Lennar Management: Housing Hasn't Yet Reached Bottom

Lennar Corp (LEN) reported earnings for the second fiscal quarter ending May 31, 2008, and held a conference call to discuss the report.

Financial Highlights

Revenues - $1.1 billion.
Net Loss - $120.9 million.
EPS - ($0.76) per diluted share.

The net loss and EPS number above include a $137.0 million charge for total valuation adjustments and write-offs of option deposits and pre-acquisitions costs and financial services notes receivable.

163 joint ventures.
57 have recourse debt.
31 have non-recourse debt.
75 have no debt.

Recourse indebtedness JV exposure - $807 million.
Net recourse indebtedness JV exposure - $613 million.
Partner’s equity - $1.2 billion.

Cash - $882.4 million.
Homebuilding debt - $2.31 billion.
Net Homebuilding debt - $ 1.43 billion.
Homebuilding debt to total capital - 39.5%.
Net Homebuilding debt to total capital - 28.7%.
No borrowings on revolver.

60% of closed loans were government this quarter (FHA mortgage) - up from 19% last quarter.

Management Comments

Housing Macro

"The housing market has continued to deteriorate throughout the first half of 2008 and...we expect this trend is going to continue for at least the remainder of the year. The deterioration that unfolded so quickly in the housing market so quickly in the past years has now spread to the overall economy."

"I am asked regularly as to whether or not we are at the bottom. I feel overall that we are not there yet. Generally speaking there are not yet signs of stabilization in the field. Demand patterns are inconsistent and erratic and we find that there is a constant and increasing flow of foreclosures that are maintaining downward pressure on prices and appraisals. In many markets it is apparent that the flow of foreclosed homes is expanding rather than subsiding."

"While there are some who still suggest we might avoid a recession and believe the economy will continue to grow, though at a slower pace, their case is becoming more and more difficult to make in the face of rising unemployment data, record low consumer confidence figures and a credit crisis that is constraining the movement of capital."

On Inventory

"The positive news from the field relative to some markets is that inventory of finished homes is coming down. The number of open, competing, new home communities is declining and the number of builders is also declining."

On Impairments

"...Aggregate levels of impairment and losses are more the nature of clean up rather than reconciliation to unknown market conditions. We have done the heavy lifting on impairment and are now situated with stated assets that can and will produce improving margins when the rate of declining market pricing subsides. We are very confident that even with continued degradation of market conditions, our stated asset base will not suffer nearly the levels of impairment we saw in 2007."

On Land Source

"...that venture has now gone into bankruptcy...the $1.2 billion of debt is non-recourse and that Lennar’s investment on our books is zero. So as large as this asset might seem, the potential impact to the company is not material."

Previous articles on Lennar here, here and here.

Comments

[crookedwood]

Interesting. Not enough data. Reading between the lines it appears management sees continued economic down turn which will increase the rate of foreclosure. It would have been helpful to see a management projection of time to bottom. Another 15 to 24 months?

[carey_jim]

Not to sound a ghoulish note, but there is a black lining to these clouds:

The rising price of oil and the falling dollar could give new meaning to the phrase, "Nation of Immigrants."

Housing prices might boom again if wealthy Middle Easterners and other dollar-rich folks, "flood" the market with demand.

Americans have always allowed the "huddled masses" into the country because ordinary Americans refuse to work at so many jobs.

Not to sound a ghoulish note, but why not let the "hooded masses" into America to buy up our real estate which Americans refuse to buy?

[notsosmart]

one analyst on this site was sure lennar would go belly up. in act he claimed they were there about 2 mos ago.opinions?

[CKR SUPERSTAR]

WHAT HAPPENS TO ALL THE O.C. EL TORO MARINE BASE LAND LENNAR BOUGHT UP?

[Econ 101]

My-thoughts, WHo do yuou think is going to occupy those houses after the defaults and credit swaps belong to the fed in 18 to 24 months? The government will move deserving New Orleans or other deserving refugees into them. He will probably put his wife in charge of that process. You can find her opinions in her Princton senior essay.

Urban Legends Reference Pages: Michelle Obama's Thesis
www.snopes.com/politic...
or
www.politico.com/news/...

And dont forget all of the converts to religion in our prisons, ala Eldridge Cleaver and the radicals of the 60's Big O ran with. We dont have to inport Muslims, they are already here...in the inner city

[carey_jim]

Sorry, sometimes humor strikes the funny bone a little too hard.

If you were facing foreclosure on your home, I know that you, patriotic American that you are, would NOT sell it to a rich Arab for 20% over what you paid for it.

But I have a question for you:

What percentage of Americans, facing bankruptcy, would refuse?

[Xyrus]

Econ/MyThoughts:

Are you truly that ignorant?

Do you have any idea why our country doesn't grind to an absolute halt? Because we are the r0k0rzzz!?!?!

No. Our country continues because of countries like China, Japan, Saudia Arabia, and a group of other countries that are buying our debt. If it wasn't for all those "damn foreigners" and "Muslim tarraists" buying our debt, the federal government would simply collapse under its own weight.

Muslims bring terrorists eh? No, ignorance does. Perhaps you're forgetting those good Chistian boys, the Unabomber and Ted Kazinsky. I suppose that I should start equating all Christians to be terrorists as well, right?

I don't think our country will last much longer at this rate.

~X~

[ArtfulDodger]

Americans are still in the denial phase of the housing crash. The Congress, of course, led by the likes of Barney Frank and Harry Reid and Charles Rangle stand ready to save them as soon as they pass the denial phase, and go into panic mode.

It would help if we had a real estate index for every section of the nation and for each state. Then the public would realize how volatile their home values are.

Certainly the financial media bare some of the blame for cheering on more and more government action and thus less freedom, which always harms the economy.

But the people ought to recognize freedom from statism, and this should begin in their schools, which it does not. A ripe skepticism about more government would help our nation, even though when government bureaucrats are determined to do a thing they don't give a damn what the American people think. They do it!

Hard assets and mining companies are the only hedge investors have at this point. Oil may have run its course unless, of course, there is conflict in the Middle East as the neo-con John Bolton has promised. The only thing that makes me leery of his statement about Israel's attacking Iran is that Israel has never warned before an attack; they always move in on the sneak. Perhaps they annouce it to the ruling Administration in Washington, but never publically.

But even hard assets won't hold up for long in this atmosphere, again, unless Iran is bombed.

Nevertheless, there is no hope in the long run to save our nation, as we've known it, either economically or culturally.

For as long as so many people want to keep leftists in power so that they can create more government to combat the problems and disasters that their government programs and legislation caused in the first place, we are eventually doomed economically.

And culturally, Marxists such as Barack Hussein Obambo hate society as it is, and lust to turn it upside down.

Government bureaucrats create more government over and over to fix the problems they themselves caused, but always wiggle out of what they've done by blaming private industry (Big Oil, Big Pharma, and the like, and of course a bogeyman such as Bush or Cheney or Rove, or the "evil rich"), and the people for what they have brought about.

With the help of the Marxist media, the people then yell for the government to do even more, thus causing problems that will have to be faced in the future—and that means more government rules, regulation, and legislation that brainwashed parrots scream for.

And clearly, it doesn't help sending our forces around the world to carry out other nation's wars for them. You can't blame Bush and the Republicrats for all of this either. The Dumborats in Congress voted to go get the Toy Tiger in Iraq (except for the members of the Black Caucus, which only votes for bills to punish American businesses and individuals, or to overturn society as it now stands); and Bush didn't put troops and bases in over 140 nations around the world. They were there when he took office.

Meanwhile, America has an invasion from the south, crashing stock markets and the dollar, along with hyper-inflation, declining property values, exploding crime (see "Sean Hannity's America" from Sunday, June 22, `08), and energy and food prices nearly equalling Germany's in the 1920s.

Enjoy the ride, especially those of you who're calling for even more statists to take over so they can create more government to punish businesses and anyone else who is succeeding in the private sector.

Parasites engender more parasites of different types, because when one begins its feeding, it weakens the host, which invites even more suckers to the party. The host soon withers to nothing. Consider the American people the host.

[swaps]

No kidding, the housing melt down is not over yet.

I have seen a string of observers mostly say the mortgage mess is now maybe 40 percent over, with another 60 percent to go.

Last week it was reported on CNBC that observers just realized that about a third of the reported home "sales" were actually "foreclosures&quo... meaning that sales are even worse than they statistically thought.

If you read Opdyke in the weekend syndicated Wall Street Journal today (we learn last week that he could not move to China to take a new job because he would have had to pay $4,800 a month rent there, plus carry his mortgage in Louisiana). He reports this week that his home is being kept on the market so he and Amy can downsize. Meanwhile, he notes that lower priced homes in his community are moving but his home listed among the higher priced ones are not. He says his home is priced right, but higher cost homes are just not moving. Do not know what overall percentage of the entire market is locked up in $400,000 plus homes, but the higher priced the home the more frozen it is right now in some markets, maybe many markets.

All the funny money lending that boosted the housing market will not come back for 20 years, until a new generation remembers.

I think this posting is correct in that it is not over. But I believe the wiped out consumers will not be able to fuel much of a recover when things stabilize either.

[Econ 101]

XYRUS,

You are putting words in my mouth, and you can’t spell so, No, I am not as ignorant as you. But you could tell me what a “r0k0rzzz!?!?!” might be? Is it some fantasy from Khoras ? Your moniker indicates your own fantasy of being a god.

The reasons “countries like China, Japan, Saudi Arabia, and a group of other countries that are buying our debt” are buying our debt is several fold. First until a few months ago the world believed our country was a great place to stash their cash. Now it seems there is a different reason. They are feeding the habit of a sick addict until he dies. Some of those countries (Saudi Arabia, China, et al) desire the demise of our freedoms so they can enslave even more people thru manipulation of religion. The Mullahs are con men who steal the wealth of Iraq and Iran. They now want to break our economy, dismember the US and rule here.

You should read about “La Raza” too. They too desire the violent over though of the Constitution of the United States so they can reclaim the SW for Mexico.

I would agree that Christians are not any better. Every person in power uses what he has to perpetuate that power. American politicians are some of the most corrupt in the world, and some of the most inept. The GOP has used the Christian right in the same way the Mullahs use Islam. The Democrats use secular humanism in the same way to organize their followers.

Muslims don’t necessarily bring terrorism. People with an agenda formant terrorism. If you read Ms Robinsons thesis (now Mrs. Obama) she is very much in favor of separatism to promote the black community.

What I think my readers should realize is that one thing you said I agree with, “I don't think our country will last much longer at this rate”. We have been betrayed by the politicians for decades. Starting with LBJ and getting worse with Jimmy Carter. When Big O puts Hillary on the Supreme Court the final nail of freedom's coffin will be pounded down.

[p. smith]

if you are in the market for high-end real estate, you may have to wait for another 5 years to get a reasonable price.

until the high-end tumbles, the cycle will then continue.

i'm waiting for the current $3 million home to become $1.5 million.