The housing market recovery may be at what Lennar CEO Stuart Miller calls a "rocky bottom," but the Miami-based company doesn't appear to be having any problems picking its way through it.
Lennar posted only a $0.04 loss per share Wednesday, well ahead of analysts' consensus of $0.30 per share. It was also much improved over last year's same fiscal first quarter loss of $0.98 per share.
And, while closings were still down 6% year over year to 2,004, new orders were up 128% to 2,577, and it's likely most will stick since the going cancellation rate is 13%, the lowest in years.
Backlog is up 34% to 2,204 homes, the greatest year-over-year improvement since 2002.
And cost cutting as well as lower-cost land netted the company a 3.4% operating margin, its highest in four years. Cost-to-build is lower than it has been in a decade.
"At the end of the day, we are very pleased with the progress to date," summed up Miller. "The market and overall economy appear to be continuing to stabilize and are generally in recovery."
Miller said home foreclosures have stopped being a problem in many of Lennar's markets. And "prices are not freefalling and, in fact, in many markets are starting to stabilize and even recover."
Lennar, unlike other builders, has not significantly increased its speculative home building to attract buyers seeking to qualify for the federal extended/expanded home buyer tax credit.
"We have not allowed ourselves to get caught up in spec building in anticipation of it," Miller said, adding he doesn't think that the tax credit is a main driver of sales but, rather, just a bonus for buyers. Consequently, they aren't worried that demand will disappear with the tax benefit.
"The ending of the program is going to come in an orderly fashion, and it won't be as dramatic as some of them think it will be," he said.
So confident is Lennar that the market has stabilized that it has begun to invest its considerable nest egg in land acquisition, though typically choosing to buy options on lots rather than buying the land outright.
An example offered by Richard Beckwitt, Lennar's executive vice president for operations, is its recent acquisition of options on 4,000 home sites in 73 new communities in Florida with Starwood Land, which bought the assets from TOUSA out of bankruptcy.
"It's one of the most desirable real estate portfolios to come to the market in years," Beckwitt said. He revealed an interesting detail about the deal. Lennar had agreed to option the lots even before Starwood, who had first bidding rights on the land, bought the land at auction. That gave Starwood the confidence to bid on the land up to a certain threshold, and "we locked in pricing before the auction," Beckwitt said. Lennar has flexible takedown terms on the land, and its IRR is north of 20%, he said.
Beckwitt also offered analysts summaries of conditions in the company's markets:
--In Florida, new sales per community are on the rise, with a lack of entry-level product helping the Miami market, out-of-state buyers returning to Sarasota and Naples, and increased financing available for foreign buyers in Orlando. The weakest markets are Palm Beach, Port St. Lucie, and Fort Myers, though some stabilization has recently been noted in Fort Myers.
--Land-constrained New Jersey remains strong with increased prices and success with the active-adult product.
--The Carolinas are a mixed bag, with Charlotte, N.C., remaining "tough" and "volatile" with prices still falling. Raleigh, N.C., on the other hand, is "extremely hot" with the foreclosures absorbed, strong traffic, and increased prices. Myrtle Beach, S.C., is in the early stages of recovery, and Charleston, S.C., is showing some pricing strength.
--Minnesota is starting to stabilize.
--Chicago is very weak, and there are no signs of improvement. The labor unions in the area are "very problematic."
--Dallas is the weakest Texas market with foreclosures and re-sales elevated. It's not expected to improve until the end of 2010, though some well-located communities are still seeing good sales. Houston, Lennar's largest Texas market, is stable. Traffic also is up in Austin and San Antonio.
--Colorado's Denver market is in "real recovery" with traffic up with qualified buyers.
--Las Vegas' market is similar to the Phoenix market. The unemployment rate of 13% is problematic. The high-end market there is "dead," and entry-level is improving. Lennar has no legacy assets in that market.
--In California, well-located communities in the Inland Empire are doing well, but the outlying areas are "lifeless." The Los Angles and Valencia markets are improving but a little softer than the Inland Empire. In Orange County, traffic is up and good. Bakersfield and Fresno are still hurting. The Bay Area is still strong, but Sacramento is sluggish and will be until the state government grows again.