If the home building industry was hoping for some good news out of Lennar's 1Q2011 earnings, it'll have to wait a little longer. Although the publicly held company managed to turn a profit for the quarter, earning $27.4 million, (or $0.14 per share), thanks largely to its Rialto unit, which purchases distressed loan portfolios, housing demand remained anemic.
During a related earnings call Tuesday, CEO Stuart Miller said, "The long awaited selling season of 2011 hasn't yet defined itself as the beginning of a recovery cycle."
The company's operational metrics reflected the difficult sales environment. New orders fell 12% year over year to 2,267 homes during the quarter. The weak sales combined with a rapid backlog conversion pace contributed to a 12% slide in units in backlog 1,948 homes from 1Q2010. The company delivered 1,923 homes during the quarter, a decline of 4% from a year ago.
When Goldman Sachs analyst Joshua Pollard questioned executives about the company's high backlog burn ratio, executives said they expected the backlog conversion rate to fall when the market normalized and the company could do more preselling of homes. However, for now, executives called the company backlog "extremely fresh" and ready for quick delivery.
However, executives were wont to disclose the company's average cycle time, saying only that cycle time is enhanced by the company's reignited "Everything's Included" program, which bakes into the price of a home many of the most popular options and upgrades. The program not only offers buyers value, but it improves construction efficiency by eliminating one-offs created by option requests, executives said. Although the specific items included in the homes varies by market, in general, the company is finding that increasingly what's included are items related to technology and energy efficiency.
Also contributing to the company's quick delivery pace is its spec inventory. The company counted just shy of 2,000 unsold homes under construction at the end of the quarter. However, the company limited finished specs to about two homes per community. Executives said the company's spec count also reflected the fact that the company opened a number of new communities and needed product on the ground to kick-start sales and deliveries.
During the quarter, the company added 56 new communities to its roster while closing out of 44 legacy communities, ending the quarter with a total of 452 communities. Of those new communities, Lennar executives said roughly 15% were sourced by its Rialto unit, which is a joint venture formed with the FDIC to acquire distressed loan portfolios.
However, demand for new homes has proved to be spotty, as executives called divisional performance a "mixed bag." Executives point to Southwest markets such as Phoenix and Las Vegas as the weakest links in the company, and Texas operations, particularly Houston, showed considerable softening during the quarter. In California, Sacramento and the Central Valley were tough markets while Orange County and San Diego were performing better. It was a similar story for Florida operations. Executives said Orlando was quite soft, but that, depending on the community location, the company was seeing some success in other markets such as Naples/Sarasota. However, the Mid-Atlantic, from the Carolinas to Washington, D.C., proved to be a corridor of strength for the company during the quarter.
But with heavy competition in so many of the company's markets creating some pricing pressures even as sales incentives have stabilized, executives said they remained concerned with controlling costs and preserving the company's 21% gross margin excluding balance sheet charges. Prices have been on the rise recently for lumber and copper, which contributed between a $200 to $400 per home increase in material costs, depending on the market, during the quarter, executives said. Moreover, executives expected delivery costs to increase soon given the rising price of gas.
But despite the weak start to the 2011 spring selling season, executives appeared hopeful that things would improve through the back half of the year. Lennar president Rick Beckwitt offered this bit of insight into the second quarter: "Across the board, the March to-date numbers are better than what we recorded in the previous quarter."
At the very least, year-over-year comparison should paint a more positive picture in future quarters given that sales volumes plunged following the expiration of the federal home buyer tax credit last April.
Learn more about markets featured in this article: Los Angeles, CA.