Lennar Homebuilding Investments in Unconsolidated Entities
Summarized condensed financial information on a combined 100% basis related to Lennar Homebuilding’s unconsolidated entities that are accounted for by the equity method was as follows:
Statements of Operations |
| | | | | | | | | |
| Years Ended November 30, |
(In thousands) | 2013 | | 2012 | | 2011 |
Revenues | $ | 570,910 |
| | 353,902 |
| | 301,843 |
|
Costs and expenses | 425,282 |
| | 418,905 |
| | 451,272 |
|
Other income | 14,602 |
| | 10,515 |
| | 123,007 |
|
Net earnings (loss) of unconsolidated entities | $ | 160,230 |
| | (54,488 | ) | | (26,422 | ) |
Lennar Homebuilding equity in earnings (loss) from unconsolidated entities (1) | $ | 23,803 |
| | (26,672 | ) | | (62,716 | ) |
| |
(1) | For the year ended November 30, 2013, Lennar Homebuilding equity in earnings (loss) from unconsolidated entities includes $19.8 million of equity in earnings primarily as a result of sales of homesites to third parties by one unconsolidated entity. For the year ended November 30, 2012, Lennar Homebuilding equity in loss includes a $12.1 million of valuation adjustments related to asset sales at Lennar Homebuilding's unconsolidated entities. For the year ended November 30, 2011, Lennar Homebuilding equity in loss includes a $57.6 million valuation adjustment related to an asset distribution from a Lennar Homebuilding unconsolidated entity that resulted from a linked transaction where there was also a pre-tax gain of $62.3 million included in Lennar Homebuilding other income, net, related to the distribution of assets of the unconsolidated entity. In addition, for the year ended November 30, 2011, Lennar Homebuilding equity in loss from unconsolidated entities includes $8.9 million of valuation adjustment related to the assets of Lennar Homebuilding unconsolidated entities, offset by a $15.4 million gain related to the Company’s share of a $123.0 million gain on debt extinguishment at a Lennar Homebuilding unconsolidated entity. |
Balance Sheets |
| | | | | | |
| November 30, |
(In thousands) | 2013 | | 2012 |
Assets: | | | |
Cash and cash equivalents | $ | 184,521 |
| | 156,666 |
|
Inventories | 2,904,795 |
| | 2,792,064 |
|
Other assets | 147,410 |
| | 229,603 |
|
| $ | 3,236,726 |
| | 3,178,333 |
|
Liabilities and equity: | | | |
Accounts payable and other liabilities | $ | 272,940 |
| | 309,587 |
|
Debt | 450,457 |
| | 757,573 |
|
Equity | 2,513,329 |
| | 2,111,173 |
|
| $ | 3,236,726 |
| | 3,178,333 |
|
As of November 30, 2013 and 2012, the Company’s recorded investments in Lennar Homebuilding unconsolidated entities were $716.9 million and $562.2 million, respectively, while the underlying equity in Lennar Homebuilding unconsolidated entities partners’ net assets as of November 30, 2013 and 2012 was $829.5 million and $678.5 million, respectively. The basis difference is primarily as a result of the Company buying an interest in a partner's equity in a Lennar Homebuilding unconsolidated entity at a discount to book value and contributing non-monetary assets to an unconsolidated entity with a higher fair value than book value.
The Company’s partners generally are unrelated homebuilders, land owners/developers and financial or other strategic partners. The unconsolidated entities follow accounting principles that are in all material respects the same as those used by the Company. The Company shares in the profits and losses of these unconsolidated entities generally in accordance with its ownership interests. In many instances, the Company is appointed as the day-to-day manager under the direction of a management committee that has shared powers amongst the partners of the unconsolidated entities and receives management fees and/or reimbursement of expenses for performing this function. During the years ended November 30, 2013, 2012 and 2011, the Company received management fees and reimbursement of expenses from the Homebuilding unconsolidated entities totaling $18.8 million, $20.6 million and $33.8 million, respectively.
During 2011, a Lennar Homebuilding unconsolidated entity was restructured. As part of the restructuring, the development management agreement (the “Agreement”) between the Company and the unconsolidated entity was terminated and a general release agreement was executed whereby the Company was released from any and all obligations, except any future potential third-party claims, associated with the Agreement. As a result of the restructuring, the termination of the Agreement and the execution of the general release agreement, the Company recognized $10.0 million of deferred management fees related to management services previously performed by the Company prior to November 30, 2010. The Company is not providing any other services to the unconsolidated entity associated with the deferred management fees recognized.
The Company and/or its partners sometimes obtain options or enter into other arrangements under which the Company can purchase portions of the land held by the unconsolidated entities. Option prices are generally negotiated prices that approximate fair value when the Company receives the options. During the years ended November 30, 2013, 2012 and 2011, $192.5 million, $130.3 million and $112.8 million, respectively, of the unconsolidated entities’ revenues were from land sales to the Company. The Company does not include in its Lennar Homebuilding equity in earnings (loss) from unconsolidated entities its pro rata share of unconsolidated entities’ earnings resulting from land sales to its homebuilding divisions. Instead, the Company accounts for those earnings as a reduction of the cost of purchasing the land from the unconsolidated entities. This in effect defers recognition of the Company’s share of the unconsolidated entities’ earnings related to these sales until the Company delivers a home and title passes to a third-party homebuyer.
In fiscal 2007, the Company sold a portfolio of land to a strategic land investment venture with Morgan Stanley Real Estate Fund II, L.P., an affiliate of Morgan Stanley & Co., Inc., in which the Company has a 20% ownership interest and 50% voting rights. Due to the Company’s continuing involvement, the transaction did not qualify as a sale by the Company under GAAP; thus, the inventory has remained on the Company’s consolidated balance sheet in consolidated inventory not owned. As of November 30, 2013 and 2012, the portfolio of land (including land development costs) of $241.8 million and $264.9 million, respectively, is reflected as inventory in the summarized condensed financial information related to Lennar Homebuilding’s unconsolidated entities.
The Lennar Homebuilding unconsolidated entities in which the Company has investments usually finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities.
The summary of the Company’s net recourse exposure related to the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
|
| | | | | | |
| November 30, |
(In thousands) | 2013 | | 2012 |
Several recourse debt - repayment | $ | 25,996 |
| | 48,020 |
|
Joint and several recourse debt - repayment | 15,000 |
| | 18,695 |
|
The Company’s maximum recourse exposure | 40,996 |
| | 66,715 |
|
Less: joint and several reimbursement agreements with the Company’s partners | (13,500 | ) | | (16,826 | ) |
The Company’s net recourse exposure | $ | 27,496 |
| | 49,889 |
|
During the year ended November 30, 2013, the Company's maximum recourse exposure related to indebtedness of Lennar Homebuilding unconsolidated entities decreased by $25.7 million, as a result of $5.9 million paid by the Company primarily through capital contributions to unconsolidated entities and $19.8 million primarily related to the joint ventures selling assets and other transactions.
Indebtedness of a Lennar Homebuilding unconsolidated entity is secured by its own assets. There is no cross collateralization of debt to different unconsolidated entities. The Company also does not use its investment in one unconsolidated entity as collateral for the debt in another unconsolidated entity or commingle funds among Lennar Homebuilding’s unconsolidated entities.
In connection with loans to a Lennar Homebuilding unconsolidated entity, the Company and its 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 a Lennar Homebuilding unconsolidated entity where there is a joint and several guarantee, the Company generally has a reimbursement agreement with its partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if the Lennar Homebuilding’s joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee.
If the joint ventures are unable to reduce their debt, where there is recourse to the Company, through the sale of inventory or other means, then the Company and its partners may be required to contribute capital to the joint ventures.
The recourse debt exposure in the previous table represents the Company’s maximum recourse 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 the debt or to reimburse the Company for any payments on its guarantees. The Lennar Homebuilding unconsolidated entities that have recourse debt have significant amount of assets and equity. The summarized balance sheets of the Lennar Homebuilding’s unconsolidated entities with recourse debt were as follows:
|
| | | | | | |
| November 30, |
(In thousands) | 2013 | | 2012 |
Assets | $ | 1,656,065 |
| | 1,843,163 |
|
Liabilities | $ | 470,975 |
| | 765,295 |
|
Equity | $ | 1,185,090 |
| | 1,077,868 |
|
In addition, in most instances in which the Company has guaranteed debt of a Lennar Homebuilding unconsolidated entity, the Company’s partners have also guaranteed that debt and are required to contribute their share of the guarantee payments. Some of the Company’s guarantees are repayment guarantees and some are maintenance guarantees. In a repayment guarantee, the Company and its venture partners guarantee repayment of a portion or all of the debt in the event of default before the lender would have to exercise its rights against the collateral. In the event of default, if the Company’s venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum recourse exposure, which is the full amount covered by the joint and several guarantee. The maintenance guarantees only apply if the value or the collateral (generally land and improvements) is less than a specified percentage of the loan balance. If the Company is required to make a payment under a maintenance guarantee to bring the value of the collateral above the specified percentage of the remaining loan balance, the payment would constitute a capital contribution or loan to the Lennar Homebuilding unconsolidated entity and increase the Company’s investment in the unconsolidated entity and its share of any funds the unconsolidated entity distributes. As of November 30, 2013, the Company does not have any maintenance guarantees related to its Lennar Homebuilding unconsolidated entities.
In connection with many of the loans to Lennar Homebuilding unconsolidated entities, the Company and its joint venture partners (or entities related to them) have been required to give guarantees of completion to the lenders. Those completion guarantees may require that the guarantors complete the construction of the improvements for which the financing was obtained. If the construction is to be done in phases, the guarantee generally is limited to completing only the phases as to which construction has already commenced and for which loan proceeds were used.
During the year ended November 30, 2013, there were other loan paydowns relating to recourse debt of $6.1 million. During the year ended November 30, 2012, there were other loan paydowns of $5.7 million, a portion of which related to amounts paid under the Company’s repayment guarantees. During the years ended November 30, 2013 and 2012, there were no payments under completion guarantees. Payments made to, or on behalf of, the Company’s unconsolidated entities, including payment made under guarantees, are recorded primarily as capital contributions to the Company’s Lennar Homebuilding unconsolidated entities.
As of November 30, 2013, the fair values of the repayment guarantees and completion guarantees were not material. The Company believes that as of November 30, 2013, in the event it becomes legally obligated to perform under a guarantee of the obligation of a Lennar Homebuilding 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 the Company and its partners would contribute additional capital into the venture. In certain instances, the Company has placed performance letters of credit and surety bonds with municipalities for its joint ventures (see Note 6).
The total debt of the Lennar Homebuilding unconsolidated entities in which the Company has investments was as follows:
|
| | | | | | |
| November 30, |
(Dollars In thousands) | 2013 | | 2012 |
The Company’s net recourse exposure | $ | 27,496 |
| | 49,889 |
|
Reimbursement agreements from partners | 13,500 |
| | 16,826 |
|
The Company’s maximum recourse exposure | $ | 40,996 |
| | 66,715 |
|
Non-recourse bank debt and other debt (partner’s share of several recourse) | $ | 61,008 |
| | 114,900 |
|
Non-recourse land seller debt or other debt | 20,454 |
| | 26,340 |
|
Non-recourse debt with completion guarantees | 245,821 |
| | 456,188 |
|
Non-recourse debt without completion guarantees | 82,178 |
| | 93,430 |
|
Non-recourse debt to the Company | 409,461 |
| | 690,858 |
|
Total debt | $ | 450,457 |
| | 757,573 |
|
The Company’s maximum recourse exposure as a % of total JV debt | 9 | % | | 9 | % |
