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LEN > SEC Filings for LEN > Form 10-Q on 3-Jul-2014All Recent SEC Filings

Show all filings for LENNAR CORP /NEW/

Form 10-Q for LENNAR CORP /NEW/


3-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K, for our fiscal year ended November 30, 2013.
Some of the statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Quarterly Report include statements regarding: our belief that the housing market is in a solid recovery mode; our belief that we will achieve profitability in fiscal 2014; our belief regarding the fundamental drivers of improvement in the housing market, and regarding constrained inventories; our expectation regarding our strategy; our expectation that the main driver of our earnings will continue to be our homebuilding and Financial Services operations; our belief that we are well positioned to deliver between 21,000 and 22,000 homes with gross margins expected to average about 25% during fiscal 2014; our expectation regarding the pipeline of future projects in the Multifamily segment; our expectation that our ancillary businesses will enhance shareholder value; our intent to settle the 2.75% convertible senior notes due 2020 in cash; our expectation regarding our variability in our quarterly results; our belief that Rialto Mortgage Finance ("RMF") will be a significant contributor to our Rialto Investments' revenues in the near future; our expectations regarding the renewal or replacement of our warehouse facilities; our belief regarding draws upon our bonds or letters of credit, and our belief regarding the impact to the Company if there were such a draw; our belief that our operations and borrowing resources will provide for our current and long-term capital requirements at our anticipated levels of activity; and our estimates regarding certain tax matters and accounting valuations, including our expectations regarding the result of anticipated settlements with various taxing authorities.
These forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors could in the future affect our actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. Some of the most important factors that could prevent us from achieving our goals, and cause the assumptions underlying forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements include but are not limited to the following: a slowdown in the recovery of real estate markets across the nation, or any further downturn in such markets; changes in general economic and financial conditions, and demographic trends, in the U.S. leading to decreased demand for our services and homes, lower profit margins and reduced access to credit; unfavorable or unanticipated outcomes in legal proceedings that substantially exceed our expectations; the possibility that we will incur non-recurring costs that may not have a material adverse effect on our business or financial condition, but may have a material adverse effect on our consolidated financial statements for a particular reporting period; decreased demand for our Multifamily rental properties; increased competition for home sales from other sellers of new and resale homes; conditions in the capital, credit and financial markets, including mortgage lending standards, the availability of mortgage financing and mortgage foreclosure rates; changes in interest and unemployment rates, and inflation; a decline in the value of the land and home inventories we maintain or possible future write-downs of the book value of our real estate assets; increases in operating costs, including costs related to real estate taxes, construction materials, labor and insurance, and our ability to manage our cost structure, both in our Homebuilding and Multifamily businesses; our inability to maintain anticipated pricing levels and our inability to predict the effect of interest rates on demand; the ability and willingness of the participants in various joint ventures to honor their commitments; our ability to successfully and timely obtain land-use entitlements and construction financing, and address issues that arise in connection with the use and development of our land; natural disasters and other unforeseen damage for which our insurance may not provide adequate coverage; our inability to successfully grow our ancillary businesses; potential liability under environmental or construction laws, or other laws or regulations affecting our business; our ability to comply with the terms of our debt instruments; and our ability to successfully estimate the impact of certain regulatory, accounting and tax matters.
Please see our Form 10-K, for the fiscal year ended November 30, 2013 and other filings with the SEC for a further discussion of these and other risks and uncertainties which could also affect our future results. We undertake no obligation to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events.


Outlook
We had a solid second quarter, with revenues and pretax earnings attributable to Lennar increasing 27% and 39%, respectively, from the second quarter of 2013. Our gross margin increased 140 basis points to 25.5%. This gross margin, combined with our selling, general and administrative expenses of 10.8%, increased our operating margin 140 basis points to 14.7% during the second quarter of 2014. In addition, we ended the quarter with a strong sales backlog, up 11% in homes and 26% in dollar value. During the second quarter of 2014, we also had strong performances from our other business segments. Our Financial Services segment produced $18.3 million of pretax earnings as it continues to build its primary captive business and works to replace the now diminished refinance business from our retail channel with purchase business across our national footprint. Rialto generated $13.4 million of operating earnings net of loss attributable to noncontrolling interests, benefiting from our new mortgage origination and securitization business RMF and a transition from a capital-intensive business model to an asset light, fund model. Our Multifamily rental business continued to grow during the second quarter of 2014, and we ended the quarter with 18 multifamily communities, of which 2 communities were completed and operating, 2 communities were partially completed and leasing, 13 communities were under construction and 1 community was under development. Finally, our FivePoint Communities is well positioned, managing the development of some of the most desirable real estate assets in Southern and Northern California.
While the spring selling season was softer than anticipated and we recognize the potential headwinds from a constrained and sometimes uncertain mortgage market, including interest rate volatility, fluctuations in consumer confidence and diminishing investment purchases in the resale market, the homebuilding recovery continued its progression at a slow and steady pace. We believe the fundamentals of the homebuilding industry remain strong driven by favorable monthly payment comparisons to rental and overall supply shortages. We believe that the fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture, unlocking pent-up demand from the production deficit of both single and multifamily housing that took place throughout the economic downturn and through last year. We believe the short supply of available homes and pent-up demand will continue to define our strategy of land acquisition and growth and drive the housing recovery forward. Builders of both single and multifamily housing will need to increase production to make up for the production deficit. Even as the market responds, inventories are likely to remain constrained as production increases are limited by a shortage of entitled and developed land to build on in desirable locations. Our company's strategy continues to be driven by our belief that the real estate market remains positioned to continue to recover and that our company remains well positioned to benefit from such recovery. Our principal focus in our homebuilding operations will continue to be on generating strong operating margins on the homes we sell by delivering homes from the excellent land positions purchased since 2009, increasing sales prices and reducing sales incentives, while managing increasing material, labor and land costs, as well as taking advantage of the steps we have taken over the past several years to reduce costs and right-size our overhead structure. In addition, we plan to continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets that we expect will continue to support our homebuilding operations going forward and help us increase operating leverage as our deliveries increase. We expect that our Company's main driver of earnings will continue to be our homebuilding and Financial Services operations, as we are currently well positioned to deliver between 21,000 and 22,000 homes with gross margins expected to average about 25% for fiscal 2014. We are also focused on our multiple platforms including Rialto, Multifamily, and FivePoint as these ancillary businesses continue to mature and expand their franchises providing longer-term opportunities that we expect will enhance shareholder value. Overall, we are on track to achieve another year of increased profitability in fiscal 2014, as the housing market recovery continues.


(1) Results of Operations Overview We historically have experienced, and expect to continue to experience, variability in quarterly results. As a result, our results of operations for the three and six months ended May 31, 2014 are not necessarily indicative of the results to be expected for the full year. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second fiscal quarter and increased deliveries in the second half of our fiscal year. However, periods of economic downturn in the industry, such as we have experienced in previous years, can alter seasonal patterns. Our net earnings attributable to Lennar were $137.7 million, or $0.61 per diluted share ($0.67 per basic share) in the second quarter of 2014, compared to net earnings attributable to Lennar of $137.4 million, or $0.61 per diluted share ($0.71 per basic share) in the second quarter of 2013, which included a partial reversal of the state deferred tax asset valuation allowance of $41.3 million, or $0.18 per diluted share. Our net earnings attributable to Lennar were $215.8 million, or $0.95 per diluted share ($1.06 per basic share) in the six months ended May 31, 2014, compared to net earnings attributable to Lennar of $194.9 million, or $0.88 per diluted share ($1.01 per basic share) in the six months ended May 31, 2013. Financial information relating to our operations was as follows:

                                                  Three Months Ended            Six Months Ended
                                                        May 31,                      May 31,
(In thousands)                                    2014           2013          2014          2013
Lennar Homebuilding revenues:
Sales of homes                                $ 1,605,366     1,256,267     2,745,597     2,111,348
Sales of land                                      29,419        13,577       120,573        26,940
Total Lennar Homebuilding revenues              1,634,785     1,269,844     2,866,170     2,138,288
Lennar Homebuilding costs and expenses:
Costs of homes sold                             1,195,751       952,983     2,049,929     1,619,067
Costs of land sold                                 23,786        10,916        98,858        21,264
Selling, general and administrative               173,106       136,608       308,211       238,850
Total Lennar Homebuilding costs and expenses    1,392,643     1,100,507     2,456,998     1,879,181
Lennar Homebuilding operating margins             242,142       169,337       409,172       259,107
Lennar Homebuilding equity in earnings from
unconsolidated entities                               394        13,491         5,384        12,627
Lennar Homebuilding other income, net               2,262         2,075         5,151         9,872
Other interest expense                            (10,287 )     (25,109 )     (22,978 )     (51,140 )
Lennar Homebuilding operating earnings            234,511       159,794       396,729       230,466
Lennar Financial Services revenues                111,016       119,096       187,968       214,976
Lennar Financial Services costs and expenses       92,723        89,924       165,210       169,702
Lennar Financial Services operating earnings       18,293        29,172        22,758        45,274
Rialto Investments revenues                        54,393        25,684       101,348        51,306
Rialto Investments costs and expenses              79,604        28,305       127,180        60,076
Rialto Investments equity in earnings from
unconsolidated entities                            17,939         4,505        23,293        10,678
Rialto Investments other income, net                3,595         6,646         2,366         7,973
Rialto Investments operating earnings (loss)       (3,677 )       8,530          (173 )       9,881
Lennar Multifamily revenues                        18,551        12,257        26,354        12,554
Lennar Multifamily costs and expenses              25,549        13,581        39,476        17,409
Lennar Multifamily equity in loss from
unconsolidated entities                              (182 )         (30 )        (257 )         (33 )
Lennar Multifamily operating loss                  (7,180 )      (1,354 )     (13,379 )      (4,888 )
Total operating earnings                          241,947       196,142       405,935       280,733
Corporate general and administrative expenses     (38,317 )     (33,853 )     (76,429 )     (65,123 )
Earnings before income taxes                  $   203,630       162,289       329,506       215,610


Three Months Ended May 31, 2014 versus Three Months Ended May 31, 2013 Revenues from home sales increased 28% in the second quarter of 2014 to $1.6 billion from $1.3 billion in the second quarter of 2013. Revenues were higher primarily due to a 12% increase in the number of home deliveries, excluding unconsolidated entities, and a 14% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 4,976 homes in the second quarter of 2014 from 4,449 homes in the second quarter of 2013. There was an increase in home deliveries in all our Homebuilding segments and Homebuilding Other, except in our Homebuilding Southeast Florida segment. The increase in the number of deliveries was primarily driven by an increase in active communities over the last year. The decrease in home deliveries in our Homebuilding Southeast Florida segment was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. The average sales price of homes delivered increased to $322,000 in the second quarter of 2014 from $283,000 in the second quarter of 2013, primarily due to increased pricing in many of our markets as the market recovery continues. Sales incentives offered to homebuyers were $20,300 per home delivered in the second quarter of 2014, or 5.9% as a percentage of home sales revenue, compared to $20,200 per home delivered in the second quarter of 2013, or 6.7% as a percentage of home sales revenue, and $21,300 per home delivered in the first quarter of 2014, or 6.3% as a percentage of home sales revenue.
Gross margins on home sales were $409.6 million, or 25.5%, in the second quarter of 2014, compared to $303.3 million, or 24.1%, in the second quarter of 2013. Gross margin percentage on home sales improved compared to the second quarter of 2013, primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales, an increase in the average sales price of homes delivered, a greater percentage of deliveries from our new higher margin communities (communities where land was acquired subsequent to November 30, 2008), which made up 69% of our deliveries, and $9.6 million of insurance recoveries and other nonrecurring items, partially offset by an increase in materials, labor and land costs. Gross profits on land sales totaled $5.6 million in the second quarter of 2014, compared to $2.7 million in the second quarter of 2013.
Selling, general and administrative expenses were $173.1 million in the second quarter of 2014, compared to $136.6 million in the second quarter of 2013. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 10.8% in the second quarter of 2014, from 10.9% in the second quarter of 2013.
Lennar Homebuilding equity in earnings from unconsolidated entities was $0.4 million in the second quarter of 2014, compared to $13.5 million in the second quarter of 2013. In the second quarter of 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included our share of operating earnings of $13.0 million primarily related to sale of approximately 300 homesites to third parties by one unconsolidated entity for approximately $126 million, resulting in a gross profit of approximately $53 million.
Lennar Homebuilding other income, net, totaled $2.3 million in the second quarter of 2014, compared to $2.1 million in the second quarter of 2013. Lennar Homebuilding interest expense was $49.2 million in the second quarter of 2014 ($38.6 million was included in costs of homes sold, $0.3 million in costs of land sold and $10.3 million in other interest expense), compared to $54.8 million in the second quarter of 2013 ($29.0 million was included in costs of homes sold, $0.7 million in costs of land sold and $25.1 million in other interest expense). Interest expense decreased due to an increase in qualifying assets eligible for interest capitalization, partially offset by an increase in our outstanding debt and increase in home deliveries.
Operating earnings for our Lennar Financial Services segment were $18.3 million in the second quarter of 2014, compared to $29.2 million in the second quarter of 2013. The decrease in profitability was primarily due to a more competitive environment as a result of a significant decrease in refinance transactions, which led to a lower profit per transaction in the segment's mortgage operations and a decrease in volume in the segment's title operations.
Operating earnings for our Rialto Investments ("Rialto") segment were $13.4 million in the second quarter of 2014 (which was comprised of a $3.7 million operating loss and an add back of $17.1 million of net loss attributable to noncontrolling interests), compared to operating earnings of $2.8 million (which included $8.5 million of operating earnings, partially offset by $5.7 million of net earnings attributable to noncontrolling interests) in the second quarter of 2013.
Rialto's revenues were $54.4 million in the second quarter of 2014, which consisted primarily of securitization revenue and interest income from RMF (which primarily accounted for the increase in revenues in the second quarter of 2014), interest income associated with the Rialto segment's portfolio of real estate loans and fees for managing and servicing assets. This compared to revenues of $25.7 million in the second quarter of 2013, which consisted primarily of accretable interest income associated with the segment's portfolio of real estate loans and fees for managing and servicing assets. Rialto's expenses were $79.6 million in the second quarter of 2014, which consisted primarily of loan impairments of $33.9 million, primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests), costs related to RMF, interest expense and other general and administrative expenses, compared to expenses of $28.3 million in the second quarter of 2013, which consisted primarily of costs related to its portfolio operations, loan impairments of $3.5 million


primarily associated with the segment's FDIC loan portfolio (before noncontrolling interests) and other general and administrative expenses. Expenses increased primarily due to an increase in loan impairments due to changes in the estimated cash flows expected to be collected on the segment's loan portfolios, increases in securitization expenses and general and administrative expenses related to RMF and interest expense related to Rialto's issuance of senior notes in the fourth quarter of 2013.
Rialto Investments equity in earnings from unconsolidated entities were $17.9 million and $4.5 million in the second quarter of 2014 and 2013, respectively, which were primarily related to our share of earnings from the Rialto real estate funds.
In the second quarter of 2014, Rialto Investments other income, net, was $3.6 million, which consisted primarily of net realized gains on the sale of real estate owned ("REO") of $14.2 million, rental income and other income, partially offset by expenses relating to owning and maintaining REO and other expenses. In the second quarter of 2013, Rialto Investments other income, net, was $6.6 million, which consisted primarily of net realized gains on the sale of REO of $18.5 million and rental income, partially offset by expenses related to owning and maintaining REO.
Operating loss for our Lennar Multifamily segment was $7.2 million in the second quarter of 2014, compared to $1.4 million in the second quarter of 2013. The operating loss in Lennar Multifamily primarily related to general contractor expenses and general and administrative expenses of the segment, partially offset by general contractor and management fee income.
Corporate general and administrative expenses were $38.3 million, or 2.1% as a percentage of total revenues, in the second quarter of 2014, compared to $33.9 million, or 2.4% as a percentage of total revenues, in the second quarter of 2013. As a percentage of total revenues, corporate general and administrative expenses improved due to increased operating leverage.
Net earnings (loss) attributable to noncontrolling interests were ($15.1) million and $5.4 million in the second quarter of 2014 and 2013, respectively, which were primarily related net earnings (loss) attributable to noncontrolling interests associated with the FDIC's interest in the portfolio of real estate loans that we acquired in partnership with the FDIC.
In the second quarter of 2014, we had a tax provision of $81.0 million primarily related to pre-tax earnings of the period. In the second quarter of 2013, we had a net tax provision of $19.5 million, which included a $60.8 million tax provision primarily related to pre-tax earnings of the period, partially offset by a $41.3 million reversal of our valuation allowance. Our overall effective income tax rates were 37.04% and 12.42%, in the second quarter of 2014 and 2013, respectively. The difference in effective tax rates was primarily due to the valuation allowance reversal recorded in the second quarter of 2013. Six Months Ended May 31, 2014 versus Six Months Ended May 31, 2013 Revenues from home sales increased 30% in the six months ended May 31, 2014 to $2.7 billion from $2.1 billion in 2013. Revenues were higher primarily due to a 12% increase in the number of home deliveries, excluding unconsolidated entities, and a 15% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 8,573 homes in the six months ended May 31, 2014 from 7,623 homes in the six months ended May 31, 2013. There was an increase in home deliveries in all our Homebuilding segments and Homebuilding Other, except in our Homebuilding Southeast Florida segment. The increase in the number of home deliveries was primarily driven by an increase in active communities over the last year. The decrease in home deliveries in our Homebuilding Southeast Florida segment was primarily due to a higher mix of start-up communities, which are earlier in the life cycle of delivering homes than non start-up communities. The average sales price of homes delivered increased to $320,000 in the six months ended May 31, 2014 from $277,000 in the six months ended May 31, 2013, primarily due to increased pricing in many of our markets as the market recovery continues. Sales incentives offered to homebuyers were $20,700 per home delivered in the six months ended May 31, 2014, or 6.1% as a percentage of home sales revenue, compared to $21,500 per home delivered in the six months ended May 31, 2013, or 7.2% as a percentage of home sales revenue. Currently, our biggest competition is from the sales of existing and foreclosed homes. We differentiate our new homes from those homes by issuing new home warranties, updated floor plans, our Everything's Included marketing program, community amenities and in certain markets by emphasizing energy efficiency and new technologies.
Gross margins on home sales were $695.7 million, or 25.3%, in the six months ended May 31, 2014, compared to $492.3 million, or 23.3%, in the six months ended May 31, 2013. Gross margin percentage on home sales improved compared to the six months ended May 31, 2013, primarily due to a decrease in sales incentives offered to homebuyers as a percentage of revenue from home sales, an increase in the average sales price of homes delivered, a greater percentage of deliveries from our new higher margin communities (communities where land was acquired subsequent to November 30, 2008), which made up 69% of our deliveries, and $15.1 million of insurance recoveries and other nonrecurring items, partially offset by an increase in materials, labor and land costs. Gross profits on land sales totaled $21.7 million in the six months ended May 31, 2014, compared to $5.7 million in the six months ended May 31, 2013. The increase in gross profits on land sales included two land sale transactions related to land that was not under development at that time that generated $65.4 million of revenues and $8.0 million of gross profits.


Selling, general and administrative expenses were $308.2 million in the six months ended May 31, 2014, compared to $238.9 million in the six months ended May 31, 2013. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 11.2% in the six months ended May 31, 2014, from 11.3% in the six months ended May 31, 2013.
Lennar Homebuilding equity in earnings from unconsolidated entities was $5.4 million in the six months ended May 31, 2014, compared to $12.6 million in the six months ended May 31, 2013. In the six months ended May 31, 2014, Lennar Homebuilding equity in earnings from unconsolidated entities included our share of operating earnings of $4.7 million primarily related to third-party land sales. In the six months ended May 31, 2013, Lennar Homebuilding equity in earnings from unconsolidated entities included our share of operating earnings of $13.0 million primarily related to sales of approximately 300 homesites to third parties by one unconsolidated entity for approximately $126 million, resulting in a gross profit of approximately $53 million. . . .

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