Lennar Corporation — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended November 30, 2014. The filing also reports fourth-quarter results. Lennar is primarily a U.S. homebuilder, with mortgage and title services, Rialto commercial real estate finance and investment operations, and multifamily development. Homebuilding contributed approximately 90% of FY2014 consolidated revenue.
Financial and operating performance
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Total revenue | $7.780 billion | $5.935 billion | Up 31% |
| Pretax earnings | $969.8 million | $681.9 million | Up 42% |
| Net earnings attributable to Lennar | $638.9 million | $479.7 million | Up 33% |
| Diluted EPS | $2.80 | $2.15 | Up 30% |
| Homebuilding gross margin | 25.4% | 24.9% | Up 0.5 percentage point |
| Homebuilding operating margin | 14.9% | 14.3% | Up 0.6 percentage point |
| Cash and cash equivalents | $1.282 billion | $970.5 million | At November 30 |
| Cash used in operating activities | $788.5 million | $807.7 million | Negative operating cash flow in both years |
| Total assets | $12.958 billion | $11.273 billion | At November 30 |
| Total equity | $5.251 billion | $4.627 billion | At November 30 |
- Home deliveries increased 15% to 21,003, while the average delivered home price rose to approximately $326,000 from $290,000. New orders increased to 22,029 from 19,043.
- Year-end backlog rose to 5,832 homes, valued at $1.974 billion, from 4,806 homes and $1.620 billion. The cancellation rate was 17%, versus 16%; Lennar expected substantially all backlog homes to close in FY2015.
- Homebuilding revenue was $7.025 billion. Homebuilding debt was $4.690 billion; net homebuilding debt to total capital was 44.1%, down from 45.6%. The company reported no borrowing under its $1.5 billion revolving credit facility and stated it was in compliance with its covenants. Its covenant liquidity measure was 3.31x against a 1.00x minimum.
- Financial Services operating earnings declined to $80.1 million from $85.8 million, despite higher mortgage originations. Rialto operating earnings were $44.1 million, compared with $26.1 million; management separately cited $66.6 million after its stated noncontrolling-interest adjustment. Multifamily reported an $11.0 million operating loss, improving from a $17.0 million loss.
- FY2014 fourth-quarter revenue was $2.584 billion, pretax earnings were $377.9 million, net earnings attributable to Lennar were $245.3 million, and diluted EPS was $1.07.
Material changes and notable items
- Home sales revenue grew 29%, reflecting more deliveries and a 12% increase in average sales price. Homebuilding gross margin improved, helped by pricing and lower incentives as a share of sales, but partly offset by higher labor, materials, and land costs.
- Management said labor and material costs increased 7% during FY2014. Home sales incentives averaged $21,400 per delivered home, or 6.2% of home sales revenue, versus $20,500 and 6.6% in FY2013.
- Operating cash use remained substantial, principally reflecting increased inventory from land purchases and development, higher loans held for sale, and receivables. Inventory increased to $7.737 billion from $6.601 billion.
- Rialto recorded $57.1 million of loan impairments, versus $16.1 million in FY2013. In the fourth quarter, it changed certain acquired-loan income accounting to a per-loan cost-recovery basis because future cash flows could no longer be reasonably estimated; those loans were classified as nonaccrual.
- FY2014 net income included a $341.1 million income tax provision. FY2013 earnings benefited from a $67.1 million deferred-tax valuation allowance reversal, complicating year-over-year earnings comparisons.
- Homebuilding gross margin included $20.9 million of insurance recoveries and other nonrecurring items. Rialto revenue included a $34.7 million advanced distribution related to Fund I carried interest to cover tax obligations.
Outlook, risks, and contingencies
- For FY2015, management forecast 23,500–24,000 home deliveries and average gross margins of approximately 24%, below FY2014’s 25.4%. It anticipated some margin contraction from competition and development of previously mothballed land, and expected another year of substantial profitability.
- Management described the housing recovery as slow and constrained by limited housing and land supply and tight mortgage access. It planned continued strategic land investment while shifting toward a land-lighter model, targeting positive cash flow beginning in FY2016.
- Management expected Financial Services earnings to increase in FY2015. It also expected further multifamily community sales, including five communities toward FY2015 year-end, and described Rialto’s mortgage-finance activity as a potential source of more recurring earnings. These are forward-looking expectations, not guarantees.
- Management could not project the net effect of lower oil prices: Houston might be negatively affected, with potential offsetting benefits. Other key risks include housing demand and mortgage availability, interest rates, construction costs and labor availability, land valuation and impairment, warranty and construction claims, and regulatory or environmental requirements.
- Financial Services warehouse commitments totaled $925 million and Rialto Mortgage Finance commitments totaled $650 million; facilities were due to mature in FY2015, with renewals or replacements expected. The filing disclosed $923.3 million of performance and surety bonds and $424.6 million of letters of credit; management did not anticipate material draws.
- A Maryland property dispute resulted in a January 2015 court order requiring Lennar to purchase the property for the $114 million unpaid balance, plus 12% annual interest from May 27, 2008, taxes, and attorneys’ fees. Lennar said it would appeal and recorded no liability, stating it did not believe a loss was probable. A separate $802 million compensatory and $200 million punitive jury award to Lennar was not recorded because the company did not expect to collect it.
Important facts for investors to verify
- Whether FY2015 delivery and margin guidance was achieved, especially given the forecast margin decline and construction-cost pressures.
- Whether operating cash flow turns positive as targeted, and whether inventory growth and land investment moderate.
- Debt maturities, covenant headroom, and renewal or replacement of Financial Services and Rialto warehouse funding.
- Rialto loan portfolio performance following the nonaccrual/cost-recovery change, including further impairments and the sustainability of fund-related earnings.
- Outcome and financial exposure from the Maryland judgment and appeal, along with warranty, insurance, and other litigation developments.
- Reliability of reported earnings drivers, including nonrecurring insurance recoveries, Rialto carried interest and fair-value gains, and tax-related effects.