Lennar Corporation may not be able to control market conditions, said CEO Stuart Miller during the company's Thursday March 27 earnings call, but it surely is controlling everything else it can. He downplayed the company's exposure to joint ventures, which have been the subject of much speculation in the press and among analysts. He also said he's hoping the government will step up and take care of the rest.
"What do we at Lennar do in the interim?" asked Miller. "This is exactly what we have prepared for...We have done things over the last 24 months that have situated Lennar for success going forward."
"Market conditions are as they are and we realize there are some things that are not in our control," said Miller. "But the items that are within our sphere of influence, we are all over them."
That is evident with a look at Lennar's balance sheet for its first quarter, which ended on February 29. The metrics the company has little control over were abysmal, although better than Wall Street expected by nearly half: It lost $88.2 million (including $107.1 million in land valuation impairments and adjustments), its revenues fell 62 percent to $1.1 billion, and its new orders fell by 57% compared to the same quarter of last year.
But the metrics the company has been able to wrestle control over were positive: It has $1.1 billion in cash on hand, owes nothing on its credit facility, and its total debt to capital is a low 38.2% with net homebuilding operations at 24.5%. In addition, it has raised its gross margin on home sales up to 14.3%.
Now it's the government's turn to help the overall market improve, said Miller.
"Positive, constructive steps need to be taken to properly support weakened markets and help them recover," he said. "The fixing of the component of the economy that has led us into this economic contraction, i.e. home building or housing, will be that first and most important step or fix in leading us out. This fix, it seems is the bright light that I see at the end of home building's dark tunnel."
While Miller expects conditions to remain difficult and even deteriorate more during the coming year, he thinks Lennar will do better now that it has shrunk itself and impaired its land heavily enough to make a profit on new home sales even in the face of slipping sales prices.
"While we continue to lose money in our first quarter...aggregate levels of impairment and losses are clearly now dissipating," said Miller. "We have done the heavy lifting on the impairments...We believe that, even with the continued degradation of market conditions, our stated asset base will not experience nearly the" pace to date of impairments.
Analysts on the call wanted to know more about the company's operations that barely show up on its balance sheet--the many joint ventures it is involved in that don't get reported in detail on the company's books.
Miller said he wanted to dispel "myths" that it's Joint ventures are on the verge of imploding. "Many of our JV's are in very good standing," he said. "Many of the assets in a number of our ventures are very well positioned and we don't have an issue with our partners or our lenders." Many also have the collateral to withstand the downturn.
"For the subset of ventures that are showing signs of trouble, the vast majority of them have been reworked," he said. As far as the "subset" of joint ventures that are troubled, "We resolved most of those ventures."
The company has been working to reduce the amount of recourse debt it has in JV's as well as the number of JV's in which it is involved. It reduced the number by about a third to 180 and the maximum joint venture recourse debt by about a half to $917 million from their peak levels in 2006.
There's one joint venture that Miller has no reserves about, the deal it made with Morgan Stanley to sell 11,000 lots last fall. Lennar maintained a minority ownership in the joint venture the lots were sold to as well as the rights to build on the lots in the future.
"When we concluded this transaction the market gasped and asked why," said Miller. "Today, in retrospect, we are decidedly pleased that the reasons we concluded the deal in the year's end are born out today."
"That facility could not be duplicated today," at the level of financing that occurred then, said Miller.
The deal raised capital for Lennar, reset the prices of a land to a level that the land will make a profit for builders when it is built on, and Lennar is still getting management fees for the land.
"We have used this transaction to streamline our organization and to supplement overhead coverage with fee income associated with managing the assets in the fund," he said.