Lennar Corporation — Q3 2015 Form 10-Q
Business context and reporting period. Lennar is a homebuilder with mortgage and title services, commercial real estate investment and finance (Rialto), and multifamily development operations. This filing covers the quarter and nine months ended August 31, 2015; comparisons are with the periods ended August 31, 2014, except balance-sheet comparisons, which are with November 30, 2014.
Financial results and key metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $2.492 billion | $2.014 billion | $6.528 billion | $5.196 billion |
| Earnings before income taxes | $320.7 million | $262.3 million | $777.1 million | $591.8 million |
| Net earnings attributable to Lennar | $223.3 million | $177.8 million | $521.3 million | $393.6 million |
| Diluted EPS | $0.96 | $0.78 | $2.25 | $1.73 |
- Homebuilding revenue was $2.232 billion for the quarter and $5.790 billion for the nine-month period. Q3 home deliveries rose 16% to 6,314, while average delivered-home price increased 5% to $350,000. Nine-month deliveries rose 18% to 16,604 and average price increased 6% to $343,000.
- Home-sale gross margin was 24.1% in Q3, down from 25.2%; for nine months it was 23.7%, down from 25.3%. Management cited higher land and construction costs, partly offset by higher selling prices. Q3 sales incentives were 5.6% of home-sale revenue, versus 5.8% a year earlier.
- Q3 operating earnings were $39.4 million in Financial Services, $7.0 million in Rialto (before $2.0 million of noncontrolling-interest losses), and a $3.0 million loss in Multifamily. Nine-month results were $94.0 million, $16.7 million, and a $17.4 million loss, respectively.
- Operating cash flow was negative $1.088 billion for the nine months, compared with negative $898.5 million in 2014. Inventory growth and increases in Rialto and Financial Services loans held for sale were major uses of cash. Investing cash flow was negative $15.7 million; financing cash flow was positive $627.6 million.
- Cash and cash equivalents totaled $805.3 million at August 31, down from $1.282 billion at November 30, 2014. Total assets were $14.169 billion, liabilities $8.495 billion, and total equity $5.675 billion.
- Lennar Homebuilding debt was $5.262 billion. Homebuilding debt to total capital was 49.5%; net debt to total capital was 46.5%, up from 44.1% at November 2014. Under the credit agreement, the company reported a 49.9% leverage ratio against a 65% maximum and liquidity of 2.16 times against a 1.00 minimum; it said it was covenant-compliant.
Material changes versus prior periods
- Q3 revenue increased about 24% and net earnings attributable to Lennar increased about 26% year over year. For the first nine months, revenue rose about 26% and attributable earnings about 32%.
- Homebuilding growth reflected more deliveries, higher average selling prices, and more active communities. Backlog reached 8,250 homes valued at $3.016 billion, up from 7,290 homes and $2.477 billion a year earlier; Q3 net new orders increased 10% to 6,495 homes.
- Homebuilding margins contracted despite higher selling prices, reflecting cost pressures. Financial Services earnings increased substantially, supported by higher mortgage volume and capture rate. Rialto’s equity earnings from unconsolidated entities fell, primarily because of lower fair-value gains at its funds. Multifamily’s reported loss widened; prior-year earnings benefited from larger property-sale gains.
- Debt and financing activity increased: Lennar issued $500 million of 4.75% senior notes due 2025 and $250 million of 4.50% notes due 2019, and used proceeds and cash to retire $500 million of 5.60% notes due 2015. It also borrowed $575 million under its revolving credit facility and exchanged or converted about $169 million principal amount of 2.75% convertible notes for cash and shares.
Outlook, commentary, risks, and unusual items
- Management described housing demand as improving gradually, citing pent-up demand, demographic trends, affordability, and rental occupancy. It expected another year of increased fiscal 2015 profitability, with Homebuilding and Financial Services remaining the principal earnings drivers. No numerical full-year earnings guidance was provided.
- Management expected lower homebuilding margins in Q4 than a year earlier, citing costs rising faster than selling prices, competitive pressures, and development of previously inactive land. It planned continued selective land investment and careful balancing of pricing, incentives, commissions, and advertising.
- In July, Lennar closed its Multifamily Venture, with approximately $1.1 billion of equity commitments, including a $504 million Lennar co-investment commitment. The venture was seeded with 19 assets representing about 6,100 apartments and projected costs of $2.2 billion. Lennar’s remaining commitment was $425.7 million at quarter-end.
- A Maryland property-purchase litigation judgment ordered Lennar to pay a remaining $114 million purchase price, simple interest at 12% per year, real estate taxes, and attorneys’ fees. Interest was estimated at approximately $99 million through August 31, 2015, with taxes then totaling $1.6 million. Lennar said it would appeal, considered the decision contrary to law, and recorded no liability because it did not consider a loss probable. A $223.4 million bond amount was disclosed in connection with staying the judgment during appeal.
- Other risks include home-price or land-value deterioration and impairment charges, construction and land costs, mortgage and credit-market conditions, refinancing and warehouse-facility renewals, joint-venture commitments and guarantees, and potential mortgage-loan repurchase claims. Management reported no material risk-factor changes and said disclosure controls were effective.
Important facts for investors to verify
- Whether delivery, order, and backlog growth can continue without further deterioration in home-sale gross margins.
- The sources and sustainability of earnings, particularly El Toro-related homebuilding equity earnings ($64.5 million for nine months) and Rialto fund distributions and fair-value gains.
- Cash needs from inventory investment, debt maturities, and the Multifamily Venture’s remaining $425.7 million commitment; also monitor covenant headroom and warehouse-facility renewals.
- The outcome and potential total cost of the Maryland litigation, including interest, taxes, attorneys’ fees, and the appeal bond.
- Exposure to multifamily completion and cost-overrun guarantees, joint-venture debt, and mortgage-loan representations-and-warranties claims.