LENNAR CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Item 1 of this Report and our audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K, for our fiscal year endedNovember 30, 2020 . Some of the statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in this Quarterly Report on Form 10-Q, are "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically include the words "anticipate," "believe," "consider," "estimate," "expect," "forecast," "intend," "objective," "plan," "predict," "projection," "seek," "strategy," "target," "will" or other words of similar meaning. Forward-looking statements contained herein may include opinions or beliefs regarding market conditions and similar matters. In many instances, those opinions and beliefs are based upon general observations by members of our management, anecdotal evidence and our experience in the conduct of our businesses, without specific investigation or analyses. Therefore, while they reflect our view of the industries and markets in which we are involved, they should not be viewed as reflecting verifiable views or views that are necessarily shared by all who are involved in those industries or markets. These statements concern expectations, beliefs, projections, plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements reflect our current views about future events and are subject to risks, uncertainties and assumptions. We wish to caution readers that certain important factors may have affected and could in the future affect our actual results and could cause actual results to differ significantly from what is anticipated by our forward-looking statements. The most important factors that could cause actual results to differ materially from those anticipated by our forward-looking statements include, but are not limited to: the potential negative impact to our business of the ongoing coronavirus ("COVID-19") pandemic, the duration, impact and severity of which is highly uncertain; increases in operating costs, including costs related to construction materials, labor, real estate taxes and insurance, and our inability to manage our cost structure, both in our Homebuilding and Multifamily businesses; an extended slowdown in the real estate markets across the nation, including a slowdown in the market for single family homes or the multifamily rental market; reduced availability of mortgage financing or increased interest rates; our inability to successfully execute our strategies, including our land lighter strategy and our strategy to monetize non-core assets; changes in general economic and financial conditions that reduce demand for our products and services, lower our profit margins or reduce our access to credit; our inability to acquire land at anticipated prices; the possibility that we will incur nonrecurring costs that affect earnings in one or more reporting periods; decreased demand for our homes or Multifamily rental properties; the possibility that the benefit from our increasing use of technology will not justify its cost; increased competition for home sales from other sellers of new and resale homes; our inability to pay down debt; whether government actions or other factors force us to terminate our program of repurchasing our stock; a decline in the value of our land inventories and resulting write-downs of the carrying value of our real estate assets; the failure of the participants in various joint ventures to honor their commitments; difficulty obtaining land-use entitlements or construction financing; natural disasters and other unforeseen events for which our insurance does not provide adequate coverage; new laws or regulatory changes that adversely affect the profitability of our businesses; our inability to refinance our debt on terms that are acceptable to us; and changes in accounting conventions that adversely affect our reported earnings. Please see our Form 10-K for the fiscal year endedNovember 30, 2020 and our other filings with theSEC for a further discussion of these and other risks and uncertainties which could affect our future results. We undertake no obligation, other than those imposed by securities laws, to publicly revise any forward-looking statements to reflect events or circumstances after the date of those statements or to reflect the occurrence of anticipated or unanticipated events. Outlook The housing market remains strong. The underproduction of homes for the past 10 years has created a housing shortage that, combined with strong demand, has pushed home prices higher. Even though interest rates have slightly increased, they are still lower than they were a year ago, and affordability remains strong, with many American families having fortified savings as vacations and recreational activities have been canceled or postponed, and stimulus money from the government continues to fill the remaining gaps. The dream of homeownership is an essential aspiration of the American population, and the seemingly imminent resolution of the pandemic is not slowing the growing demand. Our measured growth strategy in the current market is to focus on selling homes when we begin construction, while being patient with longer-term sales. This enables price appreciation to offset future cost escalations to maximize margin. We believe the virtue of this strategy has been borne out by our 25.0% first quarter gross margin versus 20.5% last year. We are also focused on managing the supply chain and production. In the first quarter, lumber costs increased about$2,300 per home both year over year and sequentially. These cost increases were more than offset by other cost decreases year-over-year, but not sequentially, resulting in an overall year-over-year cost decline and sequential cost increase. We expect to see additional increases in the cost of lumber throughout the year. 24 -------------------------------------------------------------------------------- While community count at the end of the first quarter was down from the prior year, we are still on track to increase our active communities by about 10% in fiscal 2021. We anticipate that we will replace our existing communities with larger, higher volume communities, which allows us to better leverage our overhead, improve our bottom line, and increase our returns and cash flow. We expect to deliver between 62,000 and 64,000 homes in 2021 and with gross margin guidance of about 25.0% for the year. We have remained focused on our optioned versus owned land strategy and believe we are in an excellent position to achieve our target of 50% owned land and 50% land controlled through options or similar agreements by the end of 2021. At the end of the first quarter, the portion of land we controlled through options or similar agreements was 45%, up from 39% at the start of the fiscal year. We ended the first quarter with a 3.4 years supply of land owned, compared to a 4.0 years supply of land owned at the same time last year. Among other things, this has enabled us to reduce debt, such that our first quarter homebuilding debt-to-total capital ratio improved to 24.0%, down from 33.6% in the prior year. Consistent with our land-light strategy, and a focus on increased profitability and returns, we expanded our business through the creation of a single-family rental platform that will facilitate a better time delivery of our homes with reduced cycle times. Our Upward America Venture will make our homes available for rent, with a portion of the homes available with a rent to own option. The venture will permit families and individuals across the country to live in brand-new homes at an attainable price point without putting up a down payment. The venture will initially be capitalized with a total equity commitment of$1.25 billion , and will be positioned to acquire over$4.0 billion of new single family homes and townhomes. Our technology initiatives, which are focused on building solutions to important challenges that are adjacent to our core Homebuilding and Financial Services businesses, have contributed meaningfully to our readiness for current economic and structural shifts while helping to improve our core business and drive our SG&A to a historic first quarter low of 8.4%. Opendoor, one of our many technology investments, began trading as a public company inDecember 2020 and we recorded a$470 million unrealized gain as a result. While this gain is extraordinary relative to our operating platform, it is not a one-time event for the Company. We have invested in a number of high-quality technology businesses, including Doma, previously known as States Title, andHippo Home Insurance , both of which have announced agreements to merge with publicly traded special purpose acquisition companies, and SunStreet solar power platform, which we have agreed to sell to Sunnova Energy International, Inc. in exchange for Sunnova stock. We are conservatively estimating an economic gain in excess of$1 billion from these three transactions. We have continued to drive and grow our ancillary business divisions, and they continue to mature, but we think being simpler would enable us better to focus on our core business units. We continue to work on strategies to better position our Multifamily platform, our new single-family home for rent platform, our land program, our commercial mortgage business and our growing technology investments platform. We believe the best way to enhance corporate value is to have Lennar standalone as a pure-play homebuilder and financial services company, and to enable these blue-chip businesses to thrive and excel independently. Therefore, we are working to construct a tax-free spin-off of all or parts of these businesses in a unified company. With a solid balance sheet, leading positions in almost all of our homebuilding markets and continued execution of our core operating strategies, we believe that we have never been better positioned financially, organizationally, culturally, and technologically, to thrive and grow in this evolving and exciting housing market. (1) Results of Operations Overview We historically have experienced, and expect to continue to experience, variability in quarterly results. Our results of operations for the three months endedFebruary 28, 2021 are not necessarily indicative of the results to be expected for the full year. 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. Our net earnings attributable to Lennar were$1.0 billion , or$3.20 per diluted share ($3.20 per basic share), in the first quarter of 2021, compared to net earnings attributable to Lennar of$398.5 million , or$1.27 per diluted share ($1.27 per basic share), in the first quarter of 2020. 25 --------------------------------------------------------------------------------
Financial information relating to our operations was as follows:
Three Months Ended February 28, 2021
(In thousands) Homebuilding Financial Services Multifamily Lennar Other Corporate Total
Revenues:
Sales of homes $ 4,890,914 - - - - 4,890,914
Sales of land 47,643 - - - - 47,643
Other revenues 4,499 244,069 131,443 6,900 - 386,911
Total revenues 4,943,056 244,069 131,443 6,900 - 5,325,468
Costs and expenses:
Costs of homes sold 3,666,862 - - - - 3,666,862
Costs of land sold 41,188 - - - - 41,188
Selling, general and administrative
expenses 410,236 - - - - 410,236
Other costs and expenses - 97,862 131,049 4,252 - 233,163 Total costs and expenses 4,118,286 97,862 131,049 4,252 - 4,351,449 Equity in earnings (loss) from unconsolidated entities, Multifamily other gain and Lennar Other other income (expense), net (4,565) - (1,268) (1,047) - (6,880) Other income, net 12,975 - - - - 12,975 Lennar Other unrealized gain - - - 469,745 - 469,745 Operating earnings (loss)$ 833,180 146,207 (874) 471,346 - 1,449,859 Corporate general and administrative expenses - - - - 110,531
110,531
Charitable foundation contribution - - - - 12,314
12,314
Earnings (loss) before income taxes$ 833,180 146,207 (874) 471,346 (122,845) 1,327,014
Three Months Ended
(In thousands) Homebuilding Financial Services Multifamily Lennar Other Corporate Total Revenues: Sales of homes$ 4,140,767 - - - - 4,140,767 Sales of land 26,867 - - - - 26,867 Other revenues 4,482 198,661 132,617 1,943 - 337,703 Total revenues 4,172,116 198,661 132,617 1,943 - 4,505,337 Costs and expenses: Costs of homes sold 3,291,779 - - - - 3,291,779 Costs of land sold 27,135 - - - - 27,135 Selling, general and administrative expenses 378,892 - - - -
378,892
Other costs and expenses - 151,344 137,348 2,574 - 291,266 Total costs and expenses 3,697,806 151,344 137,348 2,574 - 3,989,072 Equity in earnings (loss) from unconsolidated entities, Multifamily other gain and Lennar Other other income (expense), net (4,546) - 6,516 1,530 - 3,500 Other expense, net (9,366) - - - - (9,366) Operating earnings$ 460,398 47,317 1,785 899 - 510,399 Corporate general and administrative expenses - - - - 82,634
82,634
Charitable foundation contribution - - - - 4,213
4,213
Earnings (loss) before income taxes$ 460,398 47,317 1,785 899 (86,847) 423,552 Three Months EndedFebruary 28, 2021 versus Three Months EndedFebruary 29, 2020 Revenues from home sales increased 18% in the first quarter of 2021 to$4.9 billion from$4.1 billion in the first quarter of 2020. Revenues were higher primarily due to a 19% increase in the number of home deliveries, excluding unconsolidated entities. New home deliveries, excluding unconsolidated entities, increased to 12,302 homes in the first quarter of 2021 from 10,313 homes in the first quarter of 2020. The average sales price of homes delivered was$398,000 in the first quarter of 2021, compared to$402,000 in the first quarter of 2020. Gross margin on home sales were$1.2 billion , or 25.0%, in the first quarter of 2021, compared to$849.0 million , or 20.5%, in the first quarter of 2020. The gross margin percentage on home sales increased primarily driven by pricing power as we have been able to increase revenue per square foot, as well as lower interest expense per home delivered as result of 26 -------------------------------------------------------------------------------- paydowns of senior notes in the past two years and lower field expense as a percentage of home sales revenue due to increased volume. Selling, general and administrative expenses were$410.2 million in the first quarter of 2021, compared to$378.9 million in the first quarter of 2020. As a percentage of revenues from home sales, selling, general and administrative expenses improved to 8.4% in the first quarter of 2021, from 9.2% in the first quarter of 2020. This was the lowest percentage for a first quarter in our history primarily due to our focus on improving our operating leverage combined with the benefits of our technology efforts. Operating earnings for our Financial Services segment were$146.2 million in the first quarter of 2021, compared to$58.2 million in the first quarter of 2020 (which included$47.3 million of operating earnings and an add back of$10.9 million of net loss attributable to noncontrolling interests). Operating earnings increased primarily due to the improvement in our mortgage business as a result of an increase in volume and margin and improvement in our title business as a result of an increase in volume. Operating loss for our Multifamily segment was$0.9 million in the first quarter of 2021, compared to operating earnings of$1.8 million in the first quarter of 2020. Operating earnings for our Lennar Other segment were$471.3 million in the first quarter of 2021, compared to$0.9 million in the first quarter of 2020. In the first quarter of 2021, we recognized a gain of$469.7 million related to a strategic investment in Opendoor, which began trading on the Nasdaq stock market inDecember 2020 . The gain relates to the mark to market of our share holdings in the public entity. Two other technology driven companies in which we have investments have announced agreements to merge with publicly traded special purpose acquisition companies. Homebuilding Segments AtFebruary 28, 2021 , our reportable Homebuilding segments and Homebuilding Other are outlined in Note 2 of the Notes to Condensed Consolidated Financial Statements. The following tables set forth selected financial and operational information related to our homebuilding operations for the periods indicated: Selected Financial and Operational Data Three Months Ended February 28, 2021 Gross Margins Operating Earnings (Loss) Net Margins on Gross Margins Equity in Earnings Sales of Homes Costs of Sales of Sales of Homes (Loss) on Sales (Loss) from Operating Earnings ($ in thousands) Revenue Homes Gross Margin % (1) of Land Other Revenue Unconsolidated Entities Other Income (Expense), net (Loss) East$ 1,347,610 988,862 26.6 % 241,534 5,076 1,418 (492) 14,547 262,083 Central 926,438 713,546 23.0 % 132,099 (23) 405 98 (556) 132,023Texas 636,411 451,198 29.1 % 129,161 1,034 258 154 (964) 129,643 West 1,976,808 1,507,727 23.7 % 317,990 368 1,050 962 1,336 321,706 Other (2) 3,647 5,529 (51.6) % (6,968) - 1,368 (5,287) (1,388)
(12,275)
Totals$ 4,890,914 3,666,862 25.0 %$ 813,816 6,455 4,499 (4,565) 12,975 833,180 Three Months Ended February 29, 2020 Gross Margins Operating Earnings (Loss) Net Margins on Gross Margins Equity in Earnings Sales of Homes Costs of Sales of Sales of Homes (Loss) on Sales (Loss) from Operating Earnings ($ in thousands) Revenue Homes Gross Margin % (1) of Land Other Revenue Unconsolidated Entities Other Income (Expense), net (Loss) East$ 1,150,720 881,217 23.4 %$ 154,825 (451) 1,462 359 (7,441) 148,754 Central 786,698 657,283 16.5 % 54,404 (927) 451 553 1,242 55,723Texas 463,796 360,273 22.3 % 53,127 1,673 517 203 (2,447) 53,073 West 1,731,514 1,379,291 20.3 % 218,507 (563) 1,814 3,940 1,209 224,907 Other (2) 8,039 13,715 (70.6) % (10,767) - 238 (9,601) (1,929)
(22,059)
Totals$ 4,140,767 3,291,779 20.5 %$ 470,096 (268) 4,482 (4,546) (9,366) 460,398 (1)Net margins on sales of homes include selling, general and administrative expenses. (2)Negative gross and net margins were due to period costs in Urban divisions that impact costs of homes sold without sufficient sales of homes revenue to offset those costs. 27 -------------------------------------------------------------------------------- Summary of Homebuilding Data Deliveries: Three Months Ended Homes Dollar Value (In thousands) Average Sales Price February 28, February 29, February 28, February 29, February 28, February 29, 2021 2020 2021 2020 2021 2020 East 3,920 3,388$ 1,351,301 1,153,715$ 345,000 341,000 Central 2,419 2,043 926,438 786,698 383,000 385,000 Texas 2,349 1,577 636,411 463,796 271,000 294,000 West 3,622 3,304 1,976,808 1,731,514 546,000 524,000 Other 4 9 3,647 8,039 912,000 893,000 Total 12,314 10,321$ 4,894,605 4,143,762$ 397,000 401,000 Of the total homes delivered listed above, 12 homes with a dollar value of$3.7 million and an average sales price of$308,000 represent home deliveries from unconsolidated entities for the three months endedFebruary 28, 2021 , compared to eight home deliveries with a dollar value of$3.0 million and an average sales price of$374,000 for the three months endedFebruary 29, 2020 . New Orders (1): Three Months Ended Active Communities Homes Dollar Value (In thousands) Average Sales PriceFebruary 28 ,February 29 ,February 28 ,February 29 ,February 28 ,February 29 ,February 28 , February 29, 2021 2020 2021 2020 2021 2020 2021 2020 East 340 344 4,814 3,731$ 1,700,112 1,274,353$ 353,000 342,000 Central 274 323 3,326 2,667 1,333,626 1,018,443 401,000 382,000 Texas 218 236 2,775 1,999 812,169 573,079 293,000 287,000 West 327 352 4,652 3,965 2,692,395 2,125,632 579,000 536,000 Other 3 3 3 14 2,974 13,581 991,000 970,000 Total 1,162 1,258 15,570 12,376$ 6,541,276 5,005,088$ 420,000 404,000 Of the total new orders listed above, 35 homes with a dollar value of$11.6 million and an average sales price of$332,000 represent new orders in four active communities from unconsolidated entities for the three months endedFebruary 28, 2021 , compared to 26 new orders with a dollar value of$8.1 million and an average sales price of$310,000 in five active communities for the three months endedFebruary 29, 2020 . (1)New orders represent the number of new sales contracts executed with homebuyers, net of cancellations, during the three months endedFebruary 28, 2021 andFebruary 29, 2020 . Backlog: At Homes Dollar Value (In thousands) Average Sales Price February 28, February 29, February 28, February 29, February 28, February 29, 2021 2020 2021 2020 2021 2020 East 6,907 6,033$ 2,659,746 2,147,007$ 385,000 356,000 Central 5,278 3,774 2,169,360 1,475,711 411,000 391,000 Texas 3,249 2,592 1,000,342 822,620 308,000 317,000 West 6,642 5,219 3,629,018 2,702,535 546,000 518,000 Other 1 14 1,175 13,995 1,175,000 1,000,000 Total 22,077 17,632$ 9,459,641 7,161,868$ 428,000 406,000 Of the total homes in backlog listed above, 61 homes with a backlog dollar value of$19.4 million and an average sales price of$318,000 represent the backlog from unconsolidated entities atFebruary 28, 2021 , compared to 49 homes with a backlog dollar value of$15.2 million and an average sales price of$311,000 atFebruary 29, 2020 . 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. Various state and federal laws and regulations may sometimes give purchasers a right to cancel homes in backlog. We do not recognize revenue on homes under sales contracts until the sales are closed and title passes to the new homeowners. Three Months EndedFebruary 28, 2021 versus Three Months EndedFebruary 29, 2020 Homebuilding East: Revenues from home sales increased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to an increase in the number of home deliveries in all the states of the segment except inPennsylvania and 28 -------------------------------------------------------------------------------- an increase in the average sales price of homes delivered in all the states of the segment except inFlorida . The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the number of home deliveries inPennsylvania was primarily due to a decrease in the number of communities due to the timing of opening and closing of communities. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. The decrease in the average sales price of homes delivered inFlorida was primarily driven by a change in product mix due to a higher percentage of deliveries in lower-priced communities. Gross margin percentage on home deliveries in the first quarter of 2021 increased compared to the same period last year primarily due to an increase in the revenue per square foot of homes delivered. Homebuilding Central: Revenues from home sales increased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to an increase in the number of home deliveries in all the states in the segment except inMaryland andVirginia , partially offset by a decrease in the average sales price of homes delivered in all the states of the segment except inGeorgia ,Illinois ,Maryland andMinnesota . The increase in the number of home deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in the number of home deliveries inMaryland andVirginia was primarily due to a decrease in the number of communities due to the timing of opening and closing of communities. The decrease in the average sales price of homes delivered was primarily driven by a change in product mix due to a higher percentage of deliveries in lower-priced communities. The increase in the average sales price of homes delivered inGeorgia ,Illinois ,Maryland andMinnesota was primarily due to favorable market conditions. Gross margin percentage on home deliveries in the first quarter of 2021 increased compared to the same period last year primarily due to an increase in revenue per square foot of homes delivered as well as reducing interest and field expenses per home. Homebuilding Texas: Revenues from home sales increased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to an increase in the number of home deliveries, partially offset by a decrease in the average sales price of homes delivered. The increase in the number of deliveries was primarily due to higher demand as the number of deliveries per active community increased. The decrease in average sales price of homes delivered was primarily due to closing out higher priced communities and shifting into lower priced communities. Gross margin percentage on home deliveries in the first quarter of 2021 increased compared to the same period last year primarily due to an increase in revenue per square foot of homes delivered as well as reducing our interest and field expenses per home. Homebuilding West: Revenues from home sales increased in the first quarter of 2021 compared to the first quarter of 2020, primarily due to an increase in the number of home deliveries in all states of the segment except inNevada and an increase in the average sales price of homes delivered in all the states of the segment. The increase in the number of home deliveries in all states of the segment except inNevada was primarily due to higher demand as the number of deliveries per active community increased during the quarter. The decrease in the number of home deliveries inNevada was primarily due to a decrease in the number of deliveries per active community due to the timing of opening and closing of communities. The increase in the average sales price of homes delivered was primarily due to favorable market conditions. Gross margin percentage on home deliveries in the first quarter of 2021 increased compared to the same period last year primarily due to an increase in revenue per square foot of homes delivered. Financial Services Segment Our Financial Services reportable segment provides mortgage financing, title and closing services primarily for buyers of our homes. 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 segment: Three Months Ended (Dollars in thousands) February 28, 2021 February 29, 2020 Dollar value of mortgages originated$ 2,761,000 2,221,000 Number of mortgages originated 8,400 6,900 Mortgage capture rate of Lennar homebuyers 76 % 77 % Number of title and closing service transactions 15,000 11,200 AtFebruary 28, 2021 andNovember 30, 2020 , the carrying value of Financial Services' commercial mortgage-backed securities ("CMBS") was$163.3 million and$164.2 million , respectively. Details of these securities and related debt are within Note 2 of the Notes to Condensed Consolidated Financial Statements. 29
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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 selectU.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 ventures 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:
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