Lennar Corporation this morning (Sept. 25) reported results from its fiscal third quarter that fell far below what Wall Street was expecting, with revenues of $2.3 billion, down 44%; deliveries of 7,636 homes, down 41%; new orders of 5,804 homes, down 48% and a cancellation rate of 32%, which was up from 29% in the second quarter. The company took record writedowns and impairments of $847.5 million for the quarter.
The loss amounted to $3.25 per share; analysts surveyed by Thomson Financial were expecting a loss of $0.55 per share.
UBS Investment Research initiated coverage of the home builder sector under analyst David Goldbert with a sell rating on Lennar stock, which was pointing to a lower opening on the earnings report. Michael Rehaut, the lead home building analyst at J.P. Morgan Securities, put out a note to investors maintaining a neutral stance on Lennar stock. Of the charges taken by Lennar, Rehaut wrote, "We believe this is in part due to 'catching up' with the industry, as it had taken total charges (as of 2Q) of only 11.5% of equity (after-tax) vs. the industry average of 16.1%, as well as further deterioration in the market. Accordingly, we believe the industry will continue to take additional significant charges, and therefore, maintain our cautious near-term stance, as we continue to believe potential downside to the stocks remain."
Stuart Miller, Lennar's CEO and president, said, "It is already well documented that the housing market has continued to deteriorate throughout our third quarter. Heavy discounting by builders, and now the existing home market as well, has continued to drive pricing downward."
He continued, "Our response to, and primary focus in, this environment continues to be to adjust pricing to meet current market conditions in order to keep inventories low and to keep our balance sheet positioned for the future. The net effect has been a continued deterioration of our net margin and accordingly, higher impairments to our inventory."
Miller also said the company has cut its workforce by 35% this year and that more staff cuts are expected in the fourth quarter.
In the home building segment, decreased 44% to $2.2 billion from $3.9 billion in the third quarter of 2006, owing primarily to the 41% decrease in the number of home deliveries and a 6% decrease in the average sales prices. New home deliveries, excluding unconsolidated entities, decreased to 7,266 from 12,337 homes last year. The average sales price of homes delivered decreased to $296,000 in the third quarter of 2007 from $316,000 in the same period last year, primarily due to higher sales incentives offered to homebuyers ($46,000 per home delivered in the third quarter of 2007, compared to $35,900 per home delivered in the same period last year). Gross margins on home sales fell to 14.0% from 19.5% in the same quarter in 2006.
Selling, general and administrative expenses were reduced by $122.3 million, or 29%, from last year's levels, due to staff cuts and changes in compensation. SG&A increased to 14% of home sales revenue from 10.9% in 2006.
Loss on land sales totaled $344.7 million in the third quarter, including$114.6 million of valuation adjustments and $242.5 million of write-offs of deposits and pre-acquisition costs related to 15,000 homesites under option that the Company does not intend to purchase.
Operating loss for the Financial Services segment was $5.2 million, compared to operating earnings of $61.7 million last year. Lennar attributed the decrease to a decline in profitability from both the segment's mortgage and title operations and $9.3 million of partial write-offs of land seller notes receivable.
Corporate general and administrative expenses were reduced by $6.2 million, or 12%, in the third quarter of 2007, compared to the same period last year. As a percentage of total revenues, corporate general and administrative expenses increased to 1.9% in the third quarter of 2007, from 1.2% in 2006, primarily due to lower revenues.