01—Abstract
Summary
Summary of the 10-K filed January 31, 2011. Cited figures are marked; the original filing is the authoritative source.
Lennar Corporation reported a return to profitability for fiscal 2010 (year ended November 30, 2010), with net earnings attributable to Lennar of $95.3 milliona, or $0.51 per diluted share, compared to a net loss of $417.1 million, or $2.45 per diluted share, in 2009.
Revenue from home sales fell 5% to $2.6 billionb as home deliveries decreased 5% and the average sales price held at $243,000. Gross margin on home sales improved to 19.7% from 9.1%, driven primarily by lower valuation adjustments and reduced sales incentives, which were 11.9% of home sales revenue versus 15.6% a year earlier. Selling, general and administrative expenses fell $72.3 million, or 16%.
The company's new Rialto Investments segment became a major contributor, with operating earnings of $57.3 millionc in 2010 after acquiring a 40% interest in two FDIC-partnered loan pools for about $243 million and over $700 million of distressed assets from three financial institutions for $310 million. Lennar Financial Services operating earnings declined to $31.3 million from $36.0 million. The company reduced its unconsolidated joint venture count to 42 from 61 at the end of 2009, and its maximum recourse debt exposure to those ventures fell to $173 million from $288 million.
Leverage remains elevated: Lennar Homebuilding debt to total capital rose to 54.5% from 53.1%, and net Lennar Homebuilding debt to total capital rose to 42.4% from 36.9%. The company has no investment-grade credit rating, terminated its $1.1 billiond corporate credit facility in February 2010, and carries a deferred tax asset valuation allowance of $609.5 million.
Stuart A. Miller holds approximately 46% of the voting power.
02—Key points
Key Highlights
- Net earnings attributable to Lennar of $95.3 million ($0.51 per diluted share) in 2010, versus a net loss of $417.1 million ($2.45 per share) in 2009
- Gross margin on home sales rose to 19.7% from 9.1%, including valuation adjustments of $44.7 million versus $180.2 million in 2009
- Rialto Investments segment produced operating earnings of $57.3 million, including $33.2 million attributable to noncontrolling interests, on revenues of $92.6 million
- Revenues from home sales declined 5% to $2.6 billion; average sales price was steady at $243,000 and new orders fell 5%
- Lennar Homebuilding unconsolidated joint ventures reduced to 42 from 61 in 2009, with maximum recourse debt exposure cut to $173 million from $288 million
- Lennar Homebuilding debt to total capital increased to 54.5% from 53.1%; net debt to total capital rose to 42.4% from 36.9%
- Company lacks an investment-grade credit rating and has no corporate credit facility after terminating its $1.1 billion revolver in February 2010
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed January 31, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $3.07B$3.12B | −1.5% |
| Operating Expenses | $2.95B$3.58B | −17.6% |
| Operating Income | $188.65M-$642.84M | +129.3% |
| Interest Expense | $143.95M$147.45M | −2.4% |
| Net Income | $95.26M-$417.15M | +122.8% |
| EPS (Basic) | $0.51$-2.45 | +120.8% |
| EPS (Diluted) | $0.51$-2.45 | +120.8% |
| Shares Outstanding (Diluted) | 188.86M171K | +110642.5% |
05—Questions
Frequently Asked Questions
Why did Lennar return to profitability in 2010?
The filing attributes the improvement mainly to lower inventory valuation adjustments ($44.7 million versus $180.2 million in 2009), reduced sales incentives offered to homebuyers as a percentage of home sales revenue (11.9% versus 15.6%), reduced construction costs and product re-engineering, and third-party recoveries related to Chinese drywall. Selling, general and administrative expenses also fell $72.3 million, or 16%.
What is the Rialto Investments segment and how did it perform?
Rialto is a new reportable segment focused on distressed real estate investments. In 2010 it generated revenues of $92.6 million and operating earnings of $57.3 million, which included $33.2 million of net earnings attributable to noncontrolling interests. Its major investments included a 40% interest in two LLCs with the FDIC for about $243 million, over $700 million of distressed assets acquired for $310 million, and a $75 million commitment to an AB PPIP fund and a $300 million initial-commitment real estate fund.
How leveraged is Lennar and what are the debt maturities?
Lennar Homebuilding senior notes and other debt totaled $3.13 billion at November 30, 2010, up from $2.76 billion. Debt to total capital was 54.5%, and net debt to total capital was 42.4%. Scheduled principal maturities are $206.99 million in 2011, $238.35 million in 2012, $353.18 million in 2013, $279.59 million in 2014 and $504.60 million in 2015. The company issued $250 million of 6.95% senior notes due 2018, $276.5 million of 2.00% convertible notes and $446 million of 2.75% convertible notes, both due 2020.
What risks does the filing highlight about the company's credit and joint ventures?
The filing notes that Lennar no longer has an investment-grade rating, which raises borrowing costs, and that it terminated its corporate credit facility in February 2010. Two warehouse repurchase facilities for the Financial Services segment, with $150 million and $175 million commitments, mature in April and July 2011. Joint venture partners may be unable to meet obligations, and Lennar's net recourse exposure to unconsolidated entities was $114.0 million at November 30, 2010.
What is the outlook for 2011 according to management?
Management stated that it believes 2011 will be another profitable year, though high unemployment, tight lending standards and low consumer confidence continue to challenge the housing market. It said its homebuilding operations are on track toward sustainable profitability as the housing market stabilizes, and that its Financial Services and Rialto segments will continue to enhance earnings. The filing also states that recovery timing is uncertain.
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