Lennar Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended February 28, 2013; comparable period ended February 29, 2012. Lennar operates homebuilding, mortgage/title and closing services, and real estate investment businesses through Rialto. Amounts below are in millions except per-share data.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $989.9 | $724.9 |
| Earnings before income taxes | $53.3 | $6.5 |
| Net earnings attributable to Lennar | $57.5 | $15.0 |
| Diluted EPS | $0.26 | $0.08 |
| Cash and cash equivalents, all segments | $1,242.1 | $1,310.7 at November 30, 2012 |
| Net cash used in operating activities | $321.5 | $132.4 used |
| Homebuilding debt | $4,505.7 | $4,005.1 at November 30, 2012 |
- Homebuilding revenue was $868.4, up from $624.4. Home sales revenue rose 40%, reflecting 28% more deliveries and a 9% increase in average delivered price to $269,000. Home-sales gross margin was 22.1%, versus 20.9%.
- Homebuilding operating earnings increased to $67.1 from $20.0. Financial Services operating earnings rose to $16.1 from $8.3; Rialto operating earnings declined to $1.4 from $5.1.
- Sales incentives fell to $23,300 per delivered home from $34,200. Selling, general and administrative expense was 12.0% of home-sales revenue, compared with 14.9%.
- Operating cash use primarily reflected a $514.6 increase in inventories, including strategic land purchases, and lower accounts payable and other liabilities. Investing activities provided $260.0, including $219.2 from a decline in Rialto defeasance cash; financing activities used $7.2.
- Homebuilding debt-to-total-capital was 56.3% and net debt-to-total-capital 49.3%, versus 54.0% and 45.6% at November 30, 2012. Lennar reported $1.2 billion of cash across its businesses and no borrowings under its $525 million committed corporate revolving credit facility. It reported covenant compliance, with a 48.2% leverage ratio against a 67% limit and liquidity of 5.00 against a 1.00 minimum.
Material changes versus the prior period
- New home orders increased 34% to 4,055; backlog rose 82% to 4,922 homes valued at $1,456.4, from 2,711 homes valued at $711.4. The cancellation rate was 15%, compared with 18%.
- Active communities increased to 484 from 426. Owned homesites rose to 112,068 from 100,465, and controlled homesites rose to 134,610 from 117,086.
- Homebuilding debt increased by $500.6 from November 30, 2012. Lennar issued $275 million of 4.125% senior notes due 2018 and an additional $175 million of 4.750% senior notes due 2022. Rialto repaid $304.1 million of notes payable.
- Rialto earnings were lower mainly because the PPIP fund had been liquidated at the end of 2012 and Fund II was only beginning to ramp up. Financial Services benefited from higher mortgage volume and refinancing activity.
Outlook, risks and unusual items
- Management cited stronger housing demand, increased community traffic, improved sales pace, and price increases in many markets. It said the company was on track for another year of “substantial profitability” in 2013, without providing numerical earnings or revenue guidance.
- Management’s priorities include improving homebuilding margins through higher prices, reduced incentives and cost control, while investing in selectively underwritten land. It expected refinancing activity to be less robust later in 2013; Financial Services was nevertheless expected to remain a strong profit generator. Rialto was described as being in a transition year as Fund II ramps up.
- The $57.5 million of earnings attributable to Lennar included a $25.1 million reversal of a deferred-tax valuation allowance, partially offset by a $21.5 million tax provision; the resulting income-tax benefit was $3.6 million. The reported negative effective tax rate is therefore not representative of the company’s historical rate.
- Cash use, rising materials and labor costs, inventory valuation assumptions and local housing conditions remain important sensitivities. Management warned that market deterioration or changed assumptions could lead to further inventory impairments or option-deposit write-offs.
- Contingencies include $42.3 million of net recourse exposure for homebuilding unconsolidated entities; $324.8 million of letters of credit and $614.7 million of performance and surety bonds, with $360.6 million of anticipated future site-improvement costs. The company did not expect draws to materially affect results. Mortgage loan sales also retain limited representation-and-warranty exposure.
- Chinese-drywall warranty reserves were $2.5 million net of payments at quarter-end; $82.2 million had been accrued historically for the issue. The company reported 1,010 affected Florida homes identified, with reimbursement efforts continuing.
Important facts for investors to verify
- Whether order and backlog growth converts into deliveries and cash generation, and whether pricing gains continue to outpace labor and material cost increases.
- How much of reported earnings reflects recurring operations versus the tax valuation-allowance reversal and Rialto asset realizations or investment results.
- Inventory growth, future land commitments, impairment assumptions, and the adequacy of cash and financing capacity as homebuilding debt rises.
- Rialto Fund II fundraising, capital calls and investment performance, alongside the runoff of legacy loan portfolios and related credit-loss estimates.
- Potential exposure from joint-venture guarantees, letters of credit, surety bonds, mortgage repurchase claims and warranty matters.