Lennar's 2nd quarter 2014 earnings: Rising margins and prices (Part 1 of 4)
Lennar Corporation is one of the United States’ largest homebuilders
Lennar Corporation (LEN) is a homebuilder with a primary geographical focus on the Southeast, South, Southwest, and Northwest. It has small exposure to the Northeast and the Midwest. Lennar started as a single-family homebuilder in Miami, Florida, in the early 1950s and has grown by acquisition. It concentrates on single-family attached and detached homes and purchases land through unconsolidated entities. Lennar generally prefers to acquire land directly, as opposed to under options contracts.
Rialto Capital Managements is part of Lennar’s financial arm. Rialto 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. It manages external capital as well, focusing on the purchase of distressed real estate assets, including not only single-family mortgages but also distressed commercial and even mortgage-backed securities.
It also has a financial services arm, which provides mortgage financing, title insurance, and closing services. While Lennar is an originator, it sells its origination pipeline in the secondary market and doesn’t retain servicing. It doesn’t appear that Rialto funds the purchase of any of Lennar’s flow.
Lennar targets first-time, move-up, and active adult homebuyers. The average sales price of a Lennar home last year was $307,000, which puts Lennar towards the lower end of price points. It’s more in line with KB Home (KBH) or Ryland (RYL), as opposed to the luxury end, like Toll Brothers (TOL) or NVR (NVR). Toll’s latest average selling price was north of $700,000.
Lennar recently started a multi-family segment. The multi-family business will concentrate on assembling a geographically diverse portfolio of institutional-quality, multi-family rental properties. It will pursue a development strategy in select U.S. markets through unconsolidated entities. The multi-family segment is still a cash drain.
Lennar also has a couple of interesting product niches. First, there’s its NextGen idea, which offers a “house within a house” living area for when a boomerang kid moves back home or an elderly parent is ready to move in. Lennar’s “everything’s included” program allows for some upgrades as standard. The company believes this is a differentiating factor.
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