Edgar Filing: LENNAR CORP /NEW/

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2018

Commission File Number: 1-11749

Lennar Corporation

(Exact name of registrant as specified in its charter)



Delaware		95-4337490
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

700 Northwest 107th Avenue, Miami, Florida 33172

(Address of principal executive offices) (Zip Code)

(305) 559-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO ý

Common stock outstanding as of May 31, 2018:

Class A 291,726,015

Class B 37,752,643

Part I. Financial Information

Item 1. Financial Statements

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in thousands)

(unaudited)



	May 31,		November 30,
	2018 (1)		2017 (1)
ASSETS
Lennar Homebuilding:
Cash and cash equivalents	$	931,753	2,282,925
Restricted cash	17,509		8,740
Receivables, net	193,984		137,667
Inventories:
Finished homes and construction in progress	9,374,290		4,676,279
Land and land under development	7,615,922		5,791,338
Consolidated inventory not owned	404,782		393,273
Total inventories	17,394,994		10,860,890
Investments in unconsolidated entities	960,676		900,769
Goodwill	3,451,994		136,566
Other assets	1,529,605		863,404
	24,480,515		15,190,961
Lennar Financial Services	1,943,125		1,689,508
Rialto	1,054,628		1,153,840
Lennar Multifamily	872,841		710,725
Total assets	$	28,351,109	18,745,034


(1)	Under certain provisions of Accounting Standards Codification ("ASC") Topic 810, Consolidations, ("ASC 810") the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities ("VIEs") and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.

As of May 31, 2018, total assets include $883.9 million related to consolidated VIEs of which $58.2 million is included in Lennar Homebuilding cash and cash equivalents, $1.9 million in Lennar Homebuilding receivables, net, $68.5 million in Lennar Homebuilding finished homes and construction in progress, $271.1 million in Lennar Homebuilding land and land under development, $404.8 million in Lennar Homebuilding consolidated inventory not owned, $4.7 million in Lennar Homebuilding investments in unconsolidated entities, $13.4 million in Lennar Homebuilding other assets, $16.1 million in Rialto assets and $45.2 million in Lennar Multifamily assets.

As of November 30, 2017, total assets include $799.4 million related to consolidated VIEs of which $15.8 million is included in Lennar Homebuilding cash and cash equivalents, $0.2 million in Lennar Homebuilding receivables, net, $53.2 million in Lennar Homebuilding finished homes and construction in progress, $229.0 million in Lennar Homebuilding land and land under development, $393.3 million in Lennar Homebuilding consolidated inventory not owned, $4.6 million in Lennar Homebuilding investments in unconsolidated entities, $11.8 million in Lennar Homebuilding other assets, $48.8 million in Rialto assets and $42.7 million in Lennar Multifamily assets.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Balance Sheets – (Continued)

(Dollars in thousands, except shares and per share amounts)

(unaudited)



	May 31,			November 30,
	2018 (2)			2017 (2)
LIABILITIES AND EQUITY
Lennar Homebuilding:
Accounts payable	$	844,883		604,953
Liabilities related to consolidated inventory not owned	359,736			380,720
Senior notes and other debts payable	9,985,615			6,410,003
Other liabilities	1,688,118			1,315,641
	12,878,352			8,711,317
Lennar Financial Services	1,197,435			1,177,814
Rialto	430,501			720,056
Lennar Multifamily	145,951			149,715
Total liabilities	14,652,239			10,758,902
Stockholders’ equity:
Preferred stock	—			—
Class A common stock of $0.10 par value; Authorized: May 31, 2018 - 400,000,000 and November 30, 2017 - 300,000,000 shares; Issued: May 31, 2018 - 293,725,052 shares and November 30, 2017 - 205,429,942 shares	29,373			20,543
Class B common stock of $0.10 par value; Authorized: May 31, 2018 and November 30, 2017 - 90,000,000 shares; Issued: May 31, 2018 - 39,442,081 shares and November 30, 2017 - 37,687,505 shares	3,944			3,769
Additional paid-in capital	8,458,211			3,142,013
Retained earnings	5,264,674			4,840,978
Treasury stock, at cost; May 31, 2018 - 1,999,037 shares of Class A common stock and 1,689,438 shares of Class B common stock; November 30, 2017 - 1,473,590 shares of Class A common stock and 1,679,650 shares of Class B common stock	(164,552		)	(136,020	)
Accumulated other comprehensive income (loss)	(339		)	1,034
Total stockholders’ equity	13,591,311			7,872,317
Noncontrolling interests	107,559			113,815
Total equity	13,698,870			7,986,132
Total liabilities and equity	$	28,351,109		18,745,034


(2)	Under certain provisions of ASC 810, the Company is required to separately disclose on its condensed consolidated balance sheets the assets owned by consolidated variable interest entities ("VIEs") and liabilities of consolidated VIEs as to which neither Lennar Corporation, or any of its subsidiaries, has any obligations.

As of May 31, 2018, total liabilities include $420.5 million related to consolidated VIEs as to which there was no recourse against the Company, of which $14.8 million is included in Lennar Homebuilding accounts payable, $42.5 million in Lennar Homebuilding senior notes and other debts payable, $359.7 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $1.8 million in Lennar Homebuilding other liabilities, $1.6 million in Rialto liabilities and $0.1 million in Lennar Multifamily liabilities.

As of November 30, 2017, total liabilities include $389.7 million related to consolidated VIEs as to which there was no recourse against the Company, of which $5.0 million is included in Lennar Homebuilding accounts payable, $380.7 million in Lennar Homebuilding liabilities related to consolidated inventory not owned, $1.8 million in Lennar Homebuilding other liabilities and $2.2 million in Rialto liabilities.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Dollars in thousands, except per share amounts)

(unaudited)



	Three Months Ended					Six Months Ended
	May 31,					May 31,
	2018			2017		2018		2017
Revenues:
Lennar Homebuilding	$	5,063,997		2,885,741		7,726,090		4,904,435
Lennar Financial Services	232,135			208,363		403,275		356,406
Rialto	45,236			67,988		99,538		149,994
Lennar Multifamily	117,693			99,800		210,949		188,485
Total revenues	5,459,061			3,261,892		8,439,852		5,599,320
Costs and expenses:
Lennar Homebuilding	4,636,067			2,535,483		7,040,074		4,337,044
Lennar Financial Services	179,753			164,636		331,198		292,015
Rialto	35,936			59,076		81,349		125,989
Lennar Multifamily	117,186			102,698		214,385		195,347
Acquisition and integration costs related to CalAtlantic	23,875			—		128,070		—
Corporate general and administrative	84,915			66,774		152,725		127,473
Total costs and expenses	5,077,732			2,928,667		7,947,801		5,077,868
Lennar Homebuilding equity in loss from unconsolidated entities	(12,226		)	(21,506	)	(26,513	)	(33,040	)
Lennar Homebuilding other income, net	9,824			3,828		179,752		9,567
Lennar Homebuilding loss due to litigation	—			—		—		(140,000	)
Rialto equity in earnings from unconsolidated entities	4,116			5,730		13,230		6,452
Rialto other expense, net	(6,514		)	(21,104	)	(15,305	)	(37,762	)
Lennar Multifamily equity in earnings from unconsolidated entities	14,281			9,427		17,023		32,574
Earnings before income taxes	390,810			309,600		660,238		359,243
Provision for income taxes (1)	(75,961		)	(108,892	)	(208,572	)	(128,861	)
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	314,849			200,708		451,666		230,382
Less: Net earnings (loss) attributable to noncontrolling interests	4,592			(12,937	)	5,194		(21,343	)
Net earnings attributable to Lennar	$	310,257		213,645		446,472		251,725
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on securities available-for-sale	$	(589	)	419		(1,247	)	1,391
Reclassification adjustments for (gains) losses included in earnings, net of tax	(126		)	4		(126	)	4
Total other comprehensive income (loss), net of tax	$	(715	)	423		(1,373	)	1,395
Total comprehensive income attributable to Lennar	$	309,542		214,068		445,099		253,120
Total comprehensive income (loss) attributable to noncontrolling interests	$	4,592		(12,937	)	5,194		(21,343	)
Basic earnings per share (2)	$	0.95		0.89		1.53		1.05
Diluted earnings per share (2)	$	0.94		0.89		1.52		1.05
Cash dividends per each Class A and Class B common share	$	0.04		0.04		0.08		0.08


(1)	Provision for income taxes for the six months ended May 31, 2018 includes a non-cash one-time write down of deferred tax assets of $68.6 million resulting from the Tax Cuts and Jobs Act enacted in December 2017.


(2)	Basic and diluted average shares outstanding and earnings per share calculations for the three and six months ended May 31, 2017 have been adjusted to reflect 4.7 million of Class B shares distributed in the stock dividend on November 27, 2017.

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	Six Months Ended
	May 31,
	2018			2017
Cash flows from operating activities:
Net earnings (including net earnings (loss) attributable to noncontrolling interests)	$	451,666		230,382
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	41,430			29,418
Amortization of discount/premium and accretion on debt, net	(11,984		)	5,059
Equity in earnings from unconsolidated entities	(3,740		)	(5,986	)
Distributions of earnings from unconsolidated entities	18,685			44,412
Share-based compensation expense	33,720			24,817
Excess tax benefits from share-based awards	—			(1,980	)
Deferred income tax expense	46,895			13,197
Gain on sale of operating properties and equipment	(5,107		)	—
Gain on sale of interest in unconsolidated entity	(164,880		)	—
Unrealized and realized gains on real estate owned	(1,770		)	(3,374	)
Impairments of loans receivable and real estate owned	6,009			45,803
Valuation adjustments and write-offs of option deposits and pre-acquisition costs	25,807			12,343
Changes in assets and liabilities:
Decrease in restricted cash	14,883			13,968
Decrease in receivables	44,248			16,817
Increase in inventories, excluding valuation adjustments and write-offs of option deposits and pre-acquisition costs	(408,913		)	(655,183	)
Increase in other assets	(119,698		)	(13,502	)
Decrease (increase) in loans held-for-sale	(43,903		)	140,372
Increase (decrease) in accounts payable and other liabilities	111,049			(56,322	)
Net cash provided by (used in) operating activities	34,397			(159,759	)
Cash flows from investing activities:
Net additions of operating properties and equipment	(58,935		)	(47,043	)
Proceeds from the sale of operating properties and equipment	22,820			—
Proceeds from sale of investment in unconsolidated entity	175,179			—
Investments in and contributions to unconsolidated entities	(186,103		)	(315,755	)
Distributions of capital from unconsolidated entities	196,073			96,499
Proceeds from sales of real estate owned	21,658			55,521
Receipts of principal payments on loans receivable and other	2,147			19,487
Originations of loans receivable	—			(14,055	)
Purchases of commercial mortgage-backed securities bonds	(31,068		)	(40,357	)
Acquisitions, net of cash acquired	(1,102,957		)	(611,103	)
Increase in Lennar Financial Services loans held-for-investment, net	(3,012		)	(2,719	)
Purchases of Lennar Financial Services investment securities	(32,369		)	(26,811	)
Proceeds from maturities/sales of Lennar Financial Services investments securities	20,578			13,340
Decrease in restricted cash for investments	10,825			—
Other payments, net	(318		)	(540	)
Net cash used in investing activities	$	(965,482	)	(873,536	)

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)



	Six Months Ended
	May 31,
	2018			2017
Cash flows from financing activities:
Net borrowings under revolving lines of credit	$	495,300		—
Net borrowings (repayments) under warehouse facilities	7,710			(144,265	)
Proceeds from senior notes	—			1,250,000
Debt issuance costs	(12,101		)	(14,060	)
Redemption of senior notes	(575,000		)	(400,000	)
Conversions and exchanges on convertible senior notes	(59,145		)	—
Proceeds from Rialto notes payable	32,226			35,460
Principal payments on Rialto senior notes and other notes payable	(350,585		)	(10,120	)
Proceeds from other borrowings	31,846			65,096
Principal payments on other borrowings	(59,964		)	(30,600	)
Payments related to other liabilities	(1,568		)	—
Receipts related to noncontrolling interests	3,882			320
Payments related to noncontrolling interests	(30,412		)	(47,909	)
Excess tax benefits from share-based awards	—			1,980
Common stock:
Issuances	3,184			693
Repurchases	(28,526		)	(83	)
Dividends	(22,780		)	(18,778	)
Net cash provided by (used in) financing activities	(565,933		)	687,734
Net decrease in cash and cash equivalents	(1,497,018		)	(345,561	)
Cash and cash equivalents at beginning of period	2,650,872			1,329,529
Cash and cash equivalents at end of period	$	1,153,854		983,968
Summary of cash and cash equivalents:
Lennar Homebuilding	$	931,753		747,652
Lennar Financial Services	162,992			107,436
Rialto	43,729			119,592
Lennar Multifamily	15,380			9,288
	$	1,153,854		983,968
Supplemental disclosures of non-cash investing and financing activities:
Lennar Homebuilding and Lennar Multifamily:
Non-cash contributions to unconsolidated entities	$	87,269		63,014
Purchases of inventories and other assets financed by sellers	$	45,078		78,948
Conversions and exchanges on convertible senior notes	$	217,154		—
Equity component of acquisition consideration	$	5,070,006		—
Consolidation/deconsolidation of unconsolidated/consolidated entities, net:
Inventories	$	35,430		—
Receivables	$	7,198		—
Investments in unconsolidated entities	$	(25,614	)	—
Other liabilities	$	(17,014	)	—

See accompanying notes to condensed consolidated financial statements.

Lennar Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)


(1)	Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Lennar Corporation and all subsidiaries, partnerships and other entities in which Lennar Corporation has a controlling interest and VIEs (see Note 16) in which Lennar Corporation is deemed to be the primary beneficiary (the "Company"). The Company’s investments in both unconsolidated entities in which a significant, but less than controlling, interest is held and in VIEs in which the Company is not deemed to be the primary beneficiary, are accounted for by the equity method. All intercompany transactions and balances have been eliminated in consolidation. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended November 30, 2017. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the accompanying condensed consolidated financial statements have been made.

The Company has historically experienced, and expects to continue to experience, variability in quarterly results. The condensed consolidated statements of operations for the three and six months ended May 31, 2018 are not necessarily indicative of the results to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications/Revisions

Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the 2018 presentation. These reclassifications had no impact on the Company's condensed consolidated financial statements.


(2)	Business Acquisitions

Acquisition of CalAtlantic Group, Inc.

On February 12, 2018, the Company completed the acquisition of CalAtlantic Group, Inc. (“CalAtlantic”) through a transaction in which CalAtlantic was merged with and into a wholly-owned subsidiary of the Company (“Merger Sub”), with Merger Sub continuing as the surviving corporation and a wholly-owned subsidiary of the Company (the “Merger”). CalAtlantic was a homebuilder which built homes across the homebuilding spectrum, from entry level to luxury, in 43 metropolitan statistical areas spanning 19 states. CalAtlantic also provided mortgage, title and escrow services. A primary reason for the acquisition was to increase local market concentration in order to generate synergies and efficiencies.

Based on an evaluation of the provisions of ASC Topic 805, Business Combinations, ("ASC 805"), Lennar Corporation was determined to be the acquirer for accounting purposes. The purchase price accounting reflected in the accompanying financial statements is provisional and is based upon estimates and assumptions that are subject to change within the measurement period (up to one year from the acquisition date pursuant to ASC 805). The measurement period remains open pending the completion of valuation procedures related to the acquired assets and assumed liabilities. The $3.3 billion provisional amount allocated to goodwill in Lennar Homebuilding and the provisional amount of $150 million allocated to goodwill in Lennar Financial Services represents the excess of the purchase price over the estimated fair value of assets acquired and liabilities assumed.

The following table summarizes the purchase price allocation based on the estimated fair value of net assets acquired and liabilities assumed at the date of acquisition:



(Dollars in thousands)
CalAtlantic shares of common stock outstanding	118,025,879
CalAtlantic shares electing cash conversion	24,083,091
CalAtlantic shares exchanged	93,942,788
Exchange ratio for Class A common stock	0.885
Exchange ratio for Class B common stock	0.0177
Number of shares of Lennar Class A common stock issued in exchange	83,138,277
Number of shares of Lennar Class B common stock issued in exchange (due to Class B common stock dividend)	1,662,172

Consideration attributable to Class A common stock	$	4,933,425
Consideration attributable to Class B common stock	77,823
Consideration attributable to equity awards that convert upon change of control	58,758
Consideration attributable to cash including fractional shares	1,162,341
Total purchase price	$	6,232,347



(In thousands)
ASSETS
Homebuilding:
Cash and cash equivalents, restricted cash and receivables, net	$	55,736
Inventories	6,255,482
Intangible asset (1)	8,000
Investments in unconsolidated entities	151,630
Goodwill (2)	3,315,428
Other assets	603,503
Total Homebuilding assets	10,389,779
Financial Services (2)	322,991
Total assets	10,712,770
LIABILITIES
Homebuilding:
Accounts payable	85,001
Senior notes payable and other debts	3,922,695
Other liabilities (3)	359,004
Total Homebuilding liabilities	4,366,700
Financial Services	95,293
Total liabilities	4,461,993
Noncontrolling interests (4)	18,430
Total purchase price	$	6,232,347


(1)	Intangible asset includes trade name. The amortization period for the trade name is approximately six months.

(2)

Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, and it is generally not deductible for income tax purposes. As of the merger date, goodwill consisted primarily of expected greater efficiencies and opportunities due to increased concentration of local market share, reduced general and administrative costs and reduced homebuilding costs resulting from the merger and cost savings as a result of additional homebuilding and non-homebuilding synergies. The assignment of goodwill by the Company's reporting segments has not been completed yet, however, a provisional amount of goodwill of approximately $150 million was allocated to Lennar Financial Services.

(3)

Other liabilities includes contingencies assumed at the Merger date, which includes warranty and legal reserves. Warranty reserves for homes are established at an amount estimated to be adequate to cover potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a home. Warranty reserves are determined based on historical data and trends with respect to similar product types and geographical areas. Consistent with ASC 450, Contingencies, legal reserves are established when a loss is considered probable and the amount of loss can be reasonably estimated.


(4)	Fair value of noncontrolling interests was measured using discounted cash flows of expected future contributions and distributions.

For the three and six months ended May 31, 2018, Lennar Homebuilding revenue included $2.1 billion and $2.5 billion, respectively, of home sales revenues, and earnings (loss) before income taxes included $56.5 million and ($52.0) million, respectively, of a pre-tax earnings (loss) from CalAtlantic since the date of acquisition, which included acquisition and integration costs of $23.9 million and $128.1 million, respectively. These acquisition and integration costs were comprised mainly of severance expenses and transaction costs and were included within the acquisition and integration costs related to CalAtlantic line item in the accompanying condensed consolidated statement of operations for the three and six months ended May 31, 2018.

The following presents summarized unaudited supplemental pro forma operating results as if CalAtlantic had been included in the Company's Consolidated Statements of Operations beginning December 1, 2016.



	Three Months Ended			Six Months Ended
	May 31,			May 31,
(Dollars in thousands, except per share amounts)	2018		2017	2018	2017
Revenues from home sales	$	4,986,010	4,496,327	9,180,213	8,107,702
Net earnings (1)	313,471		320,239	443,967	477,027
Earnings per share:
Basic	$	0.96	0.98	1.34	1.44
Diluted	$	0.95	0.97	1.33	1.43

(1)

Net earnings for the three and six months ended May 31, 2018 include a pre-tax impact from acquisition and integration costs related to CalAtlantic of $23.9 million and $128.1 million, respectively. Additionally, net earnings for the three and six months ended May 31, 2018 include purchase accounting adjustments on CalAtlantic homes that were in backlog/construction in progress at the acquisition date that were delivered of