Lennar Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended May 31, 2022. Comparisons are with the corresponding 2021 periods unless stated otherwise. Lennar builds and sells homes, and also operates mortgage and title services, multifamily development, and investment businesses.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $8.36 billion | $6.43 billion | $14.56 billion | $11.76 billion |
| Net earnings attributable to Lennar | $1.321 billion | $831 million | $1.824 billion | $1.833 billion |
| Diluted EPS | $4.49 | $2.65 | $6.16 | $5.85 |
| Home-sales gross margin | 29.5% | 26.1% | 28.4% | 25.6% |
| Homebuilding SG&A as % of home-sale revenue | 6.1% | 7.6% | 6.7% | 8.0% |
| Operating cash flow | Not reported separately for the quarter | Not reported separately for the quarter | $53 million | $718 million |
- Homebuilding: Q2 home-sale revenue rose 33% to $8.0 billion, driven by 14% more deliveries (16,549) and a 17% higher average sale price ($483,000). Six-month deliveries increased 9% to 29,087 and average price rose 16% to $472,000.
- Cash flow and investment: Six-month operating cash flow fell to $53 million, principally as inventory increased by $3.1 billion amid land purchases, development and construction. Investing activities used $65 million.
- Liquidity and debt: Cash and restricted cash totaled $1.55 billion at May 31, down from $2.96 billion at November 30, 2021. Homebuilding debt was $4.65 billion; homebuilding cash was $1.31 billion. Homebuilding debt-to-total-capital was 17.7%, and net homebuilding debt-to-total-capital was 13.4%. Lennar had no borrowings on its $2.575 billion revolving facility and reported $3.9 billion of available capacity including homebuilding cash.
- Capital returns: Lennar repurchased $906 million of stock and paid $221 million in dividends during the six months. The quarterly dividend was $0.375 per share.
Changes and unusual items
- Despite higher revenue and homebuilding earnings, six-month net earnings attributable to Lennar were slightly lower year over year. Lennar Other recorded $473 million of technology-investment mark-to-market losses in the first half of 2022, compared with $197 million of gains in 2021. Q2 losses were $78 million in 2022 versus $273 million in 2021.
- The 2021 comparison included a $151.5 million gain on the sale of the residential solar business. Management presented adjusted Q2 net earnings, excluding technology mark-to-market effects and the prior-year solar-sale gain, of $1.4 billion, or $4.69 per diluted share, versus $924 million, or $2.95, in Q2 2021.
- Financial Services operating earnings declined to $104 million in Q2 from $121 million, and to $195 million for the first half from $268 million, mainly due to lower mortgage margins and increased competition. Multifamily operating earnings were $0.7 million in Q2 and $6.1 million for the first half, both below the prior-year periods.
- Homebuilding gross margins improved year over year, while management cited higher material and labor costs. Six-month operating cash flow was weighed down by inventory growth; total inventories were $22.1 billion at May 31, versus $18.7 billion at November 30.
Outlook, commentary and risks
- Management said rising mortgage rates, rapid price appreciation and negative economic headlines had begun to weaken traffic and orders in many markets after quarter-end. Lennar increased incentives, offered mortgage-rate buydowns and adjusted prices; it reported that price changes had produced sales upticks.
- For Q3 2022, Lennar forecast 16,000–18,000 new orders, 17,000–18,500 deliveries, homebuilding gross margins of 28.5%–29.5%, and SG&A of 6.0%–6.5% of home-sale revenue. Management said uncertainty made the ranges broader than usual.
- The company aimed for 2.75 years of owned land supply and 65% controlled homesites by year-end. At May 31, it reported 3.1 years of owned supply and 62% of homesites controlled, up from 3.3 years and 50% a year earlier.
- Lennar expected to complete a spin-off by year-end of asset-management businesses, including multifamily, single-family rental and land-related strategies, through Quarterra. Management estimated the transaction would remove $2.5 billion of assets without materially affecting earnings.
- Key risks include higher interest rates and inflation, reduced housing affordability and mortgage availability, construction labor and material costs, supply-chain and permitting constraints, possible home-price and land-value declines, and volatility in publicly traded technology investments. The filing also describes mortgage-loan representation-and-warranty claims, warranty obligations, joint-venture commitments and guarantees, and land-option exposure. Management did not expect ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- Whether post-quarter order, traffic, cancellation and incentive trends support the Q3 order and delivery outlook.
- Whether home-sale margins hold within guidance as Lennar adjusts pricing and absorbs labor and material costs.
- How inventory growth and land spending affect operating cash flow, liquidity and net homebuilding leverage.
- The size and earnings impact of further technology-investment valuation changes, and the comparability of reported earnings with 2021’s investment gains and solar-sale gain.
- Progress, timing and final terms of the planned Quarterra spin-off, including the assets and liabilities transferred.
- Exposure to land options, joint-venture guarantees, warranty claims and mortgage-loan repurchase requests; the filing does not provide a clear estimate of ultimate losses for these contingencies.