Lennar Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended May 31, 2023. Lennar builds and sells homes and also operates financial services, multifamily and other businesses. Figures below are in U.S. dollars; “Q2” refers to the three-month period.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $8.05B | $8.36B | $14.54B | $14.56B |
| Net earnings attributable to Lennar | $872M | $1.32B | $1.47B | $1.82B |
| Diluted EPS | $3.01 | $4.49 | $5.07 | $6.16 |
| Homebuilding gross margin | 22.5% | 29.5% | 21.9% | 28.4% |
| Cash from operating activities | Not separately stated for Q2 | $1.64B | $53M |
Q2 home deliveries increased 3% to 17,074, but the average delivered home price fell 7% to $449,000. Home-sale revenue declined 4%. For the first six months, deliveries rose 6% to 30,733 while average delivered price fell 5% to $449,000. Lower selling prices and higher material, labor and land costs pressured margins. Sales incentives averaged $41,000 per delivered home in Q2, versus $7,200 a year earlier.
At May 31, Lennar had $4.32B in cash and restricted cash, including $4.00B of homebuilding cash. Homebuilding debt was $3.85B; homebuilding debt to total capital was 13.3%, and net homebuilding debt was negative $152M (net cash). There were no borrowings under the $2.575B revolving credit commitment; the facility’s accordion could raise maximum capacity to $3.0B. Total reported notes and other debt across segments was approximately $5.03B.
Material changes and operating indicators
- Net earnings attributable to Lennar declined 34% in Q2; homebuilding operating earnings fell to $1.21B from $1.88B.
- Backlog fell to 20,214 homes valued at $9.53B at May 31, from 28,624 homes valued at $14.69B a year earlier. Q2 net new orders were 17,885, approximately flat year over year; cancellation rate rose to 14% from 12%.
- Financial Services operating earnings improved to about $112M in Q2, supported by higher mortgage profit per locked loan and improved title profitability. Mortgage capture rate rose to 79% from 69%.
- Multifamily reported a Q2 operating loss of $8M and a six-month loss of $30M. Lennar Other’s Q2 loss narrowed to $18M from $108M, partly reflecting a $25M mark-to-market gain on publicly traded technology investments; six-month mark-to-market gains were $2M versus losses of $473M in 2022.
- Operating cash flow improved substantially year over year, aided by earnings and the sale of Financial Services loans, partly offset by a $991M decrease in accounts payable and other liabilities, primarily from income tax payments. Cash declined by $500M over the six months, with $2.06B used in financing activities, including stock repurchases, dividends and debt repayments.
Outlook, risks and unusual items
Management described housing conditions as stabilized, with demand returning amid limited housing supply, but identified inflation, interest rates and affordability as continuing headwinds. Lennar said it would use pricing and incentives to support sales pace, emphasize production, cash flow and inventory turns, control land exposure and reduce construction costs. It expected previously negotiated construction-cost reductions to appear in reported results in the second half of 2023.
For Q3 2023, management projected 18,000–19,000 new orders, 17,750–18,250 deliveries, homebuilding gross margin of 23.5%–24.0%, and SG&A of 6.7%–6.8% of home-sale revenue. It expected average sales price to be consistent with Q2 and community count to be flat sequentially. Full-year 2023 delivery target: 68,000–70,000 homes. The planned spin-off of multifamily and single-family rental asset-management businesses into Quarterra was deferred due to market conditions.
- A $36.8M impairment of a homebuilding joint-venture investment was recorded in Q2; six-month valuation adjustments and write-offs included $85M in total, including option-deposit and pre-acquisition write-offs.
- Homebuilding option deposits and pre-acquisition costs exposed to loss totaled $2.05B; consolidated inventory not owned was $2.38B, with related liabilities of $2.01B.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Warranty reserves were $415M at May 31, up from $378M a year earlier; Q2 adjustments to pre-existing warranties were $14M.
- Key risks include higher interest rates and inflation, reduced housing affordability or demand, construction labor and material costs, land and inventory impairments, mortgage financing availability, joint-venture performance, and refinancing or credit access. Financial Services retains limited exposure to mortgage-loan representations and warranties; management believes reserves are adequate but notes outcomes may differ.
Important facts for investors to verify
- Whether order growth and deliveries meet guidance, and whether backlog declines or cancellations continue.
- Whether pricing, incentives and cost reductions stabilize or restore homebuilding gross margins.
- Whether operating cash flow remains strong after working-capital movements and land-related spending.
- Liquidity and leverage, including debt maturities, warehouse-facility renewals and performance under credit covenants.
- Potential additional inventory, joint-venture or option-deposit impairments, warranty costs, and the timing or terms of any Quarterra spin-off.