Lennar Corp (LEN.B) 2015 Q1 法說會逐字稿

Welcome to Lennar's first-quarter earnings conference call.

(Operator Instructions)

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone.

Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call, and are not intended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results, and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described in this morning's press release and our SEC filings, including those under the caption, risk factors, contained in Lennar's annual report on Form 10-K most recently filed with the SEC.

Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your host, Mr. Stuart Miller, CEO.

Sir, you may begin.

Okay, good morning, everyone.

Thank you, David, and thank you all for joining us for our first-quarter conference call.

This morning I'm joined by Bruce Gross, our Chief Financial Officer; David Collins, who you just heard from; and Diane Bessette.

Rick Beckwitt is here, with Jeff Krasnoff, our Chief Financial Officer of Rialto.

And Jon Jaffe, our Chief Operating Officer, is on the phone from California.

And they'll all join in for our Q&A period.

This morning, I'm going to be very brief with my opening remarks, as I feel that our views about the market have been consistently expressed on our prior calls.

Bruce is going to jump in with our financial detail, and then, as always, we'll open up for Q&A.

We'd like to request that during Q&A, as always, each person please limit yourself to one question and one follow-up.

So, let me go ahead and begin, and I'll begin by saying that, of course, we're very pleased to report another quarter of performance for Lennar, with each of our major segments performing as expected.

In spite of some very difficult weather conditions in various parts of the country that have limited both sales, and pushed back production, our first-quarter results demonstrate that Lennar is very well positioned to continue to perform extremely well in current market conditions.

And we continue to execute our balanced operating strategy.

Consistent with our prior conference call messages, we continue to believe that we are still in the early stages of a protracted slower-than-history-would-suggest housing recovery.

An early read from this year's spring selling season suggests that the market is continuing to improve at a very steady pace.

This recovery continues to be driven forward by a strong backlog of pent-up demand for housing that is constrained by the mortgage market.

Pent-up demand is derived from a now multi-year production deficit that is continuing to grow, even at current production levels.

At the same time, volume growth has been constrained by overly conservative lending standards, a regulatory environment that discourages mortgage lending, and a negative consumer bias overhang against home ownership.

Accordingly, we've seen, and continue to see, out-sized improvement in the rental market in terms of low vacancies and higher rental rates.

This trend, of course, has benefited our multi-family strategy rather dramatically, but also sets the stage for further improvement in the for-sale market, as new households looking for a place to live compare monthly payments.

While the relationship between pent-up demand, rental rates, and mortgage availability continues to direct the housing market, it's becoming more apparent that the mortgage market is loosening incrementally with time, and enabling more demand to be realized as household formation begins to return to more normalized levels.

We have believed, and we continue to believe, that the downside in the housing market is very limited, and the upside is very significant.

We believe that the market is downside-supported by the many years of production deficits that have yielded a limited supply of both rental and for-sale housing in the country.

Any pullback in the housing market would be short lived, as there's the need for shelter across the country, and there's very little inventory, and almost no likelihood of mortgage foreclosures given the stringent underwriting standards of the past years.

And while demand has remained constrained by impaired consumer psychology, burdensome mortgage underwriting standards, and banking regulations, buyers have continued a steady return to home ownership as the market opens up, driven by low interest rates, defining lower monthly payment versus the cost realities of a higher-priced and undersupplied rental market.

The recent program changes by FHFA and HUD aimed at bringing buyers back to the market with a consumer stimulus provided by lower gas prices and wages slowly mending, and with lower interest rates driving greater affordability, and with that multi-year deficit in production, the upside in housing continues to seem very large.

Even with the ongoing questions raised about markets like Houston, given the sharp drop in oil prices, there's strong countercurrents to act as partial offsets.

Lower gasoline prices and growing consumer confidence are netting an overall stronger market condition to pick up some of the pullback from the oil complex.

At 1 million homes of multi-family and single-family production per year, we are continuing to undersupply the demographic needs of the country, and this will have to be made up.

The shallow slope of this recovery likely provides a steady backdrop for market share expansion in a fragmented industry, and an extended recovery for those, like Lennar, who are able to participate by leveraging a strong capital base.

I would suggest that this continues to be a very healthy environment for well-capitalized national builders, and for our Company in particular.

Our results for the first quarter reflect our success in positioning our Company across the platform.

And I'll let Bruce now give you the detail.

Thanks, Stuart, and good morning.

Our net earnings for the first quarter increased 47%, on a 21% increase in revenues.

Revenues from home sales increased 23% in the first quarter, driven by a 20% increase in wholly owned deliveries, and a 3% year-over-year increase in average selling price to $326,000.

Our gross margin on home sales in the first quarter was 23.1%.

As a reminder: I highlighted in our fourth-quarter conference call that our gross margin percent is expected to be 24% for the full year in 2015, and the first quarter is seasonably the lowest.

This quarter was in line with our expectation, and we are still on track with our goal of 24% gross margin for the full year.

The prior year's gross margin percent of 25.1% included a $5.5-million benefit relating to an insurance settlement, which benefited the gross margin percent in the prior year by 50 basis points.

Sales incentives declined sequentially to 6.3% from 6.6% in the fourth quarter, while being flat with last year.

The gross margin decline year over year was also due to a moderation in pricing power, at the same time as labor, material and land costs increased.

Year over year, labor and material costs are up 6.6% to approximately $50 per square foot, but are flat sequentially with the fourth quarter.

This flattening represents a focused effort of reducing costs due to commodity declines, primarily in copper and steel.

We will continue to focus on cost reductions, including those related with petroleum-based products and lumber; however, we are still seeing offsetting labor and manufacturing pressures.

We also saw an increase in cost for manufacturers to comply with stricter environmental regulations, as well as a shortage of transportation in the trucking industry.

SG&A improved 40 basis points year over year, and approximately 30 basis points of that improvement was due to a reduction in insurance reserves.

We have also recognized operating leverage on our corporate G&A line, which improved 10 basis points to 2.7% as a percent of total revenues.

Gross profits on land sales totaled $12.1 million for the quarter, versus $16.1 million in the prior year.

Equity and earnings from unconsolidated subs was $28.9 million in the first quarter, as previously highlighted.

This was all driven by [a culture] of joint venture, selling 14 [neighborhoods] totaling 921 home sites in the next section of El Toro.

Lennar will build on 4 of the 14 neighborhoods, and, therefore, Lennar's profit of $31.3 million only includes the portion related to the 600 home sites sold to third parties.

Other income was up to $6.3 million this quarter from $2.9 million in the prior year.

The increase was due to a club sale at one of our communities that netted a $6.5-million gain.

Other interest expense declined year over year from $12.7 million in the prior year to $4.1 million in the current year, as we continue to open communities, and increase the qualifying assets eligible for capitalization.

This quarter, we opened 58 new communities, to end the quarter with a net of 626 active communities, which is up 14% over the prior year.

Our new order dollar value was up 25%, [and our] sales pace was flat year over year at 2.8 sales per community per month.

In the first quarter, we purchased 4,200 home sites, totalling $421 million versus $505 million in the prior year's quarter.

This is consistent with our strategy articulated last year to softly pivot from longer-term land parcels to shorter-term deals.

Our home sites owned and controlled now total 163,000 home sites, of which 133,000 are owned.

Our financial services business segment had strong results, with operating earnings increasing to $15.5 million from $4.5 million in the prior year.

Mortgage pre-tax income increased to $14 million from $6.5 million in the prior year.

The increased mortgage earnings were due to higher volume, as mortgage originations increased 84% to $1.6 billion from $886 million in the prior year.

The increased volume resulted from a mini refinance boom in the first quarter, as well as more home closings by Lennar and a higher capture rate of Lennar home buyers.

The capture rate of Lennar home buyers improved to 79% this quarter from 75% in the prior year.

In 2014, our mortgage subsidiary expanded its retail channel with the acquisition of Pinnacle Mortgage and by opening branches on the East Coast.

This expansion positioned us well to capitalize on the refinance activity that we did see in the first quarter.

Although we don't expect the refinance activity to continue at the same pace as the first quarter, we are well positioned to capture purchase business as the housing recovery continues.

Our title company's profit increased to $2.1 million in the quarter, from a loss of $1.6 million in the prior year.

This is primarily due to higher volume, and benefits from strategic initiatives, including closing less productive branches over the past year.

Our title team continues to focus on maximizing the title opportunities with our ancillary businesses.

Turning to Rialto, the Rialto business segment generated operating earnings totalling $4.6 million compared to $2.6 million in the prior year.

Both amounts are net of non-controlling interest.

The composition of Rialto's $4.6 million of operating earnings by the three types of investment before G&A and Rialto interest expense are as follows.

First, the investment management business contributed $24.4 million of earnings, which includes $2.7 million of equity and earnings from real estate funds; and $21.7 million of management fees and other, which included $6.5 million of a carried interest distribution from Rialto Real Estate funds.

And that's to cover the income tax obligation resulting from the allocations of taxable income to Rialto.

The carried interest for Rialto Real Estate Fund One, under a hypothetical liquidation, now stands at $105 million, and that's a footnote which we don't book until we actually receive the cash.

Second, Rialto Mortgage Finance contributed $318 million of commercial loans into two securitizations, resulting in earnings of $9.7 million for the quarter, before their G&A expenses.

And then third, our direct investments had a loss of $2 million for the quarter.

And again, we expect most of these direct investments to be monetized by the end of next year.

Rialto G&A and other expenses were $20.7 million for the quarter; and interest expense, excluding our warehouse lines, was $6.8 million.

Our multi-family operations have grown to over 200 associates in regional offices nationwide.

We currently have seasoned professionals and divisional offices in Atlanta, Boca Raton, Charlotte, Washington DC, Chicago, Dallas, Denver, Phoenix, Orange County, San Francisco, and Seattle.

We ended the quarter with 24 projects under construction, two of which are in lease-up, totaling over 6,600 apartments, with a total development cost of approximately $1.6 billion.

We also have one completed, fully leased and operating student housing community that serves the students attending the University of Texas at Austin.

Including these communities, we have a diversified development pipeline that exceeds $5.5 billion and over 20,000 apartments.

In the first quarter, we had an operating loss of approximately $5.7 million.

Despite this loss, we still expect to be profitable for the full year, benefiting from the sale of about five communities in the last six months of the fiscal year.

As we have discussed in the past, we have been merchant-building our apartment communities with third-party institutional capital on a deal-by-deal basis.

We are continuing to explore potential financing structures that would allow us to hold our completed and leased apartment communities as a portfolio to capture the recurring income stream from this portfolio.

Turning to the balance sheet, our balance sheet and liquidity remained strong in the quarter, as our homebuilding cash balance ended the quarter at $584 million.

We had $250 million outstanding under our $1.5-billion unsecured revolving credit facility.

And our leverage improved by 60 basis points year over year, as our homebuilding net debt to total capital was reduced to 47.9%.

During the quarter, we added on $250 million to our 4.5% senior notes, due November 2019, at a yield of 4.4%.

We continue to reduce our borrowing rate, as the Company's financial condition strengthens.

We grew stockholders' equity to approximately $5 billion at quarter end.

Our book value per share increased to $24.13.

Last, I'd like to summarize what was said on the call regarding goals for 2015, and an update from what we said on our fourth-quarter conference call.

One: deliveries.

We are still on track to deliver between 23,500 and 24,000 homes for 2015.

The severe weather conditions in the first quarter has delayed some construction activities, which will slightly reduce our backlog conversion ratio to 80% for Q2, and 80% to 85% for Q3.

But we will pick that up, and we are increasing our fourth-quarter conversion ratio to 95% to 100%.

Second: gross margin.

We still expect our gross margins in 2015 to average 24% for the full year.

The gross margins will vary throughout the year, depending on product mix, with the fourth quarter still expected to be the highest gross margin percent for the year.

Third, we still expect to see 15 to 25 basis points of potential improvement for the SG&A on corporate G&A combined categories.

Fourth: financial services.

We are increasing our goal for this segment, due to the strong refinance environment at the start of the year.

We now expect to earn $95 million to $100 million for the full year.

The remaining quarterly amounts are expected to be spread similar to the proportions of last year.

Rialto: We still expect a range of profits between $30 million and $40 million for the year, and it's heavily weighted to the fourth quarter.

Multi-family: We are still expecting five buildings to be sold in 2015, all expected in the second half of the year, with the 2015 profit still expected to be between $15 million and $18 million, and that will depend on the timing of these building sales.

Joint venture and land sales: We still expect to have $10 million of joint venture profit in the second quarter.

This is primarily due to our share of the profit from the El Toro land sale to Broadcom, which did close in the month of March.

That's on track, as we said last quarter.

There are no other significant transactions in Q3 or Q4 in the JVs.

And we are on track with approximately $25 million of wholly owned land sale profit for the year, with the bulk of the remaining land profit to be in our fourth quarter.

Our tax rate for 2015 is now expected to be in the mid-34% range, and our community count is on target to hit 675 by the end of the year.

So, we are well positioned for this year to deliver strong top-line and bottom-line growth throughout the year.

And with that, let me turn it over for questions.

(Operator Instructions)

Our first question is from Bob Wetenhall, RBC Capital Markets.

Congratulations, everyone.

Great start to the spring selling season.

I wanted to ask, your average selling prices on new orders were up 5.5%, which we thought was really good.

Wanted to ask you, how are you thinking about balancing price and pace in the current environment?

Are you seeing pricing power?

And how much pushback are you getting from buyers?

Bob, it's Rick Beckwitt.

We're still continuing to balance price and pace, specifically in a couple of markets where demand is really strong and we've got excellent land positions.

As you look at the price increase year over year, a component of that was mix.

We had a higher level of deliveries coming from California.

Some of it was just pure price increase, so it's a balance.

Okay.

And with the order growth that you're seeing right now, and thinking about Bruce's gross margin guidance of 24%, do you expect a majority of the expansion in gross margin to come from volume-driven operating leverage?

Or is that going to be more a reflection of the growth in average selling prices you're seeing?

Thanks very much and good luck.

It's going to be driven by the mix, Bob.

It's not going to be driven primarily by average selling price increases.

Okay, thanks very much.

(multiple speakers) We get a higher level of field absorption so some of it's volume-driven, Bob.

The next question from Haendel St.

Juste, Morgan Stanley.

Good morning.

Anyone there?

All right, we ought to go on to the next one.

Michael Rehaut, JPMC.

Hi, thanks, good morning, everyone, and congrats on a solid quarter.

First question I had was on Houston.

The 7% decline in orders, obviously you still had a great overall order growth number.

I also noticed the 4% drop in Southeast Florida.

Perhaps you could talk about those two regions in terms of was that more community-count driven?

We were just through Houston and saw a little bit of, perhaps, slower pace in February.

But it really did vary very much by sub-market and positioning, et cetera.

But any comments on Houston, and for that matter, Southeast Florida, what was driving the order trends during the quarter, would be helpful.

Okay, this is Rick.

First, let's talk about Houston because I know it's in everybody's thoughts right now.

I'll tell you that across the board, we had good traffic in all price points, definitely stronger traffic in absorptions at the sub-$350,000 price point, real, real strong between $200,000 and $300,000.

As you got above the $400,000, $500,000 price point it's slowing down.

Traffic is still strong, but buyers there are just more cautious in pulling the trigger on the sales side.

But we really think that the Houston market is a strong market.

We decided not to chase prices down and focus more on gross margin in Houston, but we're very positive on the Houston market.

With regard to Southeast Florida, that really is just the timing of communities.

If you look at the average sales price, it was up 9% year over year in the market.

But we chose to focus more on pricing power there as opposed to sales absorptions.

Great, that's very helpful.

Second question on pricing and incentives.

Broadly speaking, we've heard that the spring is off, generally speaking, to a solid start.

Obviously your comments echo that.

At the same time, given how 2014 for many builders was a little bit of an uneven year, I think at this point from what we understand, builders are still a little bit hesitant to exact any material price increases or dial back incentives.

But perhaps as the spring progresses, if there's still a solid pace that you could see that a little bit more into April and May, is that similar to what you're seeing in the market?

And an approach that you might take if you continue to see, overall, the solid start to the spring progress?

You know, Mike I'd go back to the theme that I have advanced pretty much quarter after quarter, and now for the past few years.

And that is that we're operating in this narrow channel of improvement that's defined by a production deficit across the country and constrained mortgage availability.

So you have demand pushing up, you've got constraint pushing down.

All of this is happening with inventories very, very tight across the country, both on the existing and the new home and the rental side of the equation.

The market condition generally has been choppy.

It's been moving inside the channel, a little bit up, a little bit down, and you're seeing some of that.

And of course, as you go through the first quarter, you've seen some rather severe weather conditions in a number of parts of the country that have really limited the ability of buyers to get out of their home and go look for a home if they are even inclined to.

And you've not just seen that in the Northeast where its been most aggressively articulated.

It's in Dallas; it's been in Atlanta.

We've had weather conditions in a number of places across the country.

So even in the context of some constraining weather conditions, the market is still presenting itself.

And early signs of this spring are showing themselves to be steady improvement in the marketplace, continuing along that trajectory of an improving recovering housing market, constrained by the mortgage market, limited inventories and still primarily defined by a production deficit that has been growing over the years, where pent-up demand is pushing production upward.

We think this is a terrific tailwind for the industry.

As we look ahead to the spring selling season, we're going to be balancing price and pace as we've done, in a very methodical way.

I think most builders will be doing the same.

And while the market might move up, might move down a little bit, we see steady improvement.

Great, thanks so much, guys.

Next question from Haendel St.

Juste, Morgan Stanley.

Thank you.

Sorry about the technical difficulties earlier.

That's okay.

I wanted to ask about the absorption pace.

How did that trend out in the quarter?

How is it trending currently?

Can you talk about what buyer segments are currently driving the orders and the absorption growth?

Let me ask Jon to weigh in on that.

Well, as you would expect, in our first quarter we saw, sequentially for the months, order pace improve as you move from December, January into February.

Then, as we've been saying, it's really sub-market by sub-market.

Saw our strongest absorption improvements in the coastal markets, particularly places like California, parts of Florida, up into the Carolinas.

Which is what we'd expect as we've seen it looking backwards in this recovery, the coastal markets seem to be outperforming from an absorption standpoint.

Okay, appreciate that.

And on the deliveries beat, was that driven by higher demand for specs?

Or the platform running better than you expected during the quarter?

A combination of the two.

Okay, fair enough.

Thank you.

Next question from Ivy Zelman, Zelman Associates.

Hi guys, good morning, it's Alan on for Ivy, and congrats on the quarter.

First question, Rick, I was hoping maybe to follow-up quickly on the Southeast Florida orders there.

The order pace this quarter was well below where you'd been running in the back half of last year.

And you mentioned the timing effect there from some communities.

If we look at the trends through 2014, it looks like you had a similar drop off in 1Q.

And then activity ramped pretty significantly through the remainder of the year there.

So as you think about the pipeline of community openings in that market specifically, should we expect to see a similar trend this year?

Or is this first-quarter run rate, based on your pipeline, a more realistic run rate through the year?

Some of it's really dependent on when we can get the big communities open.

We went through some rather large high-productive communities last year.

And we got similar battleships opening this year throughout Southeast Florida.

Unfortunately right now, we're getting the models open, getting the monuments, the entries open.

And it's going to be probably a couple of quarters until that pace picks back up.

But as we move into 2016, you'll see a lot of activity coming from Southeast Florida.

It'll still be a really good year, high margins, just a little bit on the flat side for the year.

Got it.

I appreciate that color.

And second, Stuart, there's been some articles written about a community opened recently in Nevada geared towards rentals on the single-family side.

Was curious if you can give some color there about what the Company's strategy is, whether this is a one-off or whether that's a business you're looking to get into?

As you know, we started years ago focusing on the rental component of the market, recognizing that the mortgage constraint would play a big role in the way that the housing market would recover.

Frankly, we didn't anticipate that the regulatory environment would constrain the mortgage market as much as it has.

And as the market has presented, we've continued to grow a rather sizeable apartment rental business.

We've built a platform that, as Bruce articulated, is very large across our geography.

And we're not only pleased with the $5.5 billion pipeline that we've put together, we think that even to our underwriting, we are seeing upside just based on low vacancies and high rental rates.

The inability of the American family to access the mortgage market is really developing an appetite for single-family product, though it might have to be realized in a rental format.

And so we are experimenting with that format as a hybrid between our for-sale and our multi-family apartment community program.

It has received a little bit of publicity, but we are building our first such community to see what the acceptance is in the marketplace.

Whether it becomes part of a trend, whether it becomes part of a program going forward, we have yet to see.

But as is typical with us, we are innovative.

We like to think of ourselves as thinking a little bit outside the box, forward thinking.

And we think that this community could be representative of somewhat of a trend in the country.

We'll wait and see.

From an upside standpoint, we look at the community as a rental opportunity that can be very interesting.

On the downside, if the rental concept doesn't work as well as we'd like, we can always convert to a for-sale platform.

So it's really right in our wheelhouse to be working on this, and we think it presents a really unique and interesting opportunity for the future.

Sounds exciting, good luck.

Thank you.

Next question from Stephen East, Evercore ISI Group.

Thank you, good morning, guys.

Stuart, you've talked a few times about mortgages, et cetera.

I guess a compound question here.

One, whose really providing the mortgages as you look across the country?

Is this coming from the bigger guys in the world and it's just smaller guys and non-banks?

And then if you just look at what you think the market, what type of growth rates the market could support this year say over the next 12 months or so, what's the limiting factor?

Is it the mortgage availability?

Or would it be more on the land or labor?

How do you all look at it right now?

First of all, as it relates to the mortgage market, Stephen, there's clearly somewhat of a shift going on.

The traditional banking world is really constrained in its view of the mortgage market and the regulatory environment.

But really that regulatory environment spreads, or is equally applied, across the mortgage platform.

Even if you're an unconventional lender, you have to look at the regulations around mortgage origination and some of the punitive constraints of the environment as a limiting factor.

And it's not just at the origination point, it's all the way through to the servicing platforms out there.

So the mortgage market, even though we're seeing that originations are finding their way across smaller lenders and less traditional lenders in the market at large, it doesn't move the needle dramatically to see the shift from big banks to others in terms of healing the mortgage market.

It's more about the regulatory environment softening, the punitive side being softened and lenders feeling their way through this turbulent landscape.

So I still view the mortgage landscape as the primary limiting factor.

Now, a secondary limiting factor, because we have been constrained in production, the land development machine has not reemerged in this housing recovery in full force.

So it takes time to get land entitled.

I keep going back to the fact that there is a land shortage, and that means entitled, developed land is in short supply.

So if you see an uptick in the marketplace, land will continue to be a constraining factor.

And then the question of materials and labor, I think are subsidiary questions.

I think to the extent that demand reveals itself, labor can be sourced with higher wages.

Materials, there are clearly some constraints on the trucking side.

And maybe the import markets are a little bit more complicated, but I think your primary constraining factors are the mortgage market, number one, and then land, number two.

Okay, thanks.

And then the other question I had, if you look at really two things.

One, your apartment sales that you got coming in the back half.

If you can give us a rundown on location and what you think the general cap rate will be.

And then what you think your cash flows.

Are you cash flow neutral this year?

Do you turn positive in 2016 with the soft pivot?

And how much of it would probably revolve around the sales of the apartments?

Well first of all, Steve, I want to recognize that you're asking compound questions which really count as multiple questions.

(laughter)

You got to squeeze them in somehow.

(laughter)

That's right.

So in terms of apartment sales, I'm not going to give specific cap rates and sale numbers.

What I will say is that our performance in the apartment segment is defined by low vacancies, higher rental rates than we had originally underwritten.

And as we look to sell apartment communities, just remember that we are in partnership in those apartment communities, so we don't have the complete unilateral ability to define the sale and define the exact timing of that sale.

This is going to unfold and we've been very cautious about describing the parameters around how sales will actually happen, because we recognize it's an imperfect landscape right now.

Of course, in order to model it, you who analyze what we're trying to do, are looking for some certainty as to how many and what the cap rate is and what the profitability will be.

And we realize there's a little tug and pull there.

We're trying to give you some general parameters, recognizing that the specifics are going to define themselves at that time.

And as we go through some of our sales, we'll start to develop some more specific parameters, which will be helpful to you as we get into 2016.

And then the second part of that compound question was?

Just looking at your cash flows for this year and next year.

Bruce, you want to talk about that?

Sure.

So as we've been saying, we think 2015, we are going through the soft pivot, so depending on some of the timing of some of the land acquisitions, we're getting to a point where, by the end of this year, we think we'll be in a position of turning positive cash flow and into next year.

And most of that is driven by the soft pivot because the ancillary businesses, as you go through this year, are pretty much self-funding.

We're putting a little bit more into multi-family this year.

But we expect as we get into 2016, those businesses will be returning cash and self funding.

So the soft pivot is what's going to be driving us to get to cash flow positive as we get towards the end of this year.

All right, I appreciate all the help.

Thank you, guys.

Next question from Stephen Kim, Barclays.

Hi guys, this is actually Trey on for Steve.

Going back and touching on the mortgage market that you guys have talked about a few times.

Yesterday, Ellie Mae published some FICO and DTI data regarding February with both tightening on the margin.

Do you believe this is representative of what's currently going on in the underwriting market?

Or do you think this is more a reflection of people walking through the door?

And are you seeing similar trends coming from your customers?

Yes, I saw that data.

I don't know really what to make of it.

It seems that the data that's reported is really within a range.

I don't know that I could see a trend from that.

It seems to us, as we look at our book of business, that still the mortgage market is opening at the margin.

The fact that FICO scores might move a little bit one way or another, I think is all part of that process of one step forward, two steps back.

But gently improving as we go forward.

So I just don't know that I would read too much into that data.

Thanks for that.

And speaking to your ancillary businesses a little bit, could you talk about the recent departures at Rialto and what most excited you are about that business?

And also regarding Five Points, what do you consider the timing for the next group of lot sales to be released to there?

Okay, let me let Jeff talk about the departures and then we'll talk about --

As far as -- this is Jeff -- as far as the departures go, I think it got probably a lot more press than really what the -- the press made a bigger deal of it than it really was, at the end of the day.

We have about 400 folks in Rialto.

The team that was that left has already been replaced, almost 100% of it internally, with a group of individuals that have been growing up in the business, and actually have been in the business even longer.

So from that perspective, we're feeling really good about it, in terms of where we are.

And let me just add to that.

I think if you look at the markets in which Rialto operates, most of the participants are groups that have been homegrown here within the Lennar environment.

Jeff and his senior management team are, I would say, the educators of the industry.

And I would say that we have the recipe here, some of the ingredients sometimes leave the building, but we can replace the ingredients.

We have a great and stable program at Rialto that continues to move forward.

I wouldn't read too much into the departure of any one, or any few, associates, either in the Rialto platform or the Lennar platform.

And again as Jeff said, I think the press made a lot -- much ado about very little.

Let me turn to Jon to answer the part about Five Point.

Thanks, Stuart.

We're very excited about where Five Point is positioned right now.

Most of the activity is occurring at El Toro, here in Orange County.

As we reported, sales have gone extremely well in the first phase, which is virtually sold out now.

We reported the closing to builders of most of the villages in the second phase.

In our first quarter, the last two villages we expect to close this quarter, with the builders starting their models in production this quarter, and a grand opening sometime mid-summer.

We also just closed, at the beginning of this quarter, commercial transaction with Broadcom that we're very excited about that bringing that commercial component on into El Toro.

And we expect the next major section of El Toro to come to market at the end of the year, probably will fall into our first quarter for FY16.

Activity continues to go very strongly up in San Francisco at Hunter's Point, the shipyard.

We're sold out of our first buildings there, our first 88 homes.

We'll be releasing our next homes in the coming couple months, and continue to start more construction at that site.

As well as we announced our large joint venture with Macerich to develop a large retail mall there, which has spurred a lot of interest from other commercial players in our activity there.

We did commence deconstruction of Candlestick Park this quarter, and we'll have that completed by next quarter.

All right, thanks guys, very helpful.

Next question from Jade Rahmani, KBW.

Hi, thanks for taking the question.

On Rialto, I wanted to also ask about if you could provide an update on your thinking regarding what you might eventually choose to do with that business, whether it be spinoff, sale or combination with another entity.

Seems that in the current regulatory environment, with the Basel III increased capital requirements for banks and the Dodd-Frank risk retention rules that go into effect late next year, non-bank platforms like Rialto should stand to benefit.

And also should see not only market growth opportunities, but interest from other players.

So wanted to see if you could provide an update on how you're thinking about it.

Jade, part of our thesis with Rialto was, as we've grown, it has definitely morphed along the lines of recognizing that the constraints around the banking industry presented a distinct opportunity for our Rialto platform.

And we are pretty enthusiastic about the prospects for future.

To the first part of your question, we have built Rialto as distinct from when we built out Lennar in the 1990s.

We've built Rialto as a segregated segment with a full complement of management team that was disentangled from the Lennar platform.

It was designed to be built with full optionality.

As we developed maturity in the business, we would have the ability to either spin, to IPO, to combine, to sell, to do any number of things.

As we look at Rialto today, given its current maturity, given the prospects for its future, it's a platform that we continue to like having the ability to hold within the Company and wait for the right next move to present itself.

So we don't feel any urgency in doing something immediately with that segment.

We think that it continues its progression of coming right along with a tremendous opportunity set in front of it.

And there will be an intersection of a right next move for Rialto as we continue to grow it and as the market continues to ripen and present itself.

So think about it in terms of having an excellent operating platform with perfect optionality to be able to realize its maximum value as the market recognizes what its potential is.

That's exactly how we think about it, and we couldn't be happier with the way it's positioned.

Great, thanks for that.

Just a small follow-up on the risk retention rules, since Rialto's buying B pieces at this point through funds, I just wanted to get clarification on whether that would meet the risk retention requirements.

Yes, Jade, it's Jeff.

Yes, as we understand them it would, it clearly would.

We believe that in terms of how we're positioned in terms of the types of investors that we have, we're expecting that to be an advantage for us as we go forward, and when the rules actually begin implementing.

Yes, and I think that like the mortgage, the residential mortgage environment, risk retention rules across all asset classes are continuing to evolve.

I think the initial intent or the initial concept of risk retention proved to be a limiting factor to the evolution of markets.

And in order to keep markets moving and working properly, those rules have had to morph.

As we sit right now, we think we're a beneficiary of whatever those risk retention rules are, because we have the unique ability to match up special servicing with the acquisition of the underlying collateral, the B piece.

And so however it evolves, we'll be compliant and we'll be a primary engine.

Thanks for taking my questions.

Sure.

Next question from Adam Rudiger, Wells Fargo Securities.

Hi, this is Joey Matthews on for Adam.

My question is probably for Rick or Jon, in regards to your moth-balled asset strategy.

You said last quarter you expect about 10% of your deliveries this year to be from those previously moth-balled assets.

Wondering what percentage of your deliveries in Q1 were from those previously moth-balled assets?

And how any difficulties you're having developing that land to get it ready to open communities?

We're looking at the number right now, but my guess is it's somewhere around that 10% number.

Just a little below 10%, 8% to 10%.

There's really no difficulties in bringing those online.

We've been making sure that we're on top of keeping entitlements in place, land ready to go.

So as the market recovers, they're in existing divisions, we've got product in our portfolio, and able to methodically bring those online.

Since those are probably in B and C locations, I would guess how have absorptions in those communities progressed this quarter?

Jon?

Consistent with the marketplace, sometimes their in B and C locations, sometimes a little bit better, just depending on when they were acquired.

We held on to mostly our better locations as we went through the liquidation of many of those assets in the downturn, particularly with our large transaction.

So we're finding they perform fairly consistently with other communities in those areas.

We're not experiencing any activity that are really in far out-reaching areas, so don't have any color on something that would be in a true tertiary market.

Great, thank you.

Why don't we go ahead and take our last question?

Your last question from Michael Dahl, Credit Suisse.

Hi, thanks.

Wanted to go back to, I think Rick made a comment earlier in response to a Houston comment, and make sure we understood the context around it.

You said you chose not to chase pricing down.

Is that a comment relating to your mix of communities not shifting towards the lower end?

Or competitively were you seeing more discounting in that market?

A lot of times when you have a bunch of builders in a market where there's headline, oil, every day in the paper, some of the smaller less capitalized builders get nervous with regard to what they do with inventory.

We've taken the position that we've got great quality assets in the right locations, so there's no reason to adjust pricing just because other builders that may be in tertiary areas are bringing their prices down.

So we've just chosen to focus more on margin than on pace.

That smoke will clear out at some point.

And actually, we view it long term, medium term, as an advantage for us.

Because we're starting to see some of the land parcels that were under contract by other folks, come back to the market or people walking away from deals.

And as Stuart has said in the past, a lot of times distress, or perceived distress, is where we really excel.

Got it, okay, that is helpful.

Secondly, I think, Bruce, in some of your opening remarks, you made some references to focused efforts on some of the material costs.

From manufactures you've heard mix.

Some are still saying -- hey, our feed stock costs haven't really -- or lower feed stock hasn't really flowed through to us yet.

So could you give any more color on how those conversations are going and how much success you are having or expect?

Yes, let me turn it over to Jon to answer that one.

I'm sorry, could you repeat the question please?

I apologize.

The question was around efforts to reduce some of the input cost dependent materials that you guys use.

And how the conversations are going with manufactures, given some of them are still trying to claim lower feed stock as hasn't flowed through to them yet.

From our vantage point, we're achieving success on one hand with manufactures and then having headwinds on another side of the equation.

The success has been with the drop in copper costs, deal costs, net flow-through to manufactures.

What's really been offsetting that is some new regulation that's occurred, particularly in the environmental front.

So for example, the Department of Energy passed new regulation at the end of last year that requires side-by-side refrigerator-freezers to be 25% more efficient.

So that requires them to use more of the material in making the product, so we end up with an offset where we're really not seeing any cost savings.

But we are seeing, not the same increase we would have seen, but had just been their compliance with the new regulation.

Seeing same thing with HVAC, windows, water heaters, all subject to new regulation.

So it's a daily focus for us.

We work with the national manufactures, with local suppliers, local trades to find every opportunity.

When you look at it as a percentage of our build cost, copper, steel are not that big a percentage.

Lumber, which is bigger percentage, we have seen that come down recently, and do expect to see some benefit from that in our second, third and fourth quarters.

But again, then you have other costs such as concrete and drywall that continue to have some pressure on them.

Okay, thank you.

All right, well very good.

Thanks, everyone, for joining.

As I said before, we feel that the market is continuing to present itself as improving, and we look forward to reconnecting at the end of our second quarter.

Thank you.

Thank you.

This does conclude the presentation.

You may disconnect at this time.