Lennar Corp (LEN) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lennar Corporation second quarter earnings release conference call.

At this time, all phone participants are in a listen-only mode.

Later we will conduct a question and answer session.

Instructions will be given at that time.

If you should need assistance during today's conference please press zero followed by the star key.

And as a reminder, this conference is being recorded.

The information that Lennar Corporation is going to discuss 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 & Exchange Commission of factors that could cause actual results to differ materially from those projected in the forward-looking statements.

The company urges you to look at them.

I would now like to turn the conference over to the Chief Executive Officer.

Please go ahead sir.

Yes, good morning.

And thank you everyone for joining us as we discuss our second quarter results for 2003.

As you can see from our press release, we continue to translate the strength in the home building market overall into very strong bottom line performance.

The market remains strong, and it looks like it's going to remain strong for the foreseeable future.

Against that backdrop I'd like to make a few brief points about our company and our strategy and then I'll turn over to Bruce who will review the numbers and then we'll turn it over to you all to open the floor for questions.

So to begin, first point is, the Lennar Process that we talk about on all of these conference calls is very much alive and well.

We continue to carefully balance growth in earnings with a strong focus on our balance sheet and long term liquidity, while at the same time we continue to improve our return on net capital.

As you can see, we're reporting year-over-year earnings increase of some 50%, with while our leverages continue to decrease to 35.5% net debt to total cap.

And additionally keep in mind that right around the corner we expect our first convertible debenture is going to convert to equity in July, and this will further bring down our net debt to total cap even lower than it is now.

This positions our company exceptionally well for future growth and performance.

And while we're growing earnings and continuing to decrease leverage, we're continuing to maintain and improve our return on net capital to remain above the 20% range, and our return on beginning equity is in the 34% range.

So as you can see, we continue to invest our capital at an extremely attractive return for our shareholders.

Next I wanted to mention that many of you have asked that with such a strong capital base as we have today, and as we've had in the past quarters, will we be able to continue to invest capital at the same pace and the same attractive returns that we have in the past?

We think we've answered that question now with our actions, as we've been able to continue to find multiple ways to invest our capital and maintain those very high returns.

First, we invest in traditional land deals.

And you've seen that we've continued to expand our community count by investing in land deals.

And this is on an ongoing organic growth strategy for -- to enhance our strong strategic positions in all of our markets across the country.

Secondly, we've also found opportunities to purchase companies which have added multiple communities to our organic growth strategy in markets where we already operate.

And the advantage that we found in adding to our organic growth strategy that way has been that these communities are already under construction, sales are already in place, and we hit the ground running with strong cash flows already flowing.

Third, we found opportunities to purchase companies which fill in the second half of our very important market by market, dual marketing strategy.

We've continued to find that a side by side dual strategy of everything's included, and design studios, enhances our penetration into every market, and it enables us to increase our market share.

This dual strategy has been working exceptionally well across the country.

Fourth, we're purchasing companies as he entrees into geographic markets.

This cuts down on startup time, communities are in place, cuts down on cost where we hit the ground running with sales in place and cash already flowing.

Our balanced approach to growth of using both land and company acquisitions to grow both organically and with new management centers, has really fueled our continued success in implementing the Lennar Process of growing earnings or reducing leverage and maintaining high returns on capital and returns on equity.

At the same time, let me underscore that our well-known strong corporate culture, that is, of staying very bottom-line focused at the division level, and during the due diligence process, while we've put people first in creating a great work environment, has enabled our company to integrate acquisitions seamlessly.

The 11 new members of the Lennar family of builders ever are all on board and contributing to the bottom line as we speak.

Finally, as we've expanded in size and scope, and the scope of our company, we have continued to build a much better company by remaining focused on our increased size to reduce the cost of homes being delivered, while at the same time, we're improving the quality of each home.

And additionally, we are continuing to effectively leverage our financial services arm as we grow.

And this is well reflected in the almost 40% increase in the contribution to earnings made by the Lennar Financial Services.

And of course, no discussion of our business strategy and success could be complete without mentioning the outstanding management team that continues to lead the efforts here at Lennar.

We're working very hard, we are hard-working group, we are focused and we're anxious to take on the opportunities, as well as the challenges, that may lie around the next corner, and confront our industry.

And of course if there is anything that differentiates Lennar from the rest of the pack, we are led and perhaps most importantly, inspired by the absolute best chief operating officer in the business, bar none, Bob Strudler.

There is simply nothing more valuable in the business than the great leadership and example and drive that Bob brings to the table.

So all is working well here at Lennar.

We expect to continue along the same consistent path that has brought us to the very comfortable position that we find ourselves in today.

Wand that, let me turn over to Bruce.

Thank you, Stuart.

As Stuart was mentioning, we had strong earnings growth this quarter up 51%, high return on net capital, 21.4% for the trailing four quarters, and our balance sheet grew stronger as net debt to total capital declined to 34.5%.

These three measures are really the scorecard for the Lennar process, and that's how we continue to achieve uncommon results on a regular basis.

Our press release indicated that home building operating earnings increased 46% and financial services operating earnings were up 39%.

The increase in home building operating earnings was driven by a 36% increase in home building revenues and a 50 basis point increase in gross margins.

Revenues were higher due to a 25% increase in deliveries and an 8% increase in average sale price.

The increase in deliveries is a result of our ability to quickly integrate these recent acquisitions Stuart mentioned, which has fueled our growth organically by adding communities in existing markets and by entering new markets via acquisitions.

The average sales price had increased and again, this is impacted by product and geographic mix, by region as follows;

The East region averaged $246,000, a 10% increase.

Central region, $197,000, a 6% increase.

The West, $317,000, a 9% increase compared to the second quarter of last year.

Our average sales price for the company of $257,000 provides a very affordable product with today's low interest rates.

Most of our markets are generating strong gross margin percentages.

The gross margin percent was strongest in the West region primarily due to the strength in California.

The Central region had lower gross margins primarily due to a little bit of a softer market in Texas.

Although Texas has been our softest market, we have performed well there performed well there by being very diversified.

And our ability to shift between everything's included, design studio marketing programs, and to have first-time, first-time move-up, active adult, gives us flexibility to focus on whatever the strongest part of that market might be.

Joint ventures, land sales and other, if we look at equity in earnings from unconsolidated joint ventures, it increased to $11.3 million from $6.7 million in the prior year.

This increase was primarily due to joint venture land sales and an increase in joint venture home deliveries from 117 in the second quarter last year to 186 this year's second quarter.

Our JV’s are structured to mitigate risk, enhance return on capital and provide current fee income which is included in results of land and other revenues.

Sales of land and other revenues increased from $9.2 million to $19.9 million in the second quarter.

Land sale revenue was approximately $72 million, resulting in approximately $13 million of land sale profit.

And additionally, there was about $6 million of other revenues, which is primarily management fee income.

We have previously released our second quarter new orders, reflecting positive new order growth of 22% year over year.

New orders are impacted by timing of community as well as model openings, homes available to sell in existing communities, and general market conditions.

New orders were strongest in our central region, up 40%, primarily due to our entry into Illinois in 2002.

Texas showed positive order growth, however, we still consider it a soft market, particularly in the Dallas area.

Our West region increased 20%, and we're seeing strain really throughout the Western region, California, Arizona, Nevada and Colorado, although it's still a little on the soft side has been improving.

The East region continues to be a steady performer with 11% increase in new orders.

Most of these markets remain strong, Carolinas is still a little bit on the softer side.

The average community count in the second quarter was 730 approximately, and we are very well positioned from a communities standpoint as we entered the third quarter.

Homes in backlog totaled 15,600 at quarter-end, and the backlog dollar value increased to $4.2 billion, a 38% increase over the prior year's quarter.

Our highest backlog dollar value is in our West region where our gross margins are the highest in the company.

Turning to financial services, financial services operating earnings increased 39% in the second quarter.

We earned $37.2 million compared to $26.7 million in the prior year.

Our mortgage operations generated $24.7 million pretax, versus $20.9 million in the prior year's quarter.

We originated $1.9 billion dollars in loans for the quarter versus $1.3 billion in the prior year's quarter.

The overall capture rate was lower in the quarter due to the number of new home building acquisitions we've had in the past year.

And it generally takes at least a year after acquisition for the capture rate of Lennar deliveries to reach our desired 70% to 80% range.

The capture rate overall for the quarter was 72%, excluding last year's acquisitions, however, it was more in line with prior quarters.

Approximately 86% of our customers are still selecting fixed-rate loans.

Our Title operations earned $11.8 million during the quarter compared to $6 million in the prior year's quarter.

Title has benefited from higher home building and refinance activities in 2003 versus the prior year as well as our ability to expand our title operations as our home building operations expand as well.

Concluding our income statement results, our diluted share count in the second quarter was $79.2 million shares and we were not diluted for our contingent convertible security due 2021.

The convertible interest added back during the second quarter was $1.6 million shares in computing EPS.

Turning to our balance sheet, as our earnings grew stronger, our balance sheet grew stronger as well.

Our debt to total capital was 41.8%, which is lower than the 44.6% in the second quarter of last year.

Our net debt to total capital is 34.5% versus 35.8% in the prior year.

Our debt to EBIT on a trailing four-quarter basis was only 1.4 times compared to 1.8 times last year.

And our EBIT to interest incurred also on a trailing four-quarter basis was 8.6 times versus 6.7 times in the prior year.

During the quarter we entered into a new $1 billion, five-year revolving credit facility with approximately 20 banks.

There was zero outstanding on this facility at quarter-end and additionally we had $481 million of cash on the balance sheet at quarter-end as well.

On Monday of this week we called our zero coupon senior convertible debentures due in 2018 for redemption.

If all of the debentures are converted, the approximate impact to our balance sheet is to reduce debt and increase equity by $272 million in the third quarter.

There is no impact to diluted earnings per share, as we have always included the security in our diluted share count, since it was issued in 1998.

Our home sites owned and controlled are approximately 182,000, with 44% owned, which is about a two-year supply, and 56% controlled, which is approximately a three-year supply.

Inventory remains in check, as we averaged about one completed unsold home per community.

Turning to Fin 46, we will be required to implement Fin 46 for all new transactions entered into since January 31st of this year, when we file our second quarter 10-Q.

The accounting profession has been in process of trying to interpret this pronouncement and is still expected to issue further clarification in the coming weeks.

Although we are waiting for final guidance before we complete this quarter's balance sheet, I would like to make two points on this topic.

First point, there will be no impact to our income statement results.

Second point, if any land, not owned by our company, is required under Fin 46 to be added to our balance sheet, it effectively grosses up inventory with the offsetting entry to minority interest.

Therefore, we do not expect any change to our net debt to total capital ratio for this quarter.

So as you can see, FIN 46 should not be a significant impact to us this quarter, from a balance sheet leverage standpoint, and certainly not from an income statement standpoint.

Today we updated our 2003 and 2004 earnings per share goals.

With two quarters of actual results in 2003 completed, and a strong backlog providing visibility on deliveries for our third and fourth quarters, we are comfortable with an $8.50 earning per share goal for 2003.

I'd like to walk through a couple of those numbers with you, and if you start with deliveries, we have been saying we will be somewhere in the 31,500 to 32,000 delivery range for this year, and we still think those are good numbers.

Our average sales price will be approximately $258,000.

And our gross margin, we believe, for the year will be approximately the same as we achieved this quarter, which is 24.5%.

Our SG&A percentage for the year we think will be somewhere around 10.7% and financial services continues to do well, and we believe it will be approximately $145 million for this year.

Our joint venture and land in other revenues category we believe will increase as well to $100 million, and we believe we'll be able to keep corporate G&A as 1.2% of total revenues, interest at 1.7% of total revenues, tax rate doesn't change, and our diluted share count for all of 2003, we expect to average to $81.4 million diluted shares.

We believe our net debt to total capital will be below 20% and we believe our return on net capital will be somewhere over 20%.

If you look at the next two quarters, our third quarter range, we believe, will be somewhere between $2.13 and $2.16 per share, and our fourth quarter range for this year will be $2.87, to $2.90.

As we look out towards 2004, we have excellent visibility, we're well positioned with the recent acquisitions integrated home sites in place and communities in place to achieve a goal of $9.50.

And the previous guidance we've given on volume for 2004 still stands at approximately 37,000 deliveries.

We believe our average sales price which go up just a tad to $260,000, and we believe gross margin percentages will continue to be stable.

We have strong markets and some softer markets, but we believe that 24.5% is a good number.

SG&A at 10.7% we believe is a good number.

And our financial services division, we believe at some point refinances will slow down, and we believe that it will not grow at the same pace that it's been growing, and we think $150 million pretax for financial services is a good number for 2004 at this point.

Our joint venture and land activities combined we believe will grow slightly to $110 million and corporate G&A interest and tax rates will remain about the same.

The diluted share count for next year, we believe will be somewhere between $84 million and $84.5 million shares.

And also, we believe our return on net capital and debt to total capital will remain consistent with the company's goals.

In conclusion, not only do we have a longstanding track record of excellent results, and visibility to achieve our 2003 and 2004 earnings per share goals, but more importantly, we have a motivated team of Lennar associates managing the Lennar Process and a balance sheet with ample liquidity to help protect our company against the down side and providing opportunities for the upside.

With that we'd like to open it up four questions and answers.

And if you would please ask one question and one follow-up question.

Thank you.

Ladies and gentlemen, if you wish to ask a question please press the 1 on your touch tone phone.

You will hear a tone indicating you've been placed in queue.

You may remove yourself from the queue at any time by pressing the pound key.

If you're using a speaker phone, we ask that you please pick up your hand sets before pressing the numbers.

If you pressed 1 prior to this announcement we ask that you please do so again at this time.

And once again, if you'll please ask one question with one follow-up you are welcome to re-queue.

One moment for our first question.

We'll go to the line of Greg Nejmeh with Deutsche Banc.

Please go ahead.

Good morning, Stuart, Bruce.

Great job again.

First question has to do with margin guidance.

Bruce, you expected you expected margins in '04 from both gross and SG&A prospective essentially to be flat with '03.

I'm wondering particularly on the SG&A line as you try to gain additional share within existing locales as opposed to opening in new geographies, isn't it reasonable to expect that we will see some SG&A leverage because you'll incur less in the way of startup expenses if more of the focus is on expanding within existing locales?

I'd like to make two points with respect to SG&A.

The first point I'd like to make is as we have continued to grow, we are expensing all of our sales and marketing expenses up front.

As we go from 32,000 to 37,000 homes roughly next year, all of our architect fees, our model and sales office costs, our grand opening costs, we expense those as we're growing the company, as we're opening up new communities.

The second point I'd like to make, Greg, you're right.

We are receiving leverage as we're gaining market share in our various markets.

But one thing to keep in mind, as we're hitting these very high earnings per share rates, very high net return on capital, we are also on the higher end in terms of our incentive compensation programs as well.

So again, that's factored into these numbers.

If there was any slow down in the future, that's more of a variable cost that you should keep in mind that's included in that number.

Greg, let me just add to that.

You know, remember also that we're moving into some uncharted waters here.

There is no question there is leverage on G&A.

There is also, you know, the potential with increased market share to reduce costs while improving quality.

But at the same time, as each of these markets, especially the most strategic, become more land-constrained, you do have land costs that are somewhat offsetting.

And you know, there are going to be questions that are going to be answered as we go.

And we choose to leave that as, you know, kind of upside potential as we see what it unfolds.

Stuart, just one quick follow-up.

As it relates to the appreciation that your equity is obviously enjoyed which has been considerable here in the last ten weeks or so, what other options exist or flexibility exists with regard to the use of your equity as acquisition currency, given the appreciation that's been enjoyed here over the last ten weeks?

Is that something that you would consider much more seriously today, or how would you characterize your appetite for acquisitions, and specifically the use of equity, as currency with which to pursue acquisitions and view of the appreciation that's been realized there?

Let me make a few points there.

It's nice to see some mild acquisition within the growth rate that's been sustained in the home building industry for a very long period of time.

But I would highlight the fact that the home builders' multiple is still about half of what you see in the S&P 500 today.

And I think that, you know, the growth story has been consistent and stable for quite a long period of time.

You know, I think that most of the movement we're seeing in our stock prices has more to do with the legitimate increase in earnings that we're seeing in our company, and as well, the rest of the industry.

And I think there's a lot of room still for stock price to grow.

So I would almost say that we kind of view our stock price as being on the inexpensive side.

So in that regard, I'd still say that our appetite for using a lot of equity as acquisition currency is on the mild side.

No. 2, I would highlight the fact that the cost of capital on the debt side remains very inexpensive today.

And with our leverage where it is, I think we'd still be more inclined to use -- to use a combination of debt and equity or more cash and debt for acquisitions, just because the cost of capital is very inexpensive and our leverage is very, very low.

And then finally, I would like to, you know, overlay the concept that we are still a return-on-capital-focused company.

And even though one might suggest that a -- you know, an equity for equity transaction is attractive, or you know, it's kind of pair a (ph) pursue and things like that, the impact to capital basis is still something we view with some significance, and we are kind of cautiously looking at the use of equity in an equity for equity transaction, because we are focused on how it would impact capital.

Return on capital.

Thank you.

Now go to the line of Myron Kaplan with Kaplan & Company.

Please go ahead.

Hi guys, marvelous quarter of course.

Thank you.

Innovations that you're making in construction in the savings and cost and time and any possible let's say augmentation of quality.

Well, Myron, hi, how are you?

Hi.

You know, it's interesting.

We are looking at a lot of different ways to work with the construction process.

In some areas of the country, we've begun a very active program of working with steal steel construction, which we feel could, ultimately, impact cycle time.

We're working -- we're working with national purchasing programs everywhere.

We're looking at the distribution channels, in many of our major regions, looking at ways to become somewhat of our own distribution network for some of the more important materials that we -- that we bring to each home.

The way that we've approached innovating within our company is, we've kind of challenged each of our regions to undertake something new, to experiment with an element of the construction process, and we meet regularly.

We meet monthly to kind of compare notes and to see how these things are progressing along.

Uh-huh.

Do you feel this gives you a product with greater quality as well as a lower cost?

Well, that's an interesting question.

Part of our mantra within the company is that we do not allow anyone to say the words "reduce cost" without also following it up with, "while improving quality."

And although that may seem simplistic, the way we look at things in every instance we are only looking at reducing cost not by cutting corners but by making sure that we're enhancing the product that we're delivering.

All right, thank you very much.

Thank you Myron.

We'll now go to the line of Stephen Kim with Smith Barney.

Please go ahead.

Hi, Steve.

Hi, congratulations on a great quarter, obviously.

Thank you.

I know you guys don't give out monthly order trends, and so I want to be somewhat delicate in the way I ask this, I don't want to get blown out of the water here.

But I guess I'm curious as to whether or not you can provide any kind of level of detail you'd like, if you can provide for us some sense of maybe how business has done, you know, over the last, you know, few months, whether or not you sort of feel it's maybe picked up at all, you know, more recently or not?

Sure, Steve.

You know, with the uncertainty with war an the like behind us, certainly as the quarter progressed, new order strength continued to get stronger throughout the quarter.

So I think it's fair to say that the environment was stronger as the uncertainty in Iraq was behind us, and as interest rates continued to come down.

So it's clear that May was a better quarter, was a better month than March or April were.

Great.

And yeah, and that's great.

Speaking to the gross margins, I guess obviously you're taking head-on here the skepticism about margins deteriorating significantly in '04.

A lot of people I think are fearful that that's going to happen and you're calling for flat margins as Greg has mentioned.

I guess I wanted to know if you could give us some sense for how, if at all, you have factored in, you know, an interest rate environment changing between now and, let's say, the middle of next year, what, if any, twined kind of price increases you've assumed.

Basically what gives you the confidence that gross margins are going to be, you know, flat to -- or better than flat, as you head out over the next year?

Is it that your land holdings that you know you're going to be building on our delivering on are exceptionally strong or just if you could provide sum color on that?

Well, you know, Steve, as we look out ahead certainly to the second half of this year, we have our strong backlog to look at and get some knowledge from.

But you're really asking about 2004.

And I think, you know, we've been down this course a number of times with everyone.

We tend not to make a lot of prediction about interest rate.

We've proven to ourselves, and I think many have proven to themselves, that none of us are very good predictors of what's going to happen in any long-term sense with interest rates or the economy in general.

So we look at a pretty static environment as we look out ahead.

And we're -- you know, we're kind of factoring into our numbers that there isn't much change.

And when I say much change, if interest rates were to go up by 50 or 100 basis points over that period of time, we don't think the impact would be all that significant.

Likewise, with purchase price, we tend to look ahead.

We tend to look at our backlog.

But we don't project -- we don't project big increases in the average sales price of our homes as we look ahead to future times.

Now, as it relates to the question of deterioration of margins, there are a lot of moving parts in that equation.

As we noted earlier, the question of leveraging SG&A is something that presents itself as an opportunity.

Likewise, the reduction of construction costs, as we improve the quality of our product, also continues to be an opportunity to offset the increases in land prices that are inherently out there, as land becomes more and more of a constrained asset.

But we feel, as we look at kind of a steady-state environment, without too much predicting of, you know, things that we feel are not predictable, we think that it looks like margins are going to remain pretty steady, even with some markets fluctuating down while perhaps other markets fluctuate up.

Okay, great, thanks.

Thank you.

We'll now go to the line of Jim Wilson with JMP Securities.

Please go ahead.

Good morning, guys.

Just one quick question, if you look at, and you discuss some of the better and worse markets, any changes in the balance or direction or things that look intriguing from a capital allocation standpoint, whether you're look at direct land acquisitions or potential corporate acquisitions?

You know, as I noted in my opening remarks, Jim, I think that we feel very, very comfortable with the acquisition strategy or the investment strategy that we've had in place.

As I noted, we've been able to invest our capital with continuing strong returns for our shareholders.

And we have a nice balanced approach between, you know, an organic and purely inquisitive strategy, because we have a strong corporate structure of due diligence, balance line, integration process relative to acquisition, acquisitions makes it a continuingly viable program for us.

So I'd have to say it's a long winded answer but the answer is probably no, not much of a change in the acquisition strategy going forward.

Okay.

And any thoughts on markets or areas that you find intriguing, you feel under-penetrated in or vice versa?

No.

I think we continue to remain opportunistic, looking for the right opportunity and the right fit for our company.

You know, again, going back to the culture issue, we generally are looking for management [inaudible] and teams that look like they're going to mesh well with the way that we like to run our business.

And so there are a number of markets out there that we don't have much of a presence in, or where we only have one-half of our dual marketing strategy present, where there are opportunities to grow.

But not one in particular that stands out.

Okay, very good.

Thanks.

And our next question comes from the line of Steve Fockens with Lehman Brothers.

Please go ahead.

Hi, good morning guys.

Good morning.

I wondered if you guys could comment at all on your thoughts of what level of pull-back would have to occur at Fannie and Freddie in terms of the mortgage market to really have any impact on your business?

That's an interesting question.

And it's certainly one that's topical today.

You know, I've wondered openly about what impacts a significant jolt to Fannie and/or Freddie would have to the industry.

And first of all let me say that given the kinds of things that have come out in the press, given the situation in Freddy Mac yesterday, it doesn't look like we'll have any of those jolts, it's likely to have disclosure and inquiry.

But if there was a jolt I'd wonder what impact it would have.

First perhaps you know with the question of whether the GSC’s remain GSC’s and all that kind of stuff, you know, the industry has kind of suggested that maybe it's a quarter to a half a point impact on mortgage rates, which we don't 30 is that significant to the industry.

But beyond that, I wonder if there aren't backup liquidity sources inherent in the marketplace that are really prepared to step in.

You'll look at the banking industry and the S & L industry across the country and there's a real appetite to invest capital.

I think that the thinking is that competing with Fannie and Freddie sometimes makes it difficult for the banks and S & L’s to invest capital in home mortgages.

But if there was a move away, a jolt to either of those two, I think that there's enough other liquidity sources in the market to come in and fill in the gaps.

So presumably there might be a short term in that scenario, you know, those others would take a little while to fill the gap, but so let's say that short time that it takes to fill, unless there were some really significant issue there, you don't see too much impact on the overall market?

Yeah, I would be surprised if there were even a short-term glitch.

Because I think the appetite to invest capital, and there is a lot of capital out in the marketplace, I think -- I think the gap would be closed pretty quickly.

But it seems to me that liquidity is not currently an issue that's confronting the consumer of home mortgages.

Great, thank you.

And just one quick follow-up.

Was there any specific rationale or maybe I'm missing something here, for including some of the unconsolidated orders by region as opposed to breaking it out separately, and along those lines, if you care to or willing to share what the orders were by region, orders and closings were by region Exion (ph) unconsolidated?

The reason we did that Steve is because as we look at joint ventures, these are structures to help mitigate risk.

So as you look at a particular region, you know, they're operating on a certain level and it's more structural whether it is a joint venture or not.

And that's the way we look at it internally is grouped together.

So we just wanted to make sure this the way we're reporting matches the way we're looking at it internally.

And I think it's important for everyone to understand whether activity is hire or lower by region as opposed to by structure.

Or to put it another way, were the growth by region pretty similar whether you look at it one way or another?

Well, the joint ventures were mainly in the east region and the West region.

Those are the two areas that had most of the joint venture activity.

And it's consistent with what we said at did beginning of the year, that the joint venture deliveries would be probably a thousand or so this year.

That was growing significantly over the prior year.

So I don't think there's a surprise in the higher number.

But I would look at it that most of the joint venture activity is in East and the West part of the country.

Great, thank you very much.

We'll now go to the line of Barbara Allen with Natexis Bleichroeder, please go ahead.

I wonder if you could give us the number of communities this quarter and the year-ago quarter.

And also kind of in line with that, could you round up how much acquisitions have contributed this quarter to let's say deliveries or backlog?

Trying to get a sense of the internal and external growth.

Sure, Barbara.

Hi.

The average communities for this quarter, compared to the second quarter of 2002 was about 730, versus about 602 in the prior year.

And I'm sorry, Barbara, the second part of your question again?

Just trying to get a sense of how much acquisitions have contributed to deliveries or earnings or so forth, versus internal growth year over year.

Right.

You know, as Stuart was saying in his opening remarks, the acquisitions are not really identified separately after the acquisition, because we're acquiring communities all the time.

And in markets where we've had acquisitions like with Pacific Century and some of the other acquisitions, it blends together.

And in other markets where you have dual marketing strategies, it loses the identity of the company we initially acquired.

So it's really -- it's not something we could even break out because we don't track it that way.

Okay, thank you.

You're welcome.

Our next question comes from Michael Rehaut with J.P. Morgan.

John Barlow on Mike's behalf.

Just wanted to ask a quick question about your order trends by demo graphic price point.

Relative strength first time move-up and active adult.

You know, we really don't break that out, because it's different from market to market.

It's really not something that's tracked.

And I think in -- as you look at some markets, first-time versus first-time move-up, I think you have to look at those carefully.

Because it's not easily identifiable, whether it's a first-time or first-time move-up, second dish time move-up and we don't really track and give those numbers out.

Okay.

And my follow-up is, how many shares are left on your share repurchase authorization?

I believe it's 10 million shares are remaining available under the share repurchase program.

Okay, thank you.

And ladies and gentlemen, if there are additional questions, please press 1.

We'll go to the line of Katherine Cullum (ph) with Capital Growth Management.

Please go ahead.

Hi, I want to congratulate you on a great quarter.

First of all I just wanted to ask, you did talk about the traffic and order activity over the past few weeks.

Can we -- is it fair to say that it's continuing into the month of June, what you're seeing-what you saw in May?

We haven't commented past May, and Kathy, you nor, we really don't give out the orders on the monthly or the weekly basis.

Okay.

And then also, as well, could you just talk about how much and where do you have a pricing flexibility?

Well, pricing flexibility exists in the markets that are most constrained.

That's where most of the pricing power seems to be.

And the western region is seeing pricing power at this point, constrained markets, whether it be Florida or the eastern region or some in the central Reese region are seeing pricing power.

Texas is the one region that doesn't have the pricing power at this time.

That is the one area that would stand out of all of our markets that isn't seeing pricing power today.

Thanks very much.

We will go to the line of Ivy Zelman Credit Suisse First Boston.

Hi, guys, great quarter.

I thought I was getting shut out.

No way.

I have housekeeping items, quick answers, maybe a series of questions.

Loan to value, day versus a year ago roughly?

Loan to value, on the financial service side?

On your mortgages, on what people are putting down, how much equity.

We'll come back to that one.

What's next.

Cancellation rate today versus a year ago.

Going back to your first question, the loan to value, Ivy, is actually improved year over year.

Loan to value is about 73% versus higher 70s last year.

Okay.

And the cancellation rate?

Cancellation rate remains at a low level.

We typically say that it's 20% to 30%.

It's at the lower end of that range.

Okay.

And of your total inventory, I guess 184,000 lots, you said 44% was optioned?

44% was owned, and 56% was optioned.

Okay.

And what percent in your backlog is spec inventory?

We have approximately -- we were saying about one completed unsold, and then there's about 4,000 homes that are started that are unsold, where we're matching the construction pace and the sales pace.

And we're very comfortable with the way that's being matched up today.

You say there's only one house completed right now?

Yeah.

Or one house per community?

One house per community.

And if you look at the overall financial services segment of the company and the title business has been, you know, significantly done very well, I mean, do you anticipate that you'll expand those services beyond just title?

I know you've talked about, you know right now you're pretty happy with that, but that portfolio of business opportunities, is it something you think will grow?

Ivy, I'm not sure if people have generally seen our more recent announcement, we've promoted David McCane to the leadership position in Lennar Financial Services while Allen Picor has become the Chairman of that part of the company.

And this is a strategic move to continue to enhance the focus within financial services, not just on improving the services that we already offer, but expanding beyond those services to the insurance area, and as well, to expand strategic technologies.

So the answer is, we're going to continue to find ways to take the customer that we've already earned the trust of, and to be able to help them in other ways, as well.

Great.

And one follow-up with another strategic question.

Realizing you do have I guess residential towers in Miami and I believe in San Diego, I believe are the two towers you have, strategically do you anticipate expanding in the residential tower business, whether it be at the low end, where you are today or even potentially at the higher end?

It is not a strategic refocus or shift in our overall strategy to move in the direction of building more and more towers.

It's certainly not going to become the significant portion of our business.

The move that you're seeing in terms of of -- in terms of some of this high rise is really a forced move, in terms of being a participant in the home-building markets in some of these markets where land is so constrained in the suburban areas that the consumer is being forced inwardly, and the only opportunities are those high-rise opportunities.

But it is not a strategic shift in the way that we're running our business.

And I'd like to just say that whenever we have a tower, we do not use percentage of completion accounting.

We only book revenue and profit at the time that a home is closed, and title transfers to a third party, and we get all the cash.

Sounds good.

What's the average deposit these days for just single-family business that people put down?

It really varies market to market.

And even to give out a number, it's just so -- it's so diverse.

We try to go for --

Range from 5% to 20%?

I mean, what's the range?

I would say that's a good range, 5% to 20%.

Thank you.

I think I overstepped my questions but thank you.

Okay.

You're welcome.

We'll now go to the line of Tom Marsaco (ph) with Marsaco Capital.

Please go ahead.

I just had a question, given success in the mid market, the $500,000 range market, and they're one of the only public home builders that are involved in that market, don't you see an opportunity that's being missed, if you only have one dominant player in that market, and given your size and your capabilities, it would seem like that could be an attractive market to enter.

Where you could get more gross profit dollars than you're getting now on a per-home basis.

Well, you know, it's an interesting point.

I think that in some of our markets, we do address that portion of the marketplace.

We do have strategies, in some of our divisions, to aim and actually compete with Toll Brothers.

But by and large, we continue to be a -- our best strategy has been to be at the middle of the market, you know, creating a value product for our customers.

We do that extremely well across the board.

And we've really chosen not to diversify our strategy too far a field, sticking to the things that we've done historically best.

In the future, as, you know, as opportunities present themselves, we could go in that direction.

I mean, it just seems logically that if land is a constraining factor in some of the markets in which you're involved in, then that would push pressure on the higher-priced end, still in today's market $500,000 for a house in California is still probably lower end of the market.

Right.

But our average sales price in California is much higher than it is in other areas of the country.

So this what I think to be a pretty wide-open opportunity, you just feel like you still have better margin opportunities or return on capital opportunities in the low end?

Well, it's really diversified, Tom, between first-time, first-time move-up, and you know, we do compete with Toll Brothers in several markets and we do have move-up product first time or second time in several markets.

So we do have product offerings in that niche.

Some of our products are priced from under $100,000 to actually over a million, even though we average just in that $250,000 range.

And just one last question, too.

You've made a number of small acquisitions.

What is the potential of making a larger acquisition, let's say of one of the other ten largest home building companies, and it would seem like you could get a lot of leverage out of expanding at a faster rate, because the time and effort it takes to do a small acquisition is, in my mind, similar to the time and effort it takes to do a much larger acquisition.

And given multiples on all the stock in the industry, your return on capital should be very high.

Well, you know, as I noted earlier, certainly nothing is off the table, and we always reopen the prospect of doing a larger acquisition.

There's some constraining questions that revolve around those kinds of acquisitions.

Not the least of which is what impact of those kinds of acquisitions would have on a return on capital.

Remembering if you're just looking at a current stock price, a number of the home builders are trading 1.5, 2, 2.5 more times book.

No, I'm not suggesting you pay a substantial premium.

You could basically convince the seller or merged partner that the one plus one would be more than two in the acquisition.

Similar to what Oracle is doing with Peoplesoft (ph).

They're basically not trying to pay any premium.

What you're saying is, that doesn't work, huh?

You ought to talk with some of the home builders.

Thanks a lot.

But it's possible.

You know, it's possible.

I think that -- let me say, let me go to the other side of your question, and say that you know, these smaller combinations are very attractive in their own right.

We really have the due diligence process and programs, I'd almost say down to a science, but I don't want to sound arrogant in that regard.

But we have a very good understanding of how to approach these kinds of combinations.

I think we do them effectively, and they're working extremely well for the growth of the company.

Uh-huh.

Thanks a lot, and a great execution.

Thank you.

We'll now go to the line of Sturgis(ph) Woodbury with Meridian (ph).

Please go ahead.

Good quarter.

Fourth quarter lines if I'm seeing this come up on the screen, I missed part of the call.

Bruce was it 287 to 290?

That's correct.

Doesn't that seem a bit conservative, unduly conservative, given last year, I'm trying to verify that there's nothing out there that you're trying to tip us off to.

Because if you did 287 last year and your gross margins look stable and your orders are up 15% on owned and 22% on total, just seems a little bit conservative.

One thing to point out, Sturgis, is in our financial services area last year we had a cable sale in the fourth quarter that was $5 million or $6 million of profit.

We had a $47 million pretax number for financial services in that fourth quarter last year.

So it was very much bad-loaded.

And then additionally, our joint venture activity, our land and other revenue activity, combined last year was about $37 million.

So we expect, for those categories I just mentioned, for this year's fourth quarter, to be lower than last year's fourth quarter.

And that's purely due to timing of transactions.

Great, thank you.

You're welcome.

We'll now go to the line of Barbara Allen with Natexis Bleichroeder.

Please go ahead.

Thank you.

I was wondering if there were any areas of the country where the land prices or deals are just too high, given the competition and shortages, and are there any that you are, you know, just kind of taking a breather from in terms of land policy right now?

There is -- there isn't a market where we're really stopping and taking a breather, mostly because we have a -- you know, I think we have a very strong land position, in each of our markets, across the country.

And it really speaks to our internal process for purchasing land.

As we -- as we manage the land process, we're constantly focused two, three and four years out, Barbara.

And therefore, we are optioning and positioning land today for year 2005, 2006, 2007, only bringing it on our books, and actually taking down the land, as we try to kind of match up our need with having the land actually on the books.

So as land becomes more expensive, the impact of that what you call overly expensive land might not hit us for a number of years.

This enables us to be very strategic and very choosy of what we buy and when we bias we kind of fill our need into the future.

And while we might be out of the land business for a year or two years, we're still working on parcels of land that we might have bought a number of years earlier.

You might remember there was a pull-back in the San Francisco Bay area, just a couple of years ago, in the wake of the technology bust.

And that was an opportunity for us to kind of reposition ourselves relative to land, and to kind of stock up in what is a very constrained market as we went forward.

And so in a market like that we're well positioned but land is once again getting very pricey.

Well, I guess that was a no, there aren't any markets you're -- you consider pricey at the moment?

There are no markets that we are pulled back from, and out of the market.

Okay.

Thank you.

You're welcome.

We'll go to the line of Tony Mann with Technical Owe limb pib.

Go ahead.

Tony Mann, your line is open.

And apparently we have no further questions in the queue.

Please continue.

Very good.

Well, we'd like to thank everybody for joining us.

We look forward to continuing to discuss with you our performance as we go forward, and next quarter, as we report our third quarter for 2003.

Thank you.

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