Lennar Corporation — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended November 30, 2015 (the fourth quarter ended on that date). Lennar is a homebuilder with mortgage/title services, commercial real estate investment and lending through Rialto, and multifamily development. Homebuilding generated about 89% of consolidated revenue.
Financial and operating performance
| Metric | FY2015 | FY2014 | Change or context |
|---|---|---|---|
| Total revenue | $9.47 billion | $7.78 billion | Up 22% |
| Net earnings attributable to Lennar | $802.9 million | $638.9 million | Up 26% |
| Diluted EPS | $3.46 | $2.80 | Up 24% |
| Homebuilding gross margin | 24.0% | 25.4% | Lower, mainly from higher land costs |
| Homebuilding operating margin | 14.1% | 14.9% | Lower year over year |
| Cash used in operating activities | $419.6 million | $788.5 million | Outflow narrowed; inventory and mortgage-loan growth remained cash uses |
| Cash and cash equivalents | $1.16 billion | $1.28 billion | At fiscal year-end |
| Homebuilding debt | $5.03 billion | $4.66 billion | Homebuilding net debt-to-total-capital ratio was 42.2%, down from 43.9% |
- Homebuilding: Deliveries rose to 24,292 from 21,003; new orders increased to 25,106 from 22,029. Average delivered home price was $344,000 versus $326,000. Year-end backlog grew to 6,646 homes worth $2.48 billion, up 14% by units and 25% by value.
- Financial Services: Revenue increased to $620.5 million from $454.4 million and operating earnings to $127.8 million from $80.1 million. Mortgage originations were $8.9 billion; capture rate among Lennar buyers using financing was 82%, versus 78%.
- Rialto: Operating earnings were $33.6 million versus $44.1 million. Lower loan impairments were offset by reduced equity earnings from funds and other changes in income. Fund III closed on more than $510 million of commitments, including $100 million from Rialto.
- Multifamily: Operating loss narrowed to $7.2 million from $11.0 million. Lennar’s share of gains from two property sales was $22.2 million. The new multifamily venture had about $1.1 billion in equity commitments and a $504 million Lennar co-investment commitment.
Liquidity, debt and capital
Lennar reported a $1.6 billion revolving credit facility with no borrowings outstanding at year-end. The credit agreement’s covenant calculations showed a 44.4% leverage ratio against a 65% maximum and liquidity of 3.19 times the required 1.00 minimum; management stated it was in compliance. Financial Services warehouse commitments totaled $1.35 billion and Rialto Mortgage Finance warehouse commitments totaled $1.0 billion. These facilities support lending activity and several mature in 2016, making renewal or replacement important.
Cash flow from operations was negative despite higher earnings, principally reflecting strategic land purchases and development, plus increases in mortgage loans held for sale. Financing cash flow was positive, supported by new senior-note issuance and warehouse borrowings. Lennar issued $1.15 billion of senior notes during FY2015 and redeemed $500 million of 5.60% notes due 2015.
Outlook, risks and unusual items
- Management expected a continued slow housing-market recovery and forecast 26,500–27,000 home deliveries in FY2016, with another year of substantial profitability. It anticipated lower homebuilding margins than FY2015 as costs rise faster than prices, competition persists, and previously inactive land is developed.
- Management cited employment, wage growth and consumer confidence as support for demand, while noting the Federal Reserve’s first rate increase in nine years. Housing demand remains sensitive to mortgage rates and financing availability.
- Notable concentration and cost risks include labor and materials shortages and inflation, land valuation and impairment, regional weakness (including energy-sector volatility in Houston), construction defects and warranty claims, and refinancing or renewal of warehouse facilities.
- Homebuilding inventory valuation and unconsolidated-venture earnings depend on estimates of sales pace, prices, costs and asset values. FY2015 included $82.8 million of homebuilding equity earnings from the El Toro venture, largely tied to land and commercial-property transactions.
- Settlers Crossing litigation: A trial court ordered Lennar to buy Maryland property for a remaining $114 million and pay 12% simple interest, taxes and attorneys’ fees. Accrued interest was approximately $103 million at November 30, 2015; taxes were $1.6 million, with attorneys’ fees undetermined. Lennar appealed, recorded no liability because it did not consider a loss probable, and posted a $223.4 million bond to stay the judgment.
- The company reported $1.3 billion of performance and surety bonds, including $223.4 million related to the litigation, and $453.2 million of letters of credit. It did not anticipate material draws. Other exposures include guarantees and cost-overrun commitments for joint ventures and potential mortgage-loan repurchase claims.
Important facts for investors to verify
- Whether FY2016 delivery guidance of 26,500–27,000 homes was achieved, and whether margin compression matched management’s expectations.
- Whether operating cash flow improves as inventory and mortgage-loan balances grow, and how land investment affects liquidity.
- Renewal or replacement terms for 2016-maturity Financial Services warehouse facilities and the effect on lending capacity.
- Developments in the Settlers Crossing appeal, potential total judgment exposure and any related financial-statement treatment.
- Whether the El Toro-related earnings contribution and other land-sale gains are repeatable, and how much reported profit depends on venture transactions.
- Performance of Rialto and the multifamily venture, including remaining Lennar commitments and the risks associated with guarantees and project cost overruns.