COVID-19 caused a sudden decrease in orders and cancelations mid-March and April, but demand has rebounded strongly.
We expect the housing market to benefit from record low rates, favorable demographics, and years of underproduction – particularly of affordably priced homes. We use two questions to help us analyze the housing and home-improvement market: Do consumers believe that housing is a good investment?
We believe that housing looks like a good investment, especially given the level of mortgage rates. This crisis has reinforced the value of a safe home with a little space to work, exercise, and relax at a safe distance from neighbors. Many people are questioning their ability to make 360 payments, but they also realize that thehave to live somewhere and interest rates are low.
Why Lennar? We believe there is a shortage of affordable housing.
LEN’s broad geographic presence is likely to add stability to its earnings growth, and it believes that a marketing effort focused on entry-level buyers in affordable regions including Texas, Florida, and the Carolinas, will help the company to post industry-leading results. The recent acquisition of CalAtlantic increases the company’s geographic reach even further. The company is also hoping to increase earnings by reducing expenses and by focusing on high-quality land that can be developed and sold quickly.
We further believe that Lennar’s improving financial strength is a competitive advantage that enables better access to borrowing than privately owned builders. Debt is often necessary to fund the purchase of new building lots. And in this cyclical industry, there are times when credit is constrained for all but the strongest borrowers. LEN is also taking advantage of its size to build relationships with carpenters and contractors. Lennar is working to win their loyalty, and secure their scarce services, by offering them
a steady and consistent flow of work.
On December 16 after the close, Lennar reported earnings for the fiscal fourth quarter ended November 30. The conference call was on December 17.
Sales, earnings, and new orders were better than our estimates and consensus. Guidance was also very strong.
Lennar earned $2.82 per share in 4Q20. Our estimate was $1.97.
Executive Chairman Stuart Miller started the conference call by saying that the housing market was very strong, and that demand for homes exceeded the limited supply. ‘It has simply never been this easy to sell as many homes as we would like in every market and every price range across the country.’
Mr. Miller also said that buyers have ample money for deposits because they have not taken vacations, gone to movie theaters, or visited restaurants during the pandemic.
For many younger people, ‘home’ was a place to sleep when they weren’t working, going to restaurants, going to the yoga studio, taking classes, going to concerts or traveling.
On the 4Q call, Mr. Miller provided a basis for continued strong housing demand, noting that ‘the proposition of home as more than shelter is becoming a hard-wired way of life, rather than a COVID-driven reaction.’
Deliveries of 16,090 homes came in above the StreetAccount consensus of 15,948 homes. Homebuilding revenue of $6.3 billion was down 2%, but exceeded the consensus of $5.1 billion. Deliveries were down about 1% because of COVID-related disruptions to the construction process in the second quarter. The average selling price was flat.
New orders of 15,214 units were up 16%, and exceeded the StreetAccount consensus of 14,448. The backlog of 18,821 homes, worth $7.8 billion, was up 24% in dollars. This, too, was better than the consensus call for a dollar value of $7.3 billion.
Homebuilding debt was 24.9% of capital, the lowest in the company’s history. There was no borrowing under the $2.4 billion revolving credit facility.
Lennar earned $7.85 per share, up from $5.74 in FY19.
EARNINGS & GROWTH ANALYSIS
The company provided 1Q21 guidance calling for12,200-12,500 deliveries at an average sales price of $390,000.That puts homebuilding revenue at $4.76-$4.88 billion. LEN’s guidance calls for a tax rate of 25.3% and 310 million shares. LEN expects Financial Services operating earnings of $110-$155 million. The guidance puts fiscal 1Q EPS at $1.64-$1.74. Our prerelease estimate was $1.13.
For the full year, the company’s guidance calls for 62,000-64,000 deliveries at an average price of $386,000-$388,000. That puts homebuilding revenue at $23.9-$24.8 billion.
The company expects Financial Services operating earnings of $400-$425 million and a tax rate of about 25.3%
Our total revenue estimate is now $24 billion, up from $22.2 million
We are initiating a FY22 EPS estimate of $9.25. We are modeling total revenue of $26.4 billion. We are not making a major change to our gross margin estimate, but we do expect some expense leverage from better use of technology and from controlled marketing expense and tight inventory controls.
Over the longer term, we expect LEN to benefit from innovative offerings, including the ‘Everything’s Included’ platform, where the company’s most popular upgrades and features are already included in the purchase price. This simplifies the production process, particularly when supply chains are constrained (as we have seen during the COVID crisis), and improves profitability. In addition, it offers a NextGen brand, which have attached apartments on the first floor with a separate private entrance, letting elderly parents or adult children live more independently in the home. We also expect to see more homes with dedicated, soundproofed offices with a separate outside door. We recently reduced our estimated five-year growth rate to 9% from 13%. We don’t like to tinker with this number. We still expect the market to benefit from years of underproduction, and the Millennial Generation’s late start in buying homes. Lennar is working to address concerns about housing affordability by building lower-priced homes.
FINANCIAL STRENGTH & DIVIDEND
We believe Lennar has generally done a good job buying land opportunistically and it appears as though it is making appropriate adjustments to its strategy as the housing recovery matures. The company had about 3.5 years of inventory at the end of 4Q20, down from 4.1 years in 4Q19.
During 4Q, Moody’s upgraded Lennar’s debt from Ba1 to an investment grade Baa3. Moody’s outlook is stable. The S&P rating is BB+ with a positive outlook. Lennar repaid $1.2 billion of debt in 4Q and $2.1 billion for the year.
LEN raised the capacity to $2.3 billion and extended the maturity to 2023. In 2Q19, LEN raised the capacity to $2.4 billion and extended the maturity to 2024. There was no borrowing under the revolver at the end of 4Q20.
On October 1, the company announced a 100% increase, taking the annual dividend to $1.00.
LEN repurchased $250 million of its stock in 4Q18, and, following the 4Q release, announced a new repurchase program for up to $1 billion (or 25 million shares). The company repurchased 9.9 million shares for $493 million in FY19 and $288 million in 1Q20. There was no repurchase activity in 2Q or 3Q. We will provide an update for the full year after we review the 10-K.
MANAGEMENT & RISKS
What is the biggest risk for the housing market? It was affordability, then it was COVID. Now it may be affordability again. We keep hearing that the market is really good. That makes us nervous. Sure, supply is very low, there is a big demographic wave, and Americans have a new appreciation for the safety of their own home. But prices are being driven by record-low interest rates. We aren’t forecasting a spike in rates, but the market could be hurt if mortgage rates turn higher.
Stuart Miller, whose father was a co-leader of the company in its very early years (along with Arnold Rosen), served as CEO from 1997 until April of 2018. He was also president from 1997 to 011. Richard Beckwitt is LEN’s CEO since April of 2018. He assumed the presidency from Stuart Miller in 2011. Mr. Beckwitt had served as the company’s executive vice president from 2006 to 2011. He had also held various executive positions at competitor D.R. Horton from 1993 to 2000. Chief operating officer Jonathan Jaffe added the title of President in April of 2018. In January 2019, Fred Rothman was promoted to chief operating officer. Mr. Jaffe continues as president.
Stuart Miller (now executive chairman) and his family had a voting interest of approximately 34% at the end of FY19 helped by ownership of Class B shares which provide 10 votes for each Class A share. This voting position gives Mr. Miller significance over the election of directors and the outcome of shareholder votes. He could favor actions that may not match the interests of smaller investors and be difficult to influence if shareholders don’t feel that the company’s capital is being used productively. The Millers’ voting power had been 40%, but declined to approximately 34% with the issuance of additional shares for the acquisition of CalAtlantic.
Like a number of other builders, Lennar creates and participates in joint ventures to reduce the cost of gaining access to future home sites. At the end of FY19, the company participated in 50 homebuilding joint ventures with maximum debt exposure of $10.8 million. In 2018, Lennar participated in 59 joint ventures with maximum debt exposure of $65.7 million, compared with 38 joint ventures with maximum debt exposure of $69.2 million in FY17.
Lennar’s Multifamily segment is involved in the development and management of apartment complexes. Through FY15, most of the activity had been through joint ventures, but LEN expects to rent apartments through their own business units in the future. The Multifamily business contributed about 2.7% of FY19 revenue. The division posted relatively small operating losses every year from FY11 through FY15. Multifamily earned an operating profit in FY16, FY17, and FY18 helped by sales of operating properties by joint venture partners. The business earned $16.4 million in FY19. One risk is that is that the apartment complexes won’t be able to attract renters.
During 4Q18, the company made progress towards becoming a pure-play builder. They sold Rialto for $240 million, contracted to sell the real estate brokerage business and sold the majority of the retail title business.
Lennar builds step-up (68% of closings), entry level (28%) and retirement (4%) homes with an average selling price of $400,000.
Our new target reflects the increases in our EPS estimates, the doubling of the dividend, and our five-year growth rate forecast of 9%.
On December 18 at midday, BUY-rated LEN traded at $80.84, up $0.89.