Lennar, one of the nation’s biggest homebuilders, posted year-over-year increases in profits, deliveries of new homes, and new orders in the third quarter on the heels of a robust housing market fueled by low interest rates and tight inventory, according to a company earnings report Tuesday.
Lennar earned a net profit of $664.4 million in the third quarter, up 30 percent from a $513.4 million profit at the same time a year ago. The company delivered 13,842 homes in Q3, up 2 percent year over year. New orders (sales) of homes clocked in at 15,564, up 16 percent, and the dollar value of those new orders rose 20 percent to $6.3 billion. The builder’s backlog rose 4 percent to 19,697 homes — a dollar value of $7.9 billion, also up 4 percent.
“Our third quarter results benefited from robust market conditions combined with the solid execution of our homebuilding and financial services businesses,” said Stuart Miller, Lennar’s executive chairman, in a statement.
“Fundamentals in the housing market continued to remain strong supported by record low interest rates and a continued undersupply of new and existing inventory,” Miller continued. “The housing market continued its strong rebound from the significantly weaker sales environment earlier in the year as a result of COVID-19.”
Lennar brought in $5.9 billion in revenue, flat from third-quarter 2019, and ended the quarter with $2 billion in cash and cash equivalents. The company’s gross margin on home sales jumped to 23.1 percent in Q3 2020 from 20.4 percent in Q3 2019 and its net margin hit a new third-quarter high of 15.1 percent. Lennar also paid off about $400 million in debt during Q3 and ended up with a debt-to-capital ratio of 29.5 percent, which the company said was an all-time low.
“During the quarter, we used the strength of the homebuilding market to accelerate starts to catch up on production lost earlier in the year. We carefully matched new orders and starts, with a continued focus on cash management which has led to greater returns. In the third quarter, new orders and starts were up 16 percent and 17 percent, respectively, over last year,” Miller said.
In fourth-quarter guidance, Lennar said it expects to deliver 15,500 to 16,000 homes in the fourth quarter with gross margins in the 23.25 to 23.5 percent range. The company predicts it will sell 13,800 to 14,300 homes at an average sales price of $390,000, down slightly from $396,000 in Q3.
“Given strong demand and limited new and existing home inventory, we expect home sales to remain strong for the foreseeable future,” Miller said.
In a conference call with investors, Miller attributed strong homebuyer demand to “low interest rates and customer focus on owning and controlling their lifestyle.”
“[T]he third quarter has been a clear point of pivot for the housing market in general, from the slowdown created by COVID to the expansion ignited by COVID. Today, the home is becoming more and more essential to the way we live and the quality of our lives,” Miller said.
“The home, which used to be just shelter is now becoming the hub of your life,” he continued. “It is our shelter and our multiple generations’ shelter. It is our office, our gym, our recreation center and our school. It is Wi-Fi connected, and it is automated. It is sustainable and environmentally sensitive. It is both a healthy home and a health system. While some of these elements will change over time, some of them will become our new way of life. Regardless, home is a refuge where families thrive through the best of times and sometimes as well through the toughest of times.”
Lennar is benefiting from demand from both first-time homebuyers and move-up buyers, according to Lennar President Jonathan Jaffe.
“[W]ith people looking for new, looking for moving away from density, we expect we’ll continue to see the demand from both of those mix segments,” he said.
Rick Beckwitt, Lennar’s CEO, also touted the company’s Amazon Alexa-powered smart homes as a focus of high demand.
“Wi-Fi connectivity, no dead spots in the home. The home automation package that we’re offering is a real driver of growth, whether it’s on the entry-level or the move-up side,” he said.
But the primary driver of growth is the decade-long “production deficit” — the short supply of homes in all segments of the market, according to Miller.
“I think that there are attributes of what has happened in the recent past that might dissipate the migration from urban to suburban or from vertical to horizontal — might or might not dissipate. But at the end of the day, we still are left, across the country, with a deficit in dwellings, in housing, both rental and for sale, both multifamily and single-family dwellings, for the population,” Miller said.
“We have seen millennials enter market,” he continued. “We have seen more move out of a co-living space with their parents and enter the household formation and ownership market. I think we’re going to continue to see these trends. People are valuing where they live, how they live in a much greater way.”
He added that this trend “was partially ignited by this moment with COVID, but it was destined to happen in time as family formation grew as postponement gave way to the realities of family formation homeownership. So at the end of the day, a 10-year production deficit, which is what we’ve seen is in our view is going to be the fuel for an expansion [in the homebuilding industry] that covers the next years, not just for the short term.”
Miller also congratulated real estate startup and iBuyer Opendoor on going public. Lennar provided Opendoor with $100 million in debt financing in January 2018 followed by even more funding in June 2018 and another round in March 2019.
Opendoor — whose main business is buying and reselling homes directly online from homeowners in need of a quick transaction — launched a pilot home trade-up program in Las Vegas with Lennar in early 2017. Homeowners in the city would sell their homes to Opendoor and “trade up” for one of Lennar’s move-in-ready homes. Opendoor quietly expanded that program with Lennar to all its markets the summer of 2017 and has been adding other builders since the fourth quarter of 2017.
Miller said the move-up program “is becoming an industry standard,” noting that “the customer experience is becoming a frictionless, coordinated and joyful engagement.”
He added, “Less friction means more transactions and more transactions at a lower cost to all parties engaged.”