Lennar Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended November 30, 2017. Lennar is primarily a U.S. homebuilder, with mortgage/title services, commercial real estate investment and finance (Rialto), and multifamily development operations. Homebuilding generated about 89% of consolidated revenue. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial and operating performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $12.65 billion | $10.95 billion |
| Earnings before income taxes | $1.19 billion | $1.33 billion |
| Net earnings attributable to Lennar | $810.5 million | $911.8 million |
| Diluted EPS | $3.38 | $3.86 |
| Cash from operating activities | $996.9 million | $507.8 million |
| Cash used in investing activities | $869.8 million | $85.8 million |
| Cash from financing activities | $1.19 billion | Cash used: $250.9 million |
| Cash and cash equivalents at year-end | $2.65 billion | $1.33 billion |
- Homebuilding: Revenue was $11.20 billion, up 15%. Deliveries rose 11% to 29,394 homes; average selling price was approximately $376,000 versus $361,000. New orders increased 11% to 30,348, and backlog grew 17% to 8,935 homes, valued at $3.55 billion. Management expected substantially all year-end backlog to deliver in FY2018.
- Margins: Home-sale gross margin declined to 22.1% from 23.0%; operating margin on home-sale revenue fell to 12.9% from 13.6%. Higher construction and land costs pressured gross margin, partly offset by higher selling prices. SG&A improved to 9.2% of home-sale revenue from 9.4%.
- Segments: Financial Services operating earnings decreased to $155.5 million from $163.6 million, mainly on weaker mortgage refinance activity. Rialto reported a $22.5 million operating loss, including substantial loan and real-estate-owned impairments. Multifamily operating earnings were $73.4 million, supported by gains from sales of seven properties through unconsolidated entities.
- Debt and liquidity: Homebuilding debt was $6.41 billion; Rialto debt was $625.1 million; and Financial Services debt was $937.4 million. The filing separately cites $6.9 billion of consolidated debt, net of issuance costs and excluding credit-facility borrowings. Homebuilding net debt-to-total-capital was 34.4%, up from 33.4%. Lennar had a $2.0 billion revolving credit facility with no borrowings outstanding and reported compliance with its covenants. Year-end cash included $1.16 billion intended for the CalAtlantic merger cash consideration.
Material changes and unusual items
- Net earnings declined despite revenue growth, reflecting lower homebuilding margins, a $140 million litigation charge, higher corporate expenses, and weaker Rialto results. Diluted EPS also declined.
- FY2017 operating cash flow improved substantially year over year, while investing outflows rose primarily because of the $611.1 million net cash acquisition of WCI and contributions to unconsolidated entities.
- Lennar acquired Florida homebuilder WCI in February 2017 for $642.6 million. WCI contributed $494.7 million of home-sale revenue and $51.7 million of pretax earnings after acquisition, including $28.1 million of transaction-related expenses.
- A Maryland property-contract lawsuit resulted in a $140 million earnings charge. Lennar purchased the property for $114 million and paid approximately $124 million in interest and other closing costs, with attorney-fee reimbursement also accrued.
- Hurricanes Harvey and Irma delayed 550 home deliveries into FY2018.
- The December 2017 Tax Cuts and Jobs Act was enacted after year-end. Lennar expected its effective tax rate to fall from about 34% to about 25% in FY2018, but anticipated a one-time, noncash deferred-tax-asset write-down of approximately $70 million in FY2018’s first quarter.
Outlook, transaction and principal risks
- Management forecast 32,000–32,500 home deliveries in FY2018, excluding CalAtlantic, and described the housing market and spring selling season positively while noting rising land, labor and material costs.
- The CalAtlantic merger remained subject to stockholder approval at the filing date and was expected to close in February 2018. Consideration included stock and up to $1.16 billion in cash. Management projected approximately $100 million of FY2018 synergies and $365 million annually thereafter; these benefits were not assured.
- Management estimated the merger could raise homebuilding net debt-to-total-capital from 34.4% to 45.5%, with a goal of returning to the pre-merger level by the end of FY2019. CalAtlantic had $3.8 billion of debt as of September 30, 2017. Integration, financing, timing and synergy realization were significant risks.
- Near-term refinancing needs include senior-note maturities and renewal or replacement of mortgage and Rialto warehouse facilities. Lennar also disclosed $511.8 million of letters of credit and $1.3 billion of surety bonds outstanding.
- Other key risks include housing-market or land-value declines, affordability and mortgage availability, cost inflation and skilled-labor shortages, warranty/construction claims, weather events, joint-venture commitments and contingent guarantees. The DOJ had requested information about FHA-loan underwriting and quality controls; it had not asserted damages or penalties as of the filing.
- Management also anticipated a one-time, non-core transaction in FY2018’s first quarter that it expected to generate a profit; the filing does not provide a clear value for that expected profit.
Investor facts to verify
- Whether the CalAtlantic merger closed as expected, the final consideration and debt assumed, and realized cost savings versus management’s estimates.
- FY2018 deliveries, backlog conversion, home-sale margins, and the extent to which labor, materials and land costs affect profitability.
- Actual FY2018 tax rate and the timing and amount of the deferred-tax charge and anticipated one-time transaction gain.
- Debt maturities and warehouse-facility renewals, post-merger leverage and covenant headroom, and the availability of cash not earmarked for the merger.
- Developments in the FHA-loan inquiry, mortgage repurchase claims, warranty reserves, and the Maryland litigation-related costs.