Lennar Earnings Got a Boost From Opendoor. Why The Stock is Falling Anyway.

Home construction fell more than expected in August, with housing starts sliding to the lowest since May. (Bing Guan/Bloomberg)

Anyone looking for signs that the worst is over for the housing industry didn’t get them in Lennar’s earnings, released Thursday night. The company’s stock was falling on Friday as executives discussed results that missed margin and revenue estimates on a conference call.

But the builder beat expectations on top-line earnings—thanks largely to its investment in Opendoor.

Lennar earned $2.29 a share in its third quarter on $8.8 billion in revenue. Analysts had expected earnings of $2.10 on revenue of just under $9 billion, according to FactSet.

Excluding mark-to-market gains on technology investments, that earnings figure drops to $2 a share. Lennar reported mark-to-market gains of $99 million on technology investments—roughly $71 million of which came from its investment in Opendoor.

On a Friday call discussing the results, Lennar co-CEO Stuart Miller said he “can’t help but note how inspired I am by the resurgence of a technology company that Lennar has supported for many years.”

“We are quite confident that Opendoor, with its new CEO, Kaz—that’s how he’s referred to—will be a contributing force and partner in Lennar’s technology journey and evolution,” he added.

Shares of Opendoor, a tech company known for buying and selling homes, were at risk of being delisted earlier this year. But the stock caught a second wind from social media, and rose further after a management shake-up that saw its two co-founders return as board members and former Shopify Chief Operating Officer Kaz Nejatian take the reins as CEO.

As of Thursday’s close, Opendoor stock was up 521.25% this year, according to Dow Jones Market Data. Lennar stock was up 1.4% in the same time frame.

The investment was a plus for Lennar in the third quarter. The housing market wasn’t. Lennar’s gross margin, a closely watched metric at a time when home builders are cutting prices and offering buyer incentives to sell homes, was 17.5%, shy of consensus estimates calling for 17.8%.

Investors had been looking to Lennar’s earnings for signs that builders’ profit margins were beginning to firm up. Builders have been pumping the breaks on construction and offering plenty of incentives to sell homes in a slow housing market, census and industry data show.

The company used buyer incentives, such as mortgage rate buy-downs, to keep homes selling, said Lennar co-CEO Jon Jaffe.

The stock was down about 3.5% early Friday afternoon.

Lennar reported 23,004 new orders, more than the 22,522 consensus. It delivered 21,584 homes to buyers, fewer than the 22,414 analysts were looking for.

To make sales in a tough housing market, builders like Lennar offer buyers discounts and deals. In a September survey of builders, 39% cut prices and 65% offered some sort of incentive, the National Association of Home Builders said this week.

“Housing affordability is hurting buyer traffic for builders, and as a result builders have slowed single-family home construction,” Buddy Hughes, the National Association of Home Builders’ chairman, said.

Lennar expects margins to stabilize at 17.5% in its fourth quarter—lower than the 17.7% consensus—as it switches up its strategy in light of recent changes to financing costs.

“Interest rates remained elevated throughout the third quarter, but then declined towards the quarter’s end. This downward trend, paired with the Fed’s recent rate cut, gives us optimism as we head into the fourth quarter,” Lennar’s Miller said. “Therefore, we believe that now is a good time to moderate our volume and allow the market to catch up.”

The builder expects to record 20,000 to 21,000 new orders in the fourth quarter, in line with expectations, and deliver 22,000-23,000 homes, fewer than the 25,587 analysts expect.

Investors could welcome the strategy shift, Wedbush analyst Jay McCanless, who rates the shares Neutral, wrote in a Friday note. “We believe Lennar’s volume over price strategy has been hurting industry gross margins for more than three years so if this is a real change in tactics, it could be good news for housing,” he wrote.

Write to Shaina Mishkin at shaina.mishkin@dowjones.com