Lennar Corporation — Q1 FY2016 Form 10-Q
Reporting period: Three months ended February 29, 2016; comparable period ended February 28, 2015. Lennar is a homebuilder with mortgage/title, real estate investment and multifamily businesses. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2016 | Prior-year period |
|---|---|---|
| Total revenue | $1.994 billion | $1.644 billion |
| Earnings before income taxes | $201.7 million | $176.6 million |
| Net earnings attributable to Lennar | $144.1 million | $115.0 million |
| Diluted / basic EPS | $0.63 / $0.68 | $0.50 / $0.56 |
| Operating cash flow | $(215.9) million | $(730.3) million |
| Cash and cash equivalents, period-end | $720.5 million | $818.4 million |
| Total assets / total liabilities, Feb. 29 | $14.195 billion / $8.102 billion | — |
- Revenue increased 21% and net earnings increased 25% year over year. Homebuilding revenue was $1.786 billion, up from $1.442 billion.
- Homebuilding gross margin on home sales was 22.7%, versus 23.1%; management reported homebuilding operating margin of 11.9%. Selling incentives declined to 5.6% of home-sales revenue from 6.3%.
- Home deliveries were 4,832 in the segment table, versus 4,302; management separately cites 4,806 deliveries excluding unconsolidated entities. Average selling price was approximately $366,000 in the table (management cites $365,000), versus $326,000.
- Net orders rose to 5,794 from 5,287. Backlog increased 19% in dollar value to $2.847 billion, representing 7,670 homes.
- Segment operating earnings: Homebuilding $220.6 million (prior $207.6 million); Financial Services $14.9 million ($15.5 million); Rialto $1.6 million ($2.8 million); Multifamily $12.2 million (prior-year loss $5.7 million). Multifamily benefited from a $20.4 million share of a joint-venture property-sale gain.
- Cash used in investing activities was $66.6 million; cash used in financing activities was $155.5 million. Cash fell from $1.158 billion at the beginning of the quarter to $720.5 million at quarter-end.
Debt, liquidity and balance-sheet changes
- Lennar Homebuilding debt was $5.334 billion, up from $5.025 billion at November 30, 2015. Homebuilding debt to total capital was 47.8% (47.1% at November 30); net debt to total capital, a non-GAAP measure, was 45.3% (42.2%).
- The company had $500 million outstanding under its $1.6 billion revolving credit facility; it reported compliance with covenants. Homebuilding cash was $510.9 million, down from $893.4 million at November 30.
- Financial Services and Rialto warehouse borrowings were $625.3 million and $187.8 million, respectively. These facilities fund loan activity and are expected to be renewed or replaced at maturity.
- Inventory was $9.368 billion, up from $8.741 billion at November 30, reflecting land investment and development. Management reported no inventory impairments in the quarter, though 28 communities with 1,178 homesites and $169.8 million carrying value had potential impairment indicators.
Outlook, commentary and risks
- Management described the housing recovery as slow and steady, with pent-up demand, limited inventory, affordability and employment supporting its outlook. It expects to deliver 26,500–27,000 homes in FY2016 and expects homebuilding and Financial Services to remain the principal earnings drivers.
- Management expects lower homebuilding margins in FY2016 than in FY2015, citing cost increases outpacing selling-price increases, competition and development of previously inactive land. It also reduced expectations for Rialto earnings in FY2016 amid capital-market volatility, while noting potential investment opportunities.
- Homebuilding Houston faced weaker demand and higher cancellation rates amid energy-sector volatility; Houston’s cancellation rate was 24%, versus 26% a year earlier. Overall cancellation rate was 15%, versus 16%.
- The effective tax rate was 28.08%, versus 34.19%; an IRS settlement reduced the rate, and management did not anticipate similar settlements for the remainder of FY2016. Energy-efficient home and solar tax credits also benefited the rate.
- A Maryland property-purchase dispute remains on appeal. The trial-court ruling would require a $114 million purchase plus 12% simple interest, approximately $106 million accrued through February 29, 2016, taxes and attorneys’ fees. Lennar recorded no liability, stating it did not consider a loss probable; a $223.4 million bond was posted to stay the judgment.
- Other exposures include $1.3 billion of performance and surety bonds (including $223.4 million related to the litigation), $467.5 million of letters of credit, joint-venture commitments and completion/cost-overrun guarantees, mortgage repurchase claims, and reliance on capital-market access and warehouse facilities. Management did not anticipate material effects from potential bond or letter-of-credit draws.
- Results are seasonal and quarterly performance may vary. The filing identifies risks including housing-market or demand deterioration, land and construction-cost changes, interest rates and financing availability, inventory valuation, joint-venture performance, legal outcomes, and regulatory or tax changes.
Most important facts for investors to verify
- Whether order growth and the $2.847 billion backlog convert to deliveries at expected prices and margins, particularly in Houston.
- Whether management’s 26,500–27,000-home FY2016 delivery target remains achievable and whether margin pressure develops as forecast.
- The sources and uses of cash, inventory investment, revolving-credit borrowings and refinancing needs, including upcoming 2016 note maturities and warehouse-facility renewals.
- The appeal and potential total cost of the Maryland litigation, including interest, taxes and fees.
- Potential variability in Multifamily gains, Rialto securitization and investment results, mortgage repurchase claims, and joint-venture commitments and guarantees.
- Reconcile the filing’s differing delivery figures (4,832 versus 4,806) and average selling prices ($366,000 versus $365,000); the text presents these figures on differing bases or with rounding.