Lennar Corporation — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended August 31, 2014. Lennar operates homebuilding, mortgage/title services, real-estate investment and multifamily development businesses. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
- Quarter: Revenue was $2.014 billion, up 25.7% year over year. Net earnings attributable to Lennar were $177.8 million, versus $120.7 million; diluted EPS was $0.78, versus $0.54.
- Nine months: Revenue was $5.196 billion, up 29.3%. Net earnings attributable to Lennar were $393.6 million, versus $315.6 million; diluted EPS was $1.73, versus $1.42. The 2013 comparison included a $67.1 million deferred-tax valuation allowance reversal.
- Homebuilding: Quarterly home-sales revenue rose 25%; deliveries increased 10% to 5,450 in management’s discussion, and average selling price rose 14% to $332,000. Nine-month deliveries increased 11% to 14,023, with average selling price up 15% to $325,000. Home-sales gross margin was 25.2% for the quarter and 25.3% for the nine months, compared with 24.9% and 24.0%, respectively.
- Orders and backlog: Third-quarter net new orders increased 23% to 5,889 homes. Backlog at quarter-end was 7,290 homes, valued at $2.477 billion, versus 5,958 homes and $1.919 billion a year earlier. Active communities rose to 603 from 514.
- Other segments: Financial Services operating earnings increased to $27.1 million for the quarter but declined to $49.9 million for nine months, from $68.8 million. Rialto reported $7.8 million of segment operating earnings for the quarter and $7.7 million for nine months, with $44.7 million of nine-month loan impairments. Multifamily earned $8.5 million for the quarter, partly reflecting $14.7 million of gains on two property sales; it posted a $4.9 million loss for nine months.
Cash, debt and liquidity
- Cash and cash equivalents totaled $833.5 million at August 31, 2014, down from $970.5 million at November 30, 2013. Homebuilding cash was $542.2 million.
- Operating activities used $898.5 million over nine months, primarily reflecting inventory investment and growth in loans held for sale. Investing activities provided $242.5 million and financing activities provided $519.1 million.
- Homebuilding debt was $4.693 billion, up from $4.194 billion at November 30, 2013. Homebuilding debt-to-total-capital was 50.6%; net debt-to-total-capital, a non-GAAP measure, was 47.5%.
- The company reported compliance with debt covenants. Under its credit agreement, its covenant leverage ratio was 49.2% against a 65% maximum, and liquidity was 2.01 times the required 1.00 times. The $1.5 billion revolving facility had $70 million outstanding.
- Total assets were $12.290 billion and total equity was $5.038 billion at quarter-end. Homebuilding inventory was $7.724 billion, compared with $6.601 billion at November 30, 2013.
Changes, outlook and risks
- Management characterized the housing recovery as slow and steady, supported by limited housing supply but constrained by mortgage access, down-payment requirements and limited land availability. It cited higher orders and selling prices and expected homebuilding and Financial Services to remain the main earnings drivers.
- Management said Lennar was on track to achieve another year of strong profits in fiscal 2014 and planned continued, carefully underwritten land investment. No specific full-year earnings or revenue guidance was provided.
- Homebuilding growth benefited from increased deliveries, selling prices and communities; rising labor, material and land costs partly offset margin gains. Sales incentives averaged $20,400 per home in the quarter, up from $18,700 a year earlier.
- Other notable items include $15.1 million of insurance recoveries and other nonrecurring items included in nine-month homebuilding gross margin, and higher Rialto impairments. Results may vary by quarter and are seasonal.
- A Maryland property-purchase lawsuit remained unresolved: a July 2014 court ruling said Lennar may be obligated to buy the property. The potential remaining purchase price was $114 million, with possible interest and attorneys’ fees. Lennar disputed the ruling, considered a loss not probable, and recorded no liability.
- Key risks include housing-market or mortgage-credit deterioration, cost inflation, inventory and land valuation, joint-venture obligations, debt covenant compliance, and mortgage-loan repurchase claims. Lennar reported no material change to the risk factors in its prior Form 10-K.
Investor verification priorities
- Reconcile reported deliveries across the MD&A and segment tables, and assess the sustainability of order, backlog and price growth.
- Evaluate cash consumption from inventory growth, debt maturities and refinancing needs, including the subsequent retirement of $250 million of 5.50% notes.
- Assess the quality and repeatability of margins, including insurance recoveries, property-sale gains and Rialto’s impairment assumptions.
- Monitor the Maryland litigation, joint-venture guarantees and commitments, and mortgage-loan representations-and-warranties exposure.