September 20, 2016 / 10:21 AM / 3 years ago

Lennar cuts margin forecast on higher land, labor costs

(Reuters) - Lennar Corp (LEN.N), the second-largest U.S. homebuilder, cut its gross margin forecast for the fourth quarter due to rising land and labor costs, problems that could weigh on rivals such as PulteGroup Inc (PHM.N) as well.

A house is under construction with the Flatirons outside of Boulder seen in the background at a housing development in Arvada, Colorado September 17, 2014. REUTERS/Rick Wilking

Lennar’s shares fell as much as 5.1 percent on a day the broader housing sector was down due to lackluster housing data.

Lennar also posted its slowest growth in orders - a key indicator of future revenue - in more than a year as it grapples with choppy demand for higher-priced homes in Houston, where the economy has been hit hard by a two-year downturn in oil prices.

The company, however, reported higher-than-expected profit and revenue for the third quarter ended Aug. 31.

Higher labor costs are a big challenge for the U.S. housing sector, which is scrambling to keep up with rising demand despite a shortage of construction workers.

There are about 200,000 unfilled construction jobs, which are typically not as lucrative as those in other industries, in the United States, up 81 percent in the last two years, National Association of Homebuilders said earlier this month.

The average cost of constructing a single family home, the kind Lennar builds, is 13.7 percent higher now than in 2007, even as the total costs of building and selling a house – a figure that includes such items as land costs, financing and marketing - are up just 2.9 percent over the same period, according to a survey by the National Association of Homebuilders.

The PHLX Housing Index .HGX was down about 1 percent in afternoon trading. Shares of D.R. Horton Inc (DHI.N), the No.1 U.S. homebuilder, were down 1.5 percent, while PulteGroup was down 3 percent.


“It’s hard to grow operations efficiently and effectively at an accelerated rate in a market where land and labor is really constrained,” Chief Executive Stuart Miller said on a conference call.

Lennar said it expects gross margin of about 23.25 percent for the current quarter ending Nov. 30, down from its previous forecast of 23.5-24 percent.

The company said orders fell 14 percent in Houston, accounting for 7.4 percent of the total orders during the quarter.

The Houston market accounted for 9.1 percent of Lennar’s home sales in the three months ended Aug. 31.

Total orders rose 8.1 percent.

Lennar sold 6,779 homes, up 7.3 percent from a year earlier. Average sales price rose 3.4 percent to $362,000.

The company’s revenue rose 13.7 percent to $2.83 billion in the third quarter.

Net income attributable to Lennar’s shareholders rose to $235.8 million, or $1.01 per share, from $223.3 million, or 96 cents per share.

Analysts on average were expecting a profit of 89 cents per share and revenue of $2.68 billion, according to Thomson Reuters I/B/E/S.

Up to Monday’s close, shares of the Florida-based builder had fallen 7.8 percent this year.

Reporting by Arunima Banerjee in Bengaluru; Editing by Savio D'Souza and Saumyadeb Chakrabarty

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