Business context and reporting period
Lennar Corporation’s Form 10-K covers the fiscal year ended November 30, 2013. Lennar is a U.S. homebuilder with mortgage, title and closing services, Rialto commercial real estate investment and finance operations, and a developing multifamily rental business.
The filing describes a housing-market recovery, supported by improving demand and limited supply. Lennar delivered 18,290 homes, up 33% from 2012; net new orders rose 21% to 19,043. Year-end backlog increased to 4,806 homes valued at $1.62 billion.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Total revenue | $5.94 billion | $4.11 billion |
| Earnings before income taxes | $681.9 million | $222.1 million |
| Net earnings attributable to Lennar | $479.7 million | $679.1 million |
| Diluted EPS | $2.15 | $3.11 |
| Home-sale gross margin | 24.9% | 22.7% |
| Homebuilding SG&A / home-sale revenue | 10.6% | 12.6% |
Homebuilding revenue was $5.35 billion, up 50% year over year; home-sale revenue rose 52%. Average delivered home price increased 14% to $290,000, while average sales incentives fell to $20,500 per home from $28,300. The improvement in gross margin reflected higher prices, lower incentives and more deliveries from newer, higher-margin communities, partly offset by higher labor, material and land costs.
Net earnings fell despite substantially higher pretax earnings because 2012 included a $435.2 million income-tax benefit, largely from reversing a deferred-tax-asset valuation allowance. In 2013 Lennar recorded a $177.0 million tax provision, including a $67.1 million partial valuation-allowance reversal. The reported effective tax rate was 26.96%.
Operating cash flow was negative $807.7 million, compared with negative $424.6 million in 2012, primarily as inventory and Rialto loans held for sale increased. Investing activities provided $689.2 million and financing activities used $221.8 million. Cash and cash equivalents ended the year at $970.5 million, including $695.4 million in Homebuilding.
At year-end, Homebuilding debt was $4.19 billion; its debt-to-total-capital ratio was 50.2%, down from 54.0%, while net Homebuilding debt-to-total-capital remained 45.6%. Lennar had a $950 million revolving credit facility due June 2017, with no borrowings outstanding, and reported compliance with its covenants. Rialto issued $250 million of 7.00% notes due 2018. Financial Services and Rialto also had warehouse facilities, including $374.2 million and $76.0 million outstanding, respectively. Total assets were $11.27 billion and total equity was $4.63 billion.
Material changes versus prior comparable period
- Home deliveries, orders, home-sale revenue and backlog grew; backlog dollar value rose 40% to $1.62 billion.
- Home-sale gross margin expanded 2.2 percentage points, and Homebuilding operating earnings increased to $733.1 million from $259.0 million.
- Fiscal 2013 pretax earnings rose sharply, but net income and diluted EPS were lower than in 2012 because the prior year included a large tax benefit.
- Operating cash outflow increased, principally reflecting strategic land purchases, higher inventory and RMF loan origination activity.
- Homebuilding debt increased to $4.19 billion from $4.01 billion; year-end Homebuilding cash declined to $695.4 million from $1.15 billion.
- Rialto’s operating earnings were $26.1 million versus $11.6 million, but earnings attributable to Lennar were $19.9 million versus $26.0 million, reflecting noncontrolling interests and changing sources of segment earnings.
- Multifamily remained in start-up mode, with a $17.0 million operating loss versus a $5.9 million loss in 2012.
Outlook, commentary, risks and unusual items
Management expected a strong spring selling season and forecast 21,000–22,000 home deliveries in fiscal 2014, with average gross margins of about 25%; it anticipated another year of substantial profitability. Management expected Financial Services earnings to decline because of lower refinancing volume and competition, while expecting RMF to contribute more predictably to Rialto. Multifamily was not expected to make a meaningful contribution until beyond fiscal 2014; management anticipated completing its development pipeline over roughly four years.
Management cited moderating housing-market improvement, higher mortgage rates, tighter government-backed loan limits, and political and economic uncertainty as potential headwinds. Other key risks include affordability and mortgage availability, rising construction and land costs, land valuation and impairment, warranty and construction-defect claims, debt and refinancing needs, warehouse-facility renewals, and obligations or guarantees related to joint ventures. Management recorded $7.5 million of Homebuilding inventory impairments and option-cost write-offs in 2013; Rialto recorded loan and REO impairment-related charges.
In December 2013, a jury awarded Lennar $802 million in compensatory damages and $200 million in punitive damages in a defamation and conspiracy case. Lennar stated it did not expect to collect the award and recorded no receivable. The filing says ordinary-course legal matters were not expected to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether fiscal 2014 deliveries and approximately 25% gross margins were achieved, and how higher labor, material and land costs affected margins.
- Whether increased inventory and negative operating cash flow translated into stronger deliveries and cash generation.
- Debt maturities, covenant headroom, and renewal or replacement of Financial Services and Rialto warehouse facilities.
- RMF’s loan-sale economics and repeatability, and Rialto fund performance, fees, impairments and capital commitments.
- Multifamily construction progress, cost-overrun exposure and expected returns from joint ventures.
- Realization of deferred tax assets and remaining tax-loss carryforwards, including state losses subject to expiration.
- Changes in warranty reserves, mortgage repurchase claims, joint-venture guarantees and other contingent exposures.