Wednesday, March 24, 2010

Lennar beats handily, shares up 6% (LEN)

Homebuilder Lennar(LEN) reported a loss of 4cents per share, versus an expected loss of 30cents.  Revenues of $574million came in $10million ahead of estimates.  Shares are up 4.7% in the first few minutes of trading.


The company gave a few deals about its new Rialto division, which engaged in a very favorable transaction with the FDIC to service problem loans.
Lennar’s Rialto Investments segment, a new reportable segment, provides advisory services, due-diligence, workout strategies, ongoing asset management services and acquires and monetizes distressed loans and securities portfolios. In February 2010, the Company acquired indirectly 40% managing member equity interests in two limited liability companies (“LLCs”), in partnership with the FDIC, for approximately $243 million(net of transactions costs and a $22 million working capital reserve). The FDIC is retaining a 60% interest and is providing $627 million of non-recourse financing at 0% interest. These LLCs have been consolidated on the Company’s balance sheet and hold two portfolios of real estate loans with a combined unpaid principal balance of approximately $3 billion. The transactions include approximately 5,500 distressed residential and commercial real estate loans from 22 failed bank receiverships. A subsidiary of the Company, Rialto Capital Advisors, will conduct the day-to-day management and workout of the portfolios.
The homebuilding business showed marked improvement:

Gross margins on home sales were $98.4 million, or 19.2%, in the first quarter of 2010, compared to gross margins on home sales of $34.2 million, or 6.5%, in the first quarter of 2009, which included $40.8 million of valuation adjustments. Gross margin percentage on home sales improved compared to last year, primarily due to a reduction in valuation adjustments and reduced sales incentives offered to homebuyers as a percentage of revenues from home sales.
Selling, general and administrative expenses were reduced by $20.3 million, or 20%, in the first quarter of 2010, compared to the same period last year, primarily due to a reduction in fixed costs.  As a percentage of revenues from home sales, selling, general and administrative expenses improved to 15.8% in the first quarter of 2010, from 19.4% in the first quarter of 2009.
Management commentary:

Stuart Miller, President and Chief Executive Officer of Lennar Corporation, said, “We continue to see that the overall housing market is moving towards stabilization, as more confident homebuyers recognize the increased affordability of homeownership.  In the first quarter, this was evidenced by our improved traffic levels, higher backlog, lower cancellation rates and reduced sales incentives.”
Mr. Miller continued, “As we strategically position our company to return to profitability in 2010, our core business continues to improve.  Our focus on reducing construction costs combined with lower sales incentives led to a 1,270 basis point improvement in gross margin on homes sales to 19.2%.  Additionally, our right-sizing of the business resulted in a 360 basis point improvement in S,G&A expenses as a percentage of home sales to 15.8%, compared to last year.  This operational focus allowed us to generate a 3.4% operating margin, which is our highest operating margin in four years.”
That focus on costs was no joke, highlighted in red box below:


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