Lennar Corporation — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2018. The filing also reports fourth-quarter results. Lennar is primarily a U.S. homebuilder, with mortgage and title services, multifamily development, and legacy Rialto investments. CalAtlantic was acquired on February 12, 2018; its inclusion materially increased reported scale and affects year-over-year comparisons.
Financial and operating performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $20.57 billion | $12.65 billion |
| Net earnings attributable to Lennar | $1.70 billion | $810.5 million |
| Diluted earnings per share | $5.44 | $3.38 |
| Cash from operating activities | $1.71 billion | $996.9 million |
| Cash and cash equivalents, year-end | $1.56 billion | $2.65 billion |
| Home deliveries, including unconsolidated entities | 45,627 | 29,394 |
| Home sales contract backlog value | $6.57 billion | $3.55 billion |
Revenue increased 63%, primarily reflecting CalAtlantic and higher deliveries. The average delivered home price, excluding unconsolidated entities, rose to $413,000 from $376,000. New orders increased to 45,826 from 30,348; the cancellation rate was 15% in both years.
Homebuilding gross margin was 19.6%, down from 22.1%; excluding a $414.6 million CalAtlantic purchase-accounting write-up on acquired homes delivered, it was 21.8%. Homebuilding SG&A was 8.5% of home sales revenue, improving from 9.2%. Management cited construction-cost increases as a margin headwind. The filing separately reports a 13.3% operating margin excluding the backlog/construction-in-process write-up; its reported homebuilding operating margin as a percentage of home sales revenue was 11.1%, versus 12.9% in 2017.
Fourth-quarter revenue was $6.46 billion and net earnings attributable to Lennar were $796.1 million, or $2.42 diluted EPS. In fourth-quarter 2017, revenue was $3.79 billion, earnings were $309.6 million, and diluted EPS was $1.29.
Cash from investing activities was an outflow of $608.1 million, including the $1.10 billion net CalAtlantic acquisition outlay, partly offset by asset-sale proceeds and distributions. Financing activities used $2.20 billion, including debt repayments and $299.8 million of stock repurchases. Lennar Homebuilding debt was $8.54 billion, versus $6.41 billion; its debt-to-total-capital ratio was 36.9%, down from 44.9%, and net debt-to-total-capital was 33.1%, versus 34.4%. The $2.6 billion revolving credit facility had no borrowings outstanding at year-end. The company reported compliance with its covenants and a liquidity-test result of 3.30 against a 1.00 minimum.
Material changes and unusual items
- CalAtlantic contributed $7.0 billion of homebuilding revenue from acquisition through year-end. The acquisition’s provisional purchase-price allocation included approximately $3.3 billion of homebuilding goodwill; integration and acquisition costs were $153.0 million.
- Lennar sold its Rialto investment and asset management platform for $340 million on November 30, 2018, recognizing a $296.4 million gain. It retained RMF, fund investments of $297.4 million, carried-interest rights, and commitments to invest up to a further $71.6 million.
- A $164.9 million gain from selling an 80% interest in Treasure Island Holdings also contributed to 2018 results.
- The 2018 effective tax rate was 24.3%, compared with 34.0%. Tax reform reduced the federal corporate rate, but Lennar recorded a non-cash, one-time $68.6 million deferred-tax-asset write-down.
- Multifamily operating earnings fell to $42.7 million from $73.4 million, partly because gains on property sales were lower and Lennar shifted toward building and holding rental properties.
- After year-end, Lennar sold most of its retail title business and its title insurer, sold its Florida real estate brokerage business, and contracted to sell residential mortgage lending to non-Lennar buyers. It authorized a new share-repurchase program for up to the lesser of $1 billion or 25 million shares.
Outlook, risks and contingencies
Management said sales and traffic slowed in the second half of 2018 as home prices and mortgage rates rose, describing the market as a “natural pause.” It reported improved traffic as rates eased near year-end and expected employment, wage growth, confidence, and a long-term housing-production deficit to support demand. Management forecast more than 50,000 home deliveries in fiscal 2019 and expected another year of strong profitability; these are forward-looking expectations, not guarantees.
Management prioritized cash generation, debt reduction, and potential share repurchases. It reported that about 25% of homesites were controlled through options or similar arrangements, with a goal of exceeding 40% over several years. Substantially all year-end backlog was expected to be delivered in fiscal 2019.
- Key risks include further housing-demand weakness, higher mortgage rates, affordability pressure, and inability to pass labor and material inflation through to buyers. The filing cites labor shortages and tariffs on Canadian lumber and other imported materials.
- Homebuilding is exposed to land and inventory impairment, option-deposit losses, weather and natural disasters, entitlement and regulatory delays, construction defects, warranty claims, and joint-venture partner or financing risks. Year-end warranty reserves were $319.1 million, including $141.0 million assumed in the CalAtlantic acquisition.
- Fiscal 2019 includes significant refinancing needs. The filing identifies $1.1 billion of senior notes maturing and warehouse facilities requiring renewal or replacement; management said it expected to refinance or replace facilities as they matured. Failure to do so could constrain mortgage operations or liquidity.
- Outstanding letters of credit were $763.8 million and surety bonds were $2.7 billion; management did not anticipate material draws. Lennar also disclosed ordinary-course litigation and claims. It paid non-material sanctions and restitution in October 2018 to resolve a DOJ inquiry into FHA-loan processes; expected San Ramon environmental sanctions were not considered material.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Investor facts to verify
- Whether CalAtlantic integration delivers the expected synergies, and how much reported earnings reflect acquisition-related accounting adjustments and asset-sale gains.
- Whether the 2019 delivery outlook is achieved as demand, mortgage rates, sales incentives, and order trends evolve.
- Whether construction-cost inflation stabilizes and homebuilding margins improve, including the distinction between reported and purchase-accounting-adjusted margins.
- How the company funds and refinances 2019 maturities, renews warehouse facilities, and balances debt reduction with repurchases.
- Whether the land-option strategy increases cash generation without materially increasing deposits at risk, and whether inventory or joint-venture impairments arise.
- The final CalAtlantic purchase accounting and goodwill allocation, as well as the results and obligations remaining after the Rialto and financial-services divestitures.