Buoyed by continued improved orders and rising backlog, CEO Stuart Millar predicted in a conference call today that the Miami-based Lennar would start booking profits next year.
“We think that we can be both cash flow positive and profitable in 2010,” he told investors during the company’s Monday call after releasing its third quarter results.
The company is moving closer. It lost 97 cents a share in its third quarter, which ended Aug. 31, and 76 cents of that was from write-offs and deferred tax asset evaluations. Orders were up every month during the third quarter, Lennar had the biggest backlog since the third quarter of ’08, and the incentives it has been offering to sell homes decreased to $42,000 from $46,000 each.
“It is starting to feel that there are enough positive indicators out there that they are starting to define a real trend,” Miller said.
As usual, though, Miller’s optimism was tempered with caution. “By no means would I suggest that housing is out of the woods,” he said, adding later during the call: "If we have seen stability, I think we are running across a very rocky bottom."
Climbing foreclosures, fluctuating mortgage rates, rising unemployment and gas prices, and the uncertainty of whether the government's housing tax credit program will continue are all potential rain clouds on the horizon, he said.
Whether the improvements continue or more setbacks remain, Miller said the company is ready “with one foot on the gas and one foot on the brake.”
An example of that foot-on-the-brake-and-accelerator approach is the company’s starts. It accelerated starts to 3,100 for the quarter, but that number matched almost exactly its sales for the quarter. "We are not out there chasing the opportunity to add production,” Miller said. “We want to do it profitably on a home-by-home basis.”
In another move to increase profitability, Lennar has retooled product to appeal to first-time and “value-oriented” buyers, decreased the number of home plans offered, and reworked those that remain to make them more profitable, all in an effort to improve margins.
Lennar is also poised to “make the (down) cycle our ally not our adversary” by taking advantage of opportunities created by the distress, Miller said.
The resolution of the LandSource bankruptcy is one such opportunity, he said. Lennar spent $140 million to buy 15% of LandSource’s new incarnation, as Newhall, as well as to purchase other assets of LandSource outright. “This is an excellent deal for the company that will hold us in good stead for years to come,” he said.
In addition, Lennar has been buying heavily discounted finished lots just in time for home construction which should improve its margins as well. Meanwhile, its raw land will remain raw for now. “Investment in development right now does not return adequately to merit the investment and that is why we are looking at primarily buying finished home sites at a lower price than you could actually develop them today,” Miller said.
Lennar is continuing to establish a separate, private-equity-funded company named Rialto to buy other land opportunities, including those beyond residential development.
“Rialto is doing a lot of what we have done as part of our DNA” in the past, Miller said.. “It’s kind of out there looking for pure distress and opportunity (for Lennar) to not only participate, but provide solid management and expertise.”
Miller likened Rialto to LNR, which is another company that Lennar built and sold, and offered some ideas on what Rialto might do. “The money is not yet raised and the opportunity set is not yet defined, but it might include pieces of RMBS (residential mortgage-backed securities) and CMBS (commercial mortgage-backed securities) traunches that become available. It’s a really different business segment that is a piece of what we have done historically and created tremendous value.”
Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.
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