How Meaningful Are Restatements of Assets at Homebuilder Lennar?

In an interview on CNBC Friday afternoon, Stuart Miller, Chief Executive Officer of Lennar Corp., responded to allegations the homebuilder used money from joint ventures to build up its balance sheet, saying it was "just not true." Barry Minkow, of the Fraud Discovery Institute, posted information on his website earlier in the day claiming -- among other allegations -- that Lennar "continues to provide vague and less than transparent responses to SEC inquiries about off-balance sheet, joint venture debt," and improved its cash reserves to $1.1 billion [year-end 2008] through less-than ethical means. Irrespective of the veracity of either Minkow's assertions or Miller's response, another read of Lennar's 10-Q regulatory filing for the third-quarter ended August 31 reflects the truth that the homebuilder's balance sheet is still drowning in an inventory of too many unsold houses and undeveloped lots.

In addition, I unearthed some disconcerting transparency issues -- or lack thereof -- in the filing, too:

1. For the nine-months ended August 31, home-building revenue declined 59 percent year-on-year to $3.3 billion, due to increased foreclosures, reduced availability of mortgage financing, lower home sales prices, and higher than anticipated sales incentives. Yet, despite this precipitious decline in sales activity -- and admission that further deterioration in market conditions was to be expected going forward --the company claimed at quarter-ended August that its homebuilding assets were worth $5.84 billion, a valuation adjustment (loss) of only $50 million from November 30, 2007!
2. Lennar listed an aggregate equity stake of 28 percent in unconsolidated joint ventures, worth $2.9 billion. However, the company will often guarantee the obligations of unconsolidated entities in order to help secure financing for the related projects. Out of a total debt of $4.6 billion, Lennar would have the reader believe that its maximum net recourse exposure is $465 million. However, the fine print reads:

• "In connection with loans to an unconsolidated entity where there is a joint and several guarantee, the Company generally has a reimbursement agreement with its partner. The reimbursement agreement provides that neither party is responsible for more than its proportionate share of the guarantee. However, if the Company's joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share, up to its maximum exposure, which is the full amount covered by the joint and several guarantee."

Like Pheidippedes running from the Battle of Marathon to Athens to warn of a possible Persian attack, readers are forewarned that despite Stuart Miller's insistence on the fourth-quarter earnings call* that they "have done the heavy lifting on impairments and are now situated with stated assets that can and will produce improving margins," growing unemployment will likely lead to an acceleration in cancellations and delayed closings in the first half of 2009, exacerbating an already crumbling real estate market. And, no bridled optimism from management in public statements or SEC filings can mask further bad tidings -- valuation impairments still to come.

[**Ed. note: Lennar announced its fourth-quarter earnings and fiscal 2008 results on December 18, but has yet to file its FORM 10-K with the SEC. Impairments continue to increase, climbing to approximately $221 million in the year-end quarter, from approximately $150 million in the just analyzed third quarter.]