Lennar Beats on Q2 Earnings & Revenues - Analyst Blog

Lennar Corp. LEN beat expectations for both earnings and revenues in the second quarter of 2014 despite a softer-than-anticipated spring selling season.

Lennar's second-quarter fiscal 2014 adjusted earnings of 61 cents per share beat the Zacks Consensus Estimate of 51 cents by 19.6%. Earnings jumped 41.9% year over year driven by double-digit growth in homebuilding revenues and solid margins. Second-quarter 2013 earnings include a tax asset valuation allowance of $41.3 million.

Total revenue of $1.82 billion beat the Zacks Consensus Estimate of $1.66 billion by 9.6%.  Revenues also grew 27.3% year over year as both the Homebuilding and Rialto segments did significantly well in the quarter. Lennar Multifamily segment also contributed to the total revenue during the quarter.   

Homebuilding Revenues

Homebuilding revenues increased 29.1% year over year to $1.64 billion. Home sales were $1.61 billion in the quarter, up 27.8% year over year, driven by higher number of homes delivered and solid pricing gains.

Despite a softer-than-expected spring selling season, demand in most of the housing market exceeded supply. The housing demand was driven by high affordability and an expensive rental market.  The supply of homes was however restricted by limited land availability.

Despite slowing construction activity due to harsh weather conditions, new home orders increased 8% year over year to 6,183 homes in the second quarter. The potential value of net orders increased 26% year over year to $2.4 billion.

New home deliveries, excluding unconsolidated entities, were up 12.0% year over year to 4,987 homes in the reported quarter. The increase was driven by demand growth in all the homebuilding segments, excluding Southeast Florida.

The average selling price ASP of homes delivered was $322,000, up 13.8% year over year and 1.9% sequentially.

Backlog grew 11% year over year in the quarter to 6,858 homes. Potential housing revenues from backlog rose 26% year over year to $2.4 billion.

The company reduced sales incentives during the quarter. Sales incentives comprised 5.9% of home sales revenues in the second quarter, lower than 6.7% in the prior-year quarter and 6.3% in the prior quarter.

Land Sales

Land sales amounted to $29.4 million in the quarter, significantly up from $13.6 million in the prior-year quarter. The company's solid land position places it well to meet the growing demand, thus giving it a competitive edge over its peers.

Increased Margins

Gross margin on home sales expanded 140 basis points (bps) to 25.5% on the back of a rise in ASP, continued momentum from land acquisition strategy and reduced incentives.

As a percentage of sales, however, selling, general and administrative (SG&A) expenses were down 10 bps to 10.8%, driven by better operating leverage  owing to volume improvement. Operating margin on home sales improved 140 bps to 14.7% during the quarter, buoyed by strong pricing power and better operating leverage.

Financial Services

Financial Services segment's revenues declined 6.8% to $111.0 million in the quarter due to a significant slowdown in the refinance business. Operating earnings of Financial Services were $18.3 million, down 37.3% year over year from $29.2 million in the prior-year quarter, due to lower profit per transaction and a decline in volumes in title operations.

Rialto Investments  

Rialto Investments' revenues of $54.4 million increased 111.7% year over year from $25.7 million in the prior-year quarter helped by the new mortgage loan origination business, Rialto Mortgage Finance and interest income for managing and servicing assets.

Rialto Investments reported operating earnings of $13.4 million in the second quarter of 2014 (which includes a $3.7 million operating loss and an add back of $17.1 million of net loss attributable to non-controlling interests). Operating earnings in the second quarter of 2014 increased from operating earnings of $2.8 million (including $8.5 million of operating earnings counteracted by $5.7 million of net earnings attributable to non-controlling interests) in the second quarter of 2013.

Lennar Multifamily

During the fourth quarter of 2013, the Lennar Multifamily operations were separated from the Homebuilding segment and became an independent segment.

Lennar Multifamily revenues increased 51.2% year over year to $18.6 million in the reported quarter. The segment incurred a start-up operating loss of $7.2 million in the second quarter compared with a loss of $1.4 million last year owing to increased general and administrative expenses.

Financial Position

Lennar had homebuilding cash and cash equivalents of $628 million as of May 31, 2014, compared with approximately $646 million as of Feb 28, 2014.

In Jun 2014, the company increased its credit facility to $1.5 billion and extended its maturity to Jun 2018. The company has no amount outstanding on its $950 million unsecured revolving credit facility.

Outlook

Lennar remains optimistic about the recovery of the housing market. The company expects high affordability, high rental market and supply shortages to drive housing demand in the upcoming quarters.

With a huge pipeline exceeding $4 billion and 17,000 apartments, Lennar expects the multifamily rental segment to make significant contribution to earnings in the near future.  The company expects to sell its first apartment community in the third quarter of 2014 and expects  a regular pattern of sales from the second half of 2015.

Lennar carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the building construction/building products sector can consider stocks like Gafisa S.A. GFA, United Rentals, Inc. URI and TRI Pointe Homes, Inc. TPH. All the three companies hold a Zacks Rank #2 (Buy).