Lennar Corp (LEN) 2002 Q4 法說會逐字稿

Good day, everyone, and welcome to the Lennar Corporation conference call to discuss year-end earnings.

Today's conference is being recorded.

The information that Lennar Corporation is going to discuss in this call will include forward-looking statements. As is always the case with regard to forward-looking statements, Lennar's actual results may differ materially from those that are projected in the forward-looking statements.

There are discussions in Lennar's annual report on Form 10-K and the quarterly reports on Form 10-Q which have been filed with the Securities and Exchange Commission and factors that could cause actual results to differ materially from those projected from in the forward-looking statements. The company urges you to look at them.

At this time I'd like to turn the call over to Stuart Miller, President and Chief Executive Officer of Lennar Corporation. Please go ahead, sir.

... 2002 accomplishments and a little bit of a view as to where we think we'll be going, and then I'll turn it over to Bruce Gross, our Chief Financial Officer, who will give a more extensive review and overview and a little bit of color behind the numbers.

We're very pleased to report another record quarter and year-end. We think it's reflective both of the strength of the overall housing market in the United States today and as well it's a real display of a pattern of success that we've been able to create for our own company.

Nationally, in spite of a longstanding debate now over the possibility of a housing bubble, and in spite of general weakening of the U.S. economy, housing has remained strong and is likely to continue to remain strong for the foreseeable future.

We feel that this strength is rooted in much more than just low interest rates. It's primarily driven much more by a predictable pattern of demographics-driven demand that stems from new household formation and immigration.

Even with a rise in interest rates that might be spurred by a recovery in the economy, we believe that demand for housing will be at about a 1.7 million level over the next decade. And this consistent level, we think, and economic recovery will stimulate new job formation and consumer confidence and will offset any increase in interest rates that might come around the corner.

Additionally, we feel that the economic stimulus package that has recently been announced, which will in some form inevitably be approved and adopted by Congress, will also work in favor of helping Americans achieve the American dream of home ownership.

As you can see from our press release, we continued to report record results, and we've achieved these results through a time-tested process of growing our company with a unique emphasis on financial balance as we grow. We call that the Lennar process of management. We've talked about it repeatedly through the years, and it continues to work very much in our favor.

As you can see, we've increased earnings some 30 percent to $545 million in 2002, and we've increased our revenues to over $7 billion by growing both organically and through acquisitions. In 2002, we purchased well over $1 billion of new land to sustain our ongoing and growing positions in our strategic markets across the country. And at the same time in 2002, we purchased some nine new companies for over $600 million in cash in order to gain market share in some markets and to expand our reach into new strategic markets across the country.

This strategy of organic growth, combined with strategic acquisitions, has worked very well for our company as we continue to grow earnings as an industry consolidator.

While we've grown our business, we've remained very financially disciplined at the same time. We have consistently used strong cash flows and a strategy of paring down assets in the wake of new acquisitions to maintain strong liquidity while we continue to increase returns on capital.

As you can see in our press release, we continued to deliver -- to delever our balance sheet, bringing our net debt to total cap down to 27.7 percent from 29 percent last year, and our debt to total cap to 41 percent from just under 48 percent last year at this time.

And even with all of our acquisitions of land and companies that we have been able, at year-end, to end our balance sheet with a healthy $700 million of cash in excess of our unextended $900 million plus revolver. At the same time, we've been able to grow our returns on net capital to over 20 percent to 21.6 percent, up from just under 20 percent last year, while we've maintained this and actually delevered the company at a very low leverage point.

This consistent pattern of producing strong earnings while building ever stronger returns on capital, while at the same time deleveraging the company, is that Lennar process that has held us in very good stead as we've gone through the years and which is very much the fabric -- woven into the fabric of the way we run our business.

Expect as we move into 2003 that we're going to continue to use the strong foundation of our balance sheet and very strong cash position to continue to grow our market share in strategic markets and to grow into new markets as we enhance our product offerings across the country. We believe that the ongoing movement within the industry towards consolidation will continue, and we will continue to be an important part of that trend. We, as other large builders, are continuing to find that the benefits of consolidation are only beginning to reveal themselves.

Synergies, cost of capital benefits, cost reduction in construction costs, and ancillary business enhancements through mortgage companies, title companies, insurance agencies' business, continue to exceed expectation and continue to drive the motivation to consolidate the industry.

Against that backdrop you'll note that we have given guidance and enhanced our guidance for 2003, and are becoming more and more comfortable with our view of 2004.

Even without further acquisition, we feel very comfortable looking at 2003, given our very strong backlog of over $3 billion, giving guidance of some $8.50 per share for 2003, and looking ahead for 2004, we expect to be able to gain more and more comfort with a $10 per share number for that year.

So, with all of that said, through acquisitions, through organic growth, with a strong backlog of $3.2 billion, with a strong strategy in place of balancing earnings growth with delivering industry-leading returns on capital, with a very strong balance sheet with strong cash position, we have a lot of confidence about our position for the future and expect to be able to continue to be one of the leading consolidators within the industry.

With that, let me turn it over to Bruce, who will walk through our numbers

Thank you, Stuart. Good morning. When reviewing our results for 2002, our performance once again demonstrates our ability to achieve uncommon results on a regular basis. We have a five-year compounded annual growth rate of revenues of over 30 percent, while our net earnings have a five-year compounded growth rate of almost 50 percent.

The Lennar process that Stuart was talking about that focuses our company on the balance approach to performance is demonstrated in these numbers. Again, in 2002 our earnings increased 30 percent, while our return on net capital for the trailing 12 months improved to 21.6 percent, and our balance sheet strengthened with our net debt to total capital decreasing to 27.7 percent.

The Lennar process not only balances profitability, returns, and balance sheet, but it also positions the company well for the future as we enter 2003 with a backlog dollar value of 61 percent and strategically located, low basis communities placing us in excellent shape to achieve our goals for 2003 and 2004.

Since our press release details our financial results pretty well, I'll just briefly discuss our fourth quarter results and balance sheet strength, and then I'll get into more detailed guidance on our 2003 and 2004 goals.

Beginning with home building, a 32 percent increase in home building earnings in the fourth quarter was primarily driven by a 25 percent increase in deliveries, which includes our joint ventures, while gross margins remain stable.

The increase in deliveries was driven by both acquisitions and organic growth. The acquisitions completed during 2002 were integrated very quickly, and our dual marketing program helped us gain market share in existing markets as we continue to grow both our Everything's Included program and our Design Studio program.

The gross margin percentage was strongest in the west region, due to a higher percentage of deliveries coming from California, where the average sales price is higher and the gross margin is higher.

We're very diversified throughout California. We now have 10 homebuilding divisions through the state, as well as four land divisions, and every one of them is performing well.

The central region reported lower gross margins, namely due to softer conditions in Texas. Dallas continues to be the softest market for us in that state. And we continue to see the use of some sales incentives to generate our targeted sales pace there.

The Texas market is still a growth market for home building. However, it does not share the constrained land supply that exists in our other markets. Supply-constrained markets generally produce higher gross margins. The impact from purchasing accounting for the quarter relating to our recent acquisitions negatively impacted our gross margin by 10 basis points.

Additionally, the fourth quarter typically has the highest average sales price as they increase seven percent from 244,000 to 261,000. The average sales price by region was 237,000 in the east, 203,000 in the central, and 320,000 in the west. The central region had the largest percent increase year-over-year as it increased 10 percent, primarily due to our entry in the Illinois market, which is now in our central region.

Although insurance costs have increased, we were able to offset that impact on SG&A by increasing efficiencies as we reduced our SG&A by 10 basis points to 9.8 percent in the current quarter.

Turning to land and joint ventures. In the fourth quarter we had a combined 37.3 million versus 29.8 million in the prior year's quarter. This quarter's number is detailed as follows -- 25.6 million coming from equity and joint venture profits, and land/other is 11.7 million.

Management income was again the largest component during the quarter in the land and other category.

Financial services operating earnings grew over 100 percent in the quarter. Our focus in financial services has been to grow ancillary services related to our primary homebuilding business, and again, the components are mortgage title, Strategic Technologies, which is stable (ph) and alarm, as well as insurance. Mortgage earnings increased from 17.6 to 30.9 million during the quarter. Year-over-year, our mortgage capture rate on Lennar buyers remains stable at the 80 percent level.

Originations increased from 1.6 billion to 2.2 billion, and our title earnings also increased significantly from 5.6 million to 10.4 million.

And on the title side, title benefited from both a strong homebuilding refinance environment in the quarter, as well as our entry into the Maryland market to support our recent Baltimore homebuilding acquisitions.

Approximately 90 percent of our customers are still selecting 30-year fixed-rate loans. Today's 30-year fixed rate is approximately six percent.

Strategic Technologies sold a cable system during the quarter with approximately just under 3,000 subscribers generating about a $5 million profit for the quarter. And we're continuing to develop new cable systems in some of our larger communities, as well as working with larger cable companies that provide the infrastructure under revenue or profit-sharing arrangements to our company.

And for the fourth quarter, corporate G&A was consistent with the prior year at 1.1 percent of revenues, and interest expense for the fourth quarter was 1.9 percent versus 1.8 percent in the prior year.

Our lower leverage, coupled with lower interest rates, has reduced our capitalized interest as a percentage of inventory on our balance sheet from 6.2 percent at the beginning of the year to 4.6 percent at the end of the year. This provides visibility to us in reducing interest expense as a percent of revenue in both 2003 and 2004.

Turning to the strength of the balance sheet, although we used approximately $600 million to fund acquisitions in 2002, we remain disciplined and focused on the balance sheet. And we did not only immediately integrate these acquisitions, but we also implemented our focus on return on capital, which helped us pair down longer-term assets and further solidify the balance sheet. As Stuart mentioned, we ended up with cash balance of 731 million, with zero outstanding on our revolver. Shareholders equity has now grown to over $2.2 billion. And our net debt to total capital is 27.7 percent, with a debt to total capital of 41.6 percent.

EBITDA for the year, at $1,068,000,000, gave us a trailing fourth quarter coverage ratio of 8.2 times. Our debt to EBITDA was 1.4 times, and our net debt to EBITDA was 1.0 times.

The home sites owned and controlled at the end of the year were 158,000, and that compares to 129,000 at the end of 2001. The home sites owned were 44 percent, with 56 percent controlled, giving us just over a two-year supply of land owned while providing three years of controlled home sites.

Looking at new orders for the fourth quarter, they increased 39 percent, and all regions showed strength, with the strongest areas of the country being California, New Jersey, Maryland, and Virginia.

As we said, the year-end backlog being up 61 percent showed significant increases in all three of our regions, and the average sales price in backlog at year-end is 254,000 (ph), and that typically runs a little bit higher than what we will see for actual average sales price going into 2003.

With the visibility provided by our backlog, we're comfortable with our 850 earnings per share goal for 2003, and I'd like to give a little further detail as to how that breaks out. Our deliveries, including joint ventures, we expect to be in the 31,500 to 32,000 range, with an average sales price of approximately $250,000. We expect our gross margin percentage to be right around 24 percent, and our SG&A percent to be somewhere around 10.6 percent for 2003, giving us an operating margin of somewhere around 13.4 percent. Our Lennar Financial Services, which generated $128 million in 2002, we expect to be approximately 125 million to 130 million in 2003 as we expect that refinances will likely slow down at some point, and that will impact our title operations slightly, and probably a small impact on our mortgage operations, and that's partially offset by the growth in our volume on the homebuilding side.

Our joint ventures and land profits we expect to be in the 80s to 90 million range for 2003. Our actual for 2002 was 87 million.

Our corporate G&A, we expect we might receive a little bit of leverage and be in the 1.1 percent to 1.2 percent, and interest expense as a percent of revenue would be in the 1.7 percent to 1.8 percent range. Our tax rate we are maintaining at 37 and three-quarters percent. And we expect EBITDA to be somewhere close to $1.2 billion for 2003. That would assume a diluted share count for 2003 of about 75.8 million, while our diluted share count for 2002 was 71.4 million, with 64.9 million actually outstanding at year-end.

When we look at that diluted share count, we are assuming that we are going to be diluted for our second zero coupon convertible instrument, which, just to remind you, our stock price 20 days at the end of each quarter needs to be at a certain range in order to receive that dilution, and for the quarter that we just entered, that would have to be $58.97 (ph) for the last 20 days of the quarter ending February 2003, and that accretes by five and an eighth percent. So by the end of the year, we would have to be at about $71.72 to receive that dilution for the fourth quarter of this year.

If we are not diluted, if for some reason our stock is not in that 69 plus range or over 72 by the end of the year, we would see about 36 cents additional to our 850 earnings per share for 2003. That would bring us to 886. But given the PE multiple assumption, we're taking a conservative approach and assuming our stock will be at the higher levels.

As we look at the quarterly breakout for those numbers, we're assuming a range for the first quarter of 2003 to be $1.35 to $1.45 per share, the second quarter to be $1.80 to $1.85 per share, the third quarter to be $2.25 to $2.30 per share, and the fourth quarter to be $2.90 to $2.95 per share.

Our community count started the year with 672 communities. We expect we'll be somewhere close to 740 by the end of 2003. And now, as we look forward beyond that, I'd like to turn to 2004, and we have a preliminary earnings per share goal of $10.

Now, current consensus today for 2004 is $7.42. Our goal is 35 percent higher than the current consensus for 2004. However, our assumptions are not overly aggressive. Our volume is based on communities already identified. Our average sales price is assuming only a one percent increase. And those numbers would be assuming deliveries of 37,000 and an average sales price of about 253,000.

We're assuming that margins would be relatively consistent with 2003, and financial services, we're assuming, would only be a five percent increase over 2003, in the range of 130 million to 140 million.

Joint ventures and land profits are based on current identified programs, and we're assuming that range would be $105 million to $115 million. Corporate G&A we would expect to be the same as 2003. And interest expense, which we have good visibility into, we expect would be 1.6 percent to 1.7 percent of revenues. We're assuming a consistent tax rate, and we're assuming a diluted share count of 76.6 million. So, again, we're assuming that we would receive full dilution for our second convertible instrument.

And the community count we expect to be at about 825 communities at the end of 2004. So we feel like the assumptions being used are fairly conservative for 2004 with what we're laying out today.

Now, obviously the 2003 and 2004 goals assume a stable homebuilding market, general economy, and obviously geopolitical events will impact any company today.

Not only did we achieve approximately a 21.6 percent net return on capital in 2002, but our incremental cost to capital remains below three percent. If we achieve our goals for 2003 and 2004, we will have generated approximately 20 percent net return on capital for four years straight. We have the management team, the financial capacity, and the business process to continue to profitably grow our business.

And with that, I'd like to open it up for questions and answers

Thank you. Our question and answer session is conducted electronically. If you would like to signal to ask a question, it's star one on your touch-tone phone. Star one on your touch-tone phone. If you're using a speakerphone, please make sure you're not muted. If you are muted, that will block your signal. So, again, star one.

Our first question will come from Joe Sroka. He's with Merrill Lynch.

Good morning, gentlemen. Awesome quarter.

Thank you.

Thank you.

You mentioned stable housing market - both Stuart, you mentioned that in your remarks, and Bruce, you just mentioned it. We were just on a call that Home Ownership Alliance did, and both Dave Sidersman (ph) at AHB and Dave Loray (ph) from National Association of Realtors both said they thought the single family sales would be down about three percent to four percent in 2003 versus 2002, but which would still be the second best sales year ever for housing. Is that sort of your forecast for a stable housing market, or do you think you still have some flexibility higher or lower to get to some of these goals that you're discussing?

I think that, if you look backwards at the projections by the NHB and others, the projections in the past have been for slightly down year over year comparisons, or even more significantly down. And the only thing I'd point out is that I think it's difficult to load into our projections anyone or anyone's economic model or projection of where housing starts are going to be. I think that we're looking at basically a stable environment, a little bit down, a little bit up, to us is exactly that, pretty stable. A combination of the communities that we have on line, men that we see out there on a day-to-day basis, the traffic counts that we're getting at our communities. These are the things that we're kind of factoring in to say that, within a reasonably stable environment we're likely to see continued growth and success in the numbers that we put out there are very comfortable to us.

OK. Then just lastly, it doesn't seem like you need to delever any further and you're generating good cash. So where, really, are the priorities for cash flow? Obviously to get the 825 community count there's got to be some mix of further land purchase and acquisitions. But then, if you could also just address share repurchase or potential increase in the dividend, given the potential for the tax benefit.

Well, all of those are certainly on the table, and are always on the table. And in our world, whether it's stock repurchase or dividend in an evolving environments (ph) of economic stimulus packages, all of these are competing investments or uses of cash. From our vantage point, to the extent that we see good and efficient ways to grow our business opportunistically and with great profit potential, mirroring what we've done in the past, we're going to continue to grow the business. Sometimes growing the business is shrinking the business, because buying back the land and opportunities that we've already purchased through a stock repurchase (inaudible) present itself as an even better opportunity. Dividends for our shareholders will be considered depending on how the package actually makes its way through Congress (ph), and as the distribution of dividend competes with other investments that we have. So all those things are on the table. Always have been, always will be with the company, and we'll consider them as time comes along.

Fair enough, Stuart. Thank you very much

We'll now go to Michael Rayhut (ph) with JP Morgan.

Yes, hi. Good morning. I've got a couple of questions. First, on the land investment you talked about at the beginning of the call, if you could just review -- you said it was $1 billion in 2002, what your investment levels were in 2001 And if you could give us an idea in terms of the price of that land. I know that it's difficult given geographies and lot sizes. But on average, perhaps even on a geography basis, how much land has risen in the past year. Second, I have a couple of follow-up questions on financial services and gross margins. But I'll let you answer the land first.

You know, when you look at the land purchases, these are not things for tight comparisons, Mike. So it's not relevant to take all these numbers and divide it out and figure out exactly how much land has changed, because we're buying different products in different geographies and we've entered different markets. So keep that in mind as a foundation.

In 2001, our land purchases, including land development dollars, were similar, around 1.3 billion, and in 2002 our actuals were approximately 1.7 billion. Now, at the same time, you can see what our volume has been growing from 2001 to '02, and what we're planning for '03 and '04. So obviously you need to take into account that the land we bought in 2002 is what we're likely using for the future.

And you had a follow-up question, Mike?

Yeah. Before we get there, though, I know, like you said geographies are different, the parcels are different. Perhaps you can give us some examples in California or Florida, two of your bigger end markets, what land prices have done in the last year.

Well, it's really varied. When you look at California, it's significantly different whether you're talking about Sacramento or San Diego or Central Valley or - you know, we have 10 homebuilding divisions there. So one thing I would say is that we do have a supply of land, two years owned and three years controlled. Land prices have gone up in that marketplace, and the embedded value in the book value of our land is significantly under the market value that exists today for the land that we have under our control.

It's hard for us to give you an exact number, because it's different for each community and each different market in the state. And if you look at Florida, you're also seeing a very diversified market, whether it's Tampa, Orlando, Naples, or down in the Southeast. And again, it's very difficult to generalize with a percentage, but one thing we can say is there's a lot of value embedded in what we have on our balance sheet today.

In terms of gross margins, you talked about the reason that it's flat year-over-year was because of weakness in Texas offsetting strength in California, and particularly you talked about sales incentives in Texas. I wanted to know if you could comment on, you know, in recent weeks and the last month or so, those sales incentives have continued, have things increased, gotten better or worse in Texas, and what your assumptions are going forward

Well, as you know, Mike, we don't give out monthly new orders, but I don't think you saw a dramatic change in the month of December. But again, we will continue to give out the quarterly new order information, because one month really doesn't make a trend. And I think it's a little deceptive to try to generalize as to what's happening from month to month. But again, December, you're not likely to have seen anything dramatically different from what's been going on in that marketplace.

In efforts to give everyone a chance to ask a question, we ask that you please limit yourself to one question and one follow-up - again, one question and one follow-up, so we can get in as many questions as possible.

We'll now go to Steve Kim at Salomon Smith Barney.

Thanks very much. Strong quarter, gentlemen. Congratulations.

I'm wondering whether or not you could provide a little bit of guidance on your inventory. I guess -- as I look at the inventories, I guess they were running around 3.2 and change billion. Can you give us a sense how much of that would be as what you would characterize as land currently under development versus, let's say, sticks and bricks, in rough terms or as specific as you feel comfortable giving it?

Sure. From a category -- when you look at our inventory, Steve, it's a very liquid asset, because we have homes under construction that's roughly half of that number, between models and what's either under construction or completed, ready to be delivered, and that's supported by a $3.2 billion backlog.

The land under development tends to be a smaller number; typically under $1 billion. And finished home sites would make up most of that business.

OK. Great

And also, when you're looking at our portfolio of inventory, again, our focus continues to stick to our discipline of investing in entitled zone (ph) sites, and we still remain very risk diverse as we're looking at our inventory in all markets.

OK, great. And then, with respect to your gross margins trajectory over the next several quarters -- I apologize if you said it before, I was scrambling to write down everything that you said. But should we expect a sort of seasonal movement in your gross margin that occurs somewhat naturally? Over the last two years we've kind of noticed your gross margin tends to be lowest in the first quarter, and then sort of migrate upward. I was wondering whether or not we would expect something similar in the following year, and so therefore, should we not be surprised to see gross margins down sequentially, for example, as we head into the first quarter?

Well, the one thing I'd say is typically the fourth quarter has the highest gross margin, but given what we see in our backlog today, I really wouldn't expect to see much change in the margins that we laid out. I don't think you're going to see a significantly lower margin than the 24 percent that we laid out as guidance for 2003.

Our next question will come from Margaret Whelan (ph). She's at UBS.

Morning, guys. Most of my questions have been answered. I guess the one thing is the SG&A for the quarter was a lot lower than you were expecting. Is that going to be sustainable, or is that one time? And then also, would you just give us a read on business over the last couple of weeks? Thanks.

Let me comment on the SG&A, Margaret. One of the things we've seen is our dual marketing program has allowed us to continue to focus on efficiencies in the FG&A (ph) area. We do think that what we're seeing for SG&A as a percentage of revenues as sustainable and possibly could go down a notch, 10 basis points or so, for 2003. So we are seeing the benefits of (inaudible) marketing and increased market share, and that's ending up in the numbers.

Business for the last few weeks, as we just commented on December activity, we still don't give out the monthly orders because, again, one month doesn't make a trend, and again, I won't expect to see anything significantly different from what we've been seeing is probably a comforting statement that we could make.

Next question will come from Jim Wilson. He's at JMP Securities.

Good morning, guys. I guess the same question asked 12 months ago, and then we found how -- what you did with it, but now you have even more cash and more liquidity. Can you give any color on what you think the most attractive -- when you look at the market, the most attractive uses of capital might be, from an applied risk adjusted return on investment for the land development versus acquisitions versus buying your own stock and tying into that with the new Bush proposal? What about a cash dividend if -- assuming something gets passed?

Well, I guess the question is the same, and so is the answer, Jim.

That's what I figured. But I wanted to ask it anyway.

Well, the reality is that we are constantly focused on positioning the balance sheet as we grow our business to be able to be opportunistic, to be able to (inaudible) particular opportunities that present themselves at a given moment in time. And, you know, last year at this time when we asked what we were going to do with our substantial cash, accumulated cash, the answer was, we're going to make sure that we're in the market with what (ph) opportunities are being presented at the time. And that's very much (inaudible) as it will continue to be in the future.

Yes, we have a lot of cash. We have a lot of availability under our revolver. We think that's a strategic advantage at all times, and we're going to continue to look at growing our business organically, which we have been doing effectively. We have a substantial need to deploy capital just to sustain the business that we've got and market share organically through our dual marketing strategy and strategic market in which we operate.

And we're continuing to look at acquisition opportunities, both large and small. Last year we found that there were some terrific opportunities to combine with some smaller homebuilders, felt that they would be strategically advantaged by being aligned with us, and that program is likely to continue in 2003 as well as looking at some larger acquisitions. But at the same time, if the stock market, or as Wall Street continues to look at the industry, very, very low multiple industry -- I was noticing yesterday that the only thing that really changed between today and yesterday in our announcement was that our multiple went down. Then I think a buyback might become more and more attractive. And we never take that off the table.

And of course, there are a lot of questions to be answered over the -- relative to the stimulus package. But all of those things are constantly (inaudible) our management team as we continue to grow the business, grow earnings per share, and at the same time, manage a good, strong balance sheet

If your question has been asked and already answered, you can remove yourself from the question queue by pressing the pound sign. The pound sign will remove you from the question queue.

We'll now go to Ivy Zelman from Credit Suisse First Boston.

Morning, guys. Dennis McGill (ph) on behalf of Ivy. First off, can you walk us through how much the acquisitions aided your deliveries in the quarter?

Sure. Probably the easiest thing to say is, in the quarter, about half of the revenue in the fourth quarter was generated from all of the acquisitions we made throughout 2002, and half was related to organic growth.

Would that be similar in your west division, primarily California, or - (inaudible) in Cambridge account for a little bit more than some of the other acquisitions?

No. (inaudible) in Cambridge during the quarter were approximately 600 deliveries.

We'll now go to Greg Nejmeh. He's with Deutsche Bank.

A quick question for you. You mentioned in the release measurable cost saving benefits, and I think in your formal remarks you indicated that the benefits associated with consolidation are just beginning to be realized. Could you link those two together and comment on measurable cost savings that you expect to realize as you more fully integrate the nine builders that you acquired and sort of some of the milestones that we might expect the company to realize over the next two to three years?

Yeah. You know, I think that the larger builders are really at the front end of finding ways to manage larger companies and more market share, both nationally and in regional markets, using their positions as an opportunity to negotiate with those suppliers, distributors, and as well labor.

And as we become a more powerful force in each local market, I think that we're finding that our negotiating position is really just at the forefront of being defined. Now, in terms of our financial modeling, we're not really looking at cost savings as a primary driver of earnings over the next year or two, but instead what we're doing internally is we are focusing on '04 and '05 as years where we expect to drive costs down in what should begin to be a more meaningful way. These strategies take some time to put into place. None of those synergies or cost savings are being filtered through our guidance numbers.

But at the same time, we strategically are starting to think about one percent and two percent cost savings per year over a multiyear period in order to make the best use of the volume that we're producing. If you start to think about what those numbers mean and reflect as we grow to be a larger builder, maybe getting to a 50,000 home per year delivery number, and you start to look at one to two percent a year, the drop from the bottom line at some point can become meaningful.

Now, you asked for a benchmark, a moment in time, something that you could kind of measure. And I think that the benchmarks today are undefined. We are, I think as a group, trying to strategize and figure out how we actually translate volume into those bottom line cost reductions and income enhancements.

And I just don't think that there are any benchmarks right now that we can define to put out there. But we do hold this out there as an added kind of sweetener to the consolidation movement that there is this additional opportunity out there that goes beyond just new acquisitions in terms of making the industry, and in particular, Lennar an even stronger company as we look ahead.

Our next question will come from Tony Campbell (ph). He's at Knott Partners (ph).

Good morning, gentlemen. Congratulations. Maybe, just to look at this in a different manner, out of 100 percent, what percentage of your, in your markets, what percentage are you, one, to say five and 10 in the markets that you serve and then maybe you could give us some sense of the differential in terms of returns by being one or two, five or ten in the marketplace

Tony, we have - you know, out of roughly 60 (ph) divisions that we operate out of, there's a few markets where, number one -- I don't have the exact number in front of me, but I'd be happy to share that with you later. And I think the question is a good one, which is, where we have more market share, what does that really mean in terms of performance and returns? And there's no question in some of the markets that we have a number one position, a large market share like Houston or Sacramento as examples, we do generate a much higher return on capital, because we're more efficient, whether it's through our dual marketing program or buying land more efficiently or saving on SG&A costs. It is a much more efficient program. And there's a lot of markets for us to grow to get into that top five or top 10 position at this point

Let me just say additionally, I don't think, as an industry, we've yet figured out a way to measure how much cost savings there is between the number one builder and the number five or six builder in the industry. And I think therein lies some of the opportunity. We're very much at the front end of even identifying what those cost savings are.

Nevertheless, I think as Bruce said, if you look at our markets, where we are a larger force within a marketplace, our return on capital is stronger, and we feel that those cost savings are starting to reveal themselves as we look at that return on capital.

Let me ask the question a different way. Vis-a-vis the private industry, in aggregate, what kind of a cost advantage do you think you have? In building a new house?

Again, I don't think we can quantify it that way. I think that we, as much as you, would like to be able to identify exactly that number. And forget exactly -- even estimate. I don't think we can put a number on the table that we would feel any confidence in. I think that what we're saying is that we're at the front end of a consolidation process, but to us, as we look at our internal numbers, as we compare division to division, as we look at our positions relative to competitors in the marketplace, there are strategic advantages in purchasing as well as in buying land, as well as in the cost of capital, and all of these things are reflecting themselves through increased returns on capital, particularly in the markets in which we have the largest market share

Next question will come from Armando Lopez at Morgan Stanley.

Good morning. Just a quick question on return on invested capital. You had talked about a return on invested capital had improved on a year-over-year basis. I was just wondering if you could comment on what you expected to do going forward. You had mentioned that - I guess it sounds like margins are going to be roughly flat going forward, and that would imply that asset turns or capital turns would need to improve. And I'm curious where you are expecting to see the improvement.

Well, we've continued to reduce the number of land -- the amount of land actually owned, Armando. So we are looking to continue to focus on turning inventory faster. But the next couple of years, we continue to have a goal of having a return on net capital of 20 percent or higher as a goal. And you're going to see that coming from lower inventories and we continue to focus on the other aspects of our business that has lower investments, such as ancillary services as well.

OK. Great. And then one, just follow-up -- with respect to the current business environment, could you just comment on what you're seeing with cancellation rates?

Cancellation rates, if we look back over this year, we always say that our cancellation rates are somewhere in that 20 percent to 30 percent range, with most of the cancellations that occur just shortly after they initially sign a contract, and if we look at our average cancellation rate for 2002, it's been somewhere in the low 20 percent range. So you really haven't seen a sizable change in that cancellation rate. It's still at the low end of our range

We'll now go to Tim Jones (ph) at Wasserman & Associates.

Yes. First of all, I bet you any kind of money that, if I put a gun to your head, you could name your land cost within five percent. But that being said, the way I'm looking at it, did your gross margins -- I'm pulling out the capitalized interest, actually go down versus last year?

For the fourth quarter?

Yes.

No. For the fourth quarter they went down ...

I'm doing it real fast on my worksheet, and it looks like it was a percentage below.

It was 10 basis points difference, which was really the purchase accounting impact from the acquisitions. And that's why we're looking at them being relatively ...

Do you have the pro forma deliveries beginning backlog and orders for your nine acquisitions?

We haven't laid out (inaudible) numbers exactly, but what we can say -- you're looking at 2002, Tim, or for the quarter?

I'm sorry, his line is cleared

OK. If Tim can hear us, please call back, Tim, to follow up on your question.

... re-signal, please press star one.

Let me see if I can get him. One moment, please.

Would you like to wait, or do you want me to go ahead with another question?

Why don't we go ahead with another question?

Sorry about that. We'll go to Paul Puryear. He's at Raymond James.

Good morning, guys. If you could comment on sales by price point in the quarter and the trends there and where you're seeing the strongest activity, and then also, if there's any particular effort, as you look at '03, as you bring new communities on line in terms of sort of staging those based on price point.

It's probably easier to answer the question, Paul, by looking at it more by geography and what is really driving most of the activity and the highest margins with our new orders is where there's supply constraint. And as we said in the quarter, California, New Jersey, Maryland, Virginia, had the best increase in new orders, and those are some of the most supply-constrained markets in the country. And our price points don't range too high, and I think in certain markets, the very high end, I think we've all seen is probably down a little bit weaker, but it's more of a focus on where the geography is and what the supply constraint is in our markets than anything else.

Just one follow-up question. Could you just comment on some of the markets where you may have seen some particular weakness? You mentioned some stronger states. But I was really looking for metropolitan areas.

In terms of -- and you're looking for where there's been weakness in metropolitan areas?

Any particular weakness, correct.

We've indicated Texas, certain parts of Texas, primarily Dallas, and that's, again, a market that doesn't have the supply constraint we see in other areas has been a little bit softer. And I would probably say the high end in Denver has probably been a little bit soft. And in general -- those are really the two that stand out. I think the other markets are pretty reasonable or strong.

We'll now go back to Tim Jones' line. Mr. Jones, your line is open.

Am I open now?

Yes, sir.

Can you hear me?

Yes, sir. Please go ahead.

You didn't answer -- I asked a question about the pro forma numbers for the nine acquisitions last year.

Right. Sorry about your line being cut off, Tim.

I don't know what ...

It certainly didn't come from us.

Not my buddies.

But was your question was for all of ...

Yes. I mean -- and it looks like - and I'm not sure there was a big jump in the backlogs in the third quarter. It looks like you added like 3,000 or so in the -- an enormous amount of units in your inventory in the backlog of the fourth quarter.

The acquired backlog for the nine acquisitions during the year were 2,800 homes at the time of acquisition.

But a bunch of them came in at the fourth quarter, didn't they?

A bunch of them came in actually in the third quarter. Most of the acquisitions hit in that July/August time frame.

I may have a mistake there in my -- I know how to check you out on that.

The other thing is -- if you don't have that, you can call me later -- but is that you're being very conservative looking at the unit increase that you're talking about, the top-line increase. I haven't done the mathematics, but whatever the 3,200, I suspect that includes joint ventures, right?

The 32,000?

The 32,000.

That's correct.

... thousand joint venture, so it's about 31,000 and change -- I mean, up from 26. I know you're adding (ph) the shares outstanding. Do those shares outstanding have to be outstanding for the whole quarter to affect you by roughly whatever it is, 7.5 cents, eight cents a quarter?

So on the second convertible, the way it works is the average stock price for the last 20 business days of the quarter has to average just about $69.

Well, it seems unlikely. We both love it that it's going to happen in the first quarter. So could I assume that your first quarter estimate is, say, 10th (ph) low?

If that's the case it would be lower. It grows as you go throughout the year, so 36 cents for the year. You can't use a straight line. It's not straight line.

I'm laughing -- am I to assume you think your stock is cheap? Thanks a lot.

Thank you, Tim.

Gentlemen, how are we standing on time? Do we have time for a couple more questions?

Couple more.

OK, very good. We'll go to Myron Kaplan (ph) at Kaplan, Nathan & Company (ph).

Hi, guys. Stellar quarter. Well done. Do you see any easing in the supply stringency (ph) of lots that you've been facing on both coasts in the - let's just say the states around the oceans?

No. I think, Myron, that one of the reasons that margins have really kind of locked where they are and remaining very healthy and strong for the industry. The land question is going to remain an issue for some time to come. They're very strong anti-growth movements that are keeping developable home sites at a -- in a constrained state. And that's going to keep pressure on pricing going up. And I know there's a lot of discussion about a bubble, but the fact is that we have a lot of demand out there and a constrained home site picture.

And again, by your own -- I guess your own guidance, there's no sign of this kind of weakness. There's some Wall Street analysts who are attributing, let's say they're saying tearing (ph) numbers to 2004, they're probably two-thirds or less of your own guidance, which would show a material - say, a divergent point of view.

We are always mindful of the fact that, when we look out ahead by, even more than three or six months, that there are a lot of factors in the world and in the economy that can change. If interest rates weren't way up, that would affect affordability. If there are significant kind of geopolitical factors out there that alter consumer psychology or other things that can change the landscape.

But given kind of an understandable, steady kind of environment, even with some things happening out there, there are demographics-driven demand elements that are driving demand and keeping it consistent, and supply is going to remain constrained. There's just not likely to be a large approval program across the country, especially in some of the high growth markets where new land is going to come on line. And barring a lot of new land, a lot of supply, you really have an imbalance that's likely to stay up there.

Right. You guys are certainly giving a great example of making haste slowly and moving ahead -- quite remarkable in its magnitude as well in earnings and EBITDA and so forth. So good luck.

We'll now go to - I believe it's Tom Marciko (ph) at Marciko Capital (ph).

Hi. This is Tom Marciko. I am trying to understand a couple of things that I can't connect the dots on. Your backlog in the west is up 49 percent in terms of units. And that is your -- that's the fastest-growing market as far as backlog, and also in new orders. And I think you mentioned that that was the highest margin properties that you have. So it would seem to me that, as you build out your backlog, your margins would tend to improve at the gross margin line and proceed through the income statement.

As we look at the backlog, Tom, the west region was up 49 percent, the east 45, and the central 36. So you're right, the west is the highest. And average sales price is the highest there. So you are correct that there is going to be more contribution from the west, and average sales price tends to be a little bit higher, which is part of the reason why average sales price is going up next year.

But again, we're starting off the year, and we're balancing that against, as we mentioned what we were seeing in particularly the Texas market, and that was averaging out to kind of a flattish type of margin.

Right. But if you look at your backlog in the central area, it's just about half of what it is in the west. So the contribution, even though it's up 36 percent, is quite less than what the west represents as a percentage of your total backlog. So you would see a drift, or I would think you would see a drift of higher margins if indeed you do receive higher margins in the west, which I think you mentioned earlier.

Your map and the way you're looking at it is correct. One thing I might offer is that Texas does tend to run a slightly lower backlog compared to the deliveries just because of the quicker turns and the shorter building time for the lower-priced product that we have in Texas. But you are making a good observation, and it's something that, if we continue to -- if we were to continue to see increases in the California marketplace in particular, and that held true the entire year, obviously there's always potential for a little bit of upside.

In talking to the Fed, they don't believe that there's a housing bubble either. And they see strong statistics for housing formation, as well as Fannie Mae does. I'm having a problem with -- and I don't find it being funny either, as a previous caller did. The stock price has really moved from an area of 25 at the end of 1998 to an area around 50, and yet your earnings have gone from 242 to 771.

It seems like you now have, given your balance sheet, an opportunity to provide a dividend and, in doing so, I think it would show prudence in capital allocation, given that you're not giving the return to the stock market that you would expect from your improved returns. And in cyclical businesses, at least people used to believe this is a cyclical business -- I think they still do -- we've gone through a weak period, there were some businesses that paid special dividends.

And I think it's very important to try to move the stock price up or do some financial engineering because of the dilution that you're getting from this year of coupon bond notes. And so that's an easy way to pick up growth if you can give the shareholders something while we're waiting for the market to understand the dynamics of this industry.

Well, I think you raise an important and interesting point. If you look historically, and you look at us as part of a peer group, dividends has, within our peer group, simply not been a significant factor. And we've been reluctant to act outside the peer group in that regard.

As we look ahead, and in particular as we consider the situation relative to the stimulus package announced yesterday, I think it's something that very much has to be put on the table, not just for us, but for our peers as well. We're in a good position financially from a balance sheet standpoint and from a cash standpoint to be able to issue a dividend. And it's something that, over the next month or couple of quarters, we're going to very actively consider both at the management level, and as well at a board level.

Gentlemen, again on the time, are we able to take a couple more questions?

About one more.

One more? OK. Our final question will come from Sandy Cho (ph) with Cliffwood Partners.

Good morning. I was just wondering if you could provide me with your same-store backlog, contracts and closings.

I'm sorry -- the same store backlog ...

Contracts and closings.

New orders and closings. Certainly. You see the numbers that are in the press release, and I guess what you're looking for is the change in community count?

Exactly.

And again, I'd caution that it's not exactly same-store sales, because each of our communities are different, and community counts would be grown in one market versus another market. So we don't like to give out a same-store number. But I will lay out what the community count change to the end of the year, with 672 communities on the last day of the year.

Now, that's not an average for the quarter. If you looked at an average throughout 2002, it was 614 for the entire year. The 672 was actually an average just for the fourth quarter.

OK.

Gentlemen, that does conclude our question and answer session. I'll turn it back over to you for any closing comments

Just in close, we'd like to thank everybody for joining us for our year-end conference call. Again, it's that balance approach of growing earnings while at the same time remaining financially very focused, improving liquidity, making sure we have a strong cash position to be able to provide the foundation for finding opportunity in the marketplace, while always remaining focused on return on capital.

So with that, we look forward to reporting back to you at the end of our first quarter of 2003. Thank you.

Thank you. That does conclude our call. We do appreciate your participation. At this time, you may disconnect. Thank you.