LENNAR CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and accompanying notes included elsewhere in this Report. It also should be read in conjunction with the disclosure under "Special Note Regarding Forward-Looking Statements" in Part I of this Form 10-K.
Outlook
We had strong 2022 results, particularly in view of the difficult home sale market in the second half of the year. Market conditions continued to deteriorate in the fourth quarter as the now well-documented interest rate driven sales slowdown and pricing correction intersected with the still stressed supply chain, high labor and material costs and elongated cycle times (i.e., the time it takes to build a home). Sales and sales prices are down across both the new and existing home markets. We believe that production of single family and multifamily dwellings nationally will be down between a quarter to a third in 2023. In addition, the supply of existing homes for sale has come down as homeowners hold on to extremely low mortgage rates. This, combined with the housing production shortfall over the past decade, leaves the industry in the middle of what we believe should be a fairly short duration market correction and, unlike previous market corrections, there currently is no inventory overhang to resolve.
Against this backdrop, we have developed a strategy that we believe should enable us to maintain sales pace and increase market share despite the difficult market:
•We have adjusted prices in various communities to levels that are intended to enable us to maintain reasonable volume. The result is that margin, as opposed to volume, becomes the shock absorber. •We are working with our trade partners to right size our cost structure to current market conditions. Although our trade partners are still completing homes that were started in the first half of 2022, the amount of new work they are receiving is down substantially. We are offering a steady flow of starts in exchange for price reductions. •We are being extremely selective on new land acquisitions and new communities. We have re-reviewed and re-underwritten land purchases in our pipeline and are not going forward with land purchases that do not meet our standards under current market conditions. •We will continue to improve our cost of doing business by focusing on and reducing SG&A expenses. Over the past several years, we have seen quarter over quarter improvement in our SG&A expenses as a percentage of home sale revenues achieving record lows. However, as average sales prices come down, the percentages will not hold without additional cost cuts. Further, we know that in more difficult times there will be upward pressure on some of our sales and marketing costs in order to drive new sales. •We will maintain tight control of our inventory under construction. We will pace home starts to meet expected sales volume. Nonetheless, inventory dollars related to inventory under construction has grown through the year because of expanded cycle times due to the supply chain disruption. We expect to bring down our cycle time during the next few quarters. This will free up a significant amount of cash that currently is tied up in the increased inventory dollars related to homes under construction. We will continue to focus on our cash flow and bottom line to protect and enhance our already strong balance sheet. While we continue to have many strong markets, in our more challenging areas we have had to adjust base sales prices, offer mortgage buy down programs and increase sales incentives to maintain or regain sales momentum. Our cancellation rate increased significantly during our third quarter and into the beginning of our fourth quarter. However, our cancellation rate peaked in October and declined significantly in November. Our construction playbook has three primary areas of focus: lowering construction costs, reducing cycle time, and achieving even flow production. We expect what has been a steady increase in construction costs over the last few years due to supply shortages will reverse over the course of fiscal 2023, as many homebuilders reduce or totally curtail new starts. Similarly, we expect cycle times, which increased significantly due to shortages of materials and labor, to start to return to normal as the number of homes being built falls as a result of market conditions. During the fourth quarter of 2022, the average cycle time was the same as in the third quarter despite the continuing effect of supply chain disruptions and two hurricanes that delayed production inFlorida and parts of the Carolinas. Even flow production is a core focus for us and is a pillar for being the builder of choice for the trades as it maximizes efficiencies for them. By maintaining our starts pace at a time when many homebuilders are reducing or stopping construction starts, we have been able to obtain cost reductions from our trade partners and increase our market share in many markets. We continue to strategically acquire land, primarily through options. Our continued focus on our land-light strategy resulted in ending fiscal 2022 with a percentage of homesites controlled rather than owned of 63%, up from 59% last year. Our 22
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years' supply of owned home sites decreased to 2.5 years as compared to 3.0 years at the end of the prior year. From a leverage perspective, we continue to benefit from our paydown of senior notes and strong generation of earnings which brought our homebuilding debt to total capital down to 14.4% at year-end, our lowest ever, and an improvement from 18.3% at the end of the prior year. While we did repurchase some stock in the fourth quarter, given the current market conditions and as a matter of careful capital allocation, we decided to go slow. We expect to continue to look at repurchasing stock in the future as opportunities present themselves. Regarding the planned spin-off of our multifamily and single-family rental investment and property management companies, current market conditions are not favorable so we are going to postpone the spin-off for the time being and wait for the right timing. Given the uncertainty about market conditions, it is difficult to provide the targeted guidance about our expected future performance that we provided in the past. Instead, we are providing broad ranges to give some boundaries for various components of our expected results during the first quarter of 2023. We expect our new orders for the first quarter of 2023 to be in the range of 12,000 to 13,500 homes, and we anticipate our first quarter deliveries to be in the range of 12,000 to 13,500 homes. We expect gross margins will be about 21.0%, though this number will adjust somewhat based on the number of deliveries. We expect our SG&A expenses as a percentage of home sale revenues will be about 8%, but that percentage will adjust based on deliveries and homebuilding revenue. We expect our first quarter ending community count to be about the same as the community count at the end of 2022, as we walked away from deals that would have produced new active communities. Our first quarter average sales price should be in the range of$440,000 to$450,000 as we continue to price to market. We believe our fiscal 2023 deliveries will be between 60,000 to 65,000 homes. We ended the year with the highest revenues, the highest profit, the highest cash flow, and the highest liquidity in Lennar's history. We have a plan of execution as we move into the uncertainties of 2023 with a focus on maintaining volume, maximizing margin through cost reductions, managing inventories, driving cash flow, managing land spend, and further enhancing our balance sheet in spite of challenging market conditions.
Results of Operations
Overview
Our net earnings attributable to Lennar were$4.6 billion , or$15.72 per diluted share ($15.74 per basic share) in 2022 and$4.4 billion , or$14.27 per diluted share ($14.28 per basic share) in 2021. 23
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Financial information relating to our operations was as follows:
Year ended November 30, 2022
Financial Lennar
(In thousands) Homebuilding Services Multifamily Other Corporate Total
Revenues:
Sales of homes $ 31,778,885 - - - - 31,778,885
Sales of land 143,041 - - - - 143,041
Other revenues 29,409 809,680 865,603 44,392 - 1,749,084
Total revenues 31,951,335 809,680 865,603 44,392 - 33,671,010
Costs and expenses:
Costs of homes sold 23,025,467 - - - - 23,025,467
Costs of land sold 171,589 - - - - 171,589
Selling, general and administrative 1,964,243 - - - - 1,964,243
Other costs and expenses - 426,378 848,931 32,258 - 1,307,567
Total costs and expenses 25,161,299 426,378 848,931 32,258 - 26,468,866
Equity in earnings (loss) from
unconsolidated entities, Multifamily
other gain and Lennar Other other
income (expense), net, and other gain
(loss) (17,235) - 52,821 (91,689) - (56,103)
Homebuilding other income, net 4,516 - - - -
4,516
Lennar Other unrealized loss from technology investments - - - (655,094) - (655,094) Operating earnings (loss) 6,777,317 383,302 69,493 (734,649) - 6,495,463 Corporate general and administrative expenses - - - - 414,498
414,498
Charitable foundation contribution - - - - 66,399
66,399
Earnings (loss) before income taxes$ 6,777,317 383,302 69,493 (734,649) (480,897) 6,014,566 Year ended November 30, 2021 Financial Lennar (In thousands) Homebuilding Services Multifamily Other Corporate Total Revenues: Sales of homes$ 25,348,105 - - - - 25,348,105 Sales of land 167,913 - - - - 167,913 Other revenues 29,224 898,745 665,232 21,457 - 1,614,658 Total revenues 25,545,242 898,745 665,232 21,457 - 27,130,676 Costs and expenses: Costs of homes sold 18,562,213 - - - - 18,562,213 Costs of land sold 143,631 - - - - 143,631 Selling, general and administrative 1,796,697 - - - - 1,796,697 Other costs and expenses - 407,731 652,810 30,955 - 1,091,496 Total costs and expenses 20,502,541 407,731 652,810 30,955 - 21,594,037 Equity in earnings (loss) from unconsolidated entities, Multifamily other gain and Lennar Other other income (expense), net, and other gain (loss) (1) (14,205) - 9,031 231,731 -
226,557
Homebuilding other income, net 3,266 - - - -
3,266
Lennar Other unrealized gain from technology investments - - - 510,802 - 510,802 Operating earnings 5,031,762 491,014 21,453 733,035 - 6,277,264 Corporate general and administrative expenses - - - - 398,381
398,381
Charitable foundation contribution - - - - 59,825 59,825 Earnings before income taxes$ 5,031,762 491,014 21,453 733,035 (458,206) 5,819,058
(1)During the year ended
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2022 versus 2021
Revenues from home sales increased 25% in the year endedNovember 30, 2022 to$31.8 billion from$25.3 billion in the year endedNovember 30, 2021 . Revenues were higher primarily due to an 11% increase in the number of home deliveries and a 13% increase in the average sales price. New home deliveries increased to 66,399 homes in the year endedNovember 30, 2022 from 59,825 homes in the year endedNovember 30, 2021 . The average sales price of homes delivered was$480,000 in the year endedNovember 30, 2022 , compared to$424,000 in the year endedNovember 30, 2021 . Gross margins on home sales were$8.8 billion , or 27.5% (27.7% pre-impairment), in the year endedNovember 30, 2022 , compared to$6.8 billion , or 26.8%, in the year endedNovember 30, 2021 . Gross margins in the year endedNovember 30, 2022 include$33.6 million of homebuilding impairments in nine communities and$18.1 million of impairments to our homes in backlog taken during the year. During the year endedNovember 30, 2022 , an increase in costs per square foot primarily due to higher materials and labor costs, was mostly offset by an increase in revenues per square foot. Overall, gross margins improved year over year as land costs remained relatively flat while interest expense decreased as a result of our focus on reducing debt. Gross loss on land sales was$28.5 million in the year endedNovember 30, 2022 , which includes$47.9 million of deposit write-offs as we walked away from 42,000 controlled homesites. This compared to gross margin on land sales of$24.3 million in the year endedNovember 30, 2021 . Selling, general and administrative expenses were$2.0 billion in the year endedNovember 30, 2022 , compared to$1.8 billion in the year endedNovember 30, 2021 . As a percentage of revenues from home sales, selling, general and administrative expenses improved to 6.2% in the year endedNovember 30, 2022 , from 7.1% in the year endedNovember 30, 2021 , due to a decrease in broker commissions, an increase in leverage, and benefits of our technology efforts. Operating earnings for our Financial Services segment were$381.9 million in the year endedNovember 30 , 2022.The operating earnings included a$35.5 million one-time charge due to an increase in a litigation accrual in the third quarter related to a court judgment. We have appealed this judgment since we believe there were clear errors of law made by the trial court. Excluding this one-time charge, operating earnings were$417.4 million , compared to operating earnings of$490.4 million in the year endedNovember 30, 2021 . The decrease in operating earnings was primarily due to lower mortgage net margins driven by a more competitive mortgage market, partially offset by an increase in rate lock volume. Mortgage results were partially offset by our title earnings, which increased primarily due to higher revenues per transaction and lower costs due to benefits of our technology efforts. Operating earnings for the Multifamily segment were$66.8 million in the year endedNovember 30, 2022 , compared to$21.5 million in the year endedNovember 30, 2021 . Operating loss for the Lennar Other segment was$735.6 million in the year endedNovember 30, 2022 , compared to operating earnings of$733.0 million in the year endedNovember 30, 2021 . Lennar Other operating loss for the year endedNovember 30, 2022 was primarily due to negative mark-to-market adjustments on our publicly traded technology investments. The operating earnings for the year endedNovember 30, 2021 were primarily due to positive mark-to-market adjustments on our publicly traded technology investments and the gain on the sale of the our solar business. For both the years endedNovember 30, 2022 and 2021, we had a tax provision of$1.4 billion , which resulted in an overall effective income tax rate of 22.8% and 23.5%, respectively. Our overall effective income tax rate was lower in 2022 primarily due to the resolution of an uncertain state tax position and the retroactive reinstatement of the energy efficient home credits for 2022, resulting from the passage of the Inflation Reduction Act byCongress .
Homebuilding Segments
AtNovember 30, 2022 , our Homebuilding operating segments and Homebuilding Other consisted of homebuilding divisions located in: East:Alabama ,Florida ,New Jersey ,Pennsylvania andSouth Carolina Central:Georgia ,Illinois ,Indiana ,Maryland ,Minnesota ,North Carolina ,Tennessee andVirginia Texas :Texas West:Arizona ,California ,Colorado ,Idaho ,Nevada ,Oregon ,Utah andWashington Other: Urban divisions and other homebuilding related investments primarily inCalifornia , including FivePoint 25
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The following tables set forth selected financial and operational information related to our homebuilding operations for the years indicated:
Selected Financial and Operational Data
Year Ended November 30, 2022
Gross Margins Operating Earnings (Loss)
Equity in Earnings
Net Margins on (Loss) from
Sales of Homes Costs of Sales Sales of Homes Gross Loss on Sales Unconsolidated Operating Earnings
(Dollars in thousands) Revenues of Homes Gross Margin % (1) of Land (2) Other Revenues Entities Other Income (Expense), net (Loss)
East $ 9,201,412 6,341,272 31.1 % $ 2,222,835 (10,701) 3,991 1,300 22,831 2,240,256
Central 5,830,587 4,532,474 22.3 % 889,359 (171) 1,496 691 (2,144) 889,231
Texas 4,212,223 2,992,532 29.0 % 941,899 (9,387) 1,250 - (4,525) 929,237
West 12,513,277 9,114,818 27.2 % 2,775,430 (4,398) 3,916 4,412 (5,763) 2,773,597
Other (3) 21,386 44,371 (107.5) % (40,348) (3,891) 18,756 (23,638) (5,883) (55,004)
Totals $ 31,778,885 23,025,467 27.5 % $ 6,789,175 (28,548) 29,409 (17,235) 4,516 6,777,317
Year Ended November 30, 2021
Gross Margins Operating Earnings (Loss)
Equity in Earnings
Net Margins on (Loss) from
Sales of Homes Costs of Sales Sales of Homes Gross Margins on Unconsolidated Operating Earnings
(Dollars in thousands) Revenues of Homes Gross Margin % (1) Sales of Land Other Revenues Entities Other Income (Expense), net (Loss)
East $ 6,814,578 4,858,456 28.7 % $ 1,432,242 10,835 7,161 308 4,886 1,455,432
Central 4,807,194 3,731,567 22.4 % 713,229 4,271 1,977 1,088 (146) 720,419
Texas 3,204,609 2,238,204 30.2 % 725,065 6,347 1,630 498 (3,075) 730,465
West 10,503,305 7,694,870 26.7 % 2,179,980 1,394 4,778 5,388 906 2,192,446
Other (3) 18,419 39,116 (112.4) % (61,321) 1,435 13,678 (21,487) 695 (67,000)
$ 25,348,105 18,562,213 26.8 % $ 4,989,195 24,282 29,224 (14,205) 3,266 5,031,762
(1)Net margins on sales of homes include selling, general and administrative
expenses.
(2)Gross loss on sales of land includes $47.9 million of deposit write-offs as
we walked away from 42,000 controlled homesites.
(3)Negative gross and net margins were due to period costs in Urban divisions
that impact costs of homes sold without sufficient sales of homes revenues to
offset those costs.
Summary of Homebuilding Data
Deliveries:
For the Years Ended November 30,
Dollar Value (In
Homes thousands) Average Sales Price
2022 2021 2022 2021 2022 2021
East 21,214 18,879 $ 9,268,940 6,846,153 $ 437,000 363,000
Central 13,152 12,138 5,830,587 4,807,195 443,000 396,000
Texas 12,993 10,939 4,212,223 3,204,609 324,000 293,000
West 19,015 17,850 12,513,277 10,503,304 658,000 588,000
Other 25 19 21,386 18,419 855,000 969,000
Total 66,399 59,825 $ 31,846,413 25,379,680 $ 480,000 424,000
Of the total homes delivered listed above, 174 homes with a dollar value of
$67.5 million and an average sales price of $388,000 represent home deliveries
from unconsolidated entities for the year ended November 30, 2022 , compared to
95 home deliveries with a dollar value of $31.6 million and an average sales
price of $332,000 for the year ended November 30, 2021 .
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Sales Incentives (1):
Average Sales Incentives Per Sales Incentives
Home Delivered as a % of Revenues
Years Ended November 30,
2022 2021 2022 2021
East $ 12,600 10,500 2.8 % 2.8 %
Central 11,900 8,500 2.6 % 2.1 %
Texas 23,000 10,000 6.6 % 3.3 %
West 22,200 6,900 3.3 % 1.2 %
Other 90,000 116,500 9.5 % 10.7 %
Total $ 17,300 9,000 3.5 % 2.1 %
(1) Sales incentives relate to home deliveries during the period, excluding deliveries by unconsolidated entities.
New Orders (2):
At November 30, For the Years Ended November 30,
Dollar Value (In
Active Communities Homes thousands) Average Sales Price
2022 2021 2022 2021 2022 2021 2022 2021
East 316 345 21,649 20,566 $ 9,516,178 7,908,164 $ 440,000 385,000
Central 313 302 12,020 12,871 5,351,534 5,366,197 445,000 417,000
Texas 235 241 11,424 12,382 3,596,037 3,833,294 315,000 310,000
West 341 372 15,990 18,703 10,604,593 11,725,035 663,000 627,000
Other 3 3 22 21 18,608 20,513 846,000 977,000
Total 1,208 1,263 61,105 64,543 $ 29,086,950 28,853,203 $ 476,000 447,000
Of the total new orders listed above, 261 homes with a dollar value of $116.7
million and an average sales price of $447,000 represent new orders from
unconsolidated entities for the year ended November 30, 2022 , compared to 136
new orders with a dollar value of $48.8 million and an average sales price of
$359,000 for the year ended November 30, 2021 .
(2)New orders represent the number of new sales contracts executed with
homebuyers, net of cancellations, during the years ended
We experienced cancellation rates in our Homebuilding segments and Homebuilding
other as follows:
Years Ended November 30,
2022 2021
East 11 % 8 %
Central 12 % 7 %
Texas 27 % 18 %
West 21 % 10 %
Other 49 % - %
Total 17 % 10 %
Backlog:
At November 30,
Homes Dollar Value (In thousands) Average Sales Price
2022 2021 2022 2021 2022 2021
East 8,706 7,932 $ 3,820,714 3,448,719 $ 439,000 435,000
Central 4,025 5,104 1,855,430 2,321,174 461,000 455,000
Texas 2,697 4,266 837,083 1,453,270 310,000 341,000
West 3,440 6,465 2,226,477 4,135,162 647,000 640,000
Other 1 4 1,164 3,942 1,164,000 986,000
Total 18,869 23,771 $ 8,740,868 11,362,266 $ 463,000 478,000
Of the total homes in backlog listed above, 166 homes with a backlog dollar
value of $77.8 million and an average sales price of $469,000 represent the
backlog from unconsolidated entities at November 30, 2022 , compared to 79 homes
with a backlog dollar value of $28.6 million and an average sales price of
$363,000 at November 30, 2021 . During the year ended November 30, 2022 , we
acquired 339 homes and 53 homes in backlog in the East and Central Homebuilding
segments, respectively.
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Backlog represents the number of homes under sales contracts. Homes are sold using sales contracts, which are generally accompanied by sales deposits. In some instances, purchasers are permitted to cancel sales if they fail to qualify for financing or under certain other circumstances. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners. Homebuilding East: Revenues from home sales increased in 2022 compared to 2021, primarily due to an increase in the number of home deliveries and the average sales price in all the states of the segment. The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to price appreciation year over year. For the year endedNovember 30, 2022 , an increase in revenues per square foot was partially offset by an increase in costs per square foot primarily due to higher materials and labor costs. Overall, gross margins improved year over year as land costs remained relatively flat while interest expense decreased as a result of our focus on reducing debt. Homebuilding Central: Revenues from home sales increased in 2022 compared to 2021, primarily due to an increase in the number of home deliveries in all the states of the segment except forGeorgia andVirginia and an increase in the average sales price in all the states of the segment. The increase in the number of home deliveries was primarily due to an increase in the number of deliveries per active community. The decrease in the number of home deliveries inGeorgia andVirginia was primarily due to a decrease in the number of deliveries per active community due to the timing of opening and closing of communities as a result of supply chain disruptions. For the year endedNovember 30, 2022 , an increase in revenues per square foot was partially offset by an increase in costs per square foot primarily due to higher materials and labor costs. Overall, gross margins remained flat year over year as land costs remained relatively flat while interest expense decreased as a result of our focus on reducing debt. Homebuilding Texas: Revenues from home sales increased in 2022 compared to 2021, primarily due to an increase in the number of home deliveries and the average sales price. The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The increase in the average sales price of homes delivered was primarily due to price appreciation year over year. For the year endedNovember 30, 2022 , gross margins decreased year over year as an increase in costs per square foot was partially offset by an increase in revenues per square foot. Homebuilding West: Revenues from home sales increased in 2022 compared to 2021, primarily due to an increase in the number of home deliveries in all states of the segment except forArizona ,Nevada andUtah and an increase in the average sales price in all the states of the segment. The increase in the number of home deliveries was primarily due to an increase in the number of deliveries per active community. The decrease in the number of home deliveries inArizona ,California ,Nevada andUtah was primarily due to a decrease in the number of deliveries per active community due to the timing of opening and closing of communities as a result of supply chain disruptions. The increase in the average sales price of homes delivered was primarily due to price appreciation year over year. For the year endedNovember 30, 2022 , an increase in revenues per square foot was partially offset by an increase in costs per square foot primarily due to higher materials and labor costs. Overall, gross margins increased year over year as land costs remained relatively flat while interest expense decreased as a result of our focus on reducing debt.
Financial Services Segment
Our Financial Services reportable segment primarily provides mortgage financing, title and closing services primarily for buyers of our homes, as well as property and casualty insurance. The segment also originates and sells into securitizations commercial mortgage loans through itsLMF Commercial business. Our Financial Services segment sells substantially all of the residential loans it originates within a short period in the secondary mortgage market, the majority of which are sold on a servicing released, non-recourse basis. After the loans are sold, we retain potential liability for possible claims by purchasers that we breached certain limited industry-standard representations and warranties in the loan sale agreements. The following table sets forth selected financial and operational information related to the residential mortgage and title activities of our Financial Services: Years Ended November 30, (Dollars in thousands) 2022 2021 Dollar value of mortgages originated$ 14,432,200 13,247,100 Number of mortgages originated 37,700 38,100 Mortgage capture rate of Lennar homebuyers 72% 75% Number of title and closing service transactions 68,800 67,500 AtNovember 30, 2022 and 2021, the carrying value of Financial Services' commercial mortgage-backed securities ("CMBS") was$143.3 million and$157.8 million , respectively. Details of these securities and related debt are within Note 2 of the Notes to Consolidated Financial Statements. 28
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November 30,
(Dollars in thousands) 2022 2021
Originations $ 740,345 770,107
Sold $ 715,933 931,023
Securitizations 6 6
Multifamily Segment
We have been actively involved, primarily through unconsolidated entities, in
the development, construction and property management of multifamily rental
properties. Our Multifamily segment focuses on developing a geographically
diversified portfolio of institutional quality multifamily rental properties in
select U.S. markets.
Originally, our Multifamily segment focused on building multifamily properties
and selling them shortly after they were completed. However, more recently we
have focused on creating and participating in funds that build multifamily
properties with the intention of retaining them after they are completed.
The following tables provide information related to our investment in the Multifamily segment: Balance Sheet
November 30 , (In thousands) 2022
2021
Multifamily investments in unconsolidated entities
935,961 976,676
Statement of Operations Years Ended November 30,
(Dollars in thousands) 2022 2021Number of operating properties/investments sold through joint ventures
2 1
Lennar's share of gains on the sale of operating
properties/investments $ 43,308 14,784
The Multifamily segment manages and has investments in Multifamily Venture Fund
I (the "LMV I") and Multifamily Venture Fund II LP (the "LMV II"), which are
long-term multifamily development investment vehicles involved in the
development, construction and ownership of class-A multifamily rental
properties. Details of each as of and during the year ended November 30, 2022
are included below:
November 30, 2022
(In thousands) LMV I LMV II
Lennar's carrying value of investments $ 217,099 293,831
Equity commitments 2,204,016 1,257,700
Equity commitments called 2,152,324 1,206,664
Lennar's equity commitments 504,016 381,000
Lennar's equity commitments called 499,919 365,807
Lennar's remaining commitments 4,097 15,193 Distributions to Lennar 25,576 12,555
Our Multifamily segment had equity investments in unconsolidated entities. The breakout of the Multifamily segment's equity investments in unconsolidated entities and the development activities by stage were as follows: (Dollars in thousands)
November 30, 2022
Under construction/owned 25
Partially completed and leasing 9
Completed and operating 49
Total unconsolidated joint ventures 83
Total development costs $ 10,043,000
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As ofNovember 30, 2022 , our Multifamily segment also had a pipeline of potential future projects, which were under contract or had letters of intent, totaling approximately$8.7 billion in anticipated development costs across a number of states that will be developed primarily by unconsolidated entities.
Lennar Other Segment
Our Lennar Other segment includes fund investments we retained subsequent to our sale of the Rialto investment and asset management platform as well as strategic investments in technology companies that are looking to improve the homebuilding and financial services industries to better serve homebuyers and homeowners and increase efficiencies. As ofNovember 30, 2022 and 2021, our balance sheet had$788.5 million and$1.5 billion , respectively, of assets in the Lennar Other segment, which included investments in unconsolidated entities of$316.5 million and$346.3 million , respectively. We have investments inBlend Labs, Inc. ("Blend Labs "), Hippo Holdings, Inc. ("Hippo"),Opendoor, Inc. ("Opendoor"), SmartRent, Inc. ("SmartRent"), Sonder Holdings, Inc. ("Sonder") and Sunnova Energy International, Inc. ("Sunnova"), which are held at market and will therefore change depending on the fair value of our share holdings in those entities on the last day of each quarter. All the investments are accounted for as investments in equity securities which are held at fair value and the changes in fair values are recognized through earnings. The following is a detail of Lennar Other unrealized gains (losses) from our technology investments: Years Ended November 30, (In thousands) 2022 2021 Blend Labs (BLND) mark-to-market$ (25,630) (6,744) Hippo (HIPO) mark-to-market (222,447) 207,634 Opendoor (OPEN) mark-to-market (265,276) 239,312 SmartRent (SMRT) mark-to-market (78,177) 79,483 Sonder (SOND) mark-to-market (2,339) - Sunnova (NOVA) mark-to-market (61,225) (8,883)
Lennar Other unrealized gains (losses) from technology investments
$ (655,094) 510,802 AtNovember 30, 2022 and 2021, Lennar Other owned commercial mortgage-backed securities ("CMBS") with carrying values of$35.5 million and$41.7 million , respectively. These securities were purchased at discount rates ranging from 33% to 55% with coupon rates ranging from 3.0% to 3.4%, stated and assumed final distribution dates betweenSeptember 2025 andMarch 2026 , and stated maturity dates betweenSeptember 2058 andMarch 2059 . We review changes in estimated cash flows periodically to determine if an other-than-temporary impairment has occurred on our CMBS. Based on management's assessment, no impairment charges were recorded during the years endedNovember 30, 2022 and 2021. We classify these securities as held-for-sale atNovember 30, 2022 and 2021.
Financial Condition and Capital Resources
At
We finance all of our activities including homebuilding, financial services, multifamily, other and general operating needs primarily with cash generated from our operations, debt issuances and investor funds as well as cash borrowed under our warehouse lines of credit and our unsecured revolving credit facility (the "Credit Facility"). AtNovember 30, 2022 , we had$4.6 billion of Homebuilding cash and cash equivalents and no outstanding borrowings under our$2.6 billion revolving credit facility, thereby providing$7.2 billion of available capacity.
Operating Cash Flow Activities
During 2022 and 2021, cash provided by operating activities totaled$3.3 billion and$2.5 billion , respectively. During 2022, cash provided by operating activities was positively impacted by our net earnings, excluding Lennar Other unrealized mark-to-market losses on our publicly traded technology investments and other realized loss totaling$672 million and an increase in accounts payable and other liabilities of$701 million . This was partially offset by a$2.4 billion increase in inventories due to strategic land purchases, land development and construction costs and an increase in receivables of$422 million . During 2021, cash provided by operating activities was positively impacted by our net earnings, net of Lennar Other unrealized/realized gains of$681 million primarily due to mark-to-market gains on strategic investments that went public during the year endedNovember 30, 2021 (Opendoor, Hippo and SmartRent) and the sale of our solar business to Sunnova. In addition, there was an increase in accounts payable and other liabilities of$881 million , partially offset by a$2.0 billion increase in inventories due to strategic land purchases, land development and construction costs and an increase in receivables of$290 million . 30
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Investing Cash Flow Activities
During 2022 and 2021, cash used in investing activities totaled$128 million and$105 million , respectively. During 2022, our cash used in investing activities was primarily due to cash contributions of$447 million to unconsolidated entities, which primarily included (1)$307 million to Homebuilding unconsolidated entities (2)$111 million to Lennar Other unconsolidated entities and (3)$30 million to Multifamily unconsolidated entities. In addition, we had$94 million of purchases of investment securities related to strategic technology investments in the Lennar Other segment. This was partially offset by distributions of capital from unconsolidated entities of$398 million , which primarily included (1)$79 million from Homebuilding unconsolidated entities, (2)$252 million from Multifamily unconsolidated entities, and (3)$67 million from our Lennar Other unconsolidated entities. During 2021, our cash used in investing activities was primarily due to cash contributions of$408 million to unconsolidated entities, which primarily included (1)$251 million to Homebuilding unconsolidated entities (2)$72 million to Multifamily unconsolidated entities, and (3)$83 million to strategic technology investments included in the Lennar Other segment. In addition, we had$128 million of purchases of investment securities related to strategic technology investments in the Lennar Other segment. This was partially offset by distributions of capital from unconsolidated entities of$362 million , which primarily included (1)$177 million from Homebuilding unconsolidated entities (2)$128 million from Multifamily unconsolidated entities, and (3)$57 million from our Lennar Other segment, which included our unconsolidated Rialto real estate funds and distributions from strategic investments.
Financing Cash Flow Activities
During 2022 and 2021, our cash used in financing activities totaled$1.3 billion and$2.4 billion , respectively. During 2022, our cash used in financing activities was primarily due to (1) early redemption of$575 million aggregate principal amount of our 4.75% senior notes dueNovember 2022 , (2)$48 million principal payments on notes payable and other borrowings, (3) repurchase of our common stock for$1.0 billion , which included$968 million of repurchases of our stock under our repurchase program and$72 million of repurchases related to our equity compensation plan, and (4)$438 million of dividend payments. These were partially offset by (1)$485 million of net proceeds from liabilities related to consolidated inventory not owned due to land sales to land banks, net of takedowns, (2)$409 million of net borrowings under our Financial Services warehouse facilities, and (3) receipts related to noncontrolling interests of$42 million . During 2021, our cash used in financing activities was primarily impacted by (1) redemption of$600 million aggregate principal amount of our 4.125% senior notes dueJanuary 2022 at par, (2) early retirement, at a premium, of$250 million aggregate principal amount of our 5.375% senior notes dueOctober 2022 , (3) retirement of$300 million aggregate principal amount of our 6.25% senior notes dueDecember 2021 , (4)$195 million principal payments on notes payable and other borrowings, (5) repurchase of our common stock for$1.4 billion , which included$1.4 billion of repurchases of our stock under our repurchase program and$65 million of repurchases related to our equity compensation plan, and (6)$310 million of dividend payments. These were partially offset by (1)$344 million of reductions in liabilities related to consolidated inventory not owned due to land sales to land banks, (2)$262 million of net borrowings under our Financial Services warehouse facilities, and (3) receipts related to noncontrolling interests of$70 million .
Debt to total capital ratios are financial measures commonly used in the homebuilding industry and are presented to assist in understanding the leverage of our Homebuilding operations. Homebuilding debt to total capital and net Homebuilding debt to total capital were calculated as follows:
November 30,
(Dollars in thousands) 2022 2021
Homebuilding debt $ 4,047,294 4,652,338
Stockholders' equity 24,100,500 20,816,425
Total capital $ 28,147,794 25,468,763
Homebuilding debt to total capital 14.4% 18.3%
Homebuilding debt$ 4,047,294
4,652,338
Less: Homebuilding cash and cash equivalents 4,616,124 2,735,213 Net Homebuilding debt
$ (568,830)
1,917,125
Net Homebuilding debt to total capital (1) (2.4)%
8.4%
(1)Net homebuilding debt to total capital is a non-GAAP financial measure
defined as net homebuilding debt (homebuilding debt less homebuilding cash and
cash equivalents) divided by total capital (net homebuilding debt plus
stockholders' equity). Our management believes the ratio of net homebuilding
debt to total capital is a relevant and a useful financial measure to investors
in understanding the leverage employed in our homebuilding operations. However,
because net homebuilding debt to total capital is not calculated in accordance
with GAAP, this financial measure should not be considered in isolation or as an
alternative to financial measures prescribed by GAAP. Rather, this non-GAAP
financial measure should be used to supplement our GAAP results.
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AtNovember 30, 2022 , Homebuilding debt to total capital was lower compared toNovember 30, 2021 primarily as a result of an increase in stockholders' equity due to net earnings and a decrease in homebuilding debt due to debt paydowns, partially offset by share repurchases. We are continually exploring various types of transactions to manage our leverage and liquidity positions, take advantage of market opportunities and increase our revenues and earnings. These transactions may include the issuance of additional indebtedness, the repurchase of our outstanding indebtedness, the repurchase of our common stock, the acquisition of homebuilders and other companies, the purchase or sale of assets or lines of business, the issuance of common stock or securities convertible into shares of common stock, and/or the pursuit of other financing alternatives. In connection with some of our non-homebuilding businesses, we are also considering other types of transactions such as sales, restructurings, joint ventures, spin-offs or initial public offerings as we continue to move back towards being a pure play homebuilding company. We have announced an intention to spin off, subject to market conditions, our multifamily and single family rental asset management businesses and some of our investment assets.
Our Homebuilding senior notes and other debts payable are summarized within Note 4 of the Notes to Consolidated Financial Statements.
InMay 2022 , we amended the credit agreement governing our unsecured revolving credit facility (the "Credit Facility") which increased the commitment from$2.5 billion to$2.6 billion and extended the maturity toMay 2027 , except for$350 million which matures inApril 2024 . The Credit Facility has a$425 million accordion feature, subject to additional commitments, thus the maximum borrowings are$3.0 billion . The proceeds available under the Credit Facility, which are subject to specified conditions for borrowing, may be used for working capital and general corporate purposes. The credit agreement also provides that up to$500 million in commitments may be used for letters of credit. As of bothNovember 30, 2022 and 2021, we had no outstanding borrowings under the Credit Facility. In addition to the Credit Facility, we have other letter of credit facilities with different financial institutions. We often post letters of credit instead of making cash deposits for option contracts and for similar purposes. We often are required to post surety bonds to guarantee completion of projects, particularly when municipal authorities are involved. Our outstanding letters of credit and surety bonds are described below: November 30, (In thousands) 2022 2021 Performance letters of credit$ 1,259,033 924,584 Financial letters of credit 503,659 425,843 Surety bonds 4,136,715 3,553,047
Anticipated future costs primarily for site improvements related to performance surety bonds
2,273,694 1,690,861
Our Homebuilding average debt outstanding and the average rates of interest were as follows:
November 30,
(Dollars in thousands) 2022 2021
Homebuilding average debt outstanding
4.7% 4.9%
Interest incurred $ 230,839 275,091
Under the Credit Facility agreement (the "Credit Agreement"), we are required to
maintain a minimum consolidated tangible net worth, a maximum leverage ratio and
either a liquidity or an interest coverage ratio. These ratios are calculated
per the Credit Facility agreement, which involves adjustments to GAAP financial
measures. As of the end of each fiscal quarter, we are required to maintain
minimum consolidated tangible net worth of approximately $10.6 billion plus 50%
of the cumulative consolidated net income for each completed fiscal quarter
subsequent to February 28, 2022 , if positive, plus 50% of the net cash proceeds
from any equity offerings from and after February 28, 2022 , minus the amount
paid after February 28, 2022 to repurchase common stock (subject to a limit on
deductions in any four fiscal quarter period of 12.5% of consolidated tangible
net worth) and minus, in the case of a spin-off transaction, the consolidated
net worth of assets that are spun off (subject to a limit of $1.0 billion ). As
of the end of each fiscal quarter, we are required to maintain a leverage ratio
that shall not exceed 65% and may be reduced by 2.5% per quarter if our interest
coverage ratio is less than 2.25:1.00 for two consecutive fiscal calendar
quarters. The leverage ratio will have a floor of 60%. If our interest coverage
ratio subsequently exceeds 2.25:1.00 for two consecutive fiscal calendar
quarters, the leverage ratio we will be required to maintain will be increased
by 2.5% per quarter to a maximum of 65%. As of the end of each fiscal quarter,
we are also required to maintain either (1) liquidity in an amount equal to or
greater than 1.00x consolidated interest incurred for the last twelve months
then ended or (2) an interest coverage ratio equal to or greater than 1.50:1.00
for the last twelve months then ended. We believe that we were in compliance
with our debt covenants at November 30, 2022 .
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The following summarizes our required debt covenants and our actual levels or ratios with respect to those covenants as calculated per the Credit Agreement as ofNovember 30, 2022 : (Dollars in thousands) Covenant Level Level Achieved as of November 30, 2022 Minimum net worth test$ 12,196,941 17,779,830 Maximum leverage ratio 65.0% (0.2)% Liquidity test (1) 1.00 32.08 (1)We are only required to maintain either (1) liquidity in an amount equal to or greater than 1.00x consolidated interest incurred for the last twelve months then ended or (2) an interest coverage ratio of equal to or greater than 1.50:1.00 for the last twelve months then ended. Although we are in compliance with our debt covenants for both calculations, we have only disclosed our liquidity test. AtNovember 30, 2022 , the Financial Services segment had warehouse facilities, all of which were 364-day repurchase facilities and were used to fund residential mortgages or commercial mortgages forLMF Commercial as follows: (In thousands) Maximum Aggregate Commitment
Residential facilities maturing:
December 2022 (1) $ 800,000 May 2023 500,000 August 2023 1,000,000 Total - Residential facilities $ 2,300,000LMF Commercial facilities maturing: December 2022 (1) $ 400,000 July 2023 50,000 November 2023 100,000 Total - LMF Commercial facilities $ 550,000 Total $ 2,850,000
(1)Subsequent to
The Financial Services segment uses the residential warehouse facilities to finance its residential lending activities until the mortgage loans are sold to investors and the proceeds are collected. The facilities are non-recourse to us and are expected to be renewed or replaced with other facilities when they mature. TheLMF Commercial facilities financeLMF Commercial loan originations and securitization activities and were secured by up to 80% interests in the originated commercial loans financed. Borrowings and collateral under the facilities and their prior year predecessors were as follows: November 30, (In thousands) 2022 2021 Borrowings under the residential facilities$ 1,877,411 1,482,258 Collateral under the residential facilities 1,950,155 1,539,641 Borrowings under the LMF Commercial facilities 124,399
96,294
If the facilities are not renewed or replaced, the borrowings under the lines of credit will be repaid by selling the mortgage loans held-for-sale to investors and by collecting receivables on loans sold but not yet paid for. Without the facilities, the Financial Services segment would have to use cash from operations and other funding sources to finance its lending activities.
Changes in Capital Structure
InOctober 2021 , the Board of Directors authorized an increase to our stock repurchase program to enable us to repurchase up to the lesser of an additional$1.0 billion in value, excluding commission, or 25 million in shares, of our outstanding Class A or Class B common stock. As a result of prior authorizations being almost exhausted, inMarch 2022 , our Board of Directors approved an additional authorization for us to repurchase up to the lesser of$2.0 billion in value, or 30 million in shares, of our outstanding Class A or Class B common stock. The repurchase authorization has no expiration date. 33
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The following table provides information about our repurchases of Class A and
Class B common stock:
Years Ended
November 30, 2022 November 30, 2021
(Dollars in thousands, except price per share) Class A Class B Class A Class B
Shares repurchased 9,628,203 1,339,797 13,910,000 100,000
Total purchase price $ 868,788 $ 98,613 $ 1,357,081 $ 8,197
Average price per share $ 90.23 $ 73.60 $ 97.56 $ 81.97
During the year ended November 30, 2022 , treasury stock decreased due to our
retirement of 46.7 million and 2.8 million treasury shares of Class A and Class
B common stock, respectively, as authorized by our Board of Directors. The
retirement of Class A and Class B common stock in treasury resulted in a reclass
between treasury shares and additional paid-in capital within stockholders'
equity. During the year ended November 30, 2022 , this decrease in treasury
shares was partially offset by our repurchase of 9.6 million and 1.3 million
shares of Class A and Class B common stock, respectively, through our stock
repurchase program.
During the year ended November 30, 2021 , treasury stock increased by 14.7
million shares of Class A common stock and 0.1 million shares of Class B common
stock primarily due to 14.0 million shares of common stock repurchased during
the year through our stock repurchase program.
During the years ended November 30, 2022 and 2021, our Class A and Class B
common stockholders received an aggregate per share annual dividend of $1.50 and
$1.00 , respectively. On January 12, 2023 , our Board of Directors declared a
quarterly cash dividend of $0.375 per share on both our Class A and Class B
common stock. The dividend is payable on February 10, 2023 to holders of record
at the close of business on January 27, 2023 .
Based on our current financial condition and credit relationships, we believe
that our operations and borrowing resources will provide for our current and
long-term capital requirements at our anticipated levels of activity.
Supplemental Financial Information
Currently, certain of our 100% owned subsidiaries, which are primarily our homebuilding subsidiaries, are guaranteeing all our senior notes. The guarantees are full and unconditional.
The indentures governing our senior notes require that, if any of our 100% owned subsidiaries, other than our finance company subsidiaries and foreign subsidiaries, directly or indirectly guarantee at least$75 million principal amount of debt ofLennar Corporation (other than senior notes), those subsidiaries must also guaranteeLennar Corporation's obligations with regard to its senior notes. Included in the following tables as part of "Obligors" together withLennar Corporation are subsidiary entities that are not finance company subsidiaries or foreign subsidiaries and were guaranteeing the senior notes because atNovember 30, 2022 they were guaranteeingLennar Corporation's letter of credit facilities and its Credit Facility, disclosed in Note 4 of the Notes to Consolidated Financial Statements. The guarantees are full, unconditional and joint and several and the guarantor subsidiaries are 100% directly or indirectly owned byLennar Corporation . A subsidiary's guarantee of Lennar senior notes will be suspended at any time when it is not directly or indirectly guaranteeing at least$75 million principal amount of debt ofLennar Corporation (other than senior notes), and a subsidiary will be released from its guarantee and any other obligations it may have regarding the senior notes if all or substantially all its assets, or all of its capital stock, are sold or otherwise disposed. If the proposed spin-off of our multifamily and single family rental asset management businesses takes place, the subsidiaries involved in those businesses will no longer guarantee our senior notes. Supplemental information for the Obligors, which excludes non-guarantor subsidiaries and intercompany transactions, atNovember 30, 2022 is included in the following tables. Intercompany balances and transactions within the Obligors have been eliminated and amounts attributable to the Obligor's investment in consolidated subsidiaries that have not issued or guaranteed the senior notes have been excluded. Amounts due from and transactions with non-guarantor subsidiaries and related parties are separately disclosed: (In thousands) November 30, 2022 November 30, 2021 Due from non-guarantor subsidiaries$ 17,959,091 4,187,044 Equity method investments 1,090,831 937,920 Total assets 40,929,435 30,750,296 Total liabilities 10,455,359 9,631,796 34
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Year Ended
(In thousands) November 30, 2022
Total revenues $ 31,078,352
Operating earnings 6,578,451
Earnings before income taxes 6,106,521
Net earnings attributable to Lennar 4,708,943
Off-Balance Sheet Arrangements
Homebuilding - Investments in Unconsolidated Entities
AtNovember 30, 2022 , we had equity investments in 48 active Homebuilding and land unconsolidated entities (of which 4 had recourse debt, 15 had non-recourse debt and 29 had no debt), compared to 41 active Homebuilding and land unconsolidated entities atNovember 30, 2021 . Historically, we have invested in unconsolidated entities that acquired and developed land (1) for our homebuilding operations or for sale to third parties or (2) for the construction of homes for sale to third-party homebuyers. Through these entities, we have primarily sought to reduce and share our risk by limiting the amount of our capital invested in land, while obtaining access to potential future homesites and allowing us to participate in strategic ventures. The use of these entities also, in some instances, has enabled us to acquire land to which we could not otherwise obtain access, or could not obtain access on as favorable terms, without the participation of a strategic partner. Participants in these joint ventures have been land owners/developers, other homebuilders and financial or strategic partners. Joint ventures with land owners/developers have given us access to homesites owned or controlled by our partners. Joint ventures with other homebuilders have provided us with the ability to bid jointly with our partners for large land parcels. Joint ventures with financial partners have allowed us to combine our homebuilding expertise with access to our partners' capital. Joint ventures with strategic partners have allowed us to combine our homebuilding expertise with the specific expertise (e.g. commercial or infill experience) of our partner. Each joint venture is governed by an executive committee consisting of members from the partners. Details regarding these investments, balances and debt are included in Note 3 of the Notes to Consolidated Financial Statements. We regularly monitor the results of our Homebuilding unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of Homebuilding joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants atNovember 30, 2022 . The following table summarizes the principal maturities of our Homebuilding unconsolidated entities ("JVs") debt as per current debt arrangements as ofNovember 30, 2022 . It does not represent estimates of future cash payments that will be made to reduce debt balances. Many JV loans have extension options in the loan agreements that would allow the loans to be extended into future years.
Principal Maturities of Homebuilding Unconsolidated JVs Debt by Period (In thousands)
Total JV Debt 2023 2024 2025 Thereafter Other
Debt without recourse to Lennar $ 1,381,438 167,051 391,940 715,283 107,164 - Land seller and other debt without recourse to Lennar 11,113 - - - 11,113 - Maximum recourse debt exposure to Lennar 9,138 - - - 9,138 - Debt issuance costs (18,387) - - - - (18,387) Total $ 1,383,302 167,051 391,940 715,283 127,415 (18,387)
Multifamily - Investments in Unconsolidated Entities
AtNovember 30, 2022 , Multifamily had equity investments in 23 active unconsolidated entities that are engaged in multifamily residential developments (of which 15 had non-recourse debt and 8 had no debt), compared to 14 active unconsolidated entities atNovember 30, 2021 . We invest in unconsolidated entities that acquire and develop land to construct multifamily rental properties. Through these entities, we are focusing on developing a geographically diversified portfolio of institutional quality multifamily rental properties in selectU.S. markets. Participants in these joint ventures have been financial partners. Joint ventures with financial partners have allowed us to combine our development and construction expertise with access to our partners' capital. Each joint venture is governed by an operating agreement that provides significant substantive 35
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participating voting rights on major decisions to our partners.
The Multifamily segment manages and has investments in LMV I and LMV II, which are long-term multifamily development investment vehicles involved in the development, construction and ownership of class-A multifamily rental properties. Details of each as of and during the year endedNovember 30, 2022 are included in Note 3 of the Notes to Consolidated Financial Statements. We regularly monitor the results of our Multifamily unconsolidated joint ventures and any trends that may affect their future liquidity or results of operations. We also monitor the performance of Multifamily joint ventures in which we have investments on a regular basis to assess compliance with debt covenants. For those joint ventures not in compliance with the debt covenants, we evaluate and assess possible impairment of our investment. We believe all of the joint ventures were in compliance with their debt covenants atNovember 30, 2022 . The following table summarizes the principal maturities of our Multifamily unconsolidated entities debt as per current debt arrangements as ofNovember 30, 2022 . It does not represent estimates of future cash payments that will be made to reduce debt balances.
Principal Maturities of Multifamily Unconsolidated JVs Debt by Period (In thousands)
Total JV Debt 2023 2024 2025 Thereafter Other
Debt without recourse to Lennar $ 4,345,145 1,286,563
1,022,248 1,052,564 983,770 -
Debt issuance costs (26,371) - - - - (26,371)
Total $ 4,318,774 1,286,563 1,022,248 1,052,564 983,770 (26,371)
Lennar Other - Investments in Unconsolidated Entities
As part of the sale of the Rialto investment and asset management platform, we retained the right to receive a portion of payments with regard to carried interests if funds meet specified performance thresholds. We periodically receive advance distributions related to the carried interests in order to cover income tax obligations resulting from allocations of taxable income to the carried interests. These distributions are not subject to clawbacks but will reduce future carried interest payments to which we become entitled and have been recorded as revenues.
As of
Option Contracts
We often obtain access to land through option contracts, which generally enable
us to control portions of properties owned by third parties (including land
funds) and unconsolidated entities until we have determined whether to exercise
the options. Since fiscal year 2020, we have been increasing the percentage of
our total homesites that we control through options rather than own.
As part of our focus on strategic relationships to further enhance our land
lighter strategy, at the end of fiscal year 2020 we entered into an arrangement
with various land bank investor groups. Under the arrangement, in most instances
when we want to acquire a property for use in our for-sale single family home
business, we will offer the investor group the opportunity to acquire the
property and give us an option to purchase all or a portion of it back in the
future, if it is mutually beneficial to both parties. To the extent the investor
group does not elect to purchase properties we identify, we can utilize our
other investor relationships to have other investor groups purchase the land or
we can purchase it directly. The arrangement with the investor group, together
with existing and other strategic partnerships we are discussing, are
significant steps in our strategy to migrate to a higher percentage of our
homesites which we control but do not own, which we expect will result in
greater cash flow and higher returns on assets and equity.
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The table below indicates the number of homesites owned and homesites to which
we had access through option contracts with third parties ("optioned") or
unconsolidated JVs (i.e., controlled homesites) at November 30, 2022 and 2021:
Controlled Homesites
Owned Total Years of Supply
November 30, 2022 Optioned JVs Total Homesites Homesites Owned (1)
East 92,710 - 92,710 49,507 142,217
Central 41,725 - 41,725 34,242 75,967
Texas 79,775 - 79,775 38,620 118,395
West 61,441 - 61,441 41,320 102,761
Other - 5,758 5,758 2,018 7,776
Total homesites 275,651 5,758 281,409 165,707 447,116 2.5
% of total homesites 63 % 37 %
Controlled Homesites
Owned Total Years of Supply
November 30, 2021 Optioned JVs Total Homesites Homesites Owned (1)
East 87,083 - 87,083 51,041 138,124
Central 30,682 - 30,682 41,872 72,554
Texas 75,027 - 75,027 37,946 112,973
West 58,631 - 58,631 49,059 107,690
Other - 6,086 6,086 2,043 8,129
Total homesites 251,423 6,086 257,509 181,961 439,470 3.0
% of total homesites 59 % 41 %
(1)Based on trailing twelve months of home deliveries.
Excluding homes in inventory, our percentage of total homesites controlled as ofNovember 30, 2022 and 2021 was 69% and 64%, respectively. Excluding homes in inventory, our years of supply owned as ofNovember 30, 2022 and 2021 was 1.9 years and 2.4 years, respectively.
Details on option contracts and related consolidated inventory not owned and exposure are included in Note 1 and Note 8 of the Notes to Consolidated Financial Statements.
Contractual Obligations and Commercial Commitments
The following table summarizes certain of our contractual obligations at
Payments Due by Period
Less than 1 to 3 3 to 5 More than
(In thousands) Total 1 year years years 5 years
Homebuilding - Senior notes and other
debts payable (1) $ 4,038,871 223,130 2,103,491 1,669,835 42,415
Financial Services - Notes and other
debts payable 2,135,093 2,001,810 - - 133,283
Interest commitments under interest
bearing debt (2) 599,130 200,754 254,614 136,724 7,038
Operating lease obligations 178,677 34,167 52,721 34,832 56,957
Other contractual obligations (3) 96,577 36,582 38,816 2,304 18,875
Total contractual obligations $ 7,048,348 2,496,443 2,449,642 1,843,695 258,568
(1)The amounts presented in the table above exclude debt issuance costs and any
discounts/premiums and purchase accounting adjustments.
(2)Interest commitments on variable interest-bearing debt are determined based
on the interest rate as of November 30, 2022 .
(3)Amounts include $4.1 million and $15.2 million remaining equity investment
commitments to LMV I and LMV II, respectively, for future expenditures related
to the construction and development of the projects and $77.3 million remaining
equity investment commitment to the Upward America Venture.
We are subject to the usual obligations associated with entering into contracts
(including option contracts) for the purchase, development and sale of real
estate in the routine conduct of our business. Option contracts for the purchase
of land generally reduces our financial risk and costs of capital associated
with land holdings. At November 30, 2022 , we had access to 281,409 homesites
through option contracts with third parties and unconsolidated entities in which
we have investments. At November 30, 2022 , we had $2.0 billion of non-refundable
option deposits and pre-acquisition costs related to certain of these homesites
and had posted $163.9 million of letters of credit in lieu of cash deposits
under certain land and option contracts.
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At
Our Financial Services segment had a pipeline of loan applications in process of$3.8 billion atNovember 30, 2022 . Loans in process for which interest rates were committed to the borrowers totaled approximately$2.2 billion as ofNovember 30, 2022 . A significant portion of these commitments had a remaining period of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers or borrowers may not meet certain criteria at the time of closing, the total commitments do not necessarily represent future cash requirements. Our Financial Services segment uses mandatory mortgage-backed securities ("MBS") forward commitments, option contracts, futures contracts and investor commitments to hedge our mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts, futures contracts and loan sales transactions is managed by limiting our counterparties to investment banks, federally regulated bank affiliates and other investors meeting our credit standards. Our risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and the option contracts. AtNovember 30, 2022 , we had open commitments amounting to$3.5 billion to sell MBS with varying settlement dates throughFebruary 2023 and open future contracts in the amount of$9.5 million with the settlement dates throughMarch 2023 .
The following sections discuss market and financing risk, seasonality and interest rates and changing prices that may have an impact on our business:
Market and Financing Risk
We finance our contributions to JVs, land acquisition and development activities, construction activities, financial services activities, Multifamily activities and general operating needs primarily with cash generated from operations and debt, as well as borrowings under our Credit Facility and warehouse repurchase facilities. We also purchase land under option agreements, which enables us to control homesites until we have determined whether to exercise the options. We try to manage the financial risks of adverse market conditions associated with land holdings by what we believe to be prudent underwriting of land purchases in areas we view as desirable growth markets, careful management of the land development process and limitation of risks by using partners to share the costs of purchasing and developing land as well as obtaining access to land through option contracts. Although we believe our land underwriting standards are conservative, we were required to take impairment charges with regards to several properties in 2022 due to the reduced demand for new homes in the second half of 2022.
Seasonality
We historically have experienced, and expect to continue to experience, variability in quarterly results. Our homebuilding business is seasonal in nature and generally reflects higher levels of new home order activity in our second and third fiscal quarters and increased deliveries in the second half of our fiscal year. However, a variety of factors can alter seasonal patterns. For example, in 2020, the shutdown of large portions of our national economy in March and April due to the COVID-19 pandemic temporarily reduced our home sales, and therefore altered our normal seasonal pattern.
Interest Rates and Changing Prices
Inflation can have a long-term impact on us because increasing costs of land, materials and labor result in a need to increase the sales prices of homes. In addition, inflation is often accompanied by higher interest rates, which can have a negative impact on housing demand and increase the costs of financing land development activities and housing construction. Rising interest rates as well as increased material and labor costs, may reduce gross margins. An increase in materials and labor costs would be particularly a problem during a period of declining home prices. Conversely, deflation can impact the value of real estate and make it difficult for us to recover our land costs. Therefore, either inflation or deflation could adversely impact our future results of operations.
New Accounting Pronouncements
See Note 1 of the notes to our consolidated financial statements for a comprehensive list of new accounting pronouncements.
Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 1 of the notes to our consolidated financial statements included in Item 8 of this document. As discussed in Note 1, the preparation of financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and accompanying 38
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notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and such differences may be material to our consolidated financial statements. Listed below are those policies and estimates that we believe are critical and require the use of significant judgment in their application.
We recorded a significant amount of goodwill in connection with the 2018 acquisition ofCalAtlantic . We record goodwill associated with acquisitions of businesses when the purchase price of the business exceeds the fair value of the net tangible and identifiable assets acquired. In accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC 350"), we evaluate goodwill for potential impairment on at least an annual basis. We have the option to perform a qualitative or quantitative assessment to determine whether the fair value of a reporting unit exceeds its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting units and other entity and reporting unit specific events. We believe that the accounting estimate for goodwill is a critical accounting estimate because of the judgment required in assessing the fair value of each of our reporting units. We estimate fair value through various valuation methods, including the use of discounted expected future cash flows of each reporting unit. The expected future cash flows for each segment are significantly impacted by current market conditions. If these market conditions and resulting expected future cash flows for each reporting unit decline significantly, the actual results for each segment could differ from our estimate, which would cause goodwill to be impaired. Our accounting for goodwill represents our best estimate of future events.
Homebuilding Revenue Recognition
Homebuilding revenues and related profits from sales of homes are recognized at the time of the closing of a sale, when title to and possession of the property are transferred to the homebuyer. In order to promote sales of the homes, we may offer sales incentives to homebuyers. The types of incentives vary on a community-by-community basis and home-by-home basis. They include primarily price discounts on individual homes and financing incentives, all of which are reflected as a reduction of home sales revenues. Our performance obligation, to deliver the agreed-upon home, is generally satisfied in less than one year from the original contract date. Cash proceeds from home closings held in escrow for our benefit, typically for approximately three days, are included in Homebuilding cash and cash equivalents in the Consolidated Balance Sheets and disclosed in the notes to consolidated balance sheets. Contract liabilities include customer deposit liabilities related to sold but undelivered homes that are included in other liabilities in the Consolidated Balance Sheets. We periodically elect to sell parcels of land to third parties. Cash consideration from land sales is typically due on the closing date, which is generally when performance obligations are satisfied, and revenue is recognized as title to and possession of the property are transferred to the buyer.
Multifamily Revenue Recognition
Our Multifamily segment provides management services with respect to the
development, construction and property management of rental projects in joint
ventures in which we have investments. As a result, our Multifamily segment
earns and receives fees, which are generally based upon a stated percentage of
development and construction costs and a percentage of gross rental collections.
These fees are recorded over the period in which the services are performed
using an input method, which properly depicts the level of effort required to
complete the management services. In addition, our Multifamily segment provides
general contractor services for the construction of some of its rental projects
and recognizes the revenue over the period in which the services are performed
using an input method, which properly depicts the level of effort required to
complete the construction services. These customer contracts require us to
provide management and general contractor services which represents a
performance obligation that we satisfy over time. Management fees and general
contractor services in the Multifamily segment are included in Multifamily
revenue. When the Multifamily segment acts as general contractor, it treats the
entire construction cost as revenue and treats payments to subcontractors as
expenses.
Inventories
Inventories are stated at cost unless the inventory within a community is
determined to be impaired, in which case the impaired inventory is written down
to fair value. Inventory costs include land, land development and home
construction costs, real estate taxes, deposits on land purchase contracts and
interest related to development and construction. We review our inventory for
indicators of impairment by evaluating each community during each reporting
period. If the undiscounted cash flows expected to be generated by a community
are less than its carrying amount, an impairment charge is recorded to write
down the carrying amount of such community to its estimated fair value.
In conducting our review for indicators of impairment on a community level, we
evaluate, among other things, the margins on homes that have been delivered,
margins on homes under sales contracts in backlog, projected margins with regard
to future home sales over the life of the community, projected margins with
regard to future land sales, and the estimated fair value of the land itself.
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We estimate the fair value of our communities using a discounted cash flow model. The projected cash flows for each community are significantly impacted by estimates related to market supply and demand, product type by community, homesite sizes, sales pace, sales prices, sales incentives, construction costs, sales and marketing expenses, the local economy, competitive conditions, labor costs, costs of materials and other factors for that particular community. Every division evaluates the historical performance of each of its communities as well as current trends in the market and economy impacting the community and its surrounding areas. These trends are analyzed for each of the estimates listed above. Since the estimates and assumptions included in our cash flow models are based upon historical results and projected trends, they do not anticipate unexpected changes in market conditions or strategies that may lead to us incurring additional impairment charges in the future. Using all the available information, we calculate our best estimate of projected cash flows for each community. While many of the estimates are calculated based on historical and projected trends, all estimates are subjective and change from market to market and community to community as market and economic conditions change. The determination of fair value also requires discounting the estimated cash flows at a rate we believe a market participant would determine to be commensurate with the inherent risks associated with the assets and related estimated cash flow streams. The discount rate used in determining each asset's fair value depends on the community's projected life and development stage. We estimate the fair value of inventory evaluated for impairment based on market conditions and assumptions made by management at the time the inventory is evaluated, which may differ materially from actual results if market conditions or our assumptions change. We believe that the accounting related to inventory valuation and impairment is a critical accounting policy because: (1) assumptions inherent in the valuation of our inventory are highly subjective and susceptible to change and (2) the impact of recognizing impairments on our inventory could be material to our consolidated financial statements.
Product Warranty
Although we subcontract virtually all aspects of construction to others and our contracts call for the subcontractors to repair or replace any deficient items related to their trades, we are primarily responsible to homebuyers to correct any deficiencies. Additionally, in some instances, we may be held responsible for the actions of or losses incurred by subcontractors. Warranty and similar 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. Reserves are determined based upon historical data and trends with respect to similar product types and geographical areas. We believe the accounting estimate related to the reserve for warranty costs is a critical accounting estimate because the estimate requires a large degree of judgment. While we believe that the reserve for warranty costs is adequate, there can be no assurances that historical data and trends will accurately predict our actual warranty costs. Additionally, there can be no assurances that future economic or financial developments might not lead to a significant change in the reserve.
Investments in Unconsolidated Entities
We strategically invest in unconsolidated entities that acquire and develop land
(1) for our homebuilding operations or for sale to third parties, (2) for
construction of homes for sale to third-party homebuyers or (3) for the
construction and sale of multifamily rental properties. Our Homebuilding
partners generally are unrelated homebuilders, land owners/developers and
financial or other strategic partners. Additionally, in recent years, we have
invested in technology companies that are looking to improve the homebuilding
and financial services industry in order to better serve homebuyers and
homeowners and increase efficiencies. Our Multifamily partners are all financial
partners.
Most of the unconsolidated entities through which we acquire and develop land
are accounted for by the equity method of accounting because we are not the
primary beneficiary or a de-facto agent, and we have a significant, but less
than controlling, interest in the entities. We record our investments in these
entities in our consolidated balance sheets as Investments in Unconsolidated
Entities and our pro-rata share of the entities' earnings or losses in our
consolidated statements of operations as Equity in Earnings (Loss) from
Unconsolidated Entities within each of the respective segments. For most
unconsolidated entities, we generally have the right to share in earnings and
distributions on a pro-rata basis based upon ownership percentages. However,
certain Homebuilding unconsolidated entities and all of our Multifamily
unconsolidated entities provide for a different allocation of profit and cash
distributions if and when cumulative results of the joint venture exceed
specified targets (such as a specified internal rate of return). Advances to
these entities are included in the investment balance.
Management looks at specific criteria and uses its judgment when determining if
we are the primary beneficiary of, or have a controlling interest in, an
unconsolidated entity. Factors considered in determining whether we have
significant influence, or we have control include risk and reward sharing,
experience and financial condition of the other partners, voting rights,
involvement in day-to-day capital and operating decisions and continuing
involvement. The accounting policy relating to the use of the equity method of
accounting is a critical accounting policy due to the judgment required in
determining whether the entity is a VIE or a voting interest entity and then
whether we are the primary beneficiary or have control or significant
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influence. We believe that the equity method of accounting is appropriate for our investments in unconsolidated entities where we are not the primary beneficiary and we do not have a controlling interest, but rather share control with our partners. We evaluate the long-lived assets in unconsolidated entities for indicators of impairment during each reporting period. A series of operating losses of an investee or other factors may indicate that a decrease in the fair value of our investment in the unconsolidated entity below its carrying amount has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment's carrying amount over its estimated fair value.
The evaluation of our investment in unconsolidated entities for other-than-temporary impairment includes certain critical assumptions: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. Our assumptions on the projected future distributions from unconsolidated entities are dependent on market conditions.
We believe our assumptions on discount rates are critical accounting policies because the selection of the discount rates affects the estimated fair value of our investments in unconsolidated entities. A higher discount rate reduces the estimated fair value of our investments in unconsolidated entities, while a lower discount rate increases the estimated fair value of our investments in unconsolidated entities. Because of changes in economic conditions, actual results could differ materially from management's assumptions and may require material valuation adjustments to our investments in unconsolidated entities to be recorded in the future.
Consolidation of Variable Interest Entities
GAAP requires the assessment of whether an entity is a VIE and, if so, if we are the primary beneficiary at the inception of the entity or at a reconsideration event. Additionally, GAAP requires the consolidation of VIEs in which we have a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Our variable interest in VIEs may be in the form of (1) equity ownership, (2) contracts to purchase assets, (3) management services and development agreements between us and a VIE, (4) loans provided by us to a VIE or other partner and/or (5) guarantees provided by members to banks and other third parties. We examine specific criteria and use our judgment when determining if we are the primary beneficiary of a VIE. Factors considered in determining whether we are the primary beneficiary include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE's executive committee, existence of unilateral kick-out rights or voting rights, level of economic disproportionality between us and the other partner(s) and contracts to purchase assets from VIEs. Generally, all major decision making in our joint ventures is shared among all partners. In particular, business plans and budgets are generally required to be unanimously approved by all partners. Usually, management and other fees earned by us are nominal and believed to be at market and there is no significant economic disproportionality between us and other partners. Generally, we purchase less than a majority of the JV's assets and the purchase prices under our option contracts are believed to be at market. Generally, our unconsolidated entities become VIEs and consolidate if the other partner(s) lack the intent and financial wherewithal to remain in the entity. As a result, we continue to fund operations and debt paydowns through partner loans or substituted capital contributions. The accounting policy relating to variable interest entities is a critical accounting policy because the determination of whether an entity is a VIE and, if so, whether we are primary beneficiary may require us to exercise significant judgment.
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