W hen it comes to competing in the homebuilding game, Lennar has made sure to cover its bases.Lennar ( LEN ) builds affordable move-up and retirement homes, primarily under the Lennar brand name. About 25% of its homebuilding business is geared to first-time homebuyers. Meanwhile, Lennar’s financial services provide mortgage financing, title insurance and closings for buyers of its houses and condos.
Its multifamily segment is a nationwide developer of high-quality rental apartments.
Lennar’s Rialto is a commercial real estate financier and manager for investors.
Lennar has been riding the crest of the strengthening U.S. housing market with impressive financial results, despite first-time homebuyers who’ve been slow to move off the sidelines and into the market.
Lennar’s earnings have climbed by at least double digits year over year for the past 13 quarters.
The Biggest Of The Best
That kind of behavior has earned Lennar an IBD Composite Rating of 98 out of a possible 99.
But Lennar isn’t resting on its laurels.
Last month, the company announced the formation and closing of Lennar Multifamily Venture, an equity fund of Lennar Multifamily Communities and global sovereign and institutional investors.
It targets investments in class-A multifamily developments in 25 top U.S. metro markets.
The fund has $1.1 billion in commitments. The venture will aim to provide “superior risk-adjusted returns through a develop-to-core strategy, developing multifamily communities and then holding those communities in a portfolio long term for cash flow,” Lennar said.
Lennar will invest $504 million in the venture and will seed it with 19 undeveloped multifamily assets that were previously purchased or under contract by Lennar, totaling 6,120 apartments with a projected development cost of $2.1 billion, Lennar said.
It “marks a significant milestone in the evolution of our multifamily business,” CEO Stuart Miller said at the time. “To date, we have been building our apartment communities in individual ventures, which were structured to sell the assets once they were leased and stabilized. In addition to receiving a consistent fee stream, our new development-to-core venture allows us to … maintain an ownership interest in the income-producing community going forward.”
The week before, Lennar disclosed that it had signed a “contribution agreement” to position Lennar’s Five Point Holdings for a potential IPO , Miller said.
Management was not available to comment further for this story.
According to a report by RBC Capital Markets analyst Robert Wetenhall, through the agreement, Lennar is “taking steps to monetize its ownership interest in three premier real estate communities located in California that are managed by Five Point Communities, which is 60% owned by Lennar. The completion of an IPO of Five Point Holdings by November 2015 would allow Lennar to realize a healthy premium to book value for a unique set of assets.”
It’s not that Lennar needs a lift. Second-quarter earnings rose 30% to 79 cents a share. Revenue climbed 32% to $2.392 billion.
New-home deliveries rose 21% from a year earlier, and new-order sales value increased 28%.
Sales backlog value increased 23% to $2.9 billion, “keeping us well positioned going forward,” said Miller.
“We continue to believe that we are still in the early stages of a multiyear, slow-but-steady housing recovery,” Miller said on the second-quarter’s conference call. “This year’s spring selling season confirms that the market is continuing to improve at a very consistent pace.”
Analysts polled by Thomson Reuters expect full-year 2015 earnings to rise 16% to $3.25 a share.
They see an 18% gain in 2016.
Overall, the housing market is gaining momentum.
In July, existing-home sales increased to the highest level since February 2007, according to the National Association of Realtors, while housing starts rose to the highest level since October 2007, according to the Commerce Department.
“It’s a good time to be a builder,” Lawrence Yun, NAR chief economist, told IBD. “There’s a housing shortage, and any builder who builds will not have trouble finding a buyer. Homebuilders are beginning to produce more homes, but it’s still an insufficient amount because many of the small local builders don’t have the financing to build homes. (As a result,) companies like Lennar will be in a better position to take market share.”
For-Sale Inventory Tightens
In July, the inventory of existing homes for sale stood with a 4.8-month supply, “a historically low point,” said Yun. “Therefore, we need more homes available for sale.”
Yun expects existing-home sales to rise 6.5% this year and 4.5% in 2016. Because of the shortage, he expects new-home sales to soar 25% to 30%, with similar growth next year.
Daren Blomquist, vice president at RealtyTrac, says that over the last few years, there have been a lot of “positive signs” for homebuilders. “We’re seeing the highest sales of homes since 2007,” he said. “What’s really encouraging is that builders are seeing traditional buyers beginning to get involved and not just investors driving the sales.”
In the second quarter, buyers using Federal Housing Administration loans represented 17% of all purchasers, the highest level since Q2 2010, he says, noting that FHA borrowers represent experienced and first-time homebuyers.
“If first-time buyers are buying, that means the move-up buyers are selling to the first-time buyers,” he said. “A lot of times, the path for those move-up buyers is walking away with the profits from the sale. Many times, the next step is to buy a new home.”
More Families Forming
Robert Denk, senior economist at the National Association of Home Builders, adds that household formations have picked up recently as the job market has improved.
While home prices are rising, he added, the current level is “well below peak and still affordable,” and “there’s a confidence factor” that’s kept prices from falling.
He said the price increases are helping put “household balance sheets in better shape. … People who were in negative equity territory are getting a chance to get it back. That will grease the wheels for trade-up buyers because now they’ll be able to sell the homes they were trapped in due to negative equity.”
One wild card that could hurt homebuilders, says Blomquist, is if the “shock waves from global economic problems,” including China, would cause foreign buyers to pull back on their real estate purchases.
“That could really hurt homebuilders, because where they are making money now is on the higher end, which is where a lot of these foreign buyers are buying.”