News of Lennar's profitable third quarter Monday hit home building like a cool autumn breeze after a hot, long summer: refreshing and welcome.
"Our third quarter marks the end of what has been, by all accounts, a long and difficult summer quarter in the housing market," CEO Stuart Miller told analysts Monday. "Against this rather difficult backdrop, we are pleased that our third-quarter results represent a continuation of Lennar's return to profitability."
The market continues to be "rocky and sloppy," the end of the home buyer credit has been "more impactful than anticipated, and "for the time being, the entire home builder edifice has been vilified," Miller told analysts Monday morning.
Still, Miller expressed hope that after the midterm elections that the market's volatility would subside. "There are real buyers out there," he said. "They are just taking additional time to make their home buying."
Lennar beat or met market expectations on all its major metrics. The company delivered 2,950 homes in the quarter ended July 31, up 10% over the same quarter last year.
Net earnings of $30 million ($0.16 per share) was a strong improvement over last year's third-quarter loss of $171.6 million (-0.97) a share.
Revenues at $825 million were up 14%.
Gross home sales margins of 21.1% were up 1,330 basis points. SG&A, as a percentage of home sales revenue was 13.9%, improved by 200 basis points.
And, with debt to total capital at 44.1% and $1 billion in cash, including restricted cash on hand, the company has the wherewithal to keep weathering whatever storms may emerge.
Even Lennar's lone less-than-happy statistic--a new-order decline of 15% to 3,624 homes--looked positive compared to the competition; Lennar's new orders fell less than other builders' did, indicating that the Miami builder may be gaining market share.
Lennar did get earnings-boosting help from avenues other than selling houses. Recoveries from lawsuits it filed against manufacturers and installers of defective Chinese-made drywall added to the bottom line.
But, clearly one of Miller's proudest accomplishments is the success of its Rialto subsidiary, which brought in $7.7 million during the quarter. The entity, which invested in managing distressed FDIC loan portfolios, has been making a profit since spring. Rialto has grown to 90 employees based in three offices in Miami, Atlanta, and New York. So far, the company is retrieving 90 cents on every dollar of distressed assets.
Miller said he isn't worried about too much competition in the distressed asset arena. Lennar capitalized on such opportunities during the last housing downturn and, over the years, has developed a great deal of expertise in such deals.
"We have methodically put together a machine over the last two years now in the Rialto program that allows us to invest in spaces where other builders are not able to," Miller said. "This is a process that is labor- and experience-intensive. It costs money. The barriers to entry are big, yet the returns are outsized."
"This is an arena where we have a longtime understanding of how the process works," he said. "We won't be dropping out. We know a number of competitors who have dropped out."
Rialto is contributing to Lennar's profits in another way as well. It's also providing the builder with a pipeline of lots at low prices available to Lennar without added expense from brokers and competitive bidders. Of the 3,003 lots the builder bought in its third quarter, 1,500 came through Rialto, Miller said.
Another contributor to Lennar's return to profitability is its market choices, Miller told analysts. The company has chosen to buy land in the best neighborhoods in the best markets where prices and sales have held up better.
Rick Beckwitt, a Lennar executive vice president, offered some details about the company's better-performing markets.
North Carolina's Research Triangle area near Raleigh, N.C., is holding up.
In Charleston, S.C., a new Boeing plant is driving growth.
The San Antonio, Texas market "is pretty decent because you have got a lot of military coming into the market."
Demand in Miami-Dade area is also improving.
Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.