Is leasing the strategy that could help boost Lennar?

Growth may shift from new home sales

Lennar Corporation (LEN) is set to release its first quarter earnings for 2015 on Thursday, and the results are not expected to be anything special. 

However, there is a small blimp of potential in the homebuilder’s recent launch into the single family for lease business, according to a Lennar earnings preview from Sterne Agee analyst Jay McCanless.  

In March, Lennar opened its first single family for-lease community in the Reno, Nevada, suburb of Sparks, which is projected to be a strong business venture given the difficult mortgage-lending environment, according to McCanless.

Mortgage lending is still tight for borrowers with less than pristine credit causing a greater demand for renting, which Lennar could capture.  

McCanless believes Lennar has an additional 11 for-sale communities in the Reno area with average selling prices between $200,000 and $400,000.

The report added that while Sterne Agee has not been able to obtain leasing rates and terms for the community Frontera, but it was able to get a sample of 25 homes for rent in Sparks via Zillow, which yielded an average monthly rent of $1,300.

"Assuming the Frontera neighborhood was/is a slow-selling neighborhood, we believe repurposing it may be a wise business move since first-time mortgage availability remains constrained versus historical norms. We will look for more color on Thursday's call about this new business line," said McCanless.

In its last results, Lennar posted net earnings of $245.3 million, or $1.07 per diluted share, in the fourth quarter of 2014, compared to $164.1 million, or $0.73 per diluted share, in the fourth quarter of 2013.

"As the housing market has continued its slow but steady recovery, we are extremely pleased with our fourth quarter and fiscal 2014 results, as we achieved a 50% and 33% year-over-year increase in net earnings, respectively. The recovery has been, and will continue to be, driven forward by years of production deficit that has limited supply in both the "for sale" and "for rent" markets, while it has been constrained by reduced access to credit availability," said Stuart Miller, CEO of Lennar Corporation, said about its fourth quarter earnings.

McCanless predicts a year-over-year revenue growth of 14% to $1.30 billion for Lennar, which is slightly below the consensus estimate of $1.33 billion.

In addition, he anticipates unit closings will rise 12.2% year-over-year to 4,036 which is in line with consensus, and we estimate F1Q15's average closing price will increase 1.6% year-over-year to $322,142, which is below the consensus forecast of 3.9%.

Meanwhile, builder confidence in the market for newly built, single-family homes in March fell two points to a level of 53 on the National Association of Home Builders/Wells Fargo Housing Market Index released Monday.

“Even with this slight slip, the HMI remains in positive territory and we expect the market to improve as we enter the spring buying season,” said NAHB Chairman Tom Woods, a home builder from Blue Springs, Missouri.

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