Lennar Corporation — Q1 2023 Form 10-Q
Business context and period: Homebuilder and related mortgage, multifamily and investment businesses. The unaudited quarter ended February 28, 2023; comparisons are with the three months ended February 28, 2022 unless noted. Results are seasonal and management cautions that this quarter is not necessarily indicative of the full year.
Financial and operating performance
- Revenue: $6.49 billion, up 4.6%. Homebuilding revenue was $6.16 billion; Financial Services $183.0 million; Multifamily $143.5 million; and Lennar Other $7.6 million.
- Earnings: Net earnings attributable to Lennar were $596.5 million, or $2.06 per diluted share, versus $503.6 million and $1.69. However, excluding technology-investment mark-to-market losses in both periods, management reported earnings of $614.8 million ($2.12 per share), down from $800.2 million ($2.70 per share).
- Margins: Home sales gross margin fell to 21.2% from 26.9%; management cited pricing to market and higher materials, labor and land costs. Homebuilding SG&A was 7.4% of home-sale revenue, versus 7.5%.
- Homebuilding activity: Deliveries increased 9% to 13,659 homes; average delivered price declined to $448,000 from $457,000. New orders were 14,194, down from 15,747; cancellation rate rose to 22% from 10%. Backlog declined to 19,403 homes worth $9.03 billion from 27,335 homes worth $13.56 billion.
- Cash flow and liquidity: Operating cash flow was positive $978.2 million, compared with negative $72.2 million. Cash, cash equivalents and restricted cash totaled $4.27 billion at quarter-end, versus $4.82 billion at November 30, 2022. Lennar had $4.06 billion of Homebuilding cash, no borrowings under its revolving credit facility, and approximately $6.7 billion of available capacity including that facility.
- Debt and capital: Homebuilding debt was $4.03 billion. Homebuilding debt-to-total-capital was 14.2%; net Homebuilding debt was negative $24.6 million, or net cash, and net debt-to-total-capital was negative 0.1%. Total liabilities were $12.02 billion and stockholders’ equity $24.42 billion.
- Other segments and unusual items: Financial Services operating earnings decreased to $78.7 million from $90.8 million, primarily on lower mortgage profit per loan. Multifamily recorded a $21.6 million operating loss versus $5.4 million of earnings. Lennar Other recorded a $24.0 million unrealized technology-investment loss, compared with a $395.2 million loss in Q1 2022; this large prior-year charge materially affects the reported earnings comparison.
Changes versus prior period
- Home-sale revenue rose on higher deliveries, but average selling price and gross margin declined as Lennar priced homes to market and costs remained elevated.
- Orders and backlog were substantially lower year over year, while cancellations increased, indicating weaker contracted demand despite higher quarterly deliveries.
- Operating cash flow improved sharply, supported by lower inventory cash investment and reduced Financial Services loans held for sale and receivables; financing cash use remained high at $1.48 billion.
- Homebuilding debt-to-capital improved from 18.3% a year earlier, while Homebuilding cash rose substantially from $1.37 billion.
Outlook, commentary and risks
- Management described 2023 as complicated and volatile, citing Federal Reserve rate increases and affordability pressure, countered by a persistent housing supply shortage. It said the market appeared to be stabilizing, but provided broad ranges rather than its prior targeted guidance.
- Q2 2023 outlook: New orders of 16,000–17,000; deliveries of 15,000–16,000; homebuilding gross margin of 21.0%–21.5%; SG&A of 7.2%–7.4% of home-sale revenue; average sales price of $435,000–$445,000; and community count flat to slightly higher year over year.
- FY 2023 outlook: Targeted deliveries of 62,000–66,000 homes. Management expects profitability to be compressed year over year, while focusing on volume, cash flow, inventory, land spending and balance-sheet strength. It expects negotiated construction-cost reductions to affect reported results in the second half of the year.
- Management’s strategy includes market-based pricing and incentives, steady production, tighter land acquisition and inventory control, construction-cost reductions, and SG&A management. It deferred the proposed Quarterra-related spin-off due to market conditions.
- Key risks include higher interest rates and reduced mortgage affordability, inflation and construction costs, supply-chain and labor constraints, housing demand and pricing, land values and impairment, access to financing, joint-venture obligations, and volatility in publicly traded investments. The filing reports no material change in risk factors beyond inflation and increased interest rates.
- Contingencies include ordinary-course construction and property litigation, mortgage-loan representation-and-warranty claims, joint-venture completion guarantees, and substantial letters of credit and surety bonds. Management did not expect current legal matters to materially adversely affect the business or financial position. It reported compliance with credit-facility covenants.
Important facts for investors to verify
- Whether order trends, cancellation rates and backlog stabilize, and whether the Q2 and full-year delivery ranges are achieved.
- Whether pricing and incentives continue to pressure margins, and whether expected construction-cost reductions arrive in the second half as management anticipates.
- How much of reported earnings and period-to-period change reflects technology-investment fair-value movements versus operating performance.
- Whether cash generation remains strong after inventory investment, share repurchases and dividends; also monitor debt maturities and available credit capacity.
- Potential exposure from land options, joint-venture guarantees, mortgage repurchase claims, and performance letters of credit and surety bonds.