Company Overview: Lennar Corporation is a provider of real estate related financial services, commercial real estate, investment management and finance company. The Company is a homebuilder that operates in various states. Its segments include Homebuilding East, Homebuilding Central, Homebuilding West, Lennar Financial Services, Rialto and Lennar Multifamily. It is a developer of multifamily rental properties. Its Homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land. It operates primarily under the Lennar brand name. The Lennar Financial Services segment includes mortgage financing, title insurance and closing services for both buyers of its homes and others. The Rialto segment is a real estate, investment management, and finance company. The Lennar Multifamily segment focuses on developing a portfolio of institutional multifamily rental properties in the United States markets.


LEN Details

Better than expected second Quarter Performance: Lennar Corporation (NYSE: LEN), a well-known brand in building quality homes, has posted better than expected results for the second quarter 2018 driven by the solid demand, job growth, and an expanding economy. The company in the second quarter 2018 has reported the net earnings attributable to LEN of $310.3 million, against the second quarter net earnings attributable to Lennar in 2017 of $213.6 million. The earnings in the second quarter of 2018 were impacted by the $236.8 million of pretax backlog/construction in progress write-up related to purchase accounting and $23.9 million of pretax acquisition and integration costs related to CalAtlantic. But the adjusted earnings per share was $1.58, which was better than expected. The company had reported the adjusted revenue growth of 67 percent to $5.46 billion in the second quarter of FY 18, while LEN’s deliveries were up 57% to 12,095 homes and new orders were up 62%. The company has backlog of 19,622 homes, which is up 92% and backlog dollar value is up 114% to $8.6 billion. Additionally, Lennar Financial Services operating earnings were reported to be $52.4 million against $43.7 million of previous corresponding period. Rialto operating earnings (net of noncontrolling interests) were $7.0 million against $6.2 million of previous corresponding period. Lennar Multifamily operating earnings were $14.8 million against $6.5 million of previous corresponding period. As per financial services segment, operating earnings rose to $52.4 million against $43.7 million in pcp. Mortgage operating earnings rose to $34.7 million against $32 million in pcp while originations rose to $2.9 billion from $2.3 billion. The segment’s overall operating earnings rose to $16.4 million from $9.7 million in the prior year driven by addition of CalAtlantic closings and a higher mix of purchase business with higher transaction values versus the prior year.


Performance over months (Source: Company Reports)

CalAtlantic acquisition contributed to the solid performance: The group acquired CalAtlantic, a homebuilder that build homes across the homebuilding spectrum, from entry level to luxury, in 43 metropolitan statistical areas spanning 19 states. Revenues were up 74% from home sales during the second quarter of 2018. The group’s second quarter gross margin on home sales reached 21.6%, without the CalAtlantic purchase accounting write-up of backlog and construction in progress, against gross margin percent of 21.5% in pcp. The group was transitioning CalAtlantic products, and accordingly forecasted their sales pace to be about 3.4%. But the actual sales pace was 3.6% which was better than forecasts. The group reported for 1,478 unsold homes at quarter end and this reflects about 1 home per community. This is a fall as compared to over 1.5 homes per community in pcp. Meanwhile, about 9,600 home sites were bought worth $692 million and land development spend accounted to $557 million. About 261,000 home sites were owned and controlled; and out of this, 195,000 were owned and 66,000 were controlled. The group’s homebuilding operation has 5 regions and 38 divisions with operations in 49 markets as of the second quarter. Before the merger, CalAtlantic had 4 regions and 27 divisions, with operations in 43 markets. The group entered two new markets via CalAtlantic divisions while the rest 25 divisions have been combined with group’s divisions leading to major savings. The group also controlled costs by cutting headcount by over 33%, eliminating 5 corporate and regional offices, 21 homebuilding division offices, 18 design centers, 24 financial services branches and 1 financial services processing center.

Lennar Multifamily Venture: During the second quarter, the Lennar Multifamily segment has completed the closing of Lennar Multifamily Venture II LP Fund ('Venture II') for the development, construction and property management of class-A multifamily assets. With the first close, Venture II has approximately $500 million of equity commitments, including a $255 million co-investment commitment by the company comprised of cash, undeveloped land and pre-acquisition costs.  The group’s multifamily segment delivered an operating earnings of $14.8 million during the second quarter of 2018 against $6.5 million in pcp, boosted by $17.4 million from the sale of two operating properties coupled with $5.2 million of promote revenue related to two properties in LMV Fund I. The group finished 19 properties as of the end of the quarter and 31 were under construction, 7 of which are leased up totaling over 14,600 apartments with a total development cost of over $4.9 billion. The group made a reinvestment in Open Door, which automates the valuation of homes and executes purchase offers to customers at those values. The group sees that Open Door’s strategy of reducing friction in the home sale market could be transformational to the industry.

Balance sheet position: The group has a debt to total capitalization of 42.4% during the end of the second quarter. They paid down $825 million of higher interest rate notes plus the remaining $250 million of Rialto notes. The group has $932 million of cash while it repaid $575 million of 8.38% CalAtlantic senior notes using homebuilding cash. The group is also taking steps for pay-down of Rialto’s outstanding debt.


Balance sheet position (Source: Company Reports)

Guidance: For the third quarter of 2018, deliveries and new orders are expected to be $12,500. For the fourth quarter, the group forecasts deliveries to be $15,000 while new orders would be $11,600. Average sales price, for the third quarter of 2018 is expected to be about $410,000 and Q4 to be over $415,000. Q3 Gross margins, excluding write-ups for backlog and construction in progress are forecasted to be in the range of 21.5% and 21.75% while the group expects better Q4 gross margins in the range of 22.5% and 22.75%. Financial Services earnings for third quarter is forecasted to be about $60 million while Q4 earnings is expected to be in the range of $63 million and $68 million. The group also forecasts to exceed the synergy target of $100 million for fiscal year 2018 by $25 million, and in fact, it is on track to exceed that target by an additional $35 million for total fiscal year 2018 synergies of $160 million. For fiscal year 2019, they expect to exceed their $365 million target by $10 million for a total of $380 million.


Deliveries and Prices - Dollars in thousands (Source: Company Reports)

Stock Performance: There have been concerns about rising interest rates environment and increasing construction costs which impacted Lennar stock this year to date. On the other hand, low unemployment and increasing wages, combined with short supply based on years of underproduction of new homes have been some of the support drivers to the stock. The demand for houses remained strong as the company continued to see pricing power support margins while affordability remained consistent. During the second quarter, the company has used the strong cash flow generation to reduce their debt levels by $1.1 billion. The company has paid off $825 million of homebuilding debt maturities in May and early June as well as the remaining $250 million of Rialto's senior notes without refinancing. The shares of Lennar recovered over 1.4% in the past five days and we believe investors can leverage the correction as an entry opportunity. The group’s ROE enhanced to 2.3% as at May 2018 against 2% as at February 2018. Based on the foregoing and long-term stability, we give a “Buy” recommendation on the stock at the current market price of $ 53.27.
 

LEN Daily Chart (Source: Thomson Reuters)

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