Lennar's Net Income Drops 73%
Amid Deteriorating Housing Market

Lennar Corp. became the latest home builder to feel the sting of a sharp downturn in the housing market, posting a 73% drop in profit for its fiscal first quarter amid sliding home prices and orders.

Chief Executive Stuart Miller -- warning that the trends are being exacerbated by the recent meltdown in the subprime-mortgage sector -- said he couldn't forecast when the housing market may stabilize, and he revoked Miami-based Lennar's prior financial guidance.

In January, Lennar executives predicted that the company's 2007 earnings would at least meet its 2006 level of $3.69 a share, even as they said home deliveries would fall more than 20%.

But Mr. Miller told analysts on a post-earnings conference call Tuesday that he's uncomfortable with predictions amid the current environment. The home market has been struggling with an inventory glut and declining demand.

"I'm still anxious to see whether there's a spring selling season that emerges," Mr. Miller said, noting that it hasn't emerged yet. "The reality is that market conditions are still challenging, at best, and in some markets are continuing to deteriorate."

He warned there could be "another shoe to drop" in the housing sector that worsens conditions. Among other possibilities, he said an overall downturn in the economy might increase the drag on housing, or a repricing of mortgage rates could hurt home buyers.

KB Home executives were similarly gloomy last week, when KB reported an 84% slide in profit for its fiscal first quarter.

Lennar shares were flat at $44.48 on volume of 5.9 million compared with average daily volume of 2.5 million on the New York Stock Exchange.

Shares of other home builders also fell Tuesday on the heels of Lennar's earnings release and a Monday report from the Commerce Department that showed February new-home sales fell for the second month in a row to the lowest level in seven years.

D.R. Horton Inc. shares fell 1.6%, or 37 cents at $22.42; shares of Hovnanian Enterprises lost 2.9%, or 78 cents, at $26.56; KB Home shares slid 72 cents, or 1.6%, to $45.27; and Toll Brothers Inc. shares fell 1.6%, or 45 cents, to $28.40.

Shares of Technical Olympic USA, a small homebuilder with substantial operations in Florida -- which is considered one of the most troubled markets -- fell 12%, or 54 cents, at $3.83.

Lennar reported net income Tuesday of $68.6 million, or 43 cents a share, for the quarter ended Feb. 28, off from $258.1 million, or $1.58 a share, a year earlier.

Results from the latest quarter include a $175.9 million pretax gain related to a transaction involving its LandSource joint venture, and a $91.6 million pretax charge related to valuation adjustments and write-offs of option deposits and pre-acquisition costs.

Revenue dropped to $2.79 billion from $3.24 billion a year earlier. Home-building revenue declined to $2.66 billion from $3.11 billion, and financial services revenue fell to $128.9 million from $131.9 million.

Wall Street had been expecting the company to earn 43 cents a share on $2.49 billion in revenue, according to Thomson Financial.

Lennar said its home deliveries fell 3.8% to 8,566 in the quarter, while its average selling prices fell 7% to $303,000. Meanwhile, the company's new orders fell 27%, to 7,132.

Jeremy Pinchot, an analyst with Monness Crespi Hardt & Co., called the overall quarterly results and outlook bad, saying they "add further uncertainty to the rest of 2007," both for Lennar and for the home-building sector overall.

"It was a dismal quarter and a dismal outlook," said Mr. Pinchot, who doesn't own shares of Lennar.

He said he considers it likely that Lennar will have to take additional charges to write down the value of assets.

Merrill Lynch analyst Kenneth Zener said in a research note that he also considers additional write-downs likely for Lennar. Mr. Zener doesn't own a stake in the company.

Lennar executives declined to predict during Tuesday's conference call if they'll have to do so. But they maintained that they've taken strong measures to help the company ride out the housing downturn, even as they issued an uncertain outlook.

"We are focused on the strength of our balance sheet," Mr. Miller told analysts. "We are determined to be properly positioned" when a recovery takes place.

Still, he warned that the subprime-mortgage issue stands to exacerbate problems in the housing sector. Climbing rates of delinquencies and foreclosures could increase the supply of homes on the market, at the same time that stricter lending requirements render fewer people eligible for mortgages.

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