Lennar (LEN 52.60, +3.38, +6.86%) is trading higher after reporting Q2
(May) earnings results this morning.
Lennar is one of the nation's largest homebuilders. It builds affordable, move-up, and active adult homes, primarily under the Lennar brand name. It also has a Financial Services segment that focuses on providing mortgage financing, title insurance, and closing services for buyers of Lennar's homes and other customers. Lennar's Multifamily segment is a nationwide developer of multifamily rental properties. The company also operates an asset management platform known as the Rialto segment that currently focuses on investing throughout the commercial real estate capital structure; LEN is, however, per its Q1 earnings press, exploring “strategic alternatives” for properly positioning Rialto Capital Management within the company’s broader business model.
In February, Lennar completed its major acquisition of CalAtlantic (CAA), which it purchased in a transaction valued at $9.3 bln, including $3.6 bln of net debt assumed. The combination created the nation's largest homebuilder based on revenues, with combined annual revenue of $17 bln. The combined company controls approximately 250,000 homesites and has approximately 1,300 active communities in 49 markets across 21 states, where approximately 50% of the U.S. population currently lives. This acquisition-driven critical mass is expected to yield significant benefits to a greater number of deliveries through efficiencies in purchasing, labor, access to land, and overhead allocation. CalAtlantic stockholders own approximately 26% of the combined company.
Turning to the Q2 (May) results, EPS came in at $1.58, which was much better than market expectations. Revenue rose 67.4% year/year to $5.46 bln, also above market expectations. The company reported deliveries of 12,095 homes, up 57% year/year, and new orders of 14,440 homes, up 62%. The new orders dollar value was $6.0 bln -- up 79%. LEN now has a backlog of 19,622 homes, up 92%, with a backlog dollar value of $8.6 bln, up 114%.
These are some huge growth numbers, but keep in mind that a good portion of this comes from the CalAtlantic acquisition. This was LEN's first full quarter combined with CalAtlantic. LEN says these strong results were supported by continued solid fundamentals in the housing market.
Examining these results, management commented that concerns about rising interest rates and construction costs have been offset by low unemployment and increasing wages combined with short supply deriving from years of industry underproduction of new homes. Demand remained strong as LEN continued to see pricing power support margins while affordability remained consistent. During the quarter, LEN used its strong cash flow generation to reduce debt levels by $1.1 bln.
Complementing its homebuilding business, LEN's Financial Services operating earnings increased to $52.4 mln from $43.7 mln last year as it made strides in expanding its platform across its incremental delivery base from CalAtlantic, which was partially offset by the year/year reduction in refinance activity.
LEN says its increased operating scale in local markets post-acquisition has positioned it as the builder of choice both in land acquisition and building production. Land developers are finding that they want and need LEN's volume in their communities, and, toward the strengthening of production, LEN has seen increased access to trades and improved pricing due in large part to its local scale and the attractiveness of its Everything's Included platform, which incorporates upgrades desired by homebuyers such as stainless steel appliances or solar electric packages as standard home features provided at no additional cost. Even in the context of labor cost pressures and material cost increases, LEN is exceeding cost synergy expectations.
In sum, this was an important quarter for LEN as it was the first full quarter to show combined results from the CalAtlantic acquisition, and it covered the all-important spring selling season. There was huge EPS upside, but it's possible that analysts had been waiting until after this quarter to update their models. Part of the problem is that LEN does not provide specific guidance, so analysts are left a bit in the dark. With that said, this was a very strong quarter, and investors are clearly pleased with the MayQ results. Looking ahead, though not providing specific guidance, LEN says that it's well positioned to continue its strong performance in the back half of 2018. This report should be positive for other homebuilders.
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