Lennar Corporation — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2020; comparisons are primarily with fiscal 2019. Lennar is a U.S. homebuilder with mortgage, title and closing, multifamily, and investment operations. Homebuilding generated approximately 93% of consolidated revenue.
Financial and Operating Performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $22.49 billion | $22.26 billion | Up 1% |
| Net earnings attributable to Lennar | $2.47 billion | $1.85 billion | Up 33% |
| Diluted earnings per share | $7.85 | $5.74 | Up 37% |
| Cash provided by operating activities | $4.19 billion | $1.48 billion | Up $2.71 billion |
| Homebuilding gross margin on home sales | 22.8% | 20.6% | Up 2.2 percentage points |
| SG&A as a percentage of home-sale revenue | 8.1% | 8.3% | Improved 0.2 percentage points |
- Home-sale revenue rose 1% to $20.84 billion. Deliveries excluding unconsolidated entities increased 3% to 52,813, while average selling price declined 1% to $395,000, reflecting a shift toward lower-priced communities and product mix.
- Total home deliveries, including unconsolidated entities, were 52,925 versus 51,491; new orders increased to 56,169 from 51,439. Year-end backlog grew to 18,821 homes valued at $7.81 billion, compared with 15,577 homes and $6.30 billion a year earlier. The cancellation rate was 15%, versus 16%.
- Financial Services operating earnings increased to $481 million from $225 million, aided by higher mortgage and title volume and margins, lower loan origination costs, and a $61.4 million gain on deconsolidation of an entity.
- Multifamily operating earnings were $22.7 million, compared with $16.4 million. Lennar Other reported a $10.3 million operating loss, versus $31.5 million of operating earnings, including a $25 million write-down of legacy Rialto fund assets related to COVID-19 market disruption.
- Cash and cash equivalents plus restricted cash totaled $2.93 billion at year-end, versus $1.47 billion. Homebuilding cash was $2.70 billion. Operating cash flow benefited in part from a $781 million inventory reduction.
- Homebuilding debt was $5.96 billion, down from $7.78 billion; the company retired $1.5 billion of senior notes during the year. Homebuilding debt to total capital improved to 24.9% from 32.8%; net homebuilding debt to total capital declined to 15.3% from 29.2%.
- The $2.4 billion revolving credit facility had no borrowings outstanding at year-end, providing reported available capacity of $5.1 billion when combined with Homebuilding cash. Total assets were $29.94 billion and total equity was $18.10 billion.
- Cash used in investing activities was $280 million; cash used in financing activities was $2.45 billion, including debt repayments and $321.5 million of common-stock repurchases. Annual dividends declared were $0.625 per share, versus $0.16.
Material Changes, Outlook and Management Commentary
- COVID-19 temporarily disrupted sales and operations in March and April, but management said the housing market strengthened from May onward. Virtual tours, digital sales processes, and digital closings helped maintain operations and support demand.
- Management attributed improved homebuilding margins to cost controls and favorable market conditions. Lumber, labor, and other construction costs were rising; the company sought to limit exposure by generally delaying sales-price commitments until construction was ready to begin.
- For fiscal 2021, Lennar forecast 62,000–64,000 home deliveries and a 23.75%–24.0% gross margin, compared with 22.8% in FY2020. It expected deliveries to grow faster than in FY2020, and earnings to grow faster than revenue, while noting anticipated lumber and other cost increases.
- The company expected its community count to increase approximately 10% in FY2021. It targeted a 50% owned / 50% optioned-or-similarly-controlled land mix by year-end 2021; at FY2020 year-end, 39% of homesites were controlled through options and joint ventures, and owned land represented a 3.5-year supply.
- Management said it expected a strong cash and liquidity position and planned to continue reducing debt and leverage. It also continued to consider repositioning or divesting non-core businesses, including Multifamily. A single-family rental venture was entered into after year-end.
- Opendoor began public trading in December 2020; Lennar expected to record a significant unrealized investment gain in FY2021’s first quarter. The amount was not specified in the filing.
Risks, Contingencies and Unusual Items
- Results remain sensitive to housing demand, consumer confidence, mortgage availability and interest rates, COVID-19 developments, and local economic conditions. Higher construction costs that cannot be passed through to buyers could pressure margins.
- Land inventory and option deposits may require impairment or write-offs if home prices or demand weaken. FY2020 included a $49.1 million loss on land sales, primarily reflecting a canceled development and impairments of other land assets.
- Financial Services depends on short-term warehouse financing. Residential warehouse facilities had $1.8 billion of capacity and LMF Commercial facilities $800 million; these facilities matured at various dates through FY2021, and renewal or replacement was expected but not assured.
- Construction-defect, warranty, self-insurance, mortgage-loan representation-and-warranty, environmental, and other legal claims could exceed reserves or insurance. Management did not expect ordinary-course litigation to have a material adverse effect, but outcomes remain uncertain.
- At year-end, Lennar had $1.0 billion of outstanding letters of credit and $3.1 billion of surety bonds; approximately $1.6 billion of anticipated site-improvement costs remained associated with performance surety bonds. Management did not anticipate material draws.
- Joint ventures create exposure to partner performance, project cost overruns, refinancing needs, and guarantees. Multifamily ventures had completion guarantees; Homebuilding joint ventures’ maximum recourse debt exposure was $4.9 million.
- Goodwill, community inventory, warranty reserves, and unconsolidated-entity valuations rely on significant estimates. The auditor identified VIE consolidation assessments as a critical audit matter. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important Facts for Investors to Verify
- Whether FY2021 deliveries and gross-margin guidance were achieved, and how lumber, labor, and other cost inflation affected realized margins.
- Whether backlog converted to closings as expected, including changes in cancellations, selling prices, and community count.
- Progress toward the 50/50 owned-versus-controlled land target, and the resulting effects on cash flow, land exposure, and returns.
- Debt reduction, liquidity, and renewal or replacement of Financial Services warehouse facilities as they matured.
- Potential valuation changes in land inventory, technology investments, FivePoint, and Multifamily assets, including the eventual realized or reported Opendoor gain.
- Changes in warranty and self-insurance reserves, mortgage repurchase claims, joint-venture guarantees, and the costs or outcomes of legal matters.