Lennar Corporation — Q3 2012 Form 10-Q
Business context and period. Homebuilder Lennar reported the quarter and nine months ended August 31, 2012. Its operations include homebuilding, mortgage and title services, and Rialto real estate investments. Comparisons below are with the corresponding 2011 periods unless noted.
Financial performance and position
| Metric | Q3 2012 | Nine months 2012 |
|---|---|---|
| Total revenue | $1.100 billion, up 34% | $2.755 billion, up 29% |
| Net earnings attributable to Lennar | $87.1 million; diluted EPS $0.40 | $554.8 million; diluted EPS $2.56 |
| Earnings before income taxes | $58.6 million | $117.2 million |
| Homebuilding revenue | $955.8 million | $2.388 billion |
| Homebuilding operating earnings | $71.3 million, versus $27.1 million | $147.1 million, versus $83.8 million |
| Home sales gross margin | 23.2%, versus 21.1% | 22.4%, versus 20.2% |
| Financial Services operating earnings | $25.3 million, versus $8.0 million | $51.6 million, versus $11.7 million |
| Rialto operating earnings (loss) | $(5.7) million, versus $11.7 million | $6.8 million, versus $57.4 million |
The nine-month net income comparison is substantially affected by a $447.0 million deferred-tax valuation allowance reversal in 2012; the company reported a $416.6 million income tax benefit for the period. Q3 included a $12.8 million tax benefit, including a $44.0 million valuation allowance reversal offset partly by tax expense. The reported effective tax rates are therefore not representative of historical rates.
- Homebuilding trends: Q3 deliveries excluding unconsolidated entities rose 28% to 3,617 homes; average selling price increased 4% to $258,000. Net new orders rose 44% to 4,198 homes. Backlog at quarter-end was 4,513 homes valued at $1.251 billion, versus 2,519 homes and $642.8 million a year earlier.
- Cash flow and liquidity: Cash used in operating activities was $490.5 million for nine months, compared with $115.6 million used in 2011, primarily reflecting inventory investment and increased mortgage loans held for sale. Investing activities provided $241.0 million; financing activities used $68.9 million. Cash and cash equivalents totaled $845.2 million at August 31, including $692.0 million in Homebuilding.
- Debt and capital: Homebuilding debt was $3.672 billion, up from $3.363 billion at November 30, 2011; Homebuilding net debt was $2.980 billion. Homebuilding debt-to-total-capital was 52.9%, and net debt-to-total-capital was 47.7%. Total consolidated liabilities were $5.860 billion and equity was $3.858 billion. The company reported compliance with debt covenants; its covenant leverage ratio was 49.7% against a 67% limit and its liquidity test was 3.34 against a 1.00 minimum.
Material changes and unusual items
- Homebuilding results improved with more deliveries, higher average selling prices, lower incentives, and better margins. Q3 incentives averaged $26,100 per home, versus $33,600 a year earlier.
- In Q3, Lennar issued $400 million of 4.75% senior notes due 2017 and repurchased $204.7 million principal amount of 5.95% notes due 2013, recording a $6.5 million pretax loss. A $15.0 million gain on an operating-property sale contributed to nine-month Homebuilding other income.
- Rialto’s results were affected by loan and real estate impairments, REO-related costs and gains, and investment-fund activity. Nine-month Rialto loan impairments were $22.6 million before noncontrolling interests. The AB PPIP fund began winding down and Lennar expected remaining liquidating distributions in Q4 2012.
- Operating cash use increased as inventories grew by $554.9 million excluding valuation adjustments. Homebuilding inventory totaled $5.036 billion at August 31, compared with $4.361 billion at November 30, 2011.
Outlook, commentary, and risks
Management said the housing recovery was underway, citing low mortgage rates, buyer confidence, reduced foreclosures, and improving sales and pricing trends. It expected pricing gains and reduced incentives to offset rising materials and labor costs. Management said the company was positioned for a third consecutive profitable year in 2012, but provided no numerical earnings guidance. It planned to pursue carefully underwritten land acquisitions and expected Financial Services and Rialto to support results and cash generation.
Risks include variable quarterly results; local housing-market, pricing, absorption, construction-cost and appraisal assumptions; inventory and loan valuation judgments; mortgage-loan repurchase claims tied to representations and warranties; and guarantees or other exposures involving joint ventures. The company reported $48.2 million of net recourse exposure on Homebuilding unconsolidated-entity debt, with no guarantee liabilities accrued. It also disclosed $591.2 million of performance and surety bonds, with estimated future completion costs of $319.9 million. The company cited approximately 1,000 Florida homes with confirmed defective Chinese drywall and a $3.9 million remaining related warranty reserve at August 31; it continues to seek third-party recoveries.
Key facts for investors to verify
- How much of reported 2012 earnings reflects the deferred-tax valuation allowance reversal, and whether remaining tax assets are ultimately realizable.
- Whether order, backlog, delivery, selling-price and incentive improvements persist, particularly across individual markets.
- Whether inventory growth converts into sales and operating cash flow; operating cash use was $490.5 million for the nine-month period.
- Rialto loan and REO valuations, impairment levels, and cash distributions as the AB PPIP fund completes liquidation.
- Debt maturities, refinancing and warehouse-facility renewals, plus potential exposure from joint-venture guarantees, mortgage repurchase claims, and construction bonds.