Lennar Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended May 31, 2014. Comparisons are with the corresponding 2013 periods unless stated otherwise. Lennar operates homebuilding, financial services, Rialto Investments and multifamily businesses.
Financial performance and key metrics
| Metric | Three months ended May 31 | Six months ended May 31 |
|---|---|---|
| Total revenue | $1.819 billion, versus $1.427 billion | $3.182 billion, versus $2.417 billion |
| Net earnings attributable to Lennar | $137.7 million, versus $137.4 million | $215.8 million, versus $194.9 million |
| Diluted EPS | $0.61, versus $0.61 | $0.95, versus $0.88 |
| Earnings before income taxes | $203.6 million, versus $162.3 million | $329.5 million, versus $215.6 million |
| Homebuilding gross margin on home sales | 25.5%, versus 24.1% | 25.3%, versus 23.3% |
| Cash flow from operations | Cash used: $721.7 million, versus $609.9 million |
- Second-quarter homebuilding revenue was $1.635 billion. Deliveries excluding unconsolidated entities rose 12% to 4,976; average delivered home price increased 14% to $322,000. Incentives averaged $20,300 per delivery, or 5.9% of home-sales revenue.
- New orders increased 8% to 6,183 homes in the quarter. Backlog at May 31 was 6,858 homes valued at $2.350 billion, up 11% in units and 26% in value year over year. Cancellation rate was 15%, versus 14%.
- At May 31, cash and cash equivalents were $960.2 million, including $627.6 million in Homebuilding. Total assets were $11.995 billion; inventories were $7.395 billion, up from $6.601 billion at November 30, 2013.
- Homebuilding debt was $4.683 billion, up from $4.194 billion at November 30. Homebuilding debt-to-total-capital was 51.6%; net debt-to-total-capital was 48.0%, versus 45.6% at November 30.
- There were no borrowings under the $950 million unsecured revolving credit facility at May 31. The company reported covenant leverage of 49.7% against a 65% maximum and liquidity coverage of 2.36x against a 1.00x minimum.
- Cash dividends were $0.04 per share per quarter. Six-month operating cash use was driven chiefly by a $981.1 million increase in inventories, including strategic land investment.
Material changes and segment results
- Homebuilding operating earnings rose to $234.5 million in the quarter from $159.8 million; six-month earnings rose to $396.7 million from $230.5 million. Improved home prices, lower incentives as a share of revenue, and a larger mix of newer, higher-margin communities supported margins.
- Financial Services operating earnings fell to $18.3 million in the quarter from $29.2 million, and to $22.8 million for six months from $45.3 million. Management cited reduced refinance activity, lower transaction volumes and more competitive mortgage conditions.
- Rialto reported a $3.7 million segment operating loss in the quarter and a $0.2 million loss for six months, before the separately disclosed effect of noncontrolling interests. It recorded loan impairments of $33.9 million in the quarter and $40.6 million for six months, mainly on FDIC portfolio loans. RMF increased revenue through commercial mortgage originations and securitizations.
- Multifamily operating losses widened to $7.2 million in the quarter and $13.4 million for six months. At quarter-end, Lennar reported 18 multifamily communities: two operating, two partially completed and leasing, 13 under construction, and one under development.
- The 2013 comparison benefited from reversals of tax valuation allowances: $41.3 million in the quarter and $66.4 million for six months. Consequently, the 2014 effective tax rate of about 37% was materially higher than the 2013 rates of 12.42% and 7.52%.
Outlook, risks and unusual items
- Management forecast delivery of 21,000–22,000 homes in fiscal 2014, with gross margins averaging about 25%, and said it remained on track for increased full-year profitability. This is management guidance, not a guarantee.
- Management characterized the housing recovery as continuing at a slow, steady pace, while noting a spring selling season softer than anticipated. It cited constrained and uncertain mortgage availability, interest-rate volatility, consumer-confidence fluctuations and diminishing investor purchases as potential headwinds.
- Homebuilding margin improvement included $9.6 million of insurance recoveries and other nonrecurring items in the quarter and $15.1 million for six months. Management also cited increasing material, labor and land costs; these could pressure margins.
- Rialto’s impairment charges were substantially higher than in 2013, reflecting revised expected cash flows on loan portfolios. Its results also depend on real-estate recoveries, REO sales and fund performance.
- After quarter-end, Lennar amended its revolving credit facility, increasing its stated amount to $1.5 billion and extending maturity to June 2018. Financial Services also entered a new $150 million warehouse facility in June 2014.
- Potential exposures include joint-venture guarantees and completion obligations, multifamily construction-cost overruns, mortgage-loan representation-and-warranty claims, and letters of credit and surety bonds. At May 31, performance and financial letters of credit totaled approximately $438 million; site-improvement surety bonds totaled $817.8 million, with an estimated $395.9 million of related costs remaining. Management did not anticipate material draws.
- Management identified broader risks including housing-market or economic deterioration, weaker demand or pricing, higher construction costs, land-value impairments, financing-market changes, joint-venture partner performance, regulatory and legal matters, and the ability to comply with debt covenants. It reported compliance with debt covenants at May 31.
Important facts for investors to verify
- Whether orders, backlog and deliveries convert to closings at anticipated prices, cancellation levels and gross margins.
- How much reported margin growth depended on insurance recoveries and other nonrecurring items, and how construction and land costs evolve.
- Whether Rialto loan impairments stabilize and RMF’s originations and securitizations produce sustainable earnings.
- Liquidity, debt maturities, warehouse-facility renewals and covenant headroom after the June credit-facility amendment.
- Potential cash exposure from joint ventures, multifamily guarantees, mortgage repurchase claims, letters of credit and surety bonds.
- The effect of the prior-year tax valuation-allowance reversals when comparing earnings and EPS across periods.