Lennar Guides Lower on Weaker New Home Orders with Rising Rates and Elevated Inflation

Lennar Corporation reported better than expected Q4 earnings Wednesday, however forecasted a slowdown in orders for new homes as higher mortgage rates have crushed affordability. $LEN revenue was slightly above analyst forecasts. Lennar fell 2.6% in the premarket with high labor costs, a potential impending recession, an aggressive Federal Reserve and likely margin contraction as overhanging the home builder. LEN missed its new orders forecast of 14,000-15,500 for Q4, orders were just 13,200, a 15% decline yr/yr.

Lennar

Lennar is the largest U.S. homebuilder on total revenue

Fiscal Fourth-Quarter Earnings (Nov)

  • Earnings: Adjusted earnings of $5.02 per share, which beat estimates of $4.89 per share.
  • Revenue: $10.17 billion, which beat average analyst estimates of $10.1 billion.
  • Deliveries jumped 13% year-over-year to 20,064 homes
  • Gross margin on home sales 24.8%, down from 29.2% a quarter earlier.
  • Backlog decreased 21% to 18,869 homes; backlog dollar value decreased 23% to $8.7 billion
  • New orders decreased 15% to 13,200 homes; new orders dollar value decreased 24% to $5.5 billion
  • Cancellation rate rose to 26% in Q4, up significantly from 12% in the year-ago period, the rapidly changing demand environment as rates increase is impacting decision making.
  • Homebuilding debt-to-capital ratio of 14.4%, the lowest in its history. (By comparison, LEN’s debt-to-capital ratio is lower than TOL, DHI, and PHM, each above 20% in their most recent quarters.)

“Our sales volume and pricing have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and there is still demand as we navigate the rebalance between price and interest rates ….. As we have seen over the past quarters, interest rates are fluctuating and are likely to continue to move, and the housing market will continue to rebalance pricing and interest rates,” said Stuart Miller, executive chairman of Lennar, in a statement.

Outlook

LEN provided a weak new orders outlook for Q1 (Feb), expecting orders to range from 12,000-13,500, well below the new orders of 15,747 in the year-ago quarter. This would be the lowest number of new orders since LEN’s pandemic quarter in 2Q20 (May) when the company new orders were just 13,015. The homebuilder is facing substantial headwinds with rising rates and elevated inflation.

Federal Reserve Chairman Powell said in his press conference Wednesday, just prior to Lennar’s earnings release that “We are seeing the effects of higher rates in the most-sensitive areas like housing”. He added, “the appropriate thing to do is slow the pace of hikes, will allow us to ‘feel our way’ but won’t say whether 50 bps or 25 bps.”

LEN expects deliveries to remain stagnant yr/yr in FY23 (Nov), guiding down to 60,000-65,000 compared to 66,399 in FY22. The housing market has been in somewhat of a freefall and the big unknown is how will new homebuyers react to further tightening by the Fed and further potential decline in economic conditions. This keeps the uncertainty surrounding Lennar high, for investors and management.

Mortgage rates have fallen from their high, but they are still extremely high and prohibitive to many battling inflation. Bond yields have fallen also given the recession woes besieging sentiment, bonds and stocks.

In a positive note Lennar remains confident long term with a significant housing shortage, especially in workforce housing. The company said demand still exists even as mortgage rates climbed to multi decade highs, further highlighting favorable long-term dynamics. This sentiment also came through from the earnings calls from other homebuilders including KB Home (KBH) and Toll Brothers (TOL) recently. The industry still faces unprecedented supply chain challenges for land, labor, and materials.

Lennar Competitors Earnings

  • Toll Brothers Inc (TOL) fourth-quarter results earlier this month. The company said its net signed contracts were down 60% in the quarter, but anticipated strong margins in 2023, driven by a strong backlog of 8,098 homes.
  • KB Home (KBH) is scheduled to report fourth-quarter results on Jan. 11. 
  • D.R. Horton Inc (DHI) is scheduled to report on Jan. 24.

Source: Lennar

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