Lennar Corporation — Q1 FY2012 Form 10-Q
Business context and reporting period. Homebuilder Lennar reported its first fiscal quarter ended February 29, 2012, compared with the three months ended February 28, 2011. Its businesses include Homebuilding, Financial Services and Rialto Investments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
- Revenue: $724.9 million, up 29.9% year over year. Homebuilding revenue was $624.4 million; Financial Services $68.2 million; Rialto $32.2 million.
- Earnings: Pretax earnings were $6.5 million versus $36.3 million. Net earnings attributable to Lennar were $15.0 million, or $0.08 per diluted share, versus $27.4 million, or $0.14 per diluted share. The quarter’s $8.0 million of total net earnings included a $7.0 million loss attributable to noncontrolling interests.
- Homebuilding: Home sales gross margin improved to 20.9% from 20.0%. Home deliveries were 2,482 including unconsolidated entities (2,472 excluding them); average delivered price was $248,000 including unconsolidated entities. Net new orders rose 33% to 3,022 homes; backlog increased to 2,711 homes worth $711.4 million from 1,948 homes worth $497.5 million. Sales incentives were $34,200 per delivered home, or 12.2% of home sales revenue, compared with $33,100 and 12.1%.
- Cash flow and liquidity: Operating cash flow was negative $132.4 million versus positive $9.7 million. Investing provided $156.7 million and financing used $265.0 million. Cash and cash equivalents ended at $922.9 million, down from $1,163.6 million at the beginning of the quarter. Inventory rose to $4.67 billion from $4.36 billion at November 30, 2011.
- Debt and equity: Homebuilding senior notes and other debt were $3.47 billion, up from $3.36 billion at November 30, 2011. Homebuilding debt-to-total-capital was 56.1%, versus 55.5% at November 30 and 54.2% a year earlier; net debt-to-total-capital was 49.6%, versus 46.4% at November 30. Total liabilities were $5.54 billion and total equity was $3.32 billion.
- Segments: Homebuilding operating earnings were $20.0 million versus $35.5 million; Financial Services earnings increased to $8.3 million from $1.2 million; Rialto earnings fell to $5.1 million from $23.0 million. Prior-year results included significant one-time gains.
Material changes versus the prior comparable period
- Homebuilding revenue rose 34%, primarily on 30% more deliveries excluding unconsolidated entities and a 3% increase in average selling price. Homebuilding gross margin improved, while operating earnings declined, chiefly because the prior-year period included litigation proceeds, a debt-extinguishment gain and deferred management fees.
- Company-wide earnings were lower; Q1 2011 included a $37.5 million litigation settlement. Rialto’s lower earnings reflected negative other income/expense, including real-estate ownership and maintenance costs, partly offset by increased equity earnings from unconsolidated investments.
- Cash from operations shifted to an outflow, mainly reflecting inventory investment and lower accounts payable and other liabilities. Cash used in financing included $170.0 million of Rialto debt repayments and repayments under Financial Services warehouse facilities.
- Financial Services operating earnings improved with higher mortgage originations and lower title costs. Originations rose to $743 million from $557 million.
- Homebuilding valuation adjustments and write-offs were $2.3 million versus $22.5 million in the prior-year quarter.
Outlook, risks and contingencies
- Management said new orders, sales pace and pricing indicated a stabilizing housing market, and expected improved Homebuilding operating leverage in the second half of 2012. It cited strategic land acquisitions and stated its expectation of a third consecutive profitable year in 2012. This is management commentary, not quantified earnings guidance.
- Management expects Rialto to become a growing contributor over time, while noting that asset-resolution timing varies by quarter. Rialto earnings included equity-method gains, including mark-to-market gains, and are therefore exposed to valuation and timing variability.
- The company retained a $561.3 million valuation allowance against deferred tax assets, stating that further evidence of market recovery was needed before reversing it. It recorded a $15.6 million reduction in the allowance during the quarter.
- Homebuilding inventory valuations depend on assumptions about local demand, sales pace, prices and costs; changed market conditions could trigger further impairments. Rialto also reported $4.7 million of loan and real-estate impairments/charge-offs in operating cash flow adjustments and $3.8 million of REO impairments.
- Chinese drywall claims remained a warranty exposure: Lennar reported approximately 1,000 confirmed affected Florida homes, $82.2 million of cumulative accruals for confirmed and estimated cases, and a remaining reserve of $7.1 million. Additional inspections or costs could require further accruals; third-party recoveries in the quarter were immaterial.
- Potential risks include mortgage-loan purchaser claims under representations and warranties, renewal or replacement of Financial Services warehouse facilities (one facility matured in July 2012), and joint-venture guarantees. Net recourse exposure on Homebuilding unconsolidated entities was $55.6 million; no obligation-guarantee liability was accrued. Performance and surety bonds totaled $607.3 million, with $334.3 million of anticipated completion costs; management did not anticipate material draws.
- Rialto’s FDIC-related notes were non-recourse to Lennar; the quarter included $156.9 million of principal retirement through the defeasance account. The filing also reports remaining investment commitments of $7.5 million to the AB PPIP fund and $20.5 million to Rialto’s real-estate fund.
Important facts for investors to verify
- Whether order and backlog growth convert into deliveries while cancellations, incentives and home-sale margins remain controlled.
- Whether operating cash flow improves as inventory investment and working-capital outflows change; distinguish available corporate cash from cash held in restricted, segment or VIE structures.
- Debt maturities, borrowing costs, covenant compliance and the renewal or replacement of warehouse facilities; assess leverage alongside homebuilding inventory and cash.
- Rialto’s repeatability of earnings after separating recurring income from fair-value gains, foreclosure gains and other timing-sensitive items.
- Potential changes in tax-asset realizability, warranty claims, mortgage repurchase claims, inventory impairments and joint-venture guarantee exposure.
- Management’s 2012 profitability outlook against the filing’s warning that quarterly results are variable and the first quarter is not necessarily indicative of full-year results.