Lennar Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended February 29, 2020; the comparable period ended February 28, 2019. Lennar operates homebuilding, mortgage and title services, multifamily, and other businesses. The quarter’s reported results largely preceded the significant operating disruption from COVID-19 described in the filing.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $4.505 billion | $3.868 billion |
| Earnings before income taxes | $423.6 million | $319.1 million |
| Net earnings attributable to Lennar | $398.5 million | $239.9 million |
| Diluted EPS | $1.27 | $0.74 |
| Cash from operating activities | $383.0 million | $(524.4) million |
| Cash from investing activities | $13.2 million | $(78.0) million |
| Cash used in financing activities | $(789.8) million | $69.0 million |
Homebuilding revenue was $4.172 billion, up from $3.624 billion. Home-sale gross margin was 20.5%, versus 20.1%; SG&A was 9.2% of home-sale revenue, versus 9.5%. Deliveries excluding unconsolidated entities rose 17% to 10,313 homes, while average delivered price declined 2% to $402,000. New orders rose to 12,376 from 10,463, and backlog increased to 17,632 homes from 17,259.
Financial Services reported operating earnings of $47.3 million, compared with $19.0 million; management cited higher mortgage volume and margins, lower loan origination costs, and stronger title results. Multifamily operating earnings were $1.8 million, down from $6.8 million.
Debt, liquidity, and capital
At February 29, 2020, cash and cash equivalents plus restricted cash totaled $1.075 billion, including $785.0 million of Homebuilding cash. Homebuilding debt was $8.115 billion, up from $7.777 billion at November 30, 2019. Homebuilding debt to total capital was 33.6%; net Homebuilding debt to total capital, a non-GAAP measure, was 31.4%, versus 29.2% at November 30, 2019. Total liabilities were $12.980 billion and total equity was $16.193 billion.
The company reported $300 million drawn on its $2.45 billion unsecured revolving credit facility and stated it had $2.1 billion of unused committed capacity. Management said it was in compliance with credit covenants; reported covenant measures included a 38.0% leverage ratio against a 65.0% maximum and liquidity of 2.08 against a 1.00 minimum. Financial Services warehouse borrowings were $674.8 million residential and $161.5 million commercial.
Operating cash flow benefited from earnings, lower receivables, and a $474.2 million decrease in loans held for sale; these were partly offset by a $777.0 million inventory increase. Financing cash outflows included $296.0 million of stock repurchases, $93.3 million of principal payments, and net warehouse-facility repayments. The company paid a $0.125-per-share quarterly dividend and repurchased approximately 4.4 million shares under its buyback program.
Material changes, outlook, and risks
Revenue increased approximately 16% year over year and net earnings attributable to Lennar increased approximately 66%. Home deliveries drove higher home-sale revenue despite lower average selling prices, reflecting a shift toward lower-priced communities. The effective tax rate fell to 7.5% from 24.9%, including a $69.2 million benefit from the extension of the new energy-efficient home tax credit; this materially supported the year-over-year earnings comparison.
After quarter-end, COVID-19 caused stay-at-home orders and business restrictions. Lennar reported that some markets had halted construction and home sales, while traffic and sales had slowed significantly and cancellations had increased significantly. Management said the duration and financial impact were not predictable, and provided no quantitative earnings or revenue guidance. It planned to reduce construction costs, SG&A, and other cash outflows; defer land closings and development where possible; and use technology to maintain sales and operations. A prolonged downturn could adversely affect homebuilding, mortgage lending and loan securitizations, multifamily rent collections, liquidity, and asset values.
Unusual or notable items include $24.5 million of valuation adjustments and write-offs of option deposits and pre-acquisition costs in the quarter, compared with $6.9 million in the prior-year quarter. Management also disclosed potential mortgage-loan representation-and-warranty claims, joint-venture completion and other guarantees, and $306.0 million of nonrefundable land-option deposits and pre-acquisition costs at quarter-end. Management did not expect ordinary-course litigation to have a material adverse effect; a Massachusetts environmental matter was settled for an amount described as not material.
Important facts for investors to verify
- Subsequent-quarter sales, cancellations, deliveries, and backlog conversion as COVID-19 restrictions and consumer demand evolve.
- Cash use, access to revolving and warehouse facilities, and covenant headroom under stressed operating conditions.
- Potential inventory impairments, land-option exposure, and the timing or deferral of land purchases and development spending.
- Mortgage loan sale capacity, warehouse funding, and any changes in repurchase claims or commercial loan securitizations.
- Joint-venture commitments, guarantees, and multifamily rent collection exposure; distinguish Lennar’s exposure from venture-level debt.
- The earnings effect of the $69.2 million energy-efficient home tax credit benefit and the sustainability of reported margins.