Lennar Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2013. Lennar operates homebuilding, mortgage/title and closing services, and Rialto real estate investment businesses. Comparisons are with the corresponding 2012 periods unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1.426 billion | $930.2 million | $2.416 billion | $1.655 billion |
| Pretax earnings | $162.3 million | $52.1 million | $215.6 million | $58.6 million |
| Net earnings attributable to Lennar | $137.4 million | $452.7 million | $194.9 million | $467.7 million |
| Basic / diluted EPS | $0.71 / $0.61 | $2.39 / $2.06 | $1.01 / $0.88 | $2.47 / $2.16 |
| Operating cash flow | Not separately reported for the quarter | $(609.9) million | $(213.8) million |
- Homebuilding: Q2 homebuilding revenue was $1.281 billion, up 59%; deliveries excluding unconsolidated entities rose 39% to 4,449, and average delivered price increased 13% to $283,000. Home sales gross margin improved to 24.1% from 22.5%; homebuilding operating margin was 13.3%, up 410 basis points year over year.
- Q2 net earnings fell from 2012 despite stronger operations, principally because 2012 included a $403.0 million deferred-tax valuation-allowance reversal. In Q2 2013, a $41.3 million state tax valuation-allowance reversal partly offset current-period tax expense. The six-month 2013 reversal was $66.4 million.
- Operating cash use increased year over year, mainly reflecting a $952.7 million increase in inventory, including strategic land purchases. Investing activities provided $402.0 million and financing activities used $211.2 million during the first half.
Balance sheet, debt and liquidity
- At May 31, 2013, total assets were $10.494 billion, total liabilities $6.449 billion and total equity $4.045 billion.
- Cash and cash equivalents totaled $891.7 million, down from $1.311 billion at November 30, 2012; this included $727.5 million in Homebuilding, $72.5 million in Financial Services and $91.6 million in Rialto.
- Homebuilding debt was $4.538 billion, versus $4.005 billion at November 30, 2012. Homebuilding net debt was $3.811 billion; net debt to total capital was 51.5%, compared with 45.6% at November 30, 2012. Reported homebuilding debt-to-capital was 55.9%.
- The company had no borrowings under its $525 million revolving credit facility at quarter-end. It reported covenant leverage of 53.2% against a 67% maximum and liquidity of 3.14 times against a 1.00-times minimum. In June 2013, after quarter-end, it expanded the facility to $950 million, with $917 million committed, and extended maturity to June 2017.
- Financial Services warehouse borrowings were $334.7 million, supported by facilities with $610 million in aggregate commitments plus $100 million uncommitted capacity. Rialto notes payable were $259.9 million; a substantial portion of the reduction during the half related to repayment of FDIC-portfolio debt using defeasance cash.
Changes versus prior period
- Homebuilding growth reflected higher deliveries, prices and orders, alongside lower sales incentives: Q2 incentives averaged $20,200 per delivered home versus $29,800 a year earlier. Backlog rose 55% to 6,163 homes, valued at $1.863 billion; Q2 net new orders increased 27% to 5,705.
- Homebuilding operating earnings increased to $158.4 million in Q2 from $55.8 million. Financial Services operating earnings rose to $29.2 million from $18.0 million.
- Rialto Q2 operating earnings were $8.5 million versus $7.5 million, but six-month operating earnings declined to $9.9 million from $12.5 million. Rialto revenue fell as its loan portfolio contracted and its model shifted toward managing third-party fund capital; Q2 benefited from higher realized gains on REO sales.
- Inventory increased to $5.831 billion from $5.072 billion at November 30, 2012. Investments in Homebuilding unconsolidated entities rose to $729.9 million from $565.4 million.
Outlook, risks and unusual items
- Management said the housing recovery remained intact despite rising mortgage rates, citing demand exceeding constrained supply. It expected substantial fiscal 2013 profitability and said it believed home-price increases would continue to outpace cost increases.
- Management expected Financial Services to remain a strong 2013 profit generator, while forecasting lower quarterly profits in each of the final two quarters than in Q2 as refinancing activity moderates. Rialto was described as transitioning toward a fund-investment model, with prospects for more consistent future earnings expected to improve.
- Key risks include housing-market deterioration, mortgage availability and interest rates, construction and land-cost inflation, inventory valuation, land entitlements and development, joint-venture partner performance, debt covenant compliance, and mortgage-loan sale representations and warranties.
- Potential exposures include $39.0 million of net recourse exposure to Homebuilding unconsolidated entities ($52.5 million maximum before partner reimbursement agreements); $335.5 million of letters of credit and $638.7 million of performance and surety bonds. Management did not anticipate material draws. It also disclosed a $100 million commitment to fund a new unconsolidated entity until permanent financing is obtained.
- Warranty reserves were $90.2 million. The company had accrued $82.2 million for Chinese-drywall claims; the remaining reserve for those claims, net of payments, was $2.1 million. The company continued to seek reimbursement from subcontractors, insurers and others.
- Management said it would amend prior-year and Q1 supplemental consolidating disclosures for intercompany presentation and classification issues. It stated these revisions do not affect consolidated financial statements. The 2012 period’s large tax benefit is a major comparability item.
Important facts for investors to verify
- Whether order, backlog and delivery growth continues as mortgage rates rise, and whether cancellation rates remain stable.
- Whether home-price gains and lower incentives offset rising labor, material and land costs, preserving gross margins.
- How inventory investment affects operating cash flow and whether strategic land purchases generate expected returns.
- Debt maturities, covenant headroom, availability and renewal of Financial Services warehouse facilities, and the impact of the expanded June 2013 credit facility.
- Realization of deferred tax assets, remaining state tax-loss carryforwards, and outcomes of IRS and state examinations.
- Rialto fund commitments and returns, loan-loss and REO valuations, and the extent of joint-venture, letter-of-credit, bond and warranty exposures.