Lennar Corporation — FY2022 Form 10-K
Business context and reporting period. Lennar filed its annual report for the fiscal year ended November 30, 2022. Homebuilding generated approximately 95% of consolidated revenue. The company also operates mortgage, title and closing services, multifamily development and investment businesses, and a portfolio of technology and other investments. Fiscal 2022 includes a sharp housing-market slowdown in the second half.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $33.67 billion | $27.13 billion |
| Net earnings attributable to Lennar | $4.61 billion | $4.43 billion |
| Diluted EPS | $15.72 | $14.27 |
| Cash provided by operating activities | $3.27 billion | $2.53 billion |
| Cash and restricted cash at year-end | $4.82 billion | $2.96 billion |
| Total assets | $37.98 billion | $33.21 billion |
| Total liabilities | $13.74 billion | $12.21 billion |
- Homebuilding: Home-sale revenue rose 25% to $31.78 billion, reflecting 66,399 deliveries, up 11%, and a 13% increase in average delivered price to $480,000. Home-sale gross margin was 27.5%, or 27.7% before impairments, versus 26.8% in FY2021. SG&A fell to 6.2% of home-sale revenue from 7.1%.
- Orders and backlog: Net new orders declined to 61,105 homes from 64,543; year-end backlog fell to 18,869 homes valued at $8.74 billion from 23,771 homes and $11.36 billion. Cancellation rate increased to 17% from 10%, reaching 21% in Q3 and 26% in Q4; management said it peaked in October and declined in November.
- Other segments: Financial Services operating earnings were reported as $383.3 million in the segment table; management cited lower mortgage margins and a $35.5 million litigation-accrual charge. Multifamily operating earnings rose to $69.5 million from $21.5 million. Lennar Other recorded a $734.6 million operating loss, principally reflecting $655.1 million of unrealized losses on publicly traded technology investments; FY2021 had a $510.8 million unrealized gain and a solar-business sale gain.
- Profitability and cash: Pretax earnings were $6.01 billion versus $5.82 billion. The effective tax rate declined to 22.8% from 23.5%, partly due to a tax-position resolution and reinstated energy-efficient home credits. Operating cash flow increased year over year, despite a $2.38 billion inventory increase, and benefited from earnings and higher payables and other liabilities.
- Debt and liquidity: Homebuilding debt was $4.05 billion, down from $4.65 billion. Homebuilding debt-to-total-capital improved to 14.4% from 18.3%; net homebuilding debt was negative $569 million, indicating homebuilding cash exceeded homebuilding debt. Lennar had $4.62 billion of homebuilding cash and no borrowings on its $2.6 billion revolving facility, which management described as $7.2 billion of available capacity including cash. Total reported debt across segments was $6.20 billion, including Financial Services warehouse-related borrowings.
- Capital returns: Lennar repurchased $1.04 billion of stock and paid $438 million in dividends during FY2022. Annual dividends per share increased to $1.50 from $1.00.
Material changes versus FY2021
- Revenue increased 24% and net earnings attributable to Lennar increased about 4%; diluted EPS rose about 10%.
- Housing-market conditions weakened as mortgage rates rose. Incentives increased to $17,300 per delivered home, or 3.5% of home-sale revenue, from $9,000 and 2.1%.
- Land-sale results shifted from a $24.3 million gross margin to a $28.5 million gross loss, including $47.9 million of deposit and pre-acquisition-cost write-offs after Lennar walked away from 42,000 controlled homesites. Homebuilding inventory impairments were recorded in nine communities; the filing also reports impairments to homes in backlog.
- Homesites controlled through options and joint ventures increased to 63% from 59%; owned homesite supply declined to 2.5 years from 3.0 years.
- Debt reduction and stronger earnings improved homebuilding leverage, while cash and operating cash flow increased. Technology-investment mark-to-market results swung materially from gains to losses.
Outlook, risks and contingencies
- For Q1 FY2023, management forecast 12,000–13,500 new orders and 12,000–13,500 deliveries; gross margin of about 21%; SG&A of about 8% of home-sale revenue; and average selling price of $440,000–$450,000. It projected FY2023 deliveries of 60,000–65,000 homes. These are management estimates, not guarantees.
- Management expects lower national single-family and multifamily production in 2023, and said uncertainty made precise full-year guidance difficult. Its stated priorities include pricing to sustain sales pace, negotiating lower trade-partner costs, pacing starts to sales, cutting SG&A, limiting land purchases, reducing construction cycle times and protecting cash and the balance sheet.
- The planned spin-off of multifamily and single-family rental asset-management businesses into Quarterra was postponed because market conditions were unfavorable; timing and completion remain uncertain.
- Principal risks include further housing-demand deterioration, higher mortgage rates, affordability pressure, price reductions, labor and material costs or shortages, construction delays, inventory and land impairments, option-deposit losses, and elevated cancellations. Weather events, regulatory and environmental requirements, warranty and construction-defect claims, insurance availability, mortgage-funding access, refinancing and joint-venture obligations also pose risks.
- At year-end, Lennar had $2.0 billion of non-refundable land-option deposits and pre-acquisition costs, $1.8 billion of letters of credit and $4.1 billion of surety bonds. The company reported $2.3 billion of anticipated future costs associated primarily with site improvements covered by performance surety bonds. Management did not expect bond or letter-of-credit draws to have a material effect, but actual outcomes could differ.
- Ordinary-course litigation was not expected by management to have a material adverse effect. A $35.5 million Financial Services litigation accrual was recorded for a court judgment that Lennar said it had appealed. Mortgage-loan sales also carry limited representation-and-warranty recourse exposure.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls. The audit highlighted judgment involved in assessing consolidation of variable-interest joint ventures.
Important facts for investors to verify
- Whether orders, cancellations, backlog conversion and pricing support the projected FY2023 delivery range and margins.
- How rapidly incentives, construction costs and cycle times change, and whether lower starts translate into trade-partner cost reductions.
- Whether inventory and land-option valuations require further impairment charges or deposit write-offs as local markets adjust.
- The sustainability of operating cash flow, homebuilding net-cash position, debt reduction and planned capital returns amid slower sales.
- Renewal or replacement of Financial Services warehouse facilities and refinancing of scheduled corporate debt maturities.
- The status and expected economics of the Quarterra spin-off, and potential impacts on synergies, debt guarantees and Lennar’s remaining business mix.
- Changes in fair values of technology investments, warranty and self-insurance reserves, litigation exposures, and joint-venture completion guarantees.