Lennar Corporation — Q2 2019 Form 10-Q
Business context and period. Quarter ended May 31, 2019; six-month results cover the six months ended that date. Lennar builds and sells homes across U.S. regions and also operates financial services, multifamily and other businesses. Comparisons are affected by the February 2018 CalAtlantic acquisition; 2018 results include CalAtlantic only after its acquisition date. Lennar also sold substantially all of its retail mortgage business and most of its title and brokerage operations during Q1 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $5.56bn | $5.46bn | $9.43bn | $8.44bn |
| Net earnings attributable to Lennar | $421.5m | $310.3m | $661.4m | $446.5m |
| Diluted EPS | $1.30 | $0.94 | $2.03 | $1.52 |
| Homebuilding operating earnings | $581.8m | $425.1m | $951.4m | $839.1m |
| Operating cash flow | Not reported by quarter | $(429.9)m | $19.5m |
- Q2 homebuilding revenue rose 2.6%; deliveries excluding unconsolidated entities increased 5% to 12,706, while average selling price declined 1% to $407,000. Six-month homebuilding revenue increased 14.2%, primarily reflecting higher deliveries and the acquisition’s contribution.
- Q2 home-sale gross margin was 20.1%, versus 16.8% in the prior year. The prior-year margin was reduced by $236.8m of CalAtlantic purchase-accounting adjustments; excluding those adjustments, prior-year margin was 21.6%. Higher construction costs and incentives also affected margins.
- Sales incentives increased to $26,600 per delivered home, or 6.1% of home-sale revenue, from $23,000, or 5.3%, a year earlier. SG&A was 8.4% of home-sale revenue, improving from 8.7%.
- Six-month operating cash outflow reflected a $1.5bn inventory increase, partly offset by earnings and a $542.1m decrease in receivables. Investing cash outflow was $91.6m; financing cash outflow was $53.4m.
Balance sheet, debt and liquidity
- At May 31, 2019, total assets were $29.58bn, total liabilities $14.34bn and total equity $15.25bn. Cash and restricted cash were $1.02bn, down from $1.60bn at November 30, 2018. Homebuilding cash was $800.7m.
- Homebuilding debt was $9.39bn, up from $8.54bn at November 30, 2018. Homebuilding debt to total capital was 38.3%, and net homebuilding debt to total capital was 36.2%, compared with 36.9% and 33.1%, respectively, at November 30.
- The amended revolving credit facility has $2.4bn of commitments, with a $400m accordion feature, and matures in April 2024 (with $50m maturing in June 2020). Lennar reported covenant compliance; its covenant leverage ratio was 43.6% against a 65% limit, and its liquidity test was 1.88 against a 1.00 minimum.
- Subsequent to quarter-end, Lennar redeemed $500m of 4.500% senior notes due June 2019. Financial Services warehouse borrowings were $882.0m for residential loans and $155.9m for RMF commercial loans; these facilities are described as non-recourse to Lennar.
Material changes and unusual items
- Q2 earnings included a one-time $48.9m loss when Lennar consolidated a previously unconsolidated homebuilding entity after reassessing its VIE status. The entity had $240.5m of assets and $356.4m of liabilities at May 31; its liabilities are obligations of the VIE, not Lennar.
- Prior-year six-month homebuilding results included a $164.9m gain from selling an 80% interest in a strategic joint venture. Prior-year results also included $128.1m of CalAtlantic acquisition and integration costs; there were none in the 2019 first half.
- Four entities were consolidated during the first half. Consolidated VIE assets and non-recourse liabilities rose to $1.4bn and $928.9m, respectively, from $666.2m and $242.5m at November 30, 2018.
- Multifamily Q2 operating results moved to a $4.3m loss from $14.8m of earnings, when prior-year results included property-sale gains. Financial Services revenue declined as a result of business sales, although Q2 operating earnings increased slightly.
Outlook, commentary and risks
- Management described the housing market as solid, citing lower interest rates, improved affordability, low unemployment, wage growth and consumer confidence. It expects continued market improvement, while noting land and labor costs and affordability constrain upside.
- Management expects to deliver over 50,000 homes in fiscal 2019. It expects average selling prices to trend lower as more entry-level communities open, with lower lumber costs, synergies and its production-first platform expected to help offset that pressure.
- Management expects margins to improve through the rest of 2019 as incentives subside and lumber savings and cost synergies accrue; it also expects strong cash flow and intends to use excess cash for debt reduction and opportunistic share repurchases. Lennar said it remained on track for its $380m CalAtlantic synergy target for 2019.
- Key risks include housing-market or rental-market deterioration, mortgage availability and interest rates, construction costs, land values and impairments, execution of CalAtlantic synergies and technology initiatives, refinancing access, joint-venture commitments, regulatory changes, natural disasters and insurance coverage. Management stated ordinary-course legal matters were not expected to materially adversely affect the financial statements.
- Additional exposures include $2.8bn of surety bonds, $821.5m of letters of credit, $326.8m of non-refundable land-option deposits and pre-acquisition costs, and $309.2m of remaining equity commitments to multifamily ventures. Management did not anticipate material draws on bonds or letters of credit.
Investor verification points
- Confirm whether order growth, backlog conversion and cancellation rates support the 50,000-home delivery target. Q2 net new orders were 14,518 versus 14,440; backlog was 19,061 homes versus 19,622 a year earlier; cancellations rose to 15% from 11%.
- Track whether incentives continue to decline and margins improve, while separating underlying performance from prior-year purchase-accounting effects and the 2019 VIE consolidation loss.
- Monitor operating cash generation and inventory growth, together with debt, cash balances, planned debt repayment and share repurchases.
- Review the VIE consolidation, land-option commitments, multifamily funding obligations, surety bonds and letters of credit for changes in potential cash requirements or loss exposure.
- Assess post-sale Financial Services performance, including the consolidated buyer of title operations, mortgage repurchase representations and warranties, and the renewal or replacement of warehouse facilities.