Lennar Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended May 31, 2020. Lennar builds and sells homes and also operates mortgage/title, multifamily and other businesses. Results were affected by the COVID-19 pandemic and related economic shutdowns.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $5.29B | $5.56B | $9.79B | $9.43B |
| Net earnings attributable to Lennar | $517.4M | $421.5M | $915.9M | $661.4M |
| Diluted EPS | $1.65 | $1.30 | $2.91 | $2.03 |
| Homebuilding revenue | $4.95B | $5.20B | $9.12B | $8.82B |
| Home-sales gross margin | 21.6% | 20.1% | 21.1% | 20.1% |
| Operating cash flow | Not presented by quarter | $1.31B | $(429.9)M |
- Q2 home deliveries were essentially flat at 12,653, excluding unconsolidated entities; average delivered home price fell 4% to $389,000. Six-month deliveries rose 7% to 22,966, while average price declined to $395,000 from $408,000.
- Q2 net earnings included a $61.4M Financial Services gain on deconsolidation of an entity. Homebuilding also recorded a $23.5M land-sale loss, primarily from abandoning a planned naval-base development, and Lennar Other recorded a $25.0M write-down of Rialto legacy-fund assets.
- Financial Services operating earnings improved substantially, supported by mortgage volume and margins, lower origination costs, and the deconsolidation gain. The six-month effective tax rate was 17.4%, versus 25.0%, primarily reflecting extension of energy-efficient home tax credits.
Financial position and liquidity
- At May 31, 2020, cash and cash equivalents were $1.64B; cash plus restricted cash was $1.66B. Total assets were $29.31B and total equity was $16.63B.
- Homebuilding debt was $7.50B, down from $7.78B at November 30, 2019. Homebuilding debt to total capital was 31.2%, versus 32.8% at November 30, 2019 and 38.3% a year earlier; net homebuilding debt to total capital was 26.9%.
- No borrowings were outstanding under the $2.45B unsecured revolving credit facility. Lennar reported compliance with its debt covenants; covenant leverage was 33.0% against a 65.0% maximum, and the liquidity test was 3.81 against a 1.00 minimum.
- Six-month financing cash outflow was $948.6M, including $300M to redeem 6.625% senior notes, $296.1M of stock repurchases and $78.1M of dividends. Cash increased by $188.2M over the six months.
Changes, outlook and risks
- Q2 total revenue declined 5% year over year, while net earnings rose. The increase reflected stronger homebuilding margins and Financial Services results, including the one-time deconsolidation gain; underlying housing activity was disrupted by the shutdown.
- Q2 new orders fell to 13,015 from 14,518, and quarter-end backlog declined to 17,975 homes from 19,061. Q2 homebuilding revenue fell mainly because of lower average selling prices and product mix.
- Management said new-home markets strengthened in May and early June, citing low interest rates, limited supply and apparent suburban demand. It expected further homebuilding margin improvement in the remainder of 2020, but anticipated fewer deliveries in Q3 and Q4 following the spring slowdown.
- Fiscal 2020 delivery guidance was 50,500–51,000 homes. Management expected community count to dip slightly in Q3 and stabilize in Q4; it cautioned that permitting delays made community-count forecasts difficult.
- Owned land supply was 3.9 years, down from 4.5 years a year earlier; 32% of homesites were controlled through options or similar arrangements, versus 25%. Management had slowed land purchases, development and home starts, then restarted development as sales recovered.
- Multifamily properties had no substantial change in occupancy and no significant increase in rent delinquencies to date. Management emphasized that pandemic duration and economic effects remained uncertain.
- Key risks include further COVID-19 impacts on demand, employment and consumer confidence; home and multifamily market deterioration; inventory impairment and option write-offs; construction-cost pressures; mortgage financing availability; and the ability to refinance debt. Management’s liquidity assessment depended on pandemic effects not worsening significantly for a protracted period.
- Other exposures include $2.996B of surety bonds, $946.5M of letters of credit, mortgage-loan representation-and-warranty claims, and guarantees and commitments involving unconsolidated ventures. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings growth is repeatable after excluding the $61.4M deconsolidation gain and considering the $25.0M fund write-down and land-development charge.
- Whether May–June demand strength continued, and how orders, cancellations, backlog and average selling prices developed after quarter-end.
- Whether delivery guidance of 50,500–51,000 homes and the forecast margin improvement were achieved amid permitting, construction and pandemic uncertainty.
- Whether home inventory valuations, option deposits and joint-venture exposures require additional charges or funding.
- How mortgage warehouse-facility renewals, loan-sale claims and liquidity hold up if housing or credit markets weaken.