Lennar Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended August 31, 2011; unaudited. Lennar operates homebuilding, mortgage and title services, and Rialto real estate investment businesses.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $820.2 million | $825.0 million | $2,142.7 million | $2,213.9 million |
| Net earnings attributable to Lennar | $20.7 million | $30.0 million | $61.9 million | $63.2 million |
| Diluted EPS | $0.11 | $0.16 | $0.33 | $0.34 |
| Homebuilding gross margin on home sales | 21.1% | 21.1% | 20.2% | 20.4% |
- Cash flow: Operating activities used $115.6 million in the first nine months, versus $189.1 million provided in 2010. Investing activities used $161.6 million and financing activities used $189.6 million.
- Cash and liquidity: Cash and cash equivalents totaled $927.3 million at August 31, 2011, including $800.3 million in Homebuilding. Homebuilding cash was down from $1,207.2 million at November 30, 2010. Lennar cited $325 million of maximum warehouse financing commitments for Financial Services, including an additional $50 million that was uncommitted.
- Debt and equity: Homebuilding debt was $3.128 billion; Rialto notes payable were $765.9 million; Financial Services debt was $215.4 million. Homebuilding net debt to total capital was 46.6%, up from 42.4% at November 30, 2010. Total assets were $8.724 billion, total liabilities $5.444 billion, and total equity $3.280 billion.
- Homebuilding activity: Deliveries totaled 2,865 homes in Q3, compared with 2,950; average selling price was $252,000 versus $244,000. Net new orders rose 11% to 2,914 homes. Backlog increased to 2,519 homes valued at $642.8 million, from 2,173 homes valued at $569.3 million.
- Segment results: Q3 operating earnings were $27.1 million for Homebuilding, $8.0 million for Financial Services, and $11.7 million for Rialto. For nine months, respective results were $83.8 million, $11.7 million, and $57.4 million.
Changes versus comparable periods
- Q3 revenue was nearly flat year over year, while Lennar-attributable earnings fell about 31%, mainly reflecting weaker Homebuilding equity earnings from unconsolidated entities, higher interest expense, and lower Rialto earnings; Financial Services earnings improved.
- Nine-month revenue declined about 3%, with home deliveries down 5%. Homebuilding gross margin percentage edged lower, and incentives rose to 12.1% of home-sales revenue from 11.7%.
- Nine-month Rialto operating earnings increased to $57.4 million from $32.2 million, aided by higher revenue and gains associated with foreclosures. Financial Services earnings fell from $19.6 million, primarily on lower mortgage volume.
- Homebuilding cash fell substantially from fiscal year-end, while Homebuilding debt was broadly unchanged. Operating cash flow turned negative, partly reflecting strategic land purchases, increased other assets including loans receivable, and lower accounts payable and other liabilities. The prior-year period benefited from a $323.7 million tax refund.
Outlook, commentary, risks, and unusual items
- Management said new-home demand was slowly returning, supported by low prices and low interest rates, but remained constrained by tight credit, unemployment, and weak consumer confidence. It expected favorable Q4 year-over-year sales comparisons if the current pace continued, and said Lennar was positioned to be profitable in Q4 and for the year. These are forward-looking statements, not guarantees.
- Management cited strategic land investment, higher-margin new communities, its Everything’s Included program, product re-engineering, and expense control as supporting profitability. It expected Rialto to remain profitable but noted possible earnings volatility tied to transactions and investments.
- Q3 incentives averaged $33,600 per home, or 12.0% of home-sales revenue, versus $30,600 and 11.3% a year earlier. Cancellations were 20%, compared with 18%.
- Results included several significant items: a $37.5 million cash litigation settlement; a $15.4 million share of a joint-venture debt-extinguishment gain; $10.0 million of previously deferred management fees; an $8.1 million homebuilding cost-to-complete benefit; and a $10.1 million Q3 unrealized loss on the PPIP investment. Rialto also recorded $56.9 million of nine-month gains primarily from real estate acquired through foreclosure.
- Management reported persistently depressed demand in some communities and warned that further housing-market deterioration could create pricing pressure, slower sales absorption, and additional inventory or investment write-downs. Total nine-month valuation adjustments and write-offs were $40.1 million.
- Key exposures include guarantees on unconsolidated homebuilding ventures: maximum recourse exposure was $156.4 million and net exposure after partner reimbursement agreements was $99.3 million. The filing also reports $639.9 million of performance and surety bonds, with about $315.9 million of related work remaining; management did not anticipate material draws.
- Other risks include mortgage-loan repurchase claims, refinancing or renewal of warehouse facilities, and estimates for distressed Rialto loans and real estate. The deferred tax asset valuation allowance remained $592.8 million. Lennar had accrued $82.2 million for Chinese drywall remediation over time; the remaining reserve after payments was $11.3 million, and further inspections could require additional accruals.
Important facts for investors to verify
- Whether order growth and backlog convert into deliveries and cash generation, particularly given higher cancellations and incentives.
- How much reported earnings depended on settlements, valuation changes, foreclosure gains, and other nonrecurring or estimate-sensitive items.
- Homebuilding debt, declining cash, negative operating cash flow, and the timing and availability of Financial Services warehouse facilities.
- Potential losses or funding requirements from joint-venture guarantees, surety bonds, loan repurchase claims, and Rialto’s distressed-asset portfolios.
- Whether market weakness leads to further inventory impairments, and whether deferred tax assets can ultimately be realized.