Lennar Slips Despite Stellar Q3 Results

Lennar Corporation

, one of America's biggest homebuilders, reported third-quarter earnings of $0.40 per fully diluted share, up from $0.11 per fully diluted share a year ago and well ahead of analyst estimates of $0.28. Revenues increased by 34% to $1.1 billion as deliveries of new homes rose 28% and order backlogs increased by 79%. “The housing market has stabilized and the recovery is well underway,” said Stuart Miller, Chief Executive Officer. Lennar Homebuilding, the company's core segment, reported third-quarter revenues of $932.8 million, up 33%. The increased revenues were due to a 28% increase in the number of homes delivered to 3,617 units and a 4% increase in the average sales price of a Lennar home to $258,000. Sales incentives offered to home buyers as a percentage of the sales price fell to $26,100 or 9.2% of home sales revenue compared to 12.0%in the third-quarter of 2011. Gross margins improved due to an improved sales mix as more units in higher margin communities were sold compared to the same period last year. During a conference call, management reported that the recent housing downturn had enabled the unbundling labor and materials costs in many of the markets it serves, allowing the company to take advantage of economies of scale in the purchase of building materials and thereby improving profitability. Lennar Financial Services, which provides mortgages and mortgage refinancing, saw operating earnings of $25.3 million during the third-quarter, up from $8.0 million in the third-quarter of 2011. The company reported increased volumes and improved margins in this segment. Management also stated that there has been an improvement in mortgage financing approval percentages at banks and that there is an increasing number of “quality buyers that want to execute.” The Rialto Investments segment reported operating earnings of $7.7 million compared to operating earnings of $5.7 million in the third-quarter of 2011. During a conference call, management stated that homebuilding is beginning to return to normal after the extended downturn following the Financial Crisis of 2008. Business is being helped by “reduced foreclosures and declining distressed home inventory,” CEO Miller said. “There is a recovery going on in a broad-based way across the country,” management said. But, although the recovery is occurring nationwide, “it is still only in pockets.” Lennar stated that both new home prices and construction costs are rising. On average, costs rose by about $1 per square foot. Labor shortages are evident in some markets, particularly Phoenix, Texas and Florida. Building materials are also higher, particularly lumber, which is up by 20-25%. However, these are being offset by higher home prices. Management stated that they are pushing prices higher every month and that appraisers are cooperating in allowing for the price increases when appraising homes for financing. Management said that the company is aggressively acquiring land for future development and that, as the recovery continues, it is pulling some old developments out of mothballs. As the housing recovery continues, Lennar management expects to see further improvement in profit margins but did not provide specific numbers during the conference call. Despite what everyone acknowledges was a great third-quarter, Lennar's share price is lower today amid overall market weakness and weakness in the homebuilding sector.