Lennar Corporation — Q1 FY2015 10-Q
Reporting period: Three months ended February 28, 2015; comparisons are with the three months ended February 28, 2014 unless stated otherwise. Lennar operates homebuilding, mortgage/title services, real estate investment and multifamily development businesses.
Financial performance
| Metric | Q1 FY2015 | Prior year |
|---|---|---|
| Total revenue | $1.644 billion | $1.363 billion |
| Earnings before income taxes | $176.6 million | $125.9 million |
| Net earnings attributable to Lennar | $115.0 million | $78.1 million |
| Diluted / basic EPS | $0.50 / $0.56 | $0.35 / $0.38 |
| Cash dividends per share | $0.04 | $0.04 |
| Net cash used in operating activities | $730.3 million | $394.6 million |
- Revenue increased about 21% and Lennar-attributable earnings increased about 47% year over year.
- Homebuilding revenue was $1.442 billion. Home deliveries were 4,302, up from 3,609; average delivered price was $326,000 versus $318,000.
- Homebuilding gross margin fell to 23.1% from 25.1%, as labor, material and land costs rose; prior-year margin included a $5.5 million insurance recovery. Selling, general and administrative expense was 11.4% of home-sale revenue, versus 11.8%.
- New orders rose to 5,287 homes from 4,465; quarter-end backlog was 6,817 homes worth $2.399 billion, up from 5,662 homes worth $1.938 billion. Cancellation rates were 16% in both periods.
- Operating cash outflow reflected higher inventories, strategic land purchases and development costs, increased Rialto loans held for sale, and lower accounts payable and other liabilities. Inventory was $8.407 billion at quarter-end, up from $7.737 billion at November 30, 2014.
Segments and material changes
- Homebuilding: Operating earnings were $207.6 million versus $162.2 million. Results included $31.3 million of equity earnings, primarily from third-party homesite sales by Heritage Fields El Toro, and a $6.5 million gain on sale of an operating property. Lennar also bought approximately 300 homesites from that venture; its share of the resulting $44.6 million gross profit was deferred.
- Financial Services: Operating earnings rose to $15.5 million from $4.5 million, supported by greater mortgage and title volumes, refinance activity, a higher capture rate and expanded retail presence. Mortgage originations were $1.628 billion versus $886 million; capture rate on Lennar homebuyers was 79% versus 75%.
- Rialto: Operating earnings were $2.8 million versus $3.5 million, while management described earnings net of noncontrolling interests as $4.6 million versus $2.6 million. Lower loan impairments and expenses were offset by lower interest income and fund earnings. Rialto originated $565.5 million of commercial mortgage loans and sold $318.1 million into securitizations.
- Multifamily: Operating loss narrowed to $5.7 million from $6.2 million. Lennar reported interests in 26 communities: two completed and operating, two partially completed and leasing, and 22 under construction.
Liquidity, debt and capital
- Cash and cash equivalents were $818.4 million at February 28, 2015, down from $1.282 billion at the start of the quarter. Lennar Homebuilding cash was $583.8 million.
- Homebuilding debt was $5.133 billion, up from $4.690 billion at November 30, 2014. Homebuilding debt to total capital was 50.9%; net debt to total capital was 47.9%, compared with 49.3% and 44.1%, respectively, at November 30.
- The company issued an additional $250 million of 4.50% senior notes due 2019 and borrowed $250 million under its $1.5 billion revolving credit facility. Management stated it was in compliance with debt covenants. The reported covenant leverage ratio was 49.4% against a 65% maximum; liquidity was 2.15 times against a 1.00 minimum.
- Financial Services warehouse borrowings were $632.5 million against $800 million of stated commitments. Rialto warehouse borrowings were $183.2 million; in March 2015, Rialto added a $250 million facility maturing in fiscal 2016.
Outlook, risks and unusual items
- Management said it expects to deliver 23,500–24,000 homes in fiscal 2015, with average gross margins of about 24%, and believes Lennar is on track for another year of increased profitability. It characterized the housing recovery as early-stage and slow-growth.
- Management expects some margin contraction from cost increases outpacing price increases, competition and development of previously mothballed land. It could not quantify the impact of lower oil prices on Houston, which may be negative but could have offsetting benefits.
- A Maryland property dispute produced a January 2015 court order requiring Lennar to purchase the property for the remaining $114 million contract price, pay interest at 12% from May 2008, and reimburse taxes and attorneys’ fees. Lennar plans to appeal and recorded no liability, stating it did not consider a loss probable. Simple interest through the decision date was estimated at $91.1 million; post-judgment interest and other amounts remain uncertain.
- Other exposures include homebuilding joint-venture guarantees and completion obligations, multifamily completion and cost-overrun guarantees, letters of credit, and $934.2 million of performance and surety bonds. Management did not anticipate draws with a material effect. Mortgage-loan purchasers may also seek repurchase or indemnity claims for representations and warranties.
- Results are seasonal and variable. Management cited risks including housing demand, mortgage availability, land and construction costs, interest rates, inventory valuation, competition, joint-venture performance, debt refinancing and legal outcomes.
Important facts for investors to verify
- How much of earnings growth is repeatable after the $31.3 million Heritage Fields equity gain and $6.5 million property-sale gain.
- Whether backlog converts to closings as expected, particularly given the 16% overall cancellation rate and 26% Houston rate.
- Whether homebuilding margins meet the fiscal-year outlook amid rising construction and land costs and possible Houston weakness.
- How inventory investment and negative operating cash flow evolve, and whether financing remains available as debt increases.
- The Maryland litigation outcome, including potential interest, taxes and attorneys’ fees, and the adequacy of related contingencies.
- Renewal or replacement of short-term warehouse facilities and exposure from joint ventures, guarantees, letters of credit and surety bonds.