October 2, 2019 / 10:36 AM / 15 days ago

Higher demand for cheaper homes powers Lennar's profit beat

(Reuters) - Lennar Corp’s (LEN.N) quarterly profit beat Wall Street expectations on Wednesday, boosted by cheaper borrowing rates and a focus on low-priced houses.

Shares of the company rose as much as 3.6% and were among the few stocks trading higher amid a broader sell-off, after the No. 2 U.S. homebuilder also reported an 8.5% rise in orders, an indicator of future demand.

Miami, Florida-based Lennar, whose shares have risen 42% this year, told investors in a post-earnings call that the housing market looks solid and strong.

“There are a lot of questions about upcoming potential recession ... our customers don’t seem to be viewing it that way. The housing market in general seems solid and strong and continues to improve,” Lennar President Jonathan Jaffe said.

U.S. 30-year mortgage rates are hovering near three-year lows as the Federal Reserve has cut interest rates twice so far this year.

However, lower rates have failed to spur sales in California, its biggest market, where demand took a hit from an ongoing trade war between China and the United States. The company sells mostly high-priced homes in the state, which has a significant number of wealthy Chinese buyers.

The yuan’s decline has made it more expensive for Chinese buyers to purchase homes in the United States, encouraging them to look at more affordable homes in markets outside the state’s hot spots.

California is an important market as builders can sell at higher margins, JMP Securities analyst Peter Martin said.

“But if there is an economic downturn in California, those margins come crashing down.”

Sales in the West region, which includes California, posted the smallest growth among the company’s four regions.

To boost demand, Lennar has resorted to incentives, including discounts and value additions, that have squeezed its margins.

Lennar, however, said it expected margins to improve steadily throughout the remainder for the year as prices remain stable and incentives continue to subside.

Overall, home sales rose 7%, while average selling price fell 5% largely due to incentives and higher sales of low priced homes.

Net income attributable to the company rose 13.3% to $513.4 million, or $1.59 per share, in the quarter ended Aug. 31. Revenue rose 3.3% to $5.86 billion.

Analysts on average had expected Lennar to earn $1.32 per share on revenue of $5.48 billion.

Reporting by Dominic Roshan K.L. and Ankit Ajmera in Bengaluru; Editing by Sweta Singh and Maju Samuel

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