Lennar Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended August 31, 2020. The unaudited filing covers Lennar’s homebuilding, financial services, multifamily and other operations. Amounts below are U.S. dollars.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $5.87B | $5.86B | $15.66B | $15.29B |
| Net earnings attributable to Lennar | $666.4M | $513.4M | $1.58B | $1.17B |
| Diluted EPS | $2.12 | $1.59 | $5.03 | $3.63 |
| Homebuilding gross margin on home sales | 23.1% | 20.4% | 21.8% | 20.2% |
| Operating cash flow | Not separately presented for the quarter | $2.90B | $298.3M |
- Q3 home-sale revenue rose 3% to $5.5B. Deliveries excluding unconsolidated entities increased 2% to 13,809; average selling price increased 1% to $396,000. The filing’s delivery table includes unconsolidated-entity deliveries and reports 13,842 homes.
- Nine-month home-sale revenue rose 3% to $14.5B, while deliveries excluding unconsolidated entities increased 5% to 36,775. Average selling price declined to $395,000 from $403,000, reflecting product and regional mix.
- Q3 homebuilding SG&A was 8.0% of home-sale revenue, versus 8.3% a year earlier; nine-month SG&A was 8.4%, versus 8.7%.
- Financial Services operating earnings were $135.1M in Q3 and $329.7M for nine months, benefiting from increased mortgage and title volumes and margins. Multifamily recorded operating losses of $5.1M in Q3 and $4.0M for nine months.
- At August 31, cash and restricted cash totaled $2.23B; homebuilding cash was $1.97B. Homebuilding debt was $7.18B, down from $7.78B at November 30, 2019. Homebuilding debt-to-total-capital was 29.5%, versus 32.8% at November 2019 and 37.1% a year earlier; net homebuilding debt-to-total-capital was 23.3%.
- The $2.4B revolving credit facility had no borrowings outstanding. Lennar reported compliance with its covenants; its covenant liquidity measure was 5.68 against a 1.00 minimum.
- Nine-month operating cash flow rose sharply year over year, including effects from mortgage-loan sales and working-capital movements. Investing cash outflow was $267.5M and financing cash outflow was $1.87B, including debt repayments, $319.0M of stock repurchases and $117.1M of dividends.
Material changes and unusual items
- Q3 pretax earnings increased to $859.0M from $667.1M. Improved homebuilding margins and Financial Services results contributed to the increase.
- Nine-month Financial Services results included a $61.4M gain from deconsolidating a previously consolidated entity. The transaction followed a third-party equity raise that reduced Lennar’s ownership and control.
- Nine-month homebuilding results included $21.9M of losses on land sales, primarily a write-off related to a decision not to proceed with a naval base development in Concord, California. Inventory valuation adjustments and option/pre-acquisition cost write-offs were also significant; cash flow disclosures report $76.6M for valuation adjustments and write-offs of option deposits and pre-acquisition costs.
- Lennar recorded a $25.0M write-down of assets held by Rialto legacy funds, citing pandemic-related capital-market disruption. The nine-month effective tax rate decreased to 19.5% from 24.2%, primarily reflecting energy-efficient-home tax credits.
- Homebuilding new orders rose to 15,564 in Q3 from 13,369; backlog increased to 19,697 homes from 18,908 a year earlier. Owned land supply declined to 3.8 years from 4.4 years, while optioned or similar controlled land rose to 35% of total homesites from 30%.
Outlook, risks and contingencies
- Management forecast Q4 2020 deliveries of 15,500–16,000 homes and approximately 10% community-count growth in 2021. It expected strong margins to continue through 2021 and bottom-line growth to exceed top-line growth; no specific EPS guidance was provided.
- Management described housing demand as strong, citing low interest rates and increased importance of the home, while noting that Q3 closings were constrained by the March–May production pause. It planned to increase production, manage rising lumber and other costs, continue reducing debt, and resume some form of stock repurchase program. Its longer-term land strategy targets a 50% optioned/50% owned mix.
- COVID-19 duration and economic effects remain uncertain. The filing warns that renewed disruption, weaker consumer confidence or housing demand, reduced mortgage availability, rising construction costs, land impairment, and refinancing or liquidity challenges could adversely affect results. Management noted that COVID-19 had not significantly impaired home sales through the quarter, but said that might not continue.
- Homebuilding joint-venture debt was approximately $1.1B; Lennar’s stated maximum recourse exposure was $4.9M. Multifamily ventures had $2.47B of debt without recourse to Lennar, but completion and cost-overrun guarantees may expose Lennar to costs. Uncalled Lennar equity commitments to two multifamily funds totaled approximately $129M.
- Outstanding letters of credit were $1.03B and surety bonds were $3.04B. Management did not anticipate material draws. Ordinary-course legal matters were not expected by management to have a material adverse effect. The home warranty reserve was $318.7M at quarter-end.
- Subsequent to quarter-end, the board increased the annual dividend from $0.50 to $1.00 per share, with a quarterly dividend of $0.25 per share payable October 30, 2020.
Key facts for investors to verify
- Whether Q4 delivery guidance and planned 2021 community growth were achieved, and how order growth converted into closings and cash.
- Whether homebuilding margins held up amid lumber, labor and other cost inflation, and whether inventory impairments or land-option write-offs increased.
- How much of the exceptional nine-month operating cash flow reflected sustainable earnings versus mortgage-loan sales and working-capital changes.
- Whether the $61.4M deconsolidation gain, $25.0M Rialto write-down and land-development write-off affect comparisons with recurring operating performance.
- Debt reduction, liquidity and capital returns, including execution of the announced dividend increase and any resumed share repurchases.
- COVID-19 effects on housing demand and financing, mortgage repurchase claims, joint-venture commitments and guarantees, and the multifamily platform’s returns and monetization plans.