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Is Lennar (LEN) Mulling Over the Divesture of Rialto Capital?

Zacks

Lennar Corporation LEN is likely to sell its real estate investment management unit, Rialto Capital, to a private-equity firm, Stone Point Capital LLC, per the report by Wall Street Journal.

However, Lennar’s spokesperson refrained from commenting on the same.

In April, the Miami-based homebuilder had already indicated strategic alternatives to improve the future path of Rialto, to drive efficiencies and cash flow. In fact, in its recent third-quarter of fiscal 2018 earnings call, the company disclosed that it will focus on core homebuilding business, while strategically repositioning and opportunistically monetizing the non-core business.

To this end, Lennar has segregated Rialto’s balance sheet assets in order to maximize value. The company is currently evaluating many attractive opportunities to monetize the business, as part of those alternatives.

A Look at Rialto’s Performance

In the fiscal third quarter, Rialto’s revenues of $49.5 million decreased 14.4% year over year. However, the segment reported operating earnings of $9.4 million in the quarter against a loss of $3.2 million in the year-ago quarter.

Meanwhile, the company reduced fourth-quarter Rialto earnings projection to approximately $5 million from previous expectation of $28-$38 million.

Lennar’s recent move to offload this business is expected to bode well for the company, as is evident from its core homebuilding performance this year.

Lennar’s Overall Performance

Defying ongoing housing market woes, Lennar posted stellar third-quarter fiscal 2018 results, wherein earnings surpassed the Zacks Consensus Estimate by 17.7%. Its top and bottom lines grew considerably on a year-over-year basis, primarily on higher orders along with improved gross margins, and SG&A expenses.

In fact, in the first nine months of 2018, Lennar’s revenues from home sales increased 67% year over year. The increase was attributable to 52% higher home deliveries (excluding unconsolidated entities) and a 10% rise in the average sales price of homes delivered.

Indeed, the recent market data related to revenues, permits, starts and existing home sales reported decelerating growth rate, which raised apprehensions about housing recovery. Moreover, labor shortages, trade-driven material price increases, limited land availability, along with increases in new and existing home sale prices have been making things worse.

That said, Lennar has been performing well over the past few quarters and remains positive, given strong demand trend in the U.S. housing market, driven by production deficit that persisted over a decade. Steady job and wage growth, a recovering economy, rising rentals, rapidly increasing household formation and a limited supply of inventory point toward strong demand. Although rising interest/mortgage rates and construction costs are causes of concern, low unemployment and increasing wages are likely to offset these headwinds.

The company also expects to achieve synergies of $380 million in 2019, arising from corporate and SG&A savings, as well as direct construction cost savings.

Although shares of Lennar, a Zacks Rank #3 (Hold) stock, have lost 21.7% in the past year, earnings estimates for 2018 have moved up 0.9% over the past seven days. The upside reflects analysts’ optimism on the company’s future performance.



Stocks to Consider

Some better-ranked stocks from the same industry include Toll Brothers Inc. TOL, Armstrong Flooring, Inc. AFI and Armstrong World Industries, Inc. AWI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Toll Brothers’ earnings for 2018 are expected to increase 44.2%.

Armstrong Flooring’s 2018 earnings are expected to grow 104.8%.

Armstrong World is expected to record 23.5% earnings growth in fiscal 2018.

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