of deposits and pre-acquisition costs related to land under option that we do not intend to purchase and $130.3 million of valuation adjustments).

 

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Gross margins on home sales excluding valuation adjustments is a Non-GAAP financial measure that is discussed previously under “Non-GAAP Financial Measure.” The table set forth below reconciles our gross margins on home sales excluding valuation adjustments for the years ended November 30, 2009, 2008 and 2007 for each of our reportable homebuilding segments and Homebuilding Other to our gross margins on home sales for the years ended November 30, 2009, 2008 and 2007:

 

     Years Ended November 30,
     2009    2008    2007
     (In thousands)

East:

        

Sales of homes

   $ 844,689    1,252,725    2,691,198

Cost of homes sold

     808,528    1,088,229    2,602,239
                

Gross margins on home sales

     36,161    164,496    88,959

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     73,670    76,791    279,064
                

Gross margins on homes sales excluding valuation adjustments

     109,831    241,287    368,023
                

Central:

        

Sales of homes

     361,273    512,957    1,549,020

Cost of homes sold

     332,040    481,176    1,447,050
                

Gross margins on home sales

     29,233    31,781    101,970

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     13,603    28,142    91,354
                

Gross margins on homes sales excluding valuation adjustments

     42,836    59,923    193,324
                

West:

        

Sales of homes

     810,459    1,408,051    3,460,667

Cost of homes sold

     717,631    1,253,952    3,341,518
                

Gross margins on home sales

     92,828    154,099    119,149

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     64,095    75,614    331,827
                

Gross margins on homes sales excluding valuation adjustments

     156,923    229,713    450,976
                

Houston:

        

Sales of homes

     429,127    542,288    815,250

Cost of homes sold

     353,838    438,368    643,597
                

Gross margins on home sales

     75,289    103,920    171,653

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     1,116    2,262    2,836
                

Gross margins on homes sales excluding valuation adjustments

     76,405    106,182    174,489
                

Other:

        

Sales of homes

     331,302    434,696    946,805

Cost of homes sold

     312,813    379,365    857,864
                

Gross margins on home sales

     18,489    55,331    88,941

Valuation adjustments to finished homes, CIP and land on which we intend to build homes

     27,755    12,709    42,762
                

Gross margins on homes sales excluding valuation adjustments

     46,244    68,040    131,703
                

Total gross margins on home sales

   $ 252,000    509,627    570,672

Total valuation adjustments

   $ 180,239    195,518    747,843
                

Total gross margins on home sales excluding valuation adjustments

   $ 432,239    705,145    1,318,515
                

 

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Financial Services Segment

 

We have one Financial Services reportable segment that provides primarily mortgage financing, title insurance and closing services for both buyers of our homes and others. Substantially all of the loans the Financial Services segment originates are sold in the secondary mortgage market on a servicing released, non-recourse basis; although, we remain liable for certain limited representations. The following table sets forth selected financial and operational information relating to our Financial Services segment.

 

     Years Ended November 30,  
     2009     2008     2007  
     (Dollars in thousands)  

Revenues

   $ 285,102      312,379      456,529   

Costs and expenses (1)

     249,120      343,369      450,409   
                    

Operating earnings (loss) (1)

   $ 35,982      (30,990   6,120   
                    

Dollar value of mortgages originated

   $ 4,020,000      4,290,000      7,740,000   
                    

Number of mortgages originated

     17,900      18,300      30,900   
                    

Mortgage capture rate of Lennar homebuyers

     87   85   73
                    

Number of title and closing service transactions

     120,500      105,900      136,300   
                    

Number of title policies issued

     92,500      96,700      146,200   
                    

 

(1)   Financial Services costs and expenses and operating loss for the year ended November 30, 2008 include a $27.2 million impairment of goodwill.

 

Financial Condition and Capital Resources

 

At November 30, 2009, we had cash and cash equivalents related to our homebuilding and financial services operations of $1,457.4 million, compared to $1,203.4 million at November 30, 2008 and $795.2 million at November 30, 2007.

 

We finance our land acquisition and development activities, construction activities, financial services activities 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.

 

Operating Cash Flow Activities

 

During 2009 and 2008, cash provided by operating activities totaled $420.8 million and $1,100.8 million, respectively. During 2009, cash provided by operating activities was positively impacted by a decrease in inventories as a result of reducing completed, unsold inventory, a reduction in construction in progress resulting from lower new home starts in early 2009 and write-offs and valuation adjustments pertaining to the respective inventory, which was partially offset by land acquisitions. Cash provided by operating activities was partially offset by our net loss, a decrease in accounts payable and other liabilities and an increase in our receivables as a result of an increase in our income tax receivables primarily due to a change in tax legislation, which allowed us to carryback our fiscal year 2009 tax loss to recover previously paid income taxes.

 

During 2008, cash provided by operating activities included a decrease in our inventory as a result of reduced land purchases, a reduction in construction in progress resulting from lower new home starts and write-offs and valuation adjustments pertaining to the respective inventory. In order to improve liquidity in 2008, we continued to focus our efforts on adjusting pricing to meet market conditions, as we pulled back production and curtailed land purchases where possible in order to keep our balance sheet positioned for future opportunities. Cash provided by operating activities was also impacted by a decrease in our receivables primarily related to the collection of our income tax receivables, a decrease in loans held-for-sale resulting from a decrease in our new home deliveries during the year and our deferred income tax provision. Cash provided by operating activities was partially offset by our net loss and a decrease in accounts payable and other liabilities primarily due to a decrease in our land purchases.

 

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Investing Cash Flow Activities

 

During 2009 and 2008, cash used in investing activities totaled $275.1 million and $265.7 million, respectively. During the year ended November 30, 2009, we contributed $326.0 million of cash to unconsolidated entities of which $94.5 million related to our investment in the reorganized Newhall, as well as the purchase of equity interests in other joint ventures previously owned by LandSource, compared to $403.7 million of cash contributed to unconsolidated entities in 2008. Our investing activities also included distributions of capital from unconsolidated entities of $24.1 million and $87.8 million, respectively, during the years ended November 30, 2009 and 2008.

 

We are always looking at the possibility of acquiring homebuilders and other companies. However, at November 30, 2009, we had no agreements or understandings regarding any significant transactions.

 

Financing Cash Flow Activities

 

During 2009, our net cash provided by financing activities was primarily attributed to the issuance of common stock and new debt, partially offset by the redemption of debt.

 

During 2008, our net cash used in financing activities primarily related to net repayments under financial services debt, principal payments on other borrowings and dividends paid, partially offset by receipts related to minority interests.

 

During 2007, we sold a diversified portfolio of land consisting of approximately 11,000 homesites in 32 communities located throughout the country to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which we have a 20% ownership interest and 50% voting rights. Due to our continuing involvement, the transaction did not qualify as a sale under GAAP; thus, the inventory remained on our balance sheet in consolidated inventory not owned. During 2009 and 2008, we exercised certain land option contracts from the land investment venture, reducing the liabilities reflected on our consolidated balance sheet related to consolidated inventory not owned by $33.7 million and $48.4 million, respectively.

 

Homebuilding debt to total capital and net homebuilding debt to total capital are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our homebuilding operations. Management believes providing a measure of leverage of our homebuilding operations enables management and readers of our financial statements to better understand our financial position and performance. Homebuilding debt to total capital and net homebuilding debt to total capital are calculated as follows:

 

     November 30,  
     2009     2008  
     (Dollars in thousands)  

Homebuilding debt

   $ 2,761,352      2,544,935   

Stockholders’ equity

     2,443,479      2,623,007   
              

Total capital

   $ 5,204,831      5,167,942   
              

Homebuilding debt to total capital

     53.1   49.2
              

Homebuilding debt

   $ 2,761,352      2,544,935   

Less: Homebuilding cash and cash equivalents

     1,330,603      1,091,468   
              

Net homebuilding debt

   $ 1,430,749      1,453,467   
              

Net homebuilding debt to total capital (1)

     36.9   35.7
              

 

(1)   Net homebuilding debt to total capital consists of net homebuilding debt (homebuilding debt less homebuilding cash and cash equivalents) divided by total capital (net homebuilding debt plus stockholders’ equity).

 

At November 30, 2009, homebuilding debt to total capital was higher compared to prior year due to the increase in homebuilding debt as a result of a net increase in senior notes and other debts payable, and the decrease in stockholders’ equity primarily due to our net loss, which included the effects of inventory valuation adjustments, write-offs of option deposits and pre-acquisition costs, our share of valuation adjustments related to

 

39


assets of unconsolidated entities, valuation adjustments to investments in unconsolidated entities and a valuation allowance against our deferred tax assets, all of which are non-cash items. This decrease in stockholders’ equity was partially offset by common stock issued under our equity draw down program and a reversal of a portion of our deferred tax asset valuation allowance during the fourth quarter of 2009, primarily due to a change in tax legislation, which allowed us to carry back our fiscal year 2009 tax loss to recover previously paid income taxes.

 

In addition to the use of capital in our homebuilding and financial services operations, we actively evaluate various other uses of capital, which fit into our homebuilding and financial services strategies and appear to meet our profitability and return on capital goals. This may include acquisitions of, or investments in, other entities, the payment of dividends or repurchases of our outstanding common stock or debt. These activities may be funded through any combination of our credit facilities, cash generated from operations, sales of assets or the issuance of public debt, common stock or preferred stock.

 

The following table summarizes our homebuilding senior notes and other debts payable:

 

     November 30,
     2009    2008
     (Dollars in thousands)

5.125% senior notes due 2010

   $ 249,955    299,877

5.95% senior notes due 2011

     244,727    249,615

5.95% senior notes due 2013

     347,471    346,851

5.50% senior notes due 2014

     248,365    248,088

5.60% senior notes due 2015

     501,424    501,618

6.50% senior notes due 2016

     249,760    249,733

12.25% senior notes due 2017

     392,392    —  

7 5/8% senior notes due 2009

     —      280,976

Mortgage notes on land and other debt

     527,258    368,177
           
   $ 2,761,352    2,544,935
           

 

Our average debt outstanding was $2.6 billion in 2009, compared to $2.3 billion in 2008. The average rate for interest incurred was 6.0% and 5.8%, respectively in 2009 and 2008. Interest incurred related to homebuilding debt for the year ended November 30, 2009 was $172.1 million, compared to $148.3 million in 2008. 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, debt issuances and equity offerings.

 

In April 2009, we sold $400 million of 12.25% senior notes due 2017 (the “12.25% Senior Notes”) at a price of 98.098% in a private placement. Proceeds from the offering, after payment of initial purchase’s discount and expenses, were $386.7 million. We added the proceeds to our working capital to be used for general corporate purposes, which may include the repayment or repurchase of our near-term maturities or of debt of our joint ventures that we have guaranteed. Interest on the 12.25% Senior Notes is due semi-annually. The 12.25% Senior Notes are unsecured and unsubordinated, and are guaranteed by substantially all of our subsidiaries. The 12.25% Senior Notes were subsequently exchanged for identical 12.25% Senior Notes that had been registered under the Securities Act of 1933. At November 30, 2009, the carrying amount of the 12.25% Senior Notes was $392.4 million.

 

In March 2009, we retired our $281 million of 7 5/8% senior notes due March 2009 for 100% of the outstanding principal amount, plus accrued and unpaid interest as of the maturity date.

 

In June 2007, we redeemed our $300 million senior floating-rate notes due 2009. The redemption price was $300.0 million, or 100% of the principal amount of the outstanding senior floating-rate notes due 2009, plus accrued and unpaid interest as of the redemption date.

 

In April 2006, we sold $250 million of 5.95% senior notes due 2011 and $250 million of 6.50% senior notes due 2016 (collectively, the “2006 Senior Notes”) at prices of 99.766% and 99.873%, respectively, in a private placement under SEC Rule 144A. Proceeds from the offering of the 2006 Senior Notes, after initial purchaser’s discount and expenses, were $248.7 million and $248.9 million, respectively. We added the proceeds to our working capital to be used for general corporate purposes. Interest on the 2006 Senior Notes is due semi-annually. The 2006 Senior Notes are unsecured and unsubordinated, and substantially all of our subsidiaries

 

40


guarantee the 2006 Senior Notes. The 2006 Senior Notes were subsequently exchanged for identical notes registered under the Securities Act of 1933. During the year ended November 30, 2009, we redeemed $5.0 million of the 5.95% senior notes due 2011. At November 30, 2009 and 2008, the carrying amount of the 2006 Senior Notes was $494.5 million and $499.3 million, respectively.

 

In September 2005, we sold $300 million of 5.125% senior notes due 2010 (the “5.125% Senior Notes”) at a price of 99.905% in a private placement. Proceeds from the offering, after initial purchaser’s discount and expenses, were $298.2 million. We added the proceeds to our working capital to be used for general corporate purposes. Interest on the 5.125% Senior Notes is due semi-annually. The 5.125% Senior Notes are unsecured and unsubordinated. Substantially all of our subsidiaries guaranteed the 5.125% Senior Notes. In 2006, we exchanged the 5.125% Senior Notes for registered notes. The registered notes have substantially identical terms as the 5.125% Senior Notes, except that the registered notes do not include transfer restrictions that are applicable to the 5.125% Senior Notes. During the year ended November 30, 2009, we redeemed $50.0 million of the 5.125% Senior Notes. At November 30, 2009 and 2008, the carrying amount of the 5.125% Senior Notes was $250.0 million and $299.9 million, respectively.

 

In April 2005, we sold $300 million of 5.60% Senior Notes due 2015 (the “5.60% Senior Notes”) at a price of 99.771%. Proceeds from the offering, after initial purchaser’s discount and expenses, were $297.5 million. In July 2005, we sold $200 million of 5.60% Senior Notes due 2015 at a price of 101.407%. The 5.60% Senior Notes were the same issue as the 5.60% Senior Notes we sold in April 2005. Proceeds from the offering, after initial purchaser’s discount and expenses, were $203.9 million. We added the proceeds of both offerings to our working capital to be used for general corporate purposes. Interest on the 5.60% Senior Notes is due semi-annually. The 5.60% Senior Notes are unsecured and unsubordinated. Substantially all of our subsidiaries guaranteed the 5.60% Senior Notes. The 5.60% Senior Notes were subsequently exchanged for identical 5.60% Senior Notes that had been registered under the Securities Act of 1933. At November 30, 2009 and 2008, the carrying amount of the 5.60% Senior Notes sold in April and July 2005 was $501.4 million and $501.6 million, respectively.

 

In August 2004, we sold $250 million of 5.50% senior notes due 2014 (the “5.50% Senior Notes”) at a price of 98.842% in a private placement. Proceeds from the offering, after initial purchaser’s discount and expenses, were $245.5 million. We used the proceeds to repay borrowings under our Credit Facility. Interest on the 5.50% Senior Notes is due semi-annually. The 5.50% Senior Notes are unsecured and unsubordinated. Substantially all of our subsidiaries guaranteed the 5.50% Senior Notes. At November 30, 2009 and 2008, the carrying value of the 5.50% Senior Notes was $248.4 million and $248.1 million, respectively.

 

In February 2003, we issued $350 million of 5.95% senior notes due 2013 at a price of 98.287%. Substantially all of our subsidiaries guaranteed the 5.95% senior notes. At November 30, 2009 and 2008, the carrying amount of the 5.95% senior notes was $347.5 million and $346.9 million, respectively.

 

Substantially all of our wholly-owned subsidiaries have guaranteed all our Senior Notes (the “Guaranteed Notes”). The guarantees are full and unconditional and the guarantor subsidiaries are 100% directly and indirectly owned by Lennar Corporation. The principal reason our wholly-owned subsidiaries guaranteed the Guaranteed Notes is so holders of the Guaranteed Notes will have rights at least as great with regard to our subsidiaries as any other holders of a material amount of our unsecured debt. Therefore, the guarantees of the Guaranteed Notes will remain in effect while the guarantor subsidiaries guarantee a material amount of the debt of Lennar Corporation, as a separate entity, to others. At any time, however, 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 subsidiaries’ guarantee of the Guaranteed Notes will be suspended. Currently, the only debt the guarantor subsidiaries are guaranteeing other than the Guaranteed Notes is Lennar Corporation’s principal revolving bank credit line (currently the Credit Facility). Therefore, if, the guarantor subsidiaries cease guaranteeing Lennar Corporation’s obligations under its principal revolving bank credit line 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 the guarantor subsidiaries are guaranteeing a revolving credit line 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 line is less than $75 million. Because it is possible that our banks will permit some or all of the guarantor subsidiaries to stop guaranteeing our revolving credit line, it is possible that, at some time or times in the future, the Guaranteed Notes will no longer be guaranteed by the guarantor subsidiaries.

 

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Our senior unsecured revolving credit facility (the “Credit Facility”) consists of a $1.1 billion revolving credit facility maturing in July 2011. In order to borrow under our Credit Facility, we are required to first use our cash in excess of $750 million and have availability under our borrowing base calculation. As of November 30, 2009, we had no availability to borrow under our Credit Facility. We can create availability under our Credit Facility to the extent we use the cash in excess of $750 million to purchase qualified borrowing base assets.

 

Our Credit Facility is guaranteed by substantially all of our subsidiaries. Interest rates on outstanding borrowings are LIBOR-based, with margins determined based on changes in our credit ratings, or an alternate base rate, as described in our Credit Facility agreement. During the year ended November 30, 2009, we did not have any borrowings under our Credit Facility, compared to average daily borrowings of $21.3 million during the year ended November 30, 2008. At both November 30, 2009 and 2008, we had no outstanding balance under our Credit Facility. However, at November 30, 2009 and 2008, $177.9 million and $275.2 million, respectively, of our total letters of credit outstanding discussed below, were collateralized against certain borrowings available under our Credit Facility.

 

Our performance letters of credit outstanding were $97.7 millions and $167.5 million, respectively, at November 30, 2009 and 2008. Our financial letters of credit outstanding were $205.4 million and $278.5 million, respectively, at November 30, 2009 and 2008. Performance letters of credit are generally posted with regulatory bodies to guarantee our performance of certain development and construction activities, and financial letters of credit are generally posted in lieu of cash deposits on option contracts and for insurance risks, credit enhancements and as other collateral.

 

At November 30, 2009, our Financial Services segment had two warehouse repurchase facilities with a maximum aggregate commitment of $200 million and $100 million, respectively, that mature in June 2010 and another warehouse repurchase facility with a maximum aggregate commitment of $125 million that matures in July 2010. The maximum aggregate commitment under these facilities totaled $425 million.

 

Our Financial Services segment uses these facilities to finance its lending activities until the mortgage loans are sold to investors and expects the facilities to be renewed or replaced with other facilities when they mature. Borrowings under the facilities were $217.5 million and $209.5 million, respectively, at November 30, 2009 and 2008 and were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $266.9 million and $281.2 million, respectively, at November 30, 2009 and 2008. These facilities have several interest rate-pricing options, which fluctuate with market rates. The combined effective interest rate on the facilities at November 30, 2009 was 4.2%.

 

At November 30, 2008, our Financial Services segment had advances under a different conduit funding agreement totaling $10.8 million, which had an effective interest rate of 2.9% at November 30, 2008. At November 30, 2008, our Financial Services segment had advances under the on going 60-day committed repurchase facility of $5.2 million, which were collateralized by mortgage loans and receivables on loans sold to investors but not yet paid for with outstanding principal balances of $5.5 million. The effective interest rate of this facility at November 30, 2008 was 3.7%.

 

Our Financial Services segment, in the normal course of business, uses derivative financial instruments to reduce its exposure to fluctuations in interest rates. The Financial Services segment enters into forward commitments and, to a lesser extent, option contracts to protect the value of loans held-for-sale from increases in market interest rates. We do not anticipate that we will suffer credit losses from counterparty non-performance.

 

Due to the fact that our Financial Services segment’s borrowings under the lines of credit are generally repaid with the proceeds from the sale of mortgage loans and receivables on loans that secure those borrowings, the facilities are not likely to be a call on our current cash or future cash resources. If the facilities are not renewed, the borrowings under the lines of credit will be paid off by selling the mortgage loans held-for-sale and by collecting on receivables on loans sold but not yet paid. Without the facilities, our Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.

 

Debt Covenants

 

At November 30, 2009, we believe we were in compliance with our debt covenants. Under our Credit Facility agreement (the “Agreement”), we were required to maintain a leverage ratio of less than or equal to 55% at the end of each fiscal quarter during our 2009 fiscal year and we are required to maintain a leverage ratio of less than or equal to 52.5% for our 2010 fiscal year and through the maturity of our Credit Facility in 2011. If our

 

42


adjusted consolidated tangible net worth, as calculated per the Agreement, falls below $1.6 billion, our Credit Facility would be reduced from $1.1 billion to $0.9 billion. In no event may our adjusted consolidated tangible net worth, as calculated per the Agreement, be less than $1.3 billion.

 

The following are computations of our adjusted consolidated tangible net worth and our leverage ratio as calculated per the Agreement as of November 30, 2009:

 

     Covenant
Level
    Level Achieved as of
November 30, 2009
    Cushion
     (Dollars in thousands)

Adjusted consolidated net worth (1)

   $ 1,686,031      2,254,661      568,630

Leverage ratio (2)

     55   48   700 Basis Points

 

The terms “adjusted consolidated tangible net worth” and “leverage ratio” used in the Agreement are specifically calculated per the Agreement and differ in specified ways from comparable GAAP or common usage terms. Our adjusted consolidated tangible net worth and leverage ratio, as well as our maximum recourse exposure from joint ventures were calculated for purposes of the Agreement as of November 30, 2009 as follows:

 

(1)   The minimum adjusted consolidated net worth and the adjusted consolidated tangible net worth as calculated per the Agreement is as follows:

 

Minimum adjusted consolidated tangible net worth

 

     As of
November 30, 2009
 
     (Dollars in thousands)  

Stated adjusted consolidated tangible net worth per the Agreement

   $ 2,330,000   

Plus: 50% of cumulative positive consolidated net income in excess of aggregate amount paid to purchase or redeem equity securities

     3,416   

Less: Deferred tax asset valuation allowance

     (647,385
        

Minimum adjusted consolidated tangible net worth as calculated per the Agreement

   $ 1,686,031   
        

 

Adjusted consolidated tangible net worth

 

     As of
November 30, 2009
 
     (In thousands)  

Consolidated stockholders’ equity

   $ 2,443,479   

Less: Intangible assets (a)

     (34,046
        

Consolidated tangible net worth as calculated per the Agreement

     2,409,433   

Less: Consolidated stockholders’ equity of mortgage banking subsidiaries (b)

     (154,772
        

Adjusted consolidated tangible net worth as calculated per the Agreement

   $ 2,254,661   
        

 

(a)   Intangible assets consist of the Financial Services’ title operations goodwill.
(b)   Consolidated stockholders’ equity of mortgage banking subsidiaries represents the stockholders’ equity of the Financial Services segment’s mortgage operations which is included in stockholders’ equity in our consolidated balance sheet as of November 30, 2009.

 

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(2)   The leverage ratio as calculated per the Agreement is as follows:

 

     As of
November 30, 2009
 
     (Dollars in thousands)  

Senior notes and other debts payable

   $ 2,761,352   

Less: Indebtedness of our consolidated entities (a)

     (303,263
        

Lennar’s indebtedness as calculated per the Agreement

     2,458,089   

Plus: Letters of credit (b)

     206,094   

Plus: Lennar’s maximum recourse exposure related to unconsolidated entities

     287,739   

Plus: Lennar’s maximum recourse exposure related to its consolidated entities (a)

     110,775   
        

Consolidated indebtedness as calculated per the Agreement

     3,062,697   

Less: 75% of unconsolidated and consolidated entities reimbursement obligations (c)

     (104,819

Plus: 10% of unconsolidated and consolidated entities non-recourse indebtedness with completion guarantees (d)

     60,840   

Less: the lesser of $500 million or unrestricted cash in excess of $15 million per the Agreement

     (500,000
        

Numerator as calculated per the Agreement

   $ 2,518,718   
        

Denominator as calculated per the Agreement

   $ 5,273,379   
        

Leverage ratio (e)

     48
        

 

(a)   Indebtedness of our consolidated entities primarily includes $192.9 million of non-recourse debt of our consolidated entities and $110.8 million of recourse debt of our consolidated entities. These amounts are included in senior notes and other debts payable in our consolidated balance sheet as of November 30, 2009. Indebtedness of our consolidated entities is offset by $0.5 million of primarily corporate guarantees.
(b)   Letters of credit include our financial letters of credit outstanding of $205.4 million disclosed in Note 6 of the notes to our consolidated financial statements as of November 30, 2009 and $0.7 million of letters of credit related to the Financial Services segment’s title operations.
(c)   Reimbursement obligations include $93.2 million related to our joint and several reimbursement agreements from partners of our unconsolidated entities and $46.6 million related to our joint and several reimbursement agreements from partners of our consolidated entities.
(d)   Non-recourse debt with completion guarantees includes $608.4 million of our unconsolidated entities non-recourse debt with completion guarantees.
(e)   Leverage ratio consists of the numerator as calculated per the Agreement divided by the denominator as calculated per the Agreement (consolidated indebtedness as calculated per the Agreement, less 75% of unconsolidated and consolidated entities reimbursement obligations, plus 10% of unconsolidated and consolidated non-recourse indebtedness with completion guarantees, plus adjusted consolidated tangible net worth as calculated per the Agreement).

 

Additionally, our Credit Facility requires us to effect quarterly reductions of our maximum recourse exposure related to joint ventures in which we have investments by a total of $200 million to $535 million by November 30, 2009, which we had already accomplished as of May 31, 2009. We must also effect quarterly reductions during our 2010 fiscal year totaling $180 million to $355 million of which we have already reduced it by $136.5 million. During the first six months of our 2011 fiscal year, we must reduce our maximum recourse exposure related to joint ventures by $80 million to $275 million.

 

If the joint ventures are unable to reduce their debt, where there is recourse to us, through the sale of inventory or other means, then we and our partners may be required to contribute capital to the joint ventures.

 

While we currently believe we are in compliance with our debt covenants in the Agreement, if we had to record significant additional valuation adjustments and other write-offs in the future, issue debt, and/or make significant investments in strategic joint ventures, they could cause us to fail to comply with the Agreement’s covenants. In addition, if we default in the payment or performance of certain obligations relating to the debt of unconsolidated entities above a specified threshold amount, we would be in default under the Agreement. If we are not in compliance and are unable to obtain a waiver or amendments to the Credit Facility, the lenders would have the right to terminate the facility and require us to replace or cash collateralize $177.9 million of letters of credit outstanding under our Credit Facility. A default under the Agreement might entitle holders of $2.2 billion of debt securities we have sold into the capital markets to cause the sums evidenced by those debt securities to become due immediately, which might require us to sell assets at prices well below the fair values, or the carrying values, of the assets. However, our cash and cash equivalents of $1.3 billion at November 30, 2009 provide ample liquidity to cash collateralize the letters of credit if necessary.

 

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Changes in Capital Structure

 

We have a stock repurchase program which permits the purchase of up to 20 million shares of our outstanding common stock. During 2009, 2008 and 2007, there were no material share repurchases of common stock under the stock repurchase program. As of November 30, 2009, 6.2 million shares of common stock can be repurchased in the future under the program.

 

Treasury stock increased by 0.3 million Class A common shares and 0.5 million Class A common shares, respectively, during the years ended November 30, 2009 and November 30, 2008, in connection with activity related to our equity compensation plan and forfeitures of restricted stock.

 

In April 2009, we entered into distribution agreements with J.P Morgan Securities, Inc., Citigroup Global Markets Inc., Merril Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., relating to an offering of our Class A common stock into the market from time to time for an aggregate of up to $275 million. As of November 30, 2009, we had sold a total of 21.0 million shares of our Class A common stock under the equity offering for gross proceeds of $225.5 million, or an average of $10.76 per share. After compensation to the distributors of $4.5 million, we received net proceeds of $221.0 million. We will use the proceeds from the offering for general corporate purposes.

 

During 2009, Class A and Class B common stock holders received a per share annual dividend of $0.16. In October 2008, the Company’s Board of Directors voted to decrease the annual dividend rate with regard to the Company’s Class A and Class B common stock to $0.16 per share per year (payable quarterly) from $0.64 per share per year (payable quarterly). During 2008 and 2007, Class A and Class B common stockholders received per share annual dividends of $0.52 and $0.64, respectively.

 

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

 

Investments in Unconsolidated Entities

 

At November 30, 2009, we had equity investments in 62 unconsolidated entities, compared to 116 unconsolidated entities at November 30, 2008. We are focused on continuing to reduce the number of unconsolidated entities that we have investments in. Historically, we invested in unconsolidated entities that acquire and develop 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 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, enabled us to acquire land to 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 are land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers give us access to homesites owned or controlled by our partner. Joint ventures with other homebuilders provide us with the ability to bid jointly with our partner for large land parcels. Joint ventures with financial partners allow us to combine our homebuilding expertise with access to our partners’ capital. Joint ventures with strategic partners allow 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 or maintenance guarantees generally is required.

 

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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). Our 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. 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 some instances, we are designated as the manager under the direction of a management committee that has shared power amongst the partners of the unconsolidated entity and receive fees for such services. In addition, we often enter into option contracts to acquire properties from our joint ventures, generally for market prices at specified dates in the future. Option contracts generally require us to make deposits using cash or irrevocable letters of credit toward the exercise price. These option deposits are generally negotiated by management on a case by case basis and until recently have usually been 10% of the exercise price.

 

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 are 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 many 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 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 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.

 

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 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 investing activities.

 

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Summarized financial information on a combined 100% basis related to unconsolidated entities in which we had investments that are accounted for by the equity method was as follows:

 

Statements of Operations and Selected Information

   Years Ended November 30,  
   2009     2008     2007  
     (Dollars in thousands)  

Revenues

   $ 339,993      862,728      2,060,279   

Costs and expenses

     1,212,866      1,394,601      3,075,696   
                    

Net loss of unconsolidated entities (1)

   $ (872,873   (531,873   (1,015,417
                    

Our share of net loss (2)

   $ (131,138   (55,598   (353,946

Our share of net loss—recognized (2)

   $ (130,917   (59,156   (362,899

Our cumulative share of net earnings—deferred at November 30

   $ 12,052      21,491      34,731   

Our investments in unconsolidated entities

   $ 609,140      766,752      934,271   

Equity of the unconsolidated entities

   $ 2,249,289      2,688,365      2,739,467   
                    

Our investment % in the unconsolidated entities

     27   29   34
                    

 

(1)   The net loss of unconsolidated entities for the year ended November 30, 2009 was primarily related to valuation adjustments recorded by the unconsolidated entities. Our exposure to such losses was significantly lower as a result of our small ownership interest in the respective unconsolidated entities or our previous valuation adjustments to our investments in unconsolidated entities.
(2)   For the years ended November 30, 2009, 2008 and 2007, our share of net loss recognized from unconsolidated entities includes $101.9 million, $32.2 million and $364.2 million, respectively, of our share of valuation adjustments related to assets of the unconsolidated entities in which we have investments.

 

Balance Sheets

   November 30,  
   2009     2008  
     (Dollars in thousands)  

Assets:

    

Cash and cash equivalents

   $ 171,946      135,081   

Inventories

     3,628,491      7,115,360   

Other assets

     403,383      541,984   
              
   $ 4,203,820      7,792,425   
              

Liabilities and equity:

    

Accounts payable and other liabilities

   $ 366,141      1,042,002   

Debt

     1,588,390      4,062,058   

Equity of:

    

Lennar

     609,140      766,752   

Others

     1,640,149      1,921,613   
              

Total equity of unconsolidated entities

     2,249,289      2,688,365   
              
   $ 4,203,820      7,792,425   
              

Our equity in the unconsolidated entities

     27   29
              

 

In November 2007, we sold a portfolio of land consisting of approximately 11,000 homesites in 32 communities located throughout the country to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which we have a 20% ownership interest and 50% voting rights. Due to our continuing involvement, the transaction did not qualify as a sale under GAAP; thus, the inventory has remained on our consolidated balance sheet in consolidated inventory not owned. As of November 30, 2009 and 2008, the portfolio of land (including land development costs) of $477.9 million and $538.4 million, respectively, is reflected as inventory in the summarized condensed financial information related to unconsolidated entities in which we have investments. The decrease in this inventory from November 30, 2008 to November 30, 2009, resulted primarily from valuation adjustments of $50.1 million recorded by the land investment venture.

 

In February 2007, LandSource Communities Development LLC (“LandSource”) admitted MW Housing Partners as a new strategic partner. As part of the transaction, the joint venture obtained $1.6 billion of non-recourse financing, which consisted of a $200 million five-year Revolving Credit Facility, a $1.1 billion six-year Term Loan B Facility and a $244 million seven-year Second Lien Term Facility. The transaction resulted in a cash distribution to us of $707.6 million. As a result, our ownership in LandSource was reduced to

 

47


16%. As a result of the recapitalization, we recognized a pretax financial statements gain of $175.9 million during the year ended November 30, 2007. During the year ended November 30, 2007, we also recognized $24.7 million of profit deferred at the time of the recapitalization of the LandSource joint venture in other expense, net.

 

In June 2008, LandSource and a number of its subsidiaries commenced proceedings under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. In November 2008, our land purchase options with LandSource were terminated, thus, in 2008, we recognized a deferred profit of $101.3 million (net of $31.8 million of write-offs of option deposits and pre-acquisition costs and other write-offs) related to the 2007 recapitalization of LandSource.

 

In July 2009, the United States Bankruptcy Court for the District of Delaware confirmed the plan of reorganization for LandSource. As a result of the bankruptcy proceedings, LandSource was reorganized into Newhall. The reorganized company emerged from Chapter 11 free of its previous bank debt. As part of the reorganization plan, we invested $140 million in exchange for approximately 15% equity interest in the reorganized Newhall, ownership in several communities that were formerly owned by LandSource, the settlement and release of any claims that might have been asserted against us and certain other claims LandSource had against third parties.

 

Debt to total capital of the unconsolidated entities in which we have investments was calculated as follows:

 

     November 30,  
     2009     2008  
     (Dollars in thousands)  

Debt

   $ 1,588,390      4,062,058   

Equity

     2,249,289      2,688,365   
              

Total capital

   $ 3,837,679      6,750,423   
              

Debt to total capital of our unconsolidated entities

     41.4   60.2
              

 

Our investments in unconsolidated entities by type of venture were as follows:

 

     November 30,  
     2009     2008  
     (In thousands)  

Land development

   $    565,673            633,652      

Homebuilding

     43,467      133,100   
              

Total investment

   $ 609,140      766,752   
              

 

During 2009, as homebuilding market conditions remained challenged, we recorded $101.9 million of our share of valuation adjustments related to the assets of unconsolidated entities in which we have investments, compared to $32.2 million for the year ended November 30, 2008. In addition, we recorded $89.0 million and $172.8 million, respectively, of valuation adjustments to our investments in unconsolidated entities for the years ended November 30, 2009 and 2008. We will continue to monitor our investments in joint ventures and the recoverability of assets owned by those joint ventures.

 

The summary of our net recourse exposure related to the unconsolidated entities in which we have investments was as follows:

 

     November 30,  
     2009     2008  
     (In thousands)  

Several recourse debt—repayment

   $ 42,691      78,547   

Several recourse debt—maintenance

     75,238      167,941   

Joint and several recourse debt—repayment

     85,799      138,169   

Joint and several recourse debt—maintenance

     81,592      123,051   

Land seller debt and other debt recourse exposure

     2,420      12,170   
              

Lennar’s maximum recourse exposure

     287,740      519,878   

Less: joint and several reimbursement agreements with our partners

     (93,185   (127,428
              

Lennar’s net recourse exposure

   $ 194,555      392,450   
              

 

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During the year ended November 30, 2009, we reduced our maximum recourse exposure related to indebtedness of unconsolidated entities by $232.1 million, of which $106.1 million was paid by us and $126.0 million related to the joint ventures selling inventory, dissolution of joint ventures, renegotiation of joint venture debt agreements and in certain circumstances consolidation of joint ventures. In addition, during the year ended November 30, 2009, we recorded $40.1 million of obligation guarantees related to debt of certain of our joint ventures. As of November 30, 2009, we had $14.1 million of obligation guarantees recorded as a liability on our consolidated balance sheet. The obligation guarantees are estimated based on current facts and circumstances; any unexpected changes may lead us to incur additional obligation guarantees in the future.

 

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 to different unconsolidated entities. We also do not use our investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among our unconsolidated entities.

 

In connection with a loan to an 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 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).

 

In connection with loans to an unconsolidated entity where there is a joint and several guarantee, we in certain instances have a reimbursement agreement with our partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if our joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum exposure, which is the full amount covered by the joint and several guarantee.

 

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. Our unconsolidated entities that have recourse debt have a significant amount of assets and equity. The summarized balance sheets of our unconsolidated entities with recourse debt were as follows.

 

     November 30,
     2009    2008
     (In thousands)

Assets

   $ 1,324,993    2,846,819

Liabilities

     777,836    1,565,148

Equity (1)

     547,157    1,281,671

 

(1)   The decrease in equity of our unconsolidated entities with recourse debt relates primarily to valuation adjustments recorded by the unconsolidated entities, partner buyouts and consolidation of joint ventures, partially offset by capital contributions made by us and our partners during the year ended November 30, 2009. Our exposure to impairment losses was significantly lower, as a result of our small ownership interest in the respective unconsolidated entities or our previous valuation adjustments to our investments in unconsolidated entities.

 

In addition, in most instances in which we have guaranteed debt of an unconsolidated entity, our partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Some of our guarantees are repayment guarantees and some are maintenance guarantees. 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. In the event of default, if our venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share, up to our maximum recourse exposure, which is the full amount covered by the joint and several guarantee. 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 may constitute a capital contribution or loan to the unconsolidated entity and increase our share of any funds the unconsolidated entity distributes.

 

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In many of the loans to 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 was to be done in phases, very often the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used. Under many of the completion guarantees, the guarantors are permitted, under certain circumstances, to use undisbursed loan proceeds to satisfy the completion of obligations, and in many of those cases, the guarantors only pay interest on those funds, with no repayment of the principal of such funds required.

 

During the years ended November 30, 2009 and 2008, amounts paid under our maintenance guarantees were $31.6 million and $74.0 million, respectively. During the year ended November 30, 2009, we made a payment of $5.6 million under a completion guarantee related to one joint venture. During the year ended November 30, 2008, there were no payments under completion guarantees. During the years ended November 30, 2009 and 2008, loan repayments, including amounts paid under our repayment guarantees, were $72.4 million and $94.9 million, respectively. These guarantee payments are recorded primarily as contributions to our unconsolidated entities.

 

As of November 30, 2009, the fair values of the maintenance guarantee, completion guarantees and repayment guarantees were not material. We believe that as of November 30, 2009, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event under a guarantee, most of the time the collateral should be sufficient to repay at least a significant portion of the obligation or we and our partners would contribute additional capital into the venture.

 

The total debt of the unconsolidated entities in which we have investments was as follows:

 

     November 30,  
     2009     2008  
     (Dollars in thousands)  

Lennar’s net recourse exposure

   $ 194,555      392,450   

Reimbursement agreements from partners

     93,185      127,428   
              

Lennar’s maximum recourse exposure

     287,740      519,878   
              

Non-recourse bank debt and other debt (partner’s share of several recourse)

     140,078      285,519   

Non-recourse land seller debt or other debt

     47,478      90,519   

Non-recourse debt with completion guarantees—excluding LandSource

     608,397      820,435   

Non-recourse debt without completion guarantees—excluding LandSource

     504,697      994,580   

Non-recourse debt without completion guarantees—LandSource (1)

     —        1,351,127   
              

Non-recourse debt to Lennar

     1,300,650      3,542,180   
              

Total debt

   $ 1,588,390      4,062,058   
              

Lennar’s maximum recourse exposure as a % of total JV debt

     18   13
              

 

(1)   During 2009, LandSource emerged from bankruptcy as a new reorganized company named Newhall Land Development, LLC. As a result, all of LandSource’s bank debts were discharged.

 

Some of the unconsolidated entities’ debt arrangements contain certain financial covenants. As market conditions remained challenged during the year ended November 30, 2009, we continued to closely monitor these covenants and the unconsolidated entities’ abilities to comply with them. Our Credit Facility requires us to report certain defaults arising under indebtedness with respect to our joint ventures. As of November 30, 2009, we had no reportable joint venture defaults under the Credit Facility.

 

In view of current credit market conditions, it is not uncommon for lenders to 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

 

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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 reasonable time after we determine that we are obligated with regard to them, at any point in time it is likely that we will have some balance of unpaid guarantee liability. At November 30, 2009, the liability for unpaid guarantees of joint venture indebtedness on our consolidated balance sheet totaled $14.1 million.

 

The following table summarizes the principal maturities of our unconsolidated entities (“JVs”) debt as per current debt arrangements as of November 30, 2009 and 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 Unconsolidated JVs by Period
     Total JV
Assets (1)
   Total JV
Debt
   2010    2011    2012    Thereafter    Other
Debt (2)
          (In thousands)

Net recourse debt to Lennar

   $      194,555    113,798    26,586    43,408    8,343    2,420

Reimbursement agreements

      93,185    8,862    50,878    33,445    —      —  
                                

Gross recourse debt to Lennar

   $ 1,324,993    287,740    122,660    77,464    76,853    8,343    2,420

Debt without recourse to Lennar

     2,585,204    1,300,650    203,134    960,820    70,381    13,996    52,319
                                    

Total

   $ 3,910,197    1,588,390    325,794    1,038,284    147,234    22,339    54,739
                                    

 

(1)   Excludes unconsolidated joint venture assets where the joint venture has no debt.
(2)   Represents land seller debt and other debt.

 

The following table is a breakdown of the assets, debt and equity of the unconsolidated joint ventures by partner type as of November 30, 2009:

 

    Total JV
Assets
  Gross
Recourse
Debt to
Lennar
  Reimbursement
Agreements
  Net
Recourse
Debt to
Lennar
  Total Debt
Without
Recourse to
Lennar
  Total JV
Debt
  Total JV
Equity
  JV
Debt to
Total
Capital
Ratio
    Remaining
Homes/

Homesites
in JV
    (Dollars in thousands)

Partner Type:

                 

Land Owners/Developers

  $ 680,933   62,196   —     62,196   157,190   219,386   $ 387,439   36   26,687

Other Builders

    505,775   66,450   8,862   57,588   122,216   188,666     271,097   41   8,722

Financial

    2,614,336   70,495   50,878   19,617   917,762   988,257     1,336,293   43   44,764

Strategic

    402,776   86,179   33,445   52,734   51,163   137,342     254,460   35   6,754
                                         

Total

  $ 4,203,820   285,320   93,185   192,135   1,248,331   1,533,651   $ 2,249,289   41   86,927
                               

Land seller debt and other debt

  $     2,420   —     2,420   52,319   54,739      
                           

Total JV debt

  $     287,740   93,185   194,555   1,300,650   1,588,390      
                           

 

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The table below indicates the assets, debt and equity of our 10 largest unconsolidated joint venture investments as of November 30, 2009:

 

    Lennar’s
Investment
  Total JV
Assets
  Gross
Recourse
Debt to
Lennar
  Reimbursement
Agreements
  Net
Recourse
Debt to
Lennar
  Total Debt
Without
Recourse to
Lennar
  Total JV
Debt
  Total JV
Equity
  JV
Debt to
Total
Capital
Ratio
 
    (Dollars in thousands)  

Land Development JVs (1):

                 

Platinum Triangle Partners

  $ 98,527   270,692   66,889   33,445   33,444   —     66,889   194,835   26

Heritage Fields El Toro

    84,352   1,248,401   —     —     —     545,518   545,518   674,089   45

Newhall Land Development (2)

    49,811   473,954   —     —     —     —     —     290,008   —     

56th & Lone Mountain

    39,123   109,921   15,117   —     15,117   15,116   30,233   77,900   28

Runkle Canyon

    36,690   74,888   —     —     —     —     —     73,381   —     

MS Rialto Residential Holdings

    32,357   490,461   —     —     —     110,185   110,185   352,854   24

Ballpark Village

    31,495   121,067   —     —     —     56,910   56,910   62,520   48

Rocking Horse Partners

    19,414   49,295   —     —     —     9,616   9,616   38,611   20

Treasure Island Community Development

    15,277   34,214   —     —     —     —     —     30,584   —     

Willow Springs Properties

    15,135   33,789   —     —     —     3,508   3,508   30,270   10
                                       

10 largest JV investments

    422,181   2,906,682   82,006   33,445   48,561   740,853   822,859   1,825,052   31
                                       

Other JVs

    186,959   1,297,138   203,314   59,740   143,574   507,478   710,792   424,237   63
                                       

Total

  $ 609,140   4,203,820   285,320   93,185   192,135   1,248,331   1,533,651   2,249,289   41
                             

Land seller debt and other debt

  $       2,420   —     2,420   52,319   54,739    
                           

Total JV debt

  $       287,740   93,185   194,555   1,300,650   1,588,390    
                           

 

(1)  

All of the joint ventures presented in the table above operate in our Homebuilding West segment except for 56th & Lone Mountain, Rocking Horse Partners and Willow Springs Properties, which operate in our Homebuilding Central segment, and MS Rialto Residential Holdings, which operates in all of our homebuilding segments and Homebuilding Other.

(2)   During 2009, LandSource emerged from bankruptcy as a new reorganized company named Newhall Land Development, LLC. As a result, all of LandSource’s bank debts were discharged.

 

The table below indicates the percentage of assets, debt and equity of our 10 largest unconsolidated joint venture investments as of November 30, 2009:

 

     % of Total
JV Assets
    % of Gross
Recourse
Debt to
Lennar
    % of Net
Recourse
Debt to
Lennar
    % of Total
Debt Without
Recourse to
Lennar
    % of Total
JV Equity
 

10 largest JVs

   69   29   25   59   81

Other

   31   71   75   41   19
                              

Total

   100   100   100   100   100
                              

 

Option Contracts

 

We have access to land through option contracts, which generally enables us to control portions of properties owned by third parties (including land funds) and unconsolidated entities until we have determined whether to exercise the option.

 

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. Until recently, these option deposits generally have approximated 10% of the exercise price. Our option contracts sometimes include price adjustment provisions, which adjust the purchase price of the land to its approximate fair value at the time of acquisition or are based on fair value at the time of takedown. The exercise periods of our option contracts generally range from one-to-ten years.

 

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

 

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meet our targeted return on investment. 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.

 

Some option contracts contain a predetermined take-down schedule for the optioned land parcels. However, in almost all instances, we are not required to purchase land in accordance with those take-down schedules. In substantially all instances, we have the right and ability to not exercise our option and forfeit our deposit without further penalty, other than termination of the option and loss of any unapplied portion of our deposit and pre-acquisition costs. Therefore, in substantially all instances, we do not consider the take-down price to be a firm contractual obligation.

 

When we intend not to exercise an option, we write-off any deposit and pre-acquisition costs associated with the option contract. For the years ended November 30, 2009, 2008 and 2007, we wrote-off $84.4 million, $97.2 million and $530.0 million, respectively, of option deposits and pre-acquisition costs related to homesites under option that we do not intend to purchase.

 

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 joint ventures in which we have investments (“JVs”) (i.e., controlled homesites) for each of our homebuilding segments and Homebuilding Other at November 30, 2009 and 2008:

 

November 30, 2009

           Controlled Homesites            Owned
Homesites
   Total
Homesites
   Optioned    JVs    Total      

East

   4,701    1,900    6,601    28,406    35,007

Central

   1,273    2,381    3,654    15,607    19,261

West

   78    7,667    7,745    24,770    32,515

Houston

   901    1,728    2,629    6,672    9,301

Other

   470    74    544    7,248    7,792
                        

Total homesites

   7,423    13,750    21,173    82,703    103,876