Lennar Tops Expectations as Housing Market Continues to Improve -- 2nd Update

By Lisa Beilfuss and Kris Hudson 

Home builder Lennar Corp. posted double-digit percentage gains in new orders, deliveries and net income for its fiscal third quarter, underscoring a sustained but unspectacular recovery in the U.S. new-home market.

Lennar Chief Executive Stuart Miller described the market as improving in a "slow and steady manner" in Lennar's quarter ended Aug. 31, echoing what the Federal Reserve's monetary policy-setting arm said in its statement last week. Miami-based Lennar, the second-largest U.S. home builder by houses constructed, behind D.R. Horton Inc., posted a 10% increase in orders from a year earlier, a 16% increase in deliveries of completed homes and a 5% increase in average price to $350,000.

"We have believed and continue to believe that the downside in the housing market is very limited and the upside very significant," Mr. Miller said Monday in a conference call with investors to discuss Lennar's results.

Mr. Miller outlined several points that bode well for a U.S. home-construction market that, though it is rebounding, remains at roughly half of its average annual output in the latest normal housing market of 2001 to 2003 due to weak demand for starter homes so far in the recovery and shortages of construction labor and buildable land. Construction starts on single-family homes in the U.S. in this year's first eight months are up a lukewarm 11% from the same period last year.

First, Mr. Miller noted that, though mortgage-qualification standards remain prohibitive for many borrowers, the share of Lennar's sales going to first-time buyers rose to 30% in its third quarter from 25% a year earlier. That dovetails with a report by the National Association of Realtors on Monday that 32% of sales of existing homes in August went to first-time buyers, up from 29% a year ago.

Even so, Lennar remains bullish on its rental-apartment business, which has 28 projects totaling 7,700 units under development with partners. "There is very, very large pent-up demand both in rental and in for-sale (housing) for buyers who need to come back in," Mr. Miller said.

Despite Lennar's gains in orders and closings, and a 24% increase in revenue to $2.5 billion, the builder's gross margins slipped to 24.1% from 25.2% a year earlier. That was due mostly to higher land costs, which surged 56% from last year's quarter.

Analysts were expecting a steeper decline in margin, but the surge in closings and incentives that were little changed from a year earlier were behind the gross-margin beat, said Jay McCanless, an analyst at Sterne Agee.

For the quarter, Lennar reported a profit of $223 million, or 96 cents a share, up from $177.8 million, or 78 cents a share, a year earlier. Analysts projected 80 cents in per-share profit and $2.42 billion in sales, according to Thomson Reuters.

Mr. Miller also provided an update on Lennar's nascent efforts to build communities of single-family homes for rent. The builder earlier this year started its first such project of 80 homes near Reno, Nev. Lennar now "expects to expand on that platform" due to the "very successful" early results from the Reno project, Mr. Miller said. He didn't provide additional details on the call.

Write to Lisa Beilfuss at [e-mail] and Kris Hudson at [e-mail]

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(END) Dow Jones Newswires

September 21, 2015 15:56 ET (19:56 GMT)

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