Lennar Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended August 31, 2010. Amounts below are in millions of dollars unless noted.
Business context and reporting period
Lennar operates homebuilding, mortgage and title services, and Rialto Investments. Rialto became a reportable segment in 2010 and focuses on distressed real estate assets and related investment opportunities. The filing is an unaudited interim report; management cautions that results are variable and do not necessarily indicate full-year performance.
Financial results and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $825.0 | $720.7 | $2,213.9 | $2,205.6 |
| Net earnings (loss) attributable to Lennar | $30.0 | $(171.6) | $63.2 | $(452.7) |
| Basic and diluted EPS | $0.16 | $(0.97) | $0.34 | $(2.72) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $189.1 | $386.9 |
- Homebuilding revenue was $718.1 million in Q3, up from $643.6 million; nine-month revenue was $1,944.3 million, down from $1,977.9 million.
- Home sales gross margin improved to 21.1% in Q3 from 7.8%, and to 20.4% for the nine months from 8.2%. Lower valuation adjustments and lower sales incentives contributed. Homebuilding valuation adjustments and write-offs totaled $21.7 million in Q3 and $37.9 million year to date, versus $117.7 million and $305.2 million in 2009.
- At August 31, cash and cash equivalents totaled $1,037.5 million, including $865.7 million in Homebuilding, $62.2 million in Rialto, and $109.7 million in Financial Services. Restricted cash was $131.5 million, including $122.0 million collateralizing letters of credit.
- Homebuilding debt was $2,843.2 million; Rialto notes payable were $626.9 million and non-recourse to Lennar; Financial Services debt was $203.2 million. Homebuilding debt-to-total-capital was 53.2%; net debt-to-total-capital was 44.1%, up from 36.9% at November 30, 2009.
- Total assets were $8,279.9 million and total equity was $3,068.4 million at August 31. These figures include consolidated VIE assets and liabilities, some of which are not available to Lennar or recourse to it.
Material changes versus prior comparable periods
- Lennar returned to profitability: Q3 net income attributable to Lennar was $30.0 million versus a $171.6 million loss; nine-month income was $63.2 million versus a $452.7 million loss.
- Q3 home deliveries, excluding unconsolidated entities, increased 9% to 2,909; average selling price was $240,000 versus $239,000. Nine-month deliveries declined 2% to 7,799, with average selling price unchanged at $245,000.
- Sales incentives fell to 11.3% of home sales revenue in Q3 from 15.0%, and to 11.7% year to date from 16.5%. However, Q3 net new orders fell 15% year over year to 2,624 homes; backlog declined to 2,173 homes from 2,475.
- Rialto reported Q3 operating earnings of $18.5 million and nine-month operating earnings of $32.2 million; the comparable 2009 periods recorded losses. Financial Services operating earnings fell to $6.8 million in Q3 and $19.6 million year to date, from $11.2 million and $28.2 million.
- Nine-month cash from operations declined to $189.1 million from $386.9 million. A $323.7 million tax refund and earnings supported cash flow, partly offset by a $230.3 million inventory increase. Investing used $557.2 million; financing used $51.8 million.
Outlook, management commentary, risks and unusual items
- Management described housing as in a “rocky stabilization” phase and said the expiration of the federal homebuyer tax credit in April affected demand more than expected. Timing and degree of any recovery remain uncertain; further market deterioration could pressure prices, slow sales absorption, and cause additional inventory or option write-downs.
- Management’s 2010 focus was returning the company to profitability, protecting homebuilding margins, controlling costs, targeting first-time and value-focused buyers, and making selective land acquisitions. It reported year-to-date profitability through Q3, but did not provide specific numerical guidance. Management anticipated at least some increase in Q4 sales incentives versus Q3.
- Rialto’s FDIC partnership acquired interests in portfolios of more than 5,500 distressed loans, with about $3.0 billion unpaid principal balance and an initial fair value of about $1.2 billion. Rialto recognized $69.9 million of accretable interest income year to date. These earnings depend on estimates of loan cash flows and performance and may change materially.
- On September 30, 2010, after quarter-end, Lennar acquired distressed assets with approximately $740 million of stated asset value for $310 million, including a $125 million five-year unsecured note from a seller.
- Homebuilding unconsolidated-venture net recourse exposure was $119.4 million, down from $194.6 million at November 2009; maximum recourse exposure before partner reimbursements was $180.3 million. Guarantees may require additional payments, and partner reimbursement capacity is not assured.
- Chinese drywall issues affected approximately 890 identified Florida homes. Lennar had accrued $80.7 million of related warranty reserves; the reserve net of payments was $29.1 million. Inspections continue, and further claims could increase costs; the company was pursuing insurance and other recoveries.
- The company terminated its $1.1 billion revolving credit facility and replaced its letter-of-credit capacity with cash-collateralized arrangements. It issued $250 million of 6.95% notes and $276.5 million of 2.00% convertible notes, while repurchasing older notes. The remaining $99.2 million of 5.125% notes was retired in October 2010.
Important facts for investors to verify
- Whether post-tax-credit weakness persists: track net orders, cancellations, backlog, pricing, and incentives, especially in Q4.
- Whether improved homebuilding margins are sustainable apart from lower impairments and reduced incentives.
- Rialto loan-collection assumptions, accretable-yield estimates, portfolio recoveries, and the financing and performance of the September asset acquisitions.
- Liquidity available to the parent versus cash held in restricted accounts or consolidated VIEs, and upcoming debt maturities and refinancing needs.
- Potential exposure from joint-venture guarantees, Chinese drywall remediation, tax examinations, and other contingencies.