Homebuilder Lennar Corp. Reports Mixed 3Q

| About: Lennar Corporation (LEN)

Lennar Corporation (NYSE:LEN) reported net earnings of $20.7 million or 11 cents per share in the third quarter of fiscal 2011 ended August 31, 2011, compared with $30.0 million or 16 cents per share in the year-ago quarter. Reported earnings were in line with the Zacks Consensus Estimate of 11 cents per share.

Total revenue in the quarter dropped 1% year over year to $820.2 million, due to poor performance across all the company’s reporting segments, except Rialto Investments. However, revenues exceeded the Zacks Consensus Estimate of $811 million.


Revenues from the Homebuilding segment declined marginally year over year to $711.8 million from $718.1 million in the prior year. Home sales increased to $700.6 million from $697.4 million a year ago while land sales plunged to $11.1 million from $20.7 million in the prior-year quarter.

This was attributable to a 3% decrease in new home deliveries (excluding unconsolidated entities) to 2,832 units, partly offset by a 3% increase in the average sale price of homes to $247,000.

Lennar experienced lower deliveries in its East, West and Houston segments while the Central and Other segments saw increases in deliveries during the quarter. New home orders climbed 11% to 2,914 homes with a cancellation rate of 20% during the quarter. Backlog increased 16% to 2,519 homes, mainly reflecting slow improvements in the housing industry.

The segment operating earnings were $27.1 million versus $38.1 million a year ago. Sales incentives offered to homebuyers increased to $33,600 per home (12.0% of home sales) from $30,600 per home (11.3% of home sales) in the year-earlier quarter.

Financial Services

Financial Services segment revenues fell 3.5% to $66.4 million. The segment posted operating earnings of $8.0 million in the quarter compared with $6.8 million in the third quarter of 2010. The improvement in profit was primarily attributable to the company’s cost saving initiatives.

Rialto Investments

Segment revenues rose 10.8% to $42.1 million (which consisted primarily of interest income associated with the segment's portfolio of real estate loans) from $38.0 million in the prior-year quarter. Operating earnings were $11.7 million (which included $6.1 million in net earnings attributable to non-controlling interests), compared with $18.5 million (which included $10.8 million in net earnings attributable to non-controlling interests) in the same period last year.

Financial Position

Lennar had cash and cash equivalents of $800.3 million from homebuilding as of August 31, 2011 compared with $865.7 million as of August 31, 2010. Net debt from homebuilding amounted to $2.33 billion as of August 31, 2011, reflecting a net debt-to-capitalization ratio of 46.6%.

Our Take

A depressed housing industry is the biggest concern for any homebuilder including Lennar. Besides, there is no sign of a speedy recovery. Home sales have declined consistently in each of the first two quarters of the year with a marginal increase in the third quarter. The situation is expected to deteriorate further.

In addition, house prices have been declining continuously, driven by an excess supply of homes in the face of depressed demand coupled with tough competition from pre-owned homes.

Moreover, regulations in the secondary mortgage market as well as a decline in demand for mortgage-backed securities, could force Lennar to pay its borrowers from its own reserves. This would lower its cash reserves and increase its exposure to the risk of default.

But Lennar’s efforts to counter the challenge are worth mentioning. The company has done well in its cost-reduction activities that were undertaken to mitigate the impact of the housing and credit market crisis. Moreover, the performance of Rialto Investments is another positive factor for Lennar.

Keeping these in mind, Lennar maintains a Zacks #3 Rank, which translates into a short-term Hold rating.