Lennar Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended August 31, 2023. Amounts are U.S. dollars; financial statement figures are unaudited. Lennar builds and sells homes and also operates financial services, multifamily and other investment businesses.
Financial performance and liquidity
- Third-quarter revenue: $8.73 billion, down 2% from $8.93 billion a year earlier. Net earnings attributable to Lennar were $1.11 billion, or $3.87 per diluted share, versus $1.47 billion, or $5.03 per diluted share.
- Homebuilding: Home-sale revenue was $8.29 billion, down 2%. Deliveries rose 8% to 18,559, while average delivered home price fell 9% to $448,000. Home-sale gross margin declined to 24.4% from 29.2%; selling, general and administrative expense was 7.0% of home-sale revenue versus 5.8%.
- Nine-month results: Revenue was $23.27 billion versus $23.50 billion; Lennar-attributable net earnings were $2.58 billion versus $3.29 billion, and diluted EPS was $8.94 versus $11.18. Homebuilding deliveries increased 6% to 49,292, but average delivered price fell 6% to $448,000. Home-sale gross margin was 22.9%, down from 28.7%.
- Cash flow: Operating cash flow for the first nine months was $2.59 billion, compared with $551 million in 2022. Investing activities used $115 million and financing activities used $3.17 billion. Cash and restricted cash ended at $4.12 billion, down from $4.82 billion at November 30, 2022.
- Debt and liquidity: Homebuilding debt was $3.32 billion, down from $4.05 billion; homebuilding cash was $3.89 billion. Homebuilding debt to total capital was 11.5%, and Lennar reported net homebuilding cash of $568 million. It had no borrowings on its revolving credit facility and cited approximately $6.5 billion of homebuilding cash and revolver availability. Financial Services had $1.02 billion of residential warehouse borrowings and $20 million of commercial warehouse borrowings.
- Other segments and margins: Third-quarter Financial Services operating earnings rose to $149 million from $63 million, supported by higher mortgage profit per locked loan, increased lock volume and title business improvements. Multifamily recorded an $8.7 million operating loss versus $48.5 million of earnings. Lennar Other recorded a $26.2 million operating loss, including $15.7 million of unrealized technology-investment losses.
Material changes versus comparable periods
- Home-sale volume increased, but lower selling prices and higher land costs reduced homebuilding margins. Lennar said pricing to market and product mix contributed to lower average prices; incentives also rose to $36,400 per delivered home in Q3, compared with $12,300 a year earlier.
- Q3 net earnings included $15.7 million of unrealized losses on publicly traded technology investments, versus $85.8 million in Q3 2022. The prior-year quarter also included a $35.5 million Financial Services litigation accrual charge and a $53.6 million tax benefit. Lennar’s adjusted comparison excluding the specified items was $3.91 diluted EPS in Q3 2023 versus $5.18 in Q3 2022.
- For the first nine months, the prior-year comparison included $559.0 million of technology-investment mark-to-market losses, while 2023 included $14.2 million. The 2023 homebuilding results also included $102.7 million of interest income and a $36.8 million impairment of a joint-venture investment.
- Cash generation improved significantly year over year, in part because 2022 operating cash flow was reduced by a $3.9 billion inventory increase. In 2023, cash was used for debt repayment, share repurchases, dividends and warehouse-facility repayments.
Outlook, management commentary and risks
- Management described housing demand as strong relative to limited supply, with affordability, mortgage rates and incentives continuing to shape sales. Its stated priorities include matching production and sales pace, reducing cycle time and costs, controlling inventory, maintaining land-light practices and emphasizing cash flow. Lennar reported 73% of its 390,765 homesites were controlled rather than owned.
- For Q4 2023, management expected 16,200–17,200 new orders, 21,500–22,500 deliveries, a 24.4%–24.6% homebuilding gross margin, and SG&A of 6.7%–6.9% of home-sale revenue. It expected average sales price to be consistent with Q3 and community count to increase by a mid-single-digit percentage year over year. Full-year delivery target: 70,800–71,800 homes, up 7%–8% year over year.
- Management said it expected similar conditions into Q4 and 2024, while noting results are seasonal and the quarter’s results are not necessarily indicative of full-year results. A proposed spin-off of Multifamily and single-family rental asset-management businesses into Quarterra was deferred due to market conditions.
- Key risks include persistent inflation and higher interest rates, reduced mortgage availability or affordability, construction labor and material costs, home-price or land-value declines, competition, and access to land and financing. The company also identifies risks from joint ventures, guarantees, weather events, regulation and refinancing needs.
- Contingencies include home warranty claims, mortgage-loan sale representations and warranties, land-option deposits, and commitments or guarantees associated with joint ventures. Lennar said ordinary-course litigation was not expected to have a material adverse effect. It reported $4.37 billion of surety bonds and $1.42 billion of performance letters of credit; estimated future costs primarily related to site improvements under performance bonds were $2.43 billion.
Important facts for investors to verify
- Whether order growth and deliveries remain on track against Q4 and full-year guidance, and how cancellations, backlog and incentives evolve.
- Whether homebuilding gross margins stabilize within the guided range as pricing, construction costs and land costs change.
- Whether strong operating cash flow continues after working-capital movements, and how management allocates cash among debt reduction, repurchases and dividends.
- How interest rates, affordability and mortgage financing affect homebuyer demand and Financial Services results.
- Potential further impairment or losses in land, joint ventures and technology investments, as well as exposures from guarantees, warranty claims and mortgage-loan repurchase requests.