Lennar Corporation — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended August 31, 2022. Lennar builds and sells homes and operates mortgage/title, multifamily, and other investment businesses. Comparisons below are year over year unless stated otherwise.
Financial and operating results
- Q3 revenue: $8.93 billion, up 28.7%; homebuilding revenue was $8.48 billion.
- Q3 earnings: Net earnings attributable to Lennar were $1.47 billion, or $5.03 diluted EPS, versus $1.41 billion and $4.52. Results included $85.8 million of unrealized technology-investment losses, a $35.5 million Financial Services litigation accrual, and a $53.6 million tax benefit. Lennar reported adjusted Q3 earnings of $1.5 billion, or $5.18 diluted EPS, excluding technology mark-to-market changes and specified current-year items.
- Homebuilding: Q3 deliveries rose 13% to 17,248 homes; average selling price rose 15% to $491,000. Home-sale gross margin improved to 29.2% from 27.3%. SG&A was 5.8% of home-sale revenue, versus 7.0%.
- Nine-month results: Revenue was $23.50 billion, versus $18.70 billion; net earnings attributable to Lennar were $3.29 billion, versus $3.24 billion. Diluted EPS was $11.18, versus $10.36. Home-sale gross margin was 28.7%, versus 26.2%.
- Orders and backlog: Q3 net new orders fell 12% to 14,366 homes; cancellation rate rose to 21% from 10%. Quarter-end backlog was 25,734 homes, approximately flat year over year, with value of $12.89 billion.
- Cash flow: Operating cash flow for the first nine months was $551 million, down from $1.31 billion, primarily reflecting a $3.9 billion inventory increase. Investing activities used $131 million; financing activities used $1.82 billion. Cash and restricted cash ended at $1.55 billion, versus $2.96 billion at November 30, 2021.
- Debt and liquidity: Homebuilding debt was $4.06 billion; homebuilding debt-to-total-capital was 15.0%, down from 18.3% at fiscal year-end 2021. Net homebuilding debt-to-total-capital was 10.7%, up from 8.4%. Lennar had $1.3 billion of homebuilding cash and no borrowings under its $2.575 billion revolving facility, for stated available capacity of $3.9 billion. Total liabilities were $12.21 billion and equity was $23.13 billion.
Material changes and management commentary
- Higher home prices and delivery volume supported revenue and homebuilding margins, while material and labor costs continued to rise. Q3 average buyer incentives increased to $12,300 per delivered home, or 2.5% of home-sale revenue, from $7,300 and 1.7% a year earlier.
- Management said mortgage rates had more than doubled in recent months and housing demand was weakening. It cited nine markets performing well, 22 requiring significant price adjustments, and seven with more pronounced softening.
- Lennar said it was using mortgage buydowns, incentives, and price adjustments to support sales; selectively acquiring land; and emphasizing inventory discipline and cost control. Controlled homesites were 63% of total, versus 53% a year earlier; owned land supply was 2.9 years, versus 3.3.
- Management chose debt retirement over stock repurchases during Q3, while indicating repurchases could resume when opportunities arise. The company redeemed $575 million of 4.75% notes due November 2022 early and extended and increased its revolving credit facility.
- Lennar continued preparing to spin off asset-management businesses and certain non-core assets; timing and completion were not assured in the filing.
Outlook, risks, and unusual items
- Q4 2022 outlook: New orders of 14,000–15,500 homes; deliveries of 20,000–21,000; homebuilding gross margin of 26.0%–27.0%; and SG&A of 5.7%–5.9% of home-sale revenue. Management expected Q4 ending community count to rise about 5% from Q3 and to increase further in 2023, subject to market conditions.
- Key risks include higher interest rates and reduced buyer affordability, inflation, construction-material and labor constraints, weaker demand, mortgage-market competition, land and inventory valuation risk, and potential changes in access to financing. Management cautioned that market uncertainty made its outlook ranges broad.
- Financial Services earnings included a $35.5 million increased litigation accrual related to a court judgment; Lennar said it was appealing, citing alleged errors of law. The filing also describes ordinary-course litigation and warranty claims, which management did not expect to materially adversely affect the company.
- Technology-investment fair-value volatility was significant: Lennar Other recorded Q3 unrealized losses of $85.8 million, compared with gains of $493.7 million in Q3 2021; nine-month losses were $559.0 million, versus gains of $690.8 million.
Important facts for investors to verify
- Whether orders, cancellations, incentives, and price reductions indicate further deterioration in housing demand, and whether Q4 guidance is achieved.
- Whether homebuilding margins hold as incentives rise and material, labor, and financing costs change.
- Inventory growth, operating cash generation, and the effect of land commitments and consolidated inventory not owned on liquidity.
- The outcome and potential financial impact of the appealed judgment and other litigation, warranty, and repurchase-related claims.
- Technology-investment valuations, the proposed spin-off’s scope and timing, and the company’s future balance among debt reduction, dividends, and share repurchases.