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Lennar (LEN) Divests Rialto Capital to Stone Point for $340M


Lennar Corporation LEN has divested its Rialto Investment and Asset Management business segment to Stone Point Capital LLC, a private-equity firm, for $340 million.

This Miami-based company will retain the Rialto Mortgage Finance business along with interests in Rialto fund investments ($294 million as of Aug 31), and other funds as well as investments in Rialto balance sheet assets. Meanwhile, Lennar is shifting its Rialto Mortgage Finance unit into the Financial Services business.

The divesture was part of its previously announced strategy to improve the future of Rialto, as well as drive efficiencies and cash flow of the core homebuilding business. In fact, in third-quarter fiscal 2018, the company segregated Rialto’s balance sheet assets in order to maximize their value.

In the fiscal third quarter, Rialto’s revenues came in at $49.5 million, which decreased 14.4% from the prior-year quarter. 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. Although the company has divested Rialto, the said business is expected to generate profits of about $5 million in the fiscal fourth quarter.

A Look at Lennar’s Core Homebuilding Performance

Lennar offers a diversified line of homes for first-time, move-up and active adult homebuyers. After strong performances in 2014, 2015, 2016 and 2017, Lennar has maintained the growth momentum by delivering outstanding operating results in fiscal 2018 as well.

Courtesy of strong demand, the company’s total revenues grew 59.2% year over year in the first nine months of fiscal 2018, backed by a solid 67% rise in homebuilding revenues. This was primarily driven by a 52% increase in the number of home deliveries and 10% rise in the average sales price of the homes delivered. In fact, revenues from home sales increased 67% year over year in the first nine months of 2018.

Lennar, which is considered as a leading homebuilder in the United States, has been performing well over the past few quarters. The company remains positive, given demand trend in the U.S. housing market, given the robust economy and steady job and wage growth.

However, labor shortages, rising mortgage rates scenario, trade-driven material price increases, limited land availability, along with increase in new and existing home sales prices are denting homebuilders’ margins. Ongoing housing market headwinds have been impacting the homebuilding industry performance as a whole.

Meanwhile, Lennar's share has underperformed its industry in the past year, its shares have lost 29.7% compared with the industry’s collective decline of 29.3% in the said period.

Zacks Rank & Stocks to Consider

Lennar currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corp. GLDD, Altair Engineering Inc. ALTR and EMCOR Group, Inc. EME. While Great Lakes currently sports a Zacks Rank #1 (Strong Buy), Altair Engineering and EMCOR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes, Altair Engineering and EMCOR’s earnings in 2018are expected to increase 111%, 23.1% and 20%, respectively.

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