Lennar Corporation (NYSE: LEN and LEN.B) on Tuesday reported net earnings were $421.5 million, or $1.30 per diluted share, for its second quarter ended May 31, 2019, compared to second quarter net earnings in 2018 of $310.3 million, or $0.94 per diluted share.
Wall Street was expecting a gain of $1.15 per share. Lennar shares were up 3.5% to $53.48 in premarket trading Tuesday.
Revenues from home sales increased 4% in the second quarter of 2019 to $5.2 billion from $5.0 billion in the second quarter of 2018. Revenues were higher primarily due to a 5% increase in the number of home deliveries, excluding unconsolidated entities, partially offset by a 1% decrease in the average sales price of homes delivered.
New home deliveries, excluding unconsolidated entities, increased to 12,706 homes in the second quarter of 2019 from 12,078 homes in the second quarter of 2018, primarily as a result of an increase in home deliveries in the East and Texas segments. The average sales price of homes delivered was $407,000 in the second quarter of 2019, compared to $413,000 in the second quarter of 2018. The decrease in average sales price primarily resulted from product mix as a larger percentage of deliveries came from the East and Texas segments as well as the Texas segment continuing to shift to lower-priced communities. Sales incentives offered to home buyers were $26,600 per home delivered in the second quarter of 2019, or 6.1% as a percentage of home sales revenue, compared to $23,000 per home delivered in the second quarter of 2018, or 5.3% as a percentage of home sales revenue, and $25,300 per home delivered in the first quarter of 2019, or 5.8% as a percentage of home sales revenue.
Gross margins on home sales were $1.0 billion, or 20.1%, in the second quarter of 2019, compared to $840.0 million, or 16.8% (21.6% excluding purchase accounting), in the second quarter of 2018. The gross margin percentage on home sales increased primarily because the second quarter of 2018 included $236.8 million or 480 basis points of backlog/construction in progress write-up related to purchase accounting adjustments on CalAtlantic Group, Inc. homes that were delivered in that quarter. This was partially offset by higher construction costs and increased sales incentives.
The company reported new orders of 14,518 homes, up 1%, with a dollar value of $5.8 billion, down 4%.
It ended the quarter with backlog of 19,061 homes, down 3%, with backlog dollar value of $7.7 billion, down 10%.
Selling, general and administrative expenses were $435.7 million in the second quarter of 2019, compared to $432.4 million in the second quarter of 2018. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 8.4% in the second quarter of 2019, from 8.7% in the second quarter of 2018, due to improved operating leverage primarily as a result of an increase in home deliveries.
Other home building revenue, gross margin on land sales, home building equity in earnings (loss) from unconsolidated entities and home building other income (expense), net, totaled a loss of $21.1 million in the second quarter of 2019, compared to earnings of $17.5 million in the second quarter of 2018. Home building equity in earnings (loss) from unconsolidated entities was $19.6 million in the second quarter of 2019, compared to ($12.7) million in the second quarter of 2018. In the second quarter of 2019, Home building equity in earnings from unconsolidated entities was primarily attributable to the company's share of net operating income from one of its home building unconsolidated entities. In the second 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 in one home building unconsolidated entity and the company's share of net operating losses from its unconsolidated entities. Home building other income (expense), net, was ($46.2) million in the second quarter of 2019, compared to $9.9 million in the second quarter of 2018. Home building other expense, net in the second quarter of 2019 was primarily due to a one-time loss of $48.9 million from the consolidation of a previously unconsolidated entity.
Home building interest expense was $99.7 million in the second quarter of 2019 ($96.2 million was included in costs of homes sold, $0.7 million in costs of land sold and $2.9 million in home building other expense, net), compared to $75.8 million in the second quarter of 2018 ($71.9 million was included in costs of homes sold, $0.9 million in costs of land sold and $3.0 million in home building other income (expense), net). Interest expense included in costs of homes sold increased primarily due to an increase in home deliveries. Prior year's interest expense was favorably impacted by purchase accounting related to the CalAtlantic acquisition.
During the second quarter of 2018, the company recorded $23.9 million of acquisition and integration costs related to CalAtlantic.
Operating earnings for the Financial Services segment were $62.5 million in the second quarter of 2019 (which included $56.2 million of operating earnings and an add back of $6.3 million of net loss attributable to noncontrolling interests). Operating earnings in the second quarter of 2018 were $55.8 million. Operating earnings increased primarily due to improvement in the mortgage business as reductions in general and administrative expenses 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. In addition, there was an increase in operating earnings in the company's Rialto Mortgage Finance business as a result of higher securitization dollar volume in the second quarter of 2019, compared to the second quarter of 2018. This was offset by a decrease in the operating earnings of the company's title business due to a decrease in retail closed orders as a result of the sale of a majority of the retail 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 general and administrative expenses.
Operating loss for the Multifamily segment was $3.9 million in the second quarter of 2019 (which included $4.3 million of operating loss and $0.4 million of net loss attributable to noncontrolling interests), primarily due to general and administrative expenses and equity in loss as there were no sales of operating properties, partially offset by management fee income and $3.7 million of promote revenue related to two properties in Lennar Multifamily Venture I ("LMV I"). In the second quarter of 2018, the Multifamily segment had operating earnings of $14.8 million primarily due to the segment's $17.4 million share of gains as a result of the sale of two operating properties by two of Multifamily's unconsolidated entities and $5.2 million of promote revenue related to two properties in LMV I, partially offset by general and administrative expenses.
Operating earnings for the Lennar Other segment were $2.2 million in the second quarter of 2019 (which included $1.8 million of operating earnings and an add back of $0.4 million of net loss attributable to noncontrolling interests), compared to $4.0 million in the second quarter of 2018 (which included $3.9 million of operating earnings and an add back of $0.1 million of net loss attributable to noncontrolling interests).
Corporate general and administrative expenses were $76.1 million, or 1.4% as a percentage of total revenues, in the second quarter of 2019, compared to $84.9 million, or 1.6% as a percentage of total revenues, in the second 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.
Stuart Miller, executive chairman of Lennar, said, "Our second quarter results benefited from both first quarter deliveries postponed by weather as well as a recovering housing market. The well-documented market pause in the second half of 2018 set the stage for more moderate home price increases and lower interest rates which stimulated both affordability and demand, leading home buyers back to the market."
Miller continued, "Accordingly, through the second quarter, the home buying market solidified and was supported by favorable underlying fundamentals. Against that backdrop, our new orders and deliveries in the second quarter gained momentum and improved 1% and 5%, respectively, over last year."
Rick Beckwitt, CEO of Lennar, said, "In these recovering market conditions, our home building operations executed at a high level. Our home building gross margin was 20.1%, while our SG&A of 8.4% marked an all-time, second-quarter low. Our second quarter gross margin was impacted by an 80-basis point increase in incentives offered to home buyers during the market pause. While lower rates have helped drive demand, we have continued to offer incentives, although at reduced levels, to keep our home building business on track to deliver over 50,000 homes in 2019.
"Alongside our recovering home building business, our Financial Services operations continued to display strong bottom-line performance with second quarter earnings of $62.5 million, a 12% increase over last year. Operating earnings improved due to increased home deliveries, combined with an intensified focus on greater efficiency in our captive businesses after selling the majority of our retail components in the first quarter of 2019. Operating earnings also benefited from our strategic technology investments which have streamlined our processes, resulting in a more efficient operating platform."
Jon Jaffe, president of Lennar, said, "During the second quarter, we continued to experience cost pressures due to land and labor shortages. These cost pressures were somewhat offset by a decrease in lumber prices and the benefit of synergies from our CalAtlantic acquisition. In the next two quarters, we expect to see margin improvement driven by a combination of additional lumber savings and direct cost synergies."
