Lennar Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended August 31, 2018. Comparisons are with the corresponding 2017 periods unless otherwise noted. Lennar completed its CalAtlantic acquisition on February 12, 2018; reported growth therefore includes acquired operations and is not directly comparable as organic growth.
Financial and operating highlights
| Metric | Q3 2018 | Nine months 2018 | Comparison / context |
|---|---|---|---|
| Total revenue | $5.67 billion | $14.11 billion | Up 74% and 59%, respectively; primarily reflects CalAtlantic and higher home deliveries. |
| Net earnings attributable to Lennar | $453.2 million | $899.7 million | Prior-year periods: $249.2 million and $500.9 million. |
| Diluted EPS | $1.37 | $2.94 | Prior-year periods: $1.04 and $2.09. |
| Homebuilding gross margin | 20.3% | 18.8% | Excluding CalAtlantic purchase-accounting inventory write-ups, 21.9% and 21.7%, respectively; prior-year margins were 22.8% and 21.9%. |
| Operating cash flow | Not presented for the quarter | $748.7 million | Prior-year nine-month cash flow was $327.7 million. |
| Cash and cash equivalents | $1.05 billion at August 31 | Down from $2.65 billion at November 30, 2017; homebuilding cash was $833.3 million. | |
| Homebuilding debt | $9.41 billion at August 31 | Up from $6.41 billion at November 30, 2017, including debt assumed with CalAtlantic. |
- Home deliveries rose 66% in Q3 to 12,613; average delivered home price increased to $415,000 from $376,000. New orders were 12,319, versus 7,610, and backlog was 19,220 homes, versus 10,212. These comparisons include CalAtlantic in 2018 but not in the 2017 reported results.
- Sales incentives averaged $22,900 per delivered home in Q3, or 5.2% of home sales revenue, compared with $21,800 and 5.5% a year earlier.
- Q3 homebuilding selling, general and administrative expense was 8.6% of home sales revenue, down from 9.2%, reflecting improved operating leverage. Higher construction and land costs pressured gross margins.
- CalAtlantic-related acquisition and integration costs were $12.0 million in Q3 and $140.1 million for the nine months. Purchase-accounting adjustments on acquired homes delivered reduced gross margin by $84.2 million and $376.0 million, respectively.
- Other notable nine-month items included a $164.9 million gain on the sale of an 80% interest in a strategic joint venture, a $68.6 million non-cash deferred-tax-asset write-down following tax reform, and $34.1 million of Q3 tax benefits. The 2017 comparison included a $140 million litigation loss.
Liquidity, debt and capital
- Homebuilding debt to total capital was 40.1% at August 31, down from 44.9% at November 30, 2017. Net homebuilding debt to total capital, a non-GAAP measure, was 37.9%, up from 34.4% at November 30, 2017, reflecting the substantial reduction in homebuilding cash.
- The company reported $650 million outstanding under its unsecured revolving credit facility, whose maximum commitment was increased to $2.6 billion. Management said it was in compliance with debt covenants; reported covenant measures included a 47.2% leverage ratio versus a 65% maximum and liquidity of 2.29 times the required 1.00 times.
- Nine-month financing cash flow was a $1.32 billion use, including redemptions of $575 million and $250 million of senior notes and repayment of Rialto’s $350.8 million senior notes. Operating cash flow was more than offset by investing and financing outflows, including the CalAtlantic acquisition.
Outlook, risks and contingencies
- Management described housing indicators as mixed, citing slowing growth in sales, permits, starts and existing-home sales, higher mortgage rates and home prices, labor shortages, rising material costs and constrained approved land. It expected demand to resume, supported by employment, wage and economic growth, while acknowledging a near-term pause and more normalized demand.
- Management expected top-line growth consistent with 7%–10% annual homesite growth through 2019, with homesite growth targeted to taper to 5%–7% in 2020. It described a strategy to control more homesites through options rather than outright ownership.
- Management raised its CalAtlantic synergy expectations to $160 million for 2018 and $380 million for 2019, from earlier targets of $100 million and $365 million. Integration costs and purchase-accounting effects were expected to continue into Q4.
- Lennar was evaluating offers and strategic alternatives to monetize all or part of Rialto, with a stated intention to move toward a pure-play homebuilding platform. No significant transaction agreement had been reached.
- Risks include housing-market deterioration, mortgage-rate increases, cost inflation, land availability and valuation, execution of CalAtlantic synergies, refinancing and credit access, joint-venture commitments and guarantees, natural disasters, and Rialto securitization and disposition outcomes. Lennar disclosed a DOJ subpoena concerning FHA loan underwriting and quality-control processes; no damages or penalties had been asserted. It also expected monetary sanctions in a Clean Water Act matter, which management did not expect to be material.
- At August 31, outstanding letters of credit were $725.5 million and surety bonds were $2.6 billion, including approximately $1.4 billion of anticipated future site-improvement costs. Management did not anticipate material draws. Maximum exposure to loss on unconsolidated VIEs was reported at $1.09 billion, including remaining multifamily fund commitments and specified guarantees.
Investor facts to verify
- Separate acquisition-driven growth from comparable or organic performance, and assess the final CalAtlantic purchase-price allocation and realized synergies.
- Track homebuilding gross margin excluding purchase-accounting effects, construction and land costs, incentives, orders, cancellations and backlog conversion.
- Reconcile cash generation with inventory investment, acquisition spending, debt repayments and the decline in homebuilding cash; monitor leverage and covenant headroom.
- Review the outcome and terms of any Rialto strategic transaction, as well as any developments in the DOJ inquiry and other legal contingencies.
- Assess potential exposure from joint-venture guarantees, multifamily commitments, letters of credit, surety bonds and land-option deposits.