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  • Brett Schafer

Lennar Corporation: Not So Deep Dive

Updated: Sep 24, 2021

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Show Notes

(Ryan) What they do: Lennar is the largest homebuilder in the United States by revenue, but there are several elements to their business so I’ll try to get through everything in a thorough manner. By the way, they operate in 20 different states throughout the US, ranging from coast to coast.

The way it works from Lennar’s side is they acquire land that fits into 3 different buckets. The 1st category is finished land (that is land that’s ready for home construction to begin). The 2nd is land under development (in this bucket land is probably less than 4-5 years away from being able to start construction. The 3rd is land that’s more than 4-5 years away from being ready and still requires gaining approval to develop and lots of planning before it could be ready. If a piece of land is in the 1st bucket then it’s carried on the balance sheet. If it’s in the 2nd or 3rd bucket, they are structured as option agreements with various partners.

Once the land gets into that bucket 1, Lennar then typically hires independent contractors for most aspects of home construction. The homes they are building include first-time homes, move-up homes, active adult, luxury, and multigenerational homebuyers. So these are higher-end homes. For reference, the average selling price of a Lennar home is around $400k. But their services go well beyond the construction process.

They also manage the marketing process. So hiring consultants for in-home walkthroughs and stuff like that. They advertise through digital channels and different listing sites. Then once they’ve got a buyer, they also have a financial services operation to help with the closing of the house. This includes title insurance, closing services, and mortgage underwriting. But they also have a bunch of other investments, which I won’t get into for now.

(Ryan) History: Lennar was actually started in 1954 in Miami, Fl by Gene Fisher and Arnold Rosen. Originally, it was known as F&R Builders. 2 years later, Leonard Miller joined as a co-owner (I’m assuming he bought out Gene Fisher’s stake), and after 15 years of building up the business, they changed the name to Lennar and took the company public in that year. In 1981 they expanded into mortgage financing and in 2000 they acquired US Home and doubled in size.

Over the last 20 years, they’ve added a bunch of new products and home types and in 2018 they merged with CalAtlantic Homes to create the world’s largest homebuilder. Lennar really seems like a great exemplar of fostering a strong culture and steadily compounding over years and years.

(Brett) Industry/Landscape/Competition:

(Brad) Management and Ownership:

Stuart Miller is the executive chairman

  • This guy has been climbing the ladder with the company for 35 years

  • Board member of Alonzo Mourning Charities

  • He was the CEO of Lennar for 21 years until 2018

Rick Beckwitt is a co-CEO and co-President

  • Again, with the company for 15 years climbing the ladder

  • BOD of 2 publicly traded companies: Eagle Materials (building materials) and Five Point Holdings (RE development)

  • BOD member at DR Horton until 2003 and was President of DR Horton as well

  • Former managing partner at EVP Cap

  • M&A financing with Lehman Brothers

Jon Jaffe co-CEO and co-President

  • With Lennar for 38 years where he started as a regional president

  • Also a BOD of Five Point Holdings, Opendoor and True Anthem

COO sold his business to Lennar and then climbed a ladder for 15 years until his COO promotion

Ownership according to February’s proxy statement

  • Directors and officers own 1.8% of class A common stock combined

  • Stuart Miller owns 58.1% of the class B common stock with all other directors owning 0.4% more

Over 90% of the float is held by institutions with Vanguard owning 10.5% alone and Blackrock at 8.2%. There are over 1000 institutional firms with a stake in the company

These people are LOYAL!

(Brett) Valuation:

  • Market cap of $30 billion, EV of $35 billion

  • You might look at the trailing cash flow and think this company is extremely cheap, but historically its conversion to from earnings to cash flow has been very low

  • EV/EBITDA of 7.4 over the past 12 months, EV/E of about 10.5

  • Dividend yield of 1%

(Ryan) Earnings: A little bit of unfamiliar nomenclature in these earnings so I’ll try to break things down and explain their relevance

  • Revenue in Q2 was $6.4B, up 22% from a year ago. The TTM revenue was $24.5B

  • Then the 2 factors that are important to pay attention to are the backlog and deliveries (also ASP as it can range depending on the types of homes they are selling)

  • Deliveries in Q2 was roughly 14,500 homes, up 14% YoY

  • New orders increased 32% YoY, with new order value up 56% YoY

  • They’ve got roughly 25,000 homes in their backlog

  • Quarterly gross margins were 26.1% vs 21.6% a year ago

  • $831 million in net earnings, up 61% YoY (So 13% net margins)

  • They would have had ~$100M in earnings if it weren’t for mark to market losses on their Opendoor investment. (doesn’t actually impact cash flow, but thought it was interesting)

For FY 21:

  • Lennar expects to deliver 62k-64k homes with an ASP of $420k. That’s about $26B in home sales revenue

  • And they’re guiding for 26.5%-27% gross margins

(Brad) Balance sheet and liquidity:

  • $2.58 billion in cash on hand as of this quarter

  • -$800 million in net receivables

  • Another $10.4 billion in finished inventory

  • Another $8 billion in land and developments

  • It also has about $5.89 billion in senior notes and debt payable and $2.2 billion more in what it calls “other liabilities” → interest expense not too bad at $94 million with a 4.9% average interest rate

  • It has another $2.8 billion credit facility

  • Unsurprisingly this is an extremely capital intensive business which means debt and maybe a moat

  • It has also issued roughly $1.5 billion in new stock since November of 2020

Anecdotal Evidence:

(Ryan) I looked at some of the houses that they’re selling in my area and they look really nice. Also, they spoke a lot about the strength they are seeing in Texas, Florida, and Arizona. Said they are seeing a lot of migration out of the coasts and into the central states. Those states have cheap, flat land with plenty of room to build.



Future growth opportunities:

(Ryan) Single-family rental platform or LSFR. Here’s a quote from the conference call “At the end of the first quarter, LSFR formed the Upward American Venture, which was capitalized with 1.25 billion of equity from blue-chip institutional investors.” Just after the end of the 2nd quarter they acquired more capital that they said positions them to buy $4B worth of purpose-built communities. This seems to be a big bet on single-family rentals, for families that can’t yet afford a home so they have to rent. I believe they sell these to professional buyers who then rent em out. But I’m having a hard time telling.

(Brett) The spin-off of the non-core businesses. This was mentioned on the CC and apparently will have around $5 billion – $6 billion in assets taken out from Lennar. The remaining Lennar Corp will be focused on residential homebuilding and financial services (I believe, it is a bit unclear right now)

(Brad) Could the I-buying process remove some of the red tape for buying a home and lead to broader Lennar demand? There’s already a supply shortage so anything making the process more convenient could boost both top and bottom lines

Highlights and lowlights:

(Ryan) Highlights: Quite simply, from everything I’ve read there’s a housing shortage. And the only way to alleviate that is to build our way out. That should create sustained demand and a durable runway for Lennar. Also, Lennar in and of itself seems operationally sound. Lowlights: This seems like a macro bet. Also, land acquisition is getting more competitive. Big funds, billionaires, etc., all seem to be acquiring land which could drive up prices but that’s really speculative and there’s probably more than enough land to go around.

(Brett) Highlights: The tailwind has been there and continues to be there, homebuilders have been decent investments that all seem to last for decades, Lowlights: I struggle to like investments where the business is pricing in that interest rates will stay high. That is unpredictable. Other than that, few lowlights.

(Brad) highlight = management and the general lack of supply for housing in the United States; Lowlight → with federal house building programs and more infrastructure spend on the way, I wonder if new public supply could change the competitive dynamics of the business. Interest rates also have to go up eventually which will dampen affordability but we have a long way to go there.

Bull Case:

(Ryan) Sustained demand drives 10% cash flow growth for the next 5 years. If they can do that which seems completely reasonable, they’ll be generating roughly 20% of their current market cap in free cash flow in 2025.

(Brett) From what it can control, Lennar keeps doing what it is doing and the spin-off is successful and unlocks shareholder value. On a macro front, the American consumer stays in good shape and housing prices stay elevated.

(Brad) Housing shortage persists and Lennar can essentially just keep building inventory that immediately gets scooped up by eager buyers. Housing demand continues to grow as millennials enter that stage of their life.

Bear Case:

(Ryan) It has historically traded around 10x earnings. Right now it’s a little lower. The risk is that, demand dries up. Or that supply gap gets filled somehow and deliveries revert back to pre-pandemic levels of around 45-50k. That would lead to a worse investment but still not a terrible one. I think worst-case scenario you’re getting roughly market performance.

(Brett) I don’t think there is a bear case from Lennar’s execution, which has a solid track record going back decades. However, with there is the obvious bear case of demand for housing cooling off compared to the last 18 months. 

(Brad) We get another housing bubble resulting from ultra-low rates and ultra-high liquidity. People are living above their means and that can’t continue forever?

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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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