Lennar Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended November 30, 2010. Lennar is a homebuilder with mortgage and title operations and a newly reportable distressed-real-estate investment segment, Rialto. The filing is an annual report, not a standalone fourth-quarter filing; selected fourth-quarter results are included below.
Financial and operating highlights
| Metric | FY2010 | FY2009 |
|---|---|---|
| Total revenue | $3.074 billion | $3.119 billion |
| Net earnings (loss) attributable to Lennar | $95.3 million | ($417.1 million) |
| Diluted earnings (loss) per share | $0.51 | ($2.45) |
| Operating cash flow | $274.2 million | $420.8 million |
| Cash and cash equivalents, all segments | $1.394 billion | $1.457 billion |
| Total assets | $8.788 billion | $7.315 billion |
| Stockholders’ equity | $2.609 billion | $2.443 billion |
- Homebuilding: Revenue was $2.706 billion, down 5%; deliveries fell 5% to 10,955 homes. Average selling price was $243,000, unchanged. Homebuilding operating earnings were $100.1 million, versus a $676.3 million loss.
- Margins: GAAP gross margin on home sales rose to 19.7% from 9.1%. Excluding valuation adjustments, the company-reported non-GAAP margin was 21.4%, versus 15.6%. Selling, general and administrative expense fell to 14.3% of home-sale revenue from 16.2%.
- Other segments: Financial Services operating earnings were $31.3 million, down from $36.0 million. Rialto reported $57.3 million of operating earnings, including $33.2 million attributable to noncontrolling interests.
- Fourth quarter: Revenue was $860.1 million; net earnings attributable to Lennar were $32.0 million, or $0.17 per share. The first quarter recorded a $6.5 million net loss attributable to Lennar.
- Cash flow: Investing activities used $673.4 million and financing activities provided $335.8 million; cash declined $63.3 million. Operating cash flow included $343.0 million of tax refunds, while inventories increased $115.2 million.
- Debt and liquidity: Homebuilding debt was $3.128 billion, up from $2.761 billion; homebuilding cash was $1.207 billion, down from $1.331 billion. Net homebuilding debt-to-total-capital increased to 42.4% from 36.9%. Rialto reported $752.3 million of notes payable and Financial Services $271.7 million of debt. The filing states Lennar had no corporate credit line; Financial Services warehouse facilities totaling up to $325 million mature in April and July 2011.
Material changes versus the prior year
- Lennar returned to profitability as homebuilding margins improved, operating costs declined, and valuation adjustments were substantially lower. Total inventory impairments and related write-offs were $51.3 million, compared with $359.9 million in 2009.
- Despite improved profitability, new orders declined 5% to 10,928, and backlog value fell to $407.3 million from $479.6 million. The cancellation rate improved to 17% from 18%.
- Operating cash flow decreased by $146.6 million, despite tax refunds, and the company invested heavily in Rialto and strategic land purchases.
- Homebuilding debt rose while cash declined. Lennar issued $250 million of 6.95% senior notes due 2018 and $722.5 million of convertible notes due 2020, while repurchasing or retiring $624.9 million of senior notes and other debt.
- Homebuilding joint ventures declined to 42 from 61 year over year. Maximum recourse exposure related to those ventures fell to $172.9 million from $287.7 million; net exposure was $114.0 million.
Outlook, commentary, risks and unusual items
- Management said housing demand remained weak amid unemployment, foreclosures, tight mortgage standards and low consumer confidence; expiration of the federal homebuyer tax credit also slowed sales. Lennar said it believed 2011 would be profitable, but acknowledged recovery timing was uncertain. No numerical 2011 guidance was provided.
- Management emphasized value-oriented products, cost reduction and selectively acquiring land under conservative underwriting. It said recently acquired land was beginning to contribute to returns.
- Rialto’s 2010 activity included a 40% interest in FDIC-partnered loan portfolios, acquisitions from three financial institutions, investment in an AllianceBernstein PPIP fund, and launch of a real estate fund with about $300 million in commitments, including $75 million from Lennar. The FDIC partnership notes of $626.9 million are non-recourse to Lennar; $101.3 million of excess loan collections was placed in a defeasance account for repayment.
- Key risks include a prolonged housing downturn, pricing pressure from foreclosures and existing homes, restricted mortgage availability, further inventory or joint-venture impairments, and access to capital. Lennar lacked investment-grade ratings and had terminated its $1.1 billion revolving credit facility.
- Contingencies include a $9.9 million reserve for mortgage-loan repurchase claims and a $109.2 million home-warranty reserve. Of the warranty reserve, $23.3 million net of payments related to Chinese drywall; the company continued inspections and sought recoveries from insurers and other parties.
- Other notable items: the $25.7 million income-tax benefit included settlements with taxing authorities; the deferred-tax valuation allowance remained $609.5 million, with no net deferred tax assets. A subsequent extension of a joint-venture loan increased Lennar’s maximum recourse exposure by $36.3 million. Auditors issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether order trends, backlog conversion, cancellation rates and home-sale margins sustain improvement after the tax-credit expiration.
- How much of operating cash flow reflects recurring operations versus tax refunds, and the funding needs of planned land and Rialto investments.
- Debt maturities, covenant compliance, refinancing access and renewal or replacement of Financial Services warehouse facilities in 2011.
- Rialto portfolio collections, nonaccrual loans, collateral valuations, fund commitments and the sustainability of reported earnings, including noncontrolling interests and gains.
- Potential additional inventory impairments, joint-venture guarantees and the effect of the $36.3 million increase in maximum recourse exposure.
- Developments in mortgage repurchase claims, Chinese-drywall repairs and recoveries, tax examinations and realization of deferred tax assets.