Lennar Corporation (NYSE: LEN and LEN.B), today reported net income of $239.9 million, or $0.74 per diluted share, for its first fiscal quarter ended February 28, 2019. The gain compared to first quarter net earnings attributable to Lennar in 2018 of $136.2 million, or $0.53 per diluted share. Analysts were expecting a gain of $0.75 per share.
The results included:• Deliveries of 8,820 homes – up 30%
• New orders of 10,463 homes – up 24%; new orders dollar value of $4.2 billion – up 23%
• Backlog of 17,259 homes – down 2%; backlog dollar value of $7.1 billion – down 7%
• Revenues of $3.9 billion – up 30%
• Home building operating margins of $384.9 million, compared to $258.1 million
• Gross margin on home sales of 20.1%, compared to 19.5%
• S,G&A expenses as a % of revenues from home sales of 9.5%, compared to 9.7%
• Operating margin on home sales of 10.6%, compared to 9.8%
• Financial Services operating earnings (net of noncontrolling interests) of $21.8 million, compared to $25.9 million
• Multifamily operating earnings of $6.8 million, compared to operating loss of $1.2 million
• Home building cash and cash equivalents of $853 million
• Home building debt to total capital of 38.5%
Revenues from home sales increased 36% in the first quarter of 2019 to $3.6 billion from $2.6 billion in the first quarter of 2018. Revenues were higher primarily due to a 31% increase in the number of home deliveries, excluding unconsolidated entities, and a 4% increase in the average sales price of homes delivered. New home deliveries, excluding unconsolidated entities, increased to 8,802 homes in the first quarter of 2019 from 6,734 homes in the first quarter of 2018, primarily as a result of the significant increase in volume resulting from the CalAtlantic acquisition. The average sales price of homes delivered was $410,000 in the first quarter of 2019, compared to $393,000 in the first quarter of 2018. The increase in average sales price primarily resulted from the CalAtlantic acquisition. Sales incentives offered to home buyers were $25,300 per home delivered in the first quarter of 2019, or 5.8% as a percentage of home sales revenue, compared to $22,300 per home delivered in the first quarter of 2018, or 5.4% as a percentage of home sales revenue, and $25,000 per home delivered in the fourth quarter of 2018, or 5.6% as a percentage of home sales revenue. Gross margins on home sales were $726.1 million, or 20.1%, in the first quarter of 2019, compared to $516.6 million, or 19.5%, in the first quarter of 2018. The gross margin percentage on home sales increased primarily because the first quarter of 2018 included $55.0 million or 210 basis points of backlog/construction in progress write-up related to purchase accounting adjustments on CalAtlantic homes that were delivered in that quarter. There was also an increase in average sales price in the first quarter of 2019, offset by higher construction costs and increased sales incentives.
Selling, general and administrative expenses were $343.3 million in the first quarter of 2019, compared to $257.2 million in the first quarter of 2018. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 9.5% in the first quarter of 2019, from 9.7% in the first quarter of 2018, due to improved operating leverage as a result of an increase in home deliveries and continued benefit from technology initiatives. Other home building revenue, gross margin on land sales, home building equity in loss from unconsolidated entities and home building other income (expense), net, totaled a net loss of $13.2 million in the first quarter of 2019, compared to net income of $154.5 million in the first quarter of 2018.
Home building equity in loss from unconsolidated entities was $13.8 million in the first quarter of 2019, compared to $14.1 million in the first quarter of 2018. In the first quarter of 2019, home building equity in loss from unconsolidated entities was primarily attributable to the company's share of net operating losses from its unconsolidated entities. In the first 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 home building's unconsolidated entities and the company's share of net operating losses from its unconsolidated entities. Home building other income (expense), net, was ($1.5) million in the first quarter of 2019, compared to $170.0 million in the first quarter of 2018. Home building other income, net, in the first quarter of 2018 was primarily related to a gain on the sale of an 80% interest in one of home building's strategic joint ventures, Treasure Island Holdings. Home building interest expense was $64.6 million in the first quarter of 2019 ($61.3 million was included in costs of homes sold, $0.3 million in costs of land sold and $3.0 million in home building other expense, net), compared to $51.2 million in the first quarter of 2018 ($48.3 million was included in costs of homes sold, $0.4 million in costs of land sold and $2.4 million in home building other income, net). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries.
Operating earnings for the Financial Services segment were $21.8 million in the first quarter of 2019 (which included $19.0 million of operating earnings and an add back of $2.8 million of net loss attributable to non-controlling interests). Operating earnings in the first quarter of 2018 were $25.9 million. Operating earnings were impacted by the sale of non-core businesses in the first quarter of 2019 and a decrease in Rialto Mortgage Finance securitization revenues as a result of lower volume and margins. During the first quarter of 2019, the company sold the majority of its retail title agency business and its wholly owned title insurance carrier. In addition, the company sold its real estate brokerage business, which operated only in Florida, and its retail mortgage business.
Operating earnings for the Multifamily segment were $6.8 million in the first quarter of 2019, primarily due to the segment's $3.6 million share of a gain as a result of the sale of one operating property by Multifamily's unconsolidated entities and $11.9 million gain on the sale of an investment in an operating property, partially offset by general and administrative expenses. In the first quarter of 2018, the Multifamily segment had an operating loss of $1.2 million primarily due to general and administrative expenses partially offset by the segment's $4.1 million share of a gain as a result of the sale of one operating property by one of Multifamily's unconsolidated entities and management fee income.
Corporate general and administrative expenses were $79.3 million, or 2.1% as a percentage of total revenues, in the first quarter of 2019, compared to $67.8 million, or 2.3% as a percentage of total revenues, in the first 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.
During the first quarter of 2019, the company's Board of Directors authorized the company to repurchase up to the lesser of $1 billion in value, or 25 million in shares, of the company's outstanding Class A or Class B common stock. The repurchase authorization has no expiration. Under this repurchase program, the company repurchased one million shares of its Class A common stock for $47.0 million at an average per share price of $46.98.
Stuart Miller, executive chairman of Lennar, said, "Our new order growth exceeded the high end of our guidance by 5%, while our deliveries fell short of guidance primarily due to well-documented weather issues across the country. Even with lower than expected revenues in the first quarter, our continued focus on home building operating efficiencies allowed the company to increase operating earnings at a higher rate than revenues."
Miller continued, "We continued to see choppiness in the marketplace during our first quarter, consistent with what we highlighted on our fourth-quarter conference call. However, during the quarter, mortgage interest rates subsided and ultimately pulled back and home prices moderated providing a catalyst for the new home market to correct itself. Accordingly, sequentially throughout the first quarter, we saw increased interest in new home purchases as part of an improving and stabilizing housing market. We continue to believe that the basic underlying housing market fundamentals of low unemployment, higher wages and low inventory levels remain favorable."
"During the first quarter, we advanced our strategy of reverting to our pure-play core home building platform. We completed the sale of our Berkshire Hathaway real estate brokerage business, the majority of our retail title business along with our title insurance underwriter and our retail mortgage business."
Rick Beckwitt, CEO of Lennar, said, "Despite the uneven market conditions in the first quarter, we produced strong results. Our core homebuilding operations continued to leverage our size and scale in the leading markets. Our home building gross margin was 20.1%, while our SG&A of 9.5% marked an all-time, first-quarter low. Using our strong cash position, we repurchased an additional one million shares of our stock for $47.0 million during the quarter."
Jon Jaffe, president of Lennar, said, "During the first quarter, we continued our strategic production focus, controlling direct construction costs, while enhancing our 'Builder of Choice' status with our trades. These important relationships with our subcontractors will be particularly relevant as we ramp up production during the year and remain on target to meet our 2019 synergy goals."
Miller concluded, "As we move into the heart of the spring selling season, we are optimistic that we will see a continued improvement in the demand for new homes. With a solid balance sheet, strong cash flow generation and continued execution of our core operating strategies, we believe that we are well positioned to produce strong results throughout 2019."
