Lennar Corporation (NYSE: LEN) Tuesday reported better than expected
fourth-quarter earnings, reflecting the company's strong liquidity
position and continuing growth prospects for the U.S. housing sector,
according to Fitch Ratings. The company is the third largest homebuilder
in the U.S. and has an issuer default rating (IDR) of 'BB+'. Rating
Outlooks for both Lennar and the U.S. housing and homebuilding sectors
are Stable.
Lennar's fourth-quarter revenue jumped 42% to $1.35 billion and gross
margins expanded to 23.5% from 19.4%. The company's CEO noted that low
mortgage rates, affordable home prices, reduced foreclosures, and an
extremely favorable "rent versus own" comparison continued to drive the
U.S. housing recovery, as reflected in Lennar's earnings. Fitch sees
attractive home prices, persistently low mortgage rates, and a rise in
nominal incomes resulting in superior affordability and valuations.
Mortgage rates remain near their all-time recorded lows, and housing
appears more undervalued versus incomes than at any time in the past 35
years. Rising home prices and the potential for interest rates to
increase could create a sense of urgency and encourage fence-sitters to
pull the trigger and purchase a home.
Lennar maintains solid liquidity, with unrestricted homebuilding cash of
$1.15 billion as of Nov. 30, 2012. The company also has an unsecured
revolving credit facility of $500 million that expires in May 2015. Its
debt maturities are well-laddered, with roughly 20% of its total
homebuilding debt maturing through 2015.
We raised our housing forecast for 2012 a number of times during the
course of the year. Nevertheless, the current forecast still reflects a
below-trend line cyclical rise off a very low bottom. In a slowly
growing economy with somewhat diminished distressed home sales
competition, less competitive rental cost alternatives, and new home
inventories at historically low levels, 2013 single-family housing
starts should improve about 18%, while new home sales increase
approximately 22% and existing home sales grow 7%. However, as we have
noted in the past, recovery will likely occur in fits and starts.
We also adjusted expectations for home prices due to overt price
increases and mix issues. Average single-family new home prices (as
measured by the Census Bureau) improved an estimated 3.5% in 2012 and
should rise about 3.8% in 2013.
Although home prices have stabilized and started to improve, we believe
that home price appreciation will tend to be relatively narrowly focused
and very sensitive to local economic, employment, and supply issues.
Demand will likely continue to be affected by widespread negative
equity, challenging mortgage qualification standards, and excess supply
due to foreclosures. Foreclosure activity could also accelerate somewhat
this year as a result of agreements between banks and the federal
government.
Additional information is available on www.fitchratings.com.
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All opinions expressed are those of Fitch Ratings.
