Business Strategy & Outlook
From 2020-2021 proved to be strong years for the U.S. housing market despite the COVID-19 pandemic, and housing starts should remain elevated in 2022 as homebuilders work through extensive backlogs. However, deteriorating affordability has slowed housing demand, and starts to decrease 10% in 2023 to 1.435 million units and decline roughly 10% in 2024 to 1.3 million units, which is about in line with new home production in 2018-19. However, the affordability will improve over the next two years as mortgage rates subside and home prices become more tenable. The project starts will rebound to 1.55 million units by 2026 and average around 1.45 million units from 2027-31.
The first-time buyers will be a key driver of future housing demand, and Lennar is well positioned to capture these potential buyers with its increased mix of entry-level homes. Lennar controls an ample land supply, which affords the company the ability to meet future demand while focusing on improving cash flows and maintaining a strong balance sheet. The company has shifted to a lighter land acquisition strategy, which seeks to reduce the amount of capital tied up in land by purchasing smaller land parcels and relying more on land options to acquire land on a just-in-time basis. This strategy should help the company realize better returns on invested capital and cash flows over the housing cycle. Lennar’s investments in ancillary businesses, such as its multifamily business and technology startups, distinguishes the company from many other homebuilders. Management announced plans to spin off its multifamily, single-family for rent, and land businesses by the end of fiscal 2022. Whether the market will place a higher multiple on SpinCo as a standalone entity has yet to be seen, but one cannot think this transaction will result in meaningful value creation for Lennar’s remaining businesses. However, the separation of these ancillary businesses, which tend to generate lumpier earnings, should dampen Lennar’s earnings volatility.
Financial Strengths
At the end of fiscal second-quarter 2022, Lennar had approximately $4.6 billion of outstanding homebuilding debt, which net of its $1.3 billion homebuilding cash balance, equates to a 13.4% homebuilding net debt/capital ratio. The Lennar has a strong balance sheet and plenty of liquidity. Aside from the firm’s $1.3 billion homebuilding cash balance, it also has $2.5 billion available on its revolving credit facility. Given the long-term outlook for U.S. residential construction and the firm’s commitment to become a more asset-light business, the Lennar will continue to generate strong cash flow over the longer term.
Bulls Say
- The U.S. housing market is undersupplied. This supply/demand imbalance will take years to address and should support pricing power for homebuilders.
- Demand for entry-level housing should increase as the large millennial generation forms households. Lennar is well positioned to capitalize on this growing market.
- Lennar’s multifamily segment is an underappreciated asset, which could get more market recognition after it is spun off.
Company Description
Lennar is the second-largest public homebuilder in the United States. The company’s homebuilding operations target first-time, move-up, and active adult homebuyers mainly under the Lennar brand name. Lennar’s financial-services segment provides mortgage financing and related services to its homebuyers. Miami-based Lennar is also involved in multifamily construction and has invested in numerous housing-related technology startups.
(Source: Morningstar)
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