LEN

Business Context and Reporting Period

Lennar Corporation (LEN) is one of the nation's largest homebuilders and a provider of financial services. This Form 10-K covers the fiscal year ended November 30, 2008. The company operates through four homebuilding segments (East, Central, West, Houston) and a Financial Services segment. The reporting period was characterized by a severe downturn in the housing market, driven by rising unemployment, falling home prices, increased foreclosures, and tighter credit conditions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 55% to $4.58 billion, primarily due to a 53% drop in home deliveries and a 9% decrease in average sales price.
• Improved Loss Position: Net loss narrowed to $1.11 billion from $1.94 billion in 2007. This improvement was driven by significantly lower inventory valuation adjustments ($340.5 million in 2008 vs. $2.45 billion in 2007) and a gain on the recapitalization of an unconsolidated entity.
• Valuation Allowance: The company recorded a non-cash valuation allowance of $730.8 million against deferred tax assets due to cumulative losses and uncertain market conditions.
• Backlog Contraction: Backlog dollar value plummeted 67% to $456.3 million, reflecting a 48% decline in new orders and a 26% cancellation rate.
• Joint Venture Reduction: The company reduced its number of unconsolidated joint ventures to 116 (from 261 in 2006) and reduced net recourse exposure to $392.5 million.

Guidance, Outlook, and Risks

Outlook: Management expects the housing market to remain compromised by the significant domestic economic downturn. The company's top priority for 2009 is cash generation through inventory conversion, reduced land purchases, and reduced homebuilding starts. Management is "right-sizing" overhead to match anticipated lower volume levels.

Key Risks and Contingencies:

• LandSource Bankruptcy: The LandSource Communities Development LLC joint venture filed for Chapter 11 bankruptcy in June 2008. Lennar owns 16% of the entity (carrying value of zero). The bankruptcy could result in the loss of properties, termination of management agreements, and claims against Lennar.
• Asset Impairments: Continued market deterioration could lead to additional valuation adjustments on inventory and investments in unconsolidated entities.
• Credit Covenants: The company is subject to financial covenants in its $1.1 billion credit facility, including minimum tangible net worth and leverage ratios. While currently in compliance, further impairments could trigger a default.
• Financing Facilities: Financial Services warehouse facilities mature in April and June 2009; renewal is not guaranteed given current capital market conditions.

Investor Verification Checklist

• Deferred Tax Assets: Verify the sustainability of the $730.8 million valuation allowance and the likelihood of future reversals.
• LandSource Exposure: Assess the potential financial impact of the LandSource bankruptcy on Lennar's management fees, land options, and ownership interest.
• Inventory Valuation: Review the assumptions used in discounted cash flow models for inventory impairment, specifically regarding sales pace and pricing in a depressed market.
• Debt Covenants: Monitor compliance with the Credit Facility's tangible net worth and leverage requirements, particularly if further asset write-downs occur.
• Joint Venture Recourse: Confirm the status of the required quarterly reductions in net recourse exposure to unconsolidated joint ventures.