Some other things to watch at Lennar....
There is outrageous pessimism in the housing sector and within the home builders that persists and seems to become worse every day. While the home builders were regularly trashed by the pundits in 2009 (and rightfully so) the same people are either going over the top with even worse predictions for the next 6-12 months or simply saying that housing, as an industry in America is over...it will simply never recover. No houses will ever again be built in significant numbers. The end is here, there is no future. That kind of insane and ridiculous general rambling gibberish is what I LOVE to hear...but only when I am certain it is a) nonsense, b) backed by little or no builder specific meaningful data whatsoever and c) playing at a fevered pitch to the same numbskulls that buy into it at the bottom of every housing cycle. So why is it nonesense and backed by no meaningful data? How about this...Lennar just posted earnings of $39.7 million compared to a loss in the same quarter of $116.5 in 2Q 2009. OK there "Joe Pundit, My US Housing Market Is Coming To An End"...where did those numbers come from? Are you saying they are manufactured? Are you saying an $8K tax credit available for the better part of three quarters reversed a trend by almost $160 million dollars in year over quarterly earnings? And the fact gross margins on home sales are UP 1.1% YTD? While G&A expenses have dropped dramatically and are down 40 basis points as a percentage of sales? Fantasy?
Rialto, Lennar's distressed asset division was formed a couple of years ago to buy and hold distressed assets for the builder. Last fall, it got its first infusion of land when it formed a public-private partnership with the Federal Deposit Insurance Corp. to buy and then manage $3.05 billion in distressed real estate loans. Rialto is now turning a profit (something predicted by pundits and stock gurus would never happen when it was formed) and contributed $5.1 million to earning in the second quarter. $5.1 million in net earnings...after the FDIC and private partners took their cuts. Even Lennar's financial arm reported operating at a slight profit.
The weakest markets in the US right now are generally recognized as MI, FL, CA, and NV. Actually I read an article that singled out the current worst 13 general areas in the US based on unemployment and drop in home prices. Areas classified by the author as "likely never to recover". They were from bottom to worst: Providence, RI, Las Vegas, NV, Rockford, IL, Boise City, ID, Toledo, OH, Reno, NV, Grand Rapids, MI, Fort Meyers, FL, Orlando, FL, Sacramento, CA, Palm Coast, FL, Lansing, MI, and absolute worst (questionably IMO), Riverside, CA. While I have some reservations about the claims made by the half full side of the equation (REALTOR, etc) that some of these areas are supposedly already seeing a substantial recovery, Lennar does not have a presence at all in many of the ones that indeed may take several additional years to come back. They have no presence whatsoever in Michigan or Rhode Island. Their only presence in the upper midwest areas most devastated by unemployment and declining prices is Chicago...an area stabilizing as I type. And while they have a substantial presence in NV in both Las Vegas and Reno, they pulled back considerably starting in late 2007. "Florida", according to Rick Beckwitt (VP Sales) "is one of Lennar's hottest current markets". This may be explained by the fact Lennar's presence is judiciously spread throughout the state rather than being concentrated in Fort Meyers and Orlando. He also commented that sales are picking up nicely in the mid-Atlantic (a huge market for Lennar) and are very strong in the San Antonio area while CA remains "community specific". I agree with this assessment and do not believe it is "wishful thinking" as many of the housing market pundits persist in pointing out. It's based on real numbers. Particularly where CA is concerned. I stopped building in 2007, liquidated inventory on the market at that time at break even pricing and have yet to resume any spec building. Fellow builders at that time thought I was insane...these are the same builders who are (in a few instances) still paying 6% and 7% interest on construction capital sourced at that time for inventory that has been sitting on the market empty for the last 2 years. Lennar made essentially the same very cautious moves early in 2008 and restricted ongoing projects to the stronger community specific areas.
All that doesn't mean that Lennar is not sitting on empty inventory located (in some instances) in some pretty dismal community tracts. They are also going to have to walk away from some large land tracts they sourced in FL and CA simply because they made no sense to buy at the time they were purchased and cetainly make no sense now. However the Rialto arm of the company has also sourced some prime sites through fire sale prices from builders who went belly up during the recession. These tracts are estimated to more than compensate for the less astute purchases made earlier and boost profits substantially into the future.
The bottom line here being, Lennar is already in the beginning stages of a fairly unpredictable but sustainable recovery. They made all the right and painful financial moves back in 2008 and 2009 leaving them ahead of the curve and prepared for the recovery that will start slowly in 2010 and blossom in 2011. Their profitability is back up, their G&A costs are down and their subsidiaries are firing on all eight cylinders. Is there still a tough patch ahead? Yes, but dramatically moreso for the builders who didn't bite the bullet early, eat their losses upfront by clearing inventories and never got a chance to catch their breath long enough to hit the ground running when the opportunity finally presented itself early this year. All IMHO.
SBB