Lennar Corporation — Q3 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended August 31, 2019. Lennar builds and sells homes across U.S. regions and also operates financial services, multifamily and other investment businesses. Results are unaudited; the company notes that quarterly results are seasonal and may vary.
Financial performance and position
| Metric | Three months ended August 31, 2019 | Nine months ended August 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Total revenue | $5.86 billion | $15.29 billion | $5.67 billion; $14.11 billion |
| Net earnings attributable to Lennar | $513.4 million | $1.175 billion | $453.2 million; $899.7 million |
| Diluted EPS | $1.59 | $3.63 | $1.37; $2.94 |
| Homebuilding revenue | $5.44 billion | $14.26 billion | $5.29 billion; $13.01 billion |
| Homebuilding operating earnings | $659.0 million | $1.61 billion | $608.8 million; $1.45 billion |
| Operating cash flow | Not presented for the quarter | $298.3 million | $726.4 million |
Quarterly total revenue increased about 3% and Lennar-attributable earnings about 13% year over year; for the nine months, revenue rose about 8% and earnings about 31%. Home-sale gross margin was 20.4% for the quarter and 20.2% for the nine months, versus 20.3% and 18.8% in 2018. The prior-year margins included CalAtlantic purchase-accounting adjustments of $84.2 million for the quarter and $376.0 million for the nine months.
Quarterly home deliveries were 13,513 excluding unconsolidated entities, up 7%; average delivered selling price was $394,000 versus $415,000. New orders were 13,369, up from 12,319, while average order price declined to $390,000 from $412,000. Backlog was 18,908 homes, compared with 19,220 a year earlier. Incentives increased to $24,400 per delivered home from $22,900 for the quarter; management reported incentives had moderated from the second quarter.
Financial Services operating earnings were $74.7 million for the quarter and $149.9 million for the nine months, despite lower revenue following sales of most retail mortgage and title operations. Multifamily operating earnings were $10.2 million and $12.7 million, respectively. Quarter results included a $12.6 million share of gain on a property sale through an unconsolidated entity.
At August 31, 2019, total assets were $29.46 billion, total liabilities $13.99 billion and equity $15.47 billion. Inventory was $18.85 billion, up from $17.07 billion at November 30, 2018. Cash and restricted cash totaled $1.07 billion, down from $1.60 billion at fiscal year-end; Homebuilding cash was $795.4 million. Homebuilding debt was $9.08 billion, compared with $8.54 billion at fiscal year-end. Homebuilding debt to total capital was 37.1% and net Homebuilding debt to total capital 35.0%, versus 36.9% and 33.1% at fiscal year-end.
Nine-month operating cash flow fell to $298.3 million from $726.4 million, principally reflecting a $1.61 billion inventory increase, partly offset by a $528.0 million decrease in receivables. Investing activities used $39.4 million, versus $1.02 billion in 2018, when the CalAtlantic acquisition was a major use of cash. Financing activities used $785.1 million, including $500 million to redeem notes and $419.3 million for stock repurchases; $700 million of net revolving-credit borrowings partly offset outflows.
Material changes and unusual items
- Homebuilding earnings improved, but comparisons were affected by prior-year CalAtlantic purchase-accounting adjustments and $140.1 million of acquisition and integration costs in the 2018 nine-month period.
- Nine-month 2019 Homebuilding other expense included a one-time $48.9 million loss on consolidating a previously unconsolidated entity. Nine-month 2018 Homebuilding other income included a $164.9 million gain on selling an 80% interest in a strategic joint venture.
- The Financial Services segment’s retail mortgage, title and brokerage disposals reduced its revenue and transaction volumes. The title-business sale was not accounted for as a sale because Lennar provided seller financing and retained a substantial minority equity interest; the buyer’s results were consolidated.
- CalAtlantic-related synergies: management said it exceeded its initial 2018 savings expectations and remained on track for its $380 million 2019 synergy target.
Outlook, liquidity and risks
Management said housing demand improved in the quarter, supported by lower interest rates, slower price appreciation, employment and wage growth, and consumer confidence. It expected approximately 51,000 fiscal 2019 home deliveries, stable margins, further margin improvement as incentives subside, and strong cash flow for the remainder of 2019 and into 2020. Management intends to use excess cash to reduce debt while opportunistically repurchasing shares.
Lennar is pursuing a land-lighter strategy: it aims to control 40%–50% of homesite needs and reduce owned homesite supply to three years; controlled homesites were approximately 30% at quarter-end. The company reported $1.07 billion of cash and restricted cash and $700 million drawn on its revolving credit facility. Its facility commitments were $2.4 billion at quarter-end and increased by $50 million afterward. Lennar reported compliance with debt covenants at August 31, 2019.
Risks include housing-market weakness, higher construction costs, mortgage availability and interest rates, land acquisition and entitlement challenges, inventory impairment, execution of the land-lighter strategy and CalAtlantic synergies, and refinancing or joint-venture risks. Outstanding letters of credit were $863.1 million and surety bonds $2.9 billion; management did not anticipate material draws. The company reported ordinary-course legal matters not expected to materially affect its financial statements and expected a nonmaterial settlement regarding environmental compliance at a former Massachusetts development. Adoption of lease accounting in fiscal 2020 was expected to materially increase balance-sheet assets and liabilities, without a material expected effect on earnings or cash flows.
Important facts for investors to verify
- Whether delivery, order and backlog trends support the 51,000-home fiscal 2019 outlook, and how selling prices and incentives affect margins.
- Whether operating cash flow improves as inventory investment and land spending change under the land-lighter strategy.
- Debt reduction, share repurchases and liquidity trends, including availability and renewal of revolving and warehouse facilities.
- Progress toward the $380 million synergy target and the effect of business disposals and consolidation accounting on Financial Services results.
- Potential inventory impairments, joint-venture funding or guarantees, and realization of multifamily investment commitments and returns.