Lennar Corp. (NYSE:LEN) gained 5% in pre-open trading Tuesday following strong second-quarter earnings results. However, a warning from the CEO that the home-builder is starting to see the impact of Fed rate hikes leaves open questions for investors.
The company said net earnings in the quarter increased 69% to $4.49 per share, or $4.69, excluding mark-to-market losses on technology investments. This easily beat the Wall Street consensus of $3.98.
Deliveries increased 14% to 16,549 homes, while new orders increased 4% to 17,792 homes. The company’s backlog rose 16% to 28,624 homes and the backlog dollar value increased 33% to $14.7 billion.
Total revenues increased 30% to $8.4 billion, beating the consensus of $8.11 billion.
However, CEO Stuart Miller issued a stark warning on rate hikes.
“While our second-quarter results demonstrate strength and excellent performance throughout the quarter, the weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider,” Miller said. “We began to see these effects after quarter-end.”
Miller said the rate hikes and quantitative tightening have begun to have the desired effect of slowing sales in some markets and stalling price increases across the country.
He added while there remains a significant shortage of homes in the U.S., “the relationship between price and interest rates is going through a rebalance.”
Miller said, “The company is laser-focused on traffic, affordability, the quality of our backlog, along with cancellation rates and completed, unsold inventory levels which, to date, are both at low levels.” In addition, they are focused on balance sheet strength as ended the quarter with $1.3 billion in cash, no borrowings on their $2.6 billion revolver, and homebuilding debt to capital of 17.7%.
On guidance, the company said this will be more like ‘guessing’ and not ‘guiding’. However, they see deliveries between 17,000 to 18,500 homes in the third quarter and gross margins between 28.5% – 29.5%.
For the year, they are leaving delivery expectations at approximately 68,000 homes.
“Recognizing that the Fed’s actions are still quite fluid and responsive to inflation data, the housing market will rebalance supply and demand, and interest rates and purchase price as market conditions evolve,” Miller added. “Nevertheless, at Lennar, we are operating from a position of strength, enabling us to continue to execute on our core strategies.”