Lennar Corporation (NYSE: LEN and LEN.B) reported net income of $513.4 million, or $1.59 per diluted share, for its third quarter ended August 31, 2019, blowing past analyst expectations of a gain of $1.32 per share. The gain compares to third quarter net earnings attributable to Lennar in 2018 of $453.2 million, or $1.37 per diluted share.

A Lennar home.
A Lennar home.

Revenues from home sales increased 2% in the third quarter of 2019 to $5.3 billion from $5.2 billion in the third quarter of 2018. Revenues were higher primarily due to a 7% increase in the number of home deliveries, excluding unconsolidated entities, partially offset by a 5% decrease in the average sales price of homes delivered.

New home deliveries, excluding unconsolidated entities, increased to 13,513 homes in the third quarter of 2019 from 12,600 homes in the third quarter of 2018, as a result of an increase in home deliveries in all home building segments. The average sales price of homes delivered was $394,000 in the third quarter of 2019, compared to $415,000 in the third quarter of 2018. The decrease in average sales price primarily resulted from continuing to shift to lower-priced communities and increased sales incentives, as well as product mix as a larger percentage of deliveries came from the East segment.

The company reported new orders of 13,369 homes – up 9%; and a new orders dollar value of $5.2 billion, up 3%. Backlog at quarter's end was 18,908 homes – down 2%; backlog dollar value was $7.6 billion, down 9%.

Sales incentives offered to home buyers were $24,400 per home delivered in the third quarter of 2019, or 5.8% as a percentage of home sales revenue, compared to $22,900 per home delivered in the third quarter of 2018, or 5.2% as a percentage of home sales revenue, and $26,600 per home delivered in the second quarter of 2019, or 6.1% as a percentage of home sales revenue.

Gross margin on home sales was $1.1 billion, or 20.4%, in the third quarter of 2019, compared to $1.1 billion, or 20.3% (21.9% excluding purchase accounting), in the third quarter of 2018. The gross margin percentage on home sales increased primarily because the third quarter of 2018 included $84.2 million or 160 basis points of backlog/construction in progress write-up related to purchase accounting adjustments on CalAtlantic Group, Inc. ("CalAtlantic") homes that were delivered in that quarter. This was partially offset by higher construction costs and increased sales incentives.

Selling, general and administrative expenses were $444.7 million in the third quarter of 2019, compared to $446.6 million in the third quarter of 2018. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 8.3% in the third quarter of 2019, from 8.5% in the third quarter of 2018, due to improved operating leverage primarily as a result of an increase in home deliveries.

Home building equity in loss from unconsolidated entities, gross margin on land sales, home building other income, net, and other home building revenue totaled earnings of $18.1 million in the third quarter of 2019, compared to a loss of $2.6 million in the third quarter of 2018. Home building equity in loss from unconsolidated entities was $10.5 million in the third quarter of 2019, compared to $16.7 million in the third quarter of 2018. In the third quarter of 2019, Home building equity in loss from unconsolidated entities was primarily attributable to the company's share of net losses from one of its home building unconsolidated entities. In the third quarter of 2018, home building equity in loss from unconsolidated entities was primarily attributable to the company's share of valuation adjustments related to assets of a homebuilding unconsolidated entity, partially offset by the company's share of net operating earnings from its other unconsolidated entities. Gross margin on land sales was $12.2 million in the third quarter of 2019, compared to $3.3 million in the third quarter of 2018. Home building other income, net, was $12.4 million in the third quarter of 2019, compared to $10.8 million in the third quarter of 2018.

Home building interest expense was $107.2 million in the third quarter of 2019 ($98.0 million was included in costs of homes sold, $3.6 million in costs of land sold and $5.6 million in home building other income, net), compared to $86.9 million in the third quarter of 2018 ($83.0 million was included in costs of homes sold, $0.8 million in costs of land sold and $3.1 million in home building other income, net). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries. The prior year's interest expense was favorably impacted by purchase accounting related to the CalAtlantic acquisition.

During the third quarter of 2018, the Company recorded $12.0 million of acquisition and integration costs related to CalAtlantic.

Operating earnings for the Financial Services segment were $78.8 million in the third quarter of 2019 (which included $74.7 million of operating earnings and an add back of $4.1 million of net loss attributable to noncontrolling interests). Operating earnings in the third quarter of 2018 were $60.5 million. Operating earnings increased due to an improvement in the mortgage business as a result of a higher capture rate of increased Lennar home deliveries, as well as reductions in loan origination costs driven in part by technology initiatives. These improvements more than offset the decrease in retail origination volume, as a result of the sale of substantially all of the Company's retail mortgage business in the first quarter of 2019. Operating earnings of the Company's title business decreased as a result of a decline in retail closed orders due to the sale of a majority of the Company's agency business and title insurance underwriter in the first quarter of 2019. This decrease in retail volume was partially offset by an increase in captive business volume and a decrease in operating expenses.

Operating earnings for the Multifamily segment were $10.5 million in the third quarter of 2019 (which included $10.2 million of operating earnings and an add back of $0.3 million of net loss attributable to noncontrolling interests), primarily due to the segment's $12.6 million share of a gain as a result of the sale of an operating property by the segment's unconsolidated entities. In the third quarter of 2018, the Multifamily segment had an operating loss of $3.9 million primarily driven by selling, general and administrative expenses of the segment and equity in loss related to Lennar Multifamily Venture I ("LMV I") and other Multifamily joint ventures as a result of incurring expenses that exceeded revenues while rental operations were reaching stabilization. This was partially offset by $1.7 million of our share of gains from the sale of one operating property by a Lennar Multifamily unconsolidated entity as well as $5.1 million of promote revenue related to two properties in LMV I.

Operating earnings for the Lennar Other segment were $15.9 million in the third quarter of 2019 (which included $15.8 million of operating earnings and an add back of $0.1 million of net loss attributable to noncontrolling interests), compared to $10.1 million in the third quarter of 2018 (which included $8.8 million of operating earnings and an add back of $1.2 million of net loss attributable to noncontrolling interests). Operating earnings in the third quarter of 2019 were primarily related to our equity in earnings from the Rialto fund investments that were retained when we sold the Rialto investment and asset management platform.

Corporate general and administrative expenses were $92.6 million, or 1.6% as a percentage of total revenues, in the third quarter of 2019, compared to $96.3 million, or 1.7% as a percentage of total revenues, in the third quarter of 2018. The decrease in corporate general and administrative expenses as a percentage of total revenues was due to improved operating leverage as a result of an increase in home deliveries.

Rick Beckwitt, CEO of Lennar, said, "We've clearly focused our attention on becoming a land lighter company. Regarding our forward-looking 40% goal of controlled home sites (versus owned), during the quarter, we made great progress by increasing our controlled home sites from 25% to 30%. We expect to continue making significant progress on this goal by entering into deals with regional and national land platforms. During the quarter, we also made progress on reducing our years owned supply of home sites from 4.5 to 4.4 years and continue to target a goal of 3.0 years. As we reach these goals, it will enable us to generate significant cash flow by reducing our land spend, driving meaningfully greater returns over time."

Stuart Miller, executive chairman of Lennar, said, "As the market continued to solidify through the third quarter, stimulating both the affordability and demand for homes, our new orders and deliveries increased 9% and 7%, respectively, from the prior year. Our home building gross margin in the third quarter was 20.4%, while our SG&A of 8.3% marked an all-time, third-quarter low. We continue to believe that the basic underlying housing market fundamentals of low unemployment, higher wages and low inventory levels remain favorable."