Lennar Corporation is one of the United States’ largest homebuilders
Lennar Corporation (LEN) is a homebuilder with a primary geographic focus on the Southeast, South, Southwest, and Northwest. It has small exposure to the Northeast and the Midwest. Rialto Investments is its financial arm, which invests in real estate and manages funds that invest in real estate. In many ways, Rialto is similar to a hedge fund or private equity vehicle that invests in distressed real estate assets—whether properties, pools of loans, or mortgage-backed securities.
Lennar targets first-time, move-up, and active adult homebuyers. The average sales price of a Lennar home last year was $255,000, which puts Lennar towards the lower end of price points, more in line with KB Homes (KBH) or Ryland (RYL), as opposed to the luxury end like Toll Brothers (TOL) or NVR. Lennar generally prefers to acquire land directly, as opposed to under options contracts.
Highlights of the earnings report and conference call
Lennar reported third quarter earnings per share of $0.54, which includes an exceptional tax provision of $67 million or $0.30 a share. Last year’s third quarter earnings were $0.40, with a $12.8 million tax benefit or $.06 a share. So apples-to-apples, earnings more than doubled from last year. Revenues were $1.6 billion—an increase of 55%—while deliveries increased 37%. New orders increased 32%.
Stuart Miller, CEO of Lennar, addressed the recent increase in rates: “We continue to see long-term fundamental demand in the market driven by the significant shortfall of new single-family and multi-family homes built over the last five years. While there may be bumps along the road that may impact the short-term pace of the recovery, the long-term outlook for our business remains extremely bright.”
On the conference call, Miller said that the company’s mortgage business is slowing, and price increases will more than cover increased expenses—particularly labor. Lennar noted that sales have slowed since interest rates began to rise, but it views this slowdown as temporary.
One recurring theme has been increases in costs, particularly labor. Most of the price appreciation of Lennar’s new homes has been due to increased labor costs, as there’s a shortage of skilled construction workers. Land availability is also an issue. The company views this issue ultimately as a positive, though, in that even though costs are increasing, Lennar is reducing unemployment, which ultimately fuels longer-term confidence and sales. The last headwind—a tough credit market—is starting to abate.
The takeaway from the earnings report is that so far, the hike in rates is slowing demand a little, but the U.S. housing market is still suffering from an absence on inventory, not an abundance of it. Second, lumber costs are falling, but labor costs are going up. That said, margins are still increasing. Finally, the housing recovery wasn’t driven by financial engineering (that is, the Fed), but by household formation. Overall, Lennar’s report was very bullish on the housing sector as a whole. Lennar is at the lower price points, so that puts the company more in the same category as KB Home (KBH) or PulteGroup (PHM). There will be less of a read-across for the builders at the higher price points like Toll Brothers (TOL) or NVR (NVR).
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