Lennar Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended November 30, 2019. Lennar is a U.S. homebuilder with mortgage and title services, commercial mortgage origination, multifamily development, and retained investments. Homebuilding generated about 93% of FY2019 revenue. This is an annual filing; fourth-quarter figures are noted separately.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $22.26 billion | $20.57 billion |
| Net earnings attributable to Lennar | $1.85 billion | $1.70 billion |
| Diluted EPS | $5.74 | $5.44 |
| Operating cash flow | $1.48 billion | $1.69 billion |
| Cash and restricted cash at year-end | $1.47 billion | $1.60 billion |
| Homebuilding debt | $7.78 billion | $8.54 billion |
- Home deliveries, including unconsolidated entities, increased 13% to 51,491; average delivered price declined 3% to $400,000. Home sale revenue rose 9% to $20.6 billion.
- Home sale gross margin was 20.6%, versus 19.6% reported in 2018. The 2018 figure included a $414.6 million CalAtlantic purchase-accounting write-up; excluding that effect, 2018 gross margin was 21.8%.
- Selling, general and administrative expense improved to 8.3% of home sale revenue from 8.5%; operating margin on home sale revenue rose to 12.3% from 11.1%.
- Financial Services operating earnings increased to $224.6 million from $199.7 million despite lower revenue, supported by mortgage performance, higher capture of Lennar buyers and lower origination costs. Mortgage capture was 76%, versus 73%.
- Multifamily operating earnings fell to $16.4 million from $42.7 million, as gains on property sales were lower. Lennar Other moved from a $33.7 million operating loss to $31.5 million of earnings.
- Homebuilding net debt to total capital improved to 29.2% from 33.1%. The $2.5 billion revolving credit facility was undrawn at year-end; the company reported compliance with its covenants.
- Fourth-quarter revenue was $6.97 billion and net earnings attributable to Lennar were $674.3 million, compared with $6.46 billion and $796.1 million, respectively, in Q4 2018.
Changes, strategy and outlook
- Compared with FY2018, revenue and deliveries grew, while average selling price declined as Lennar shifted toward entry-level buyers. FY2018 also included a $296.4 million gain on the Rialto platform sale and $153.0 million in CalAtlantic acquisition and integration costs.
- Cash from operations decreased to $1.48 billion, principally reflecting inventory investment and increased Financial Services loans held-for-sale. Financing cash outflow was $1.63 billion, including $1.1 billion of senior-note redemptions and $523.1 million of share repurchases.
- Lennar continued its land-light strategy: controlled homesites rose to 33% of total homesites from 25% a year earlier. Management targeted 50% controlled versus owned by FY2021 and a reduction in years-owned homesite supply to three years by then.
- Management expected 54,000–55,000 home closings in FY2020, gross margins broadly consistent with FY2019, strong cash flow, debt reduction and shareholder returns. It cautioned that average selling price may decline; its plan assumed flat construction cost per square foot alongside smaller average homes and greater delivery volume.
- The board increased the annual dividend to $0.50 per share in January 2020, from $0.16. Management also cited technology-driven cost and customer-experience improvements; fourth-quarter mortgage origination cost fell to about $5,600 per loan from $8,400 a year earlier.
Risks, contingencies and unusual items
- Housing demand is sensitive to economic conditions, mortgage rates, credit availability and consumer confidence. Labor and material inflation, tariffs, supply constraints, severe weather and construction delays may pressure margins and deliveries.
- Land inventory and option deposits are exposed to market declines and impairment. Lennar reported a $48.9 million one-time loss after consolidating a previously unconsolidated homebuilding entity; management’s fair-value assessment involved significant estimates.
- Debt refinancing is a key liquidity consideration: FY2020 included $600 million of senior notes maturing, and Financial Services warehouse facilities totaling approximately $2.7 billion were due for renewal or replacement. The company expected to refinance or replace them.
- Outstanding letters of credit were $899.9 million and surety bonds were $2.9 billion; management did not anticipate material draws. Homebuilding JV maximum recourse debt exposure was $10.8 million. Multifamily ventures carry completion and cost-overrun guarantees and remaining Lennar equity commitments.
- Ordinary-course construction defect, real estate and mortgage repurchase/warranty claims remain possible. A Massachusetts environmental matter was expected to settle for an amount management did not consider material. Management did not expect pending claims or litigation to have a material adverse effect.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The audit highlighted judgment in VIE consolidation and valuation, including the entity consolidation loss.
Most important facts for investors to verify
- Whether FY2020 closings, gross-margin assumptions and cash-flow expectations were achieved, particularly given lower expected selling prices and cost pressures.
- Progress toward the land-light targets, and the cash, deposit and impairment risks associated with owned and optioned homesites.
- How the $600 million note maturity and Financial Services warehouse facilities were refinanced or renewed, and any subsequent change in liquidity or borrowing costs.
- Underlying margin comparability after adjusting for the FY2018 CalAtlantic purchase-accounting write-up, and the recurrence of asset-sale or other unusual gains and losses.
- Changes in backlog, cancellation rates, mortgage capture and JV commitments or guarantees; FY2019 backlog was $6.3 billion and the cancellation rate was 16%, versus 15% in FY2018.