This summary is based on the third quarter fiscal 2007 earnings call conducted by Lennar Corporation (LEN) on September 25, 2007.
President and CEO: Stuart A. Miller
VP and CFO: Bruce E. Gross
VP and Controller: Diane J. Bessette
Key Investors Issues
- Net loss was $3.25 per share compared to income of $1.30 a share in last year.
- Revenues were $2.3 billion, down 44% from previous year.
- Homebuilding debt decreased by $212.8 million over prior year to $2.57 billion.
- Future earnings guidance not provided due to uncertain market conditions.
Fiscal Year to Date Performance
- Total revenues fell 33% from $12 billion in 2006 to $8 billion, as revenues from home sales decreased 31% to $7.5 billion from $10.8 billion in 2006 due to a 27% decrease in the number of home deliveries and a 7% decrease in the average sales price of homes delivered in 2007.
- New home deliveries, excluding unconsolidated entities, decreased to 24,772 homes from 33,747 homes last year.
- The average sales price of homes delivered decreased to $299,000 from $321,000 in 2006, following higher sales incentives offered to homebuyers.
- Gross margins on home sales excluding inventory valuation adjustments were $1.1 billion, or 14.4%, compared to $2.4 billion, or 22.5% in 2006, due to higher sales incentives.
- Loss on land sales totaled $480 million including $197.2 million of FAS 144 valuation adjustments and $312.4 million of write-offs of deposits and pre-acquisition costs related to 24,400 homesites under option.
- Net loss was $689 million or $4.37 a share versus a profit of $789 million in 2006 or $4.88 a share.
- The company''s LandSource joint venture admitted MW Housing Partners as a new strategic partner, resulting in a cash distribution of $707.6 million.
Third Quarter Highlights
Net loss was $513.9 million or $3.25 per share as against net earnings of $206.7 million, or $1.30 per share in 2006 following losses in all segments.
- Total revenues fell 44% from $4.2 billion in the prior year to $2.3 billion, as revenues from home sales decreased 44% from $3.9 billion in 2006 to $2.2 billion, following a 41% fall in wholly-owned deliveries and a 6% drop in average sales price on wholly-owned deliveries from 316,000 to 296,000 year-over-year.
- Average sales price by region were down 17% in the East region to $282,000, the Central region was flat at $205,000 and the Western region was down 2% from $451,000 to $440,000.
- Gross margin on home sales percentage before impairments decreased to 14%, driven by the increase in sales incentives to 13.4%.
- A focus on rightsizing SG&A along with reduced variable compensation expense are the primary drivers, leading to a $122 million or 29% reduction in SG&A expenses.
Unusual and non-recurring charges impacting SG&A incurred include severance and lease costs of $7 million, research and development facility costs of $4 million and conversion costs to the national Lennar branding campaign of $4.5 million.
- New orders were down 48% and this was a broad-based decline experienced in all of the operating regions.
- The number of homes in backlog declined 60%, with each region experiencing greater than a 50% decline in homes in backlog. The cancellation rate was 32%.
Debt levels have been reduced by $218.2 million to $2.57 billion since the prior year and the company continues to be positioned with ample liquidity.
- Inventory levels decreased from $8.7 billion in 2006 to $6.7 billion. Of this reduction, $600 million was not related to impairments.
- As a result of the market deterioration and increased supply in the market, the firm reduced starts 62% inclusive of unconsolidated joint ventures.
- However, despite the mortgage market volatility, completed unsold homes were reduced by 200 homes and they remain between one and two homes completed on average per community.
- In order to preserve liquidity, the firm requested an amendment from lenders to eliminate the interest coverage ratio covenant and instead convert its calculation to define the maximum leverage ratio with 93% bank approval for the revolving credit facility amendment.
Following aggressive focus on asset management, the company has reduced homesites homes owned and controlled by 138,000 homesites from 345,000 homesites owned and controlled to 207,000, a 40% decline.
- Included in the 207,000 homesites are 86,000 homesites owned, 43,000 controlled by option with third party land sellers and 78,000 optioned from joint ventures.
- The balance of 43,000 homesites controlled by option with third parties declined almost 70% from the peak in 2006. The option deposit walk-away expense was $243 million, representing 15,000 homesites.
- Net recourse exposure on joint venture debt was reduced to $872 million, with $24 million contributed towards remargining of recourse debt. The majority of this was the result of impairments that have been taken at JV entity level.
- Mortgage banking subsidiaries continued to have sufficient warehouse financing for internally originated mortgages through two existing facilities with nine banks that aggregate to $1.1 billion.
Financial Services Segment
- Profits decreased from $61.7 million in the prior year to a loss of $5.2 million, partly due to a non recurring gain on the sale of the personal lines insurance business of over $18 million and a 39% fall in revenue to $113 million.
- The decline in profitability was also attributable to a 34% reduction in mortgage origination and the $9.3 million of partial write-offs of land seller notes receivable.
- Fixed rate loan percentage increased to 88% from 63% in the prior year. Jumbo loans were 16% of the total loans and the percentage of FHA or VA loans increased to 25% from 12% in 2006.
- Sub-prime loans were about 1% of total loan volume and these are agency eligible products in that 1%.
- Alt-A product reduced from 41% in the prior year to 25% of the originations reflective of market requirements of credit scores over 680 along with a higher down payment and partial or full verification of income.
Market Overview:
