Lennar Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended November 30, 2016. Lennar is primarily a homebuilder, with financial services, commercial real estate investment and finance (Rialto), and multifamily development businesses. Homebuilding generated about 89% of consolidated revenue.
Financial and operating performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Total revenue | $10.95 billion | $9.47 billion | +16% |
| Net earnings attributable to Lennar | $911.8 million | $802.9 million | +14% |
| Diluted earnings per share | $3.93 | $3.46 | +14% |
| Cash from operating activities | $507.8 million | Use of $419.6 million | Improved |
| Cash and cash equivalents | $1.33 billion | $1.16 billion | +15% |
| Total assets | $15.36 billion | $14.42 billion | +7% |
| Total equity | $7.21 billion | $5.95 billion | +21% |
Homebuilding revenue was $9.74 billion, up 15%. Deliveries, including unconsolidated entities, increased 9% to 26,563 homes; average selling price rose 5% to approximately $361,000. New orders rose 9% to 27,372, and year-end backlog increased 15% to 7,623 homes, valued at $2.89 billion.
Homebuilding gross margin declined to 23.0% from 24.0%, and operating margin on home sales decreased to 13.6% from 14.1%. Higher land and construction costs pressured gross margin; increased deliveries and digital marketing helped reduce homebuilding SG&A to 9.4% of home-sale revenue from 10.0%. Sales incentives remained 5.9% of home-sale revenue.
Net cash from operating activities improved substantially, mainly reflecting earnings, lower inventory investment than in prior years, and timing of mortgage-loan sales and securitizations. Investing activities used $85.8 million and financing activities used $250.9 million. Cash-flow results remain affected by working-capital movements and joint-venture contributions and distributions.
Year-end homebuilding debt was $4.58 billion; homebuilding debt-to-total-capital was 39.4%, down from 47.1%, and net homebuilding debt-to-total-capital was 33.4%, down from 42.2%. The company also reported $622.3 million of Rialto debt and $1.08 billion of Financial Services debt, primarily warehouse borrowings against mortgage loans. Its $1.8 billion revolving credit facility had no borrowings outstanding; the filing reported covenant compliance. The company reported total cash and cash equivalents of $1.33 billion.
Material changes and notable items
- Financial Services operating earnings increased to $163.6 million from $127.8 million, attributed to more transactions and higher profit per transaction in mortgage and title operations. Mortgage capture rate was 82%, unchanged from 2015.
- Rialto reported an operating loss of $16.7 million, versus operating earnings of $33.6 million. Results included a $16.0 million write-off of uncollectible hospital-related receivables, higher loan impairments and REO-related losses, and lower realized gains on real estate sales.
- Multifamily reported operating earnings of $71.2 million, compared with a $7.2 million loss. The improvement principally reflected Lennar’s $91.0 million share of gains from seven property sales through unconsolidated entities.
- Homebuilding equity in losses from unconsolidated entities was $49.3 million, including $42.6 million of FivePoint combination costs and operating losses. The prior-year result included $63.4 million of equity earnings, including significant land and property sale gains.
- Debt and equity changed following repayment of $250 million of 6.50% notes and conversion or exchange of convertible notes. The 3.25% notes converted or were redeemed for 17.0 million Class A shares; the remaining $234 million principal of 2.75% notes was settled in cash plus 5.2 million shares.
Outlook, risks and contingencies
Management expected a slow, uneven housing-market recovery in FY2017, supported by employment, household formation and pent-up demand, but constrained by rising interest rates, land and labor shortages, mortgage affordability and limited buyer purchasing power. Lennar forecast 28,500–29,000 home deliveries and expected lower margins than in FY2016 as costs were anticipated to rise faster than selling prices and competition remained a factor. Management identified homebuilding and Financial Services as the principal earnings drivers and emphasized land investment, controlled growth and SG&A discipline.
The proposed WCI Communities acquisition, announced in September 2016, was pending WCI shareholder approval. Stated consideration was $23.50 per WCI share, expected to comprise cash and Lennar Class A stock, with Lennar retaining the right to increase the cash portion or pay all cash. After year-end, Lennar issued $600 million of 4.125% notes due 2022, with proceeds intended in part to fund the acquisition.
Key risks include housing-market and interest-rate changes, land and inventory valuation, rising labor and material costs, mortgage availability, refinancing and warehouse-facility renewal, joint-venture obligations, construction defects and environmental or land-use regulation. Lennar’s Maryland Settlers Crossing litigation remained on appeal: the trial court ordered a $114 million property purchase plus 12% simple annual interest, approximately $116 million accrued through November 30, 2016, taxes and attorneys’ fees. Lennar recorded no liability, stating it did not believe a loss was probable; it posted a $223.4 million bond to stay the judgment during appeal. The company also disclosed $1.4 billion of surety bonds and $481.1 million of letters of credit, and said it did not anticipate material draws.
Other notable exposures include $85.0 million of non-refundable land-option deposits and pre-acquisition costs, and a $288.2 million remaining Lennar commitment to the Multifamily Venture. Management reported no material effect from the Tampa and Southwest Florida stormwater violations, though monetary sanctions were expected. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether delivery growth and backlog convert to closings at expected prices, cancellation rates and margins; FY2016 cancellation rate was 16%.
- Whether homebuilding margins stabilize after declining for a third consecutive year, and how land, labor and materials costs compare with price increases.
- Whether the WCI acquisition closes on the stated terms and how its cash and stock funding affects leverage and share count.
- Near-term debt maturities and renewal or replacement of Financial Services and Rialto warehouse facilities, including covenant headroom and funding costs.
- Rialto’s recovery from FY2016 losses and the sustainability of Multifamily earnings, given that FY2016 included substantial property-sale gains.
- The outcome and potential financial exposure in Settlers Crossing, plus any material developments in warranty, mortgage repurchase, environmental or joint-venture obligations.