Lennar Corp (LEN) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to third quarter earnings release conference call.

At this time all participant lines are in a listen only mode.

Later there will be an opportunity for questions and instructions will be given at that time.

If you should require an operator's assistance during the call, please press star then 0.

As a reminder, the 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 and 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 your host, president and CEO Mr. Stuart Miller.

Please go ahead.

Sir.

Good morning, everyone.

I'd like to start by thanking you all for joining us for our third quarter conference call.

Once again, we're very pleased to report another quarter of improved performance for Lennar Corporation and as you can see from our press release, we've turned record third quarter revenues of some $2.3 billion into record net earnings of $201 million which is up some 42% over last year's performance.

We continued to achieve very attractive returns on net capital at 21.8% and return on equity at 34.7% on beginning capital.

And these returns are based on a trailing four-quarter number.

We've also been able to accomplish these earnings and returns while continuing to improve our company's backlog which is up 17% to a record $4.6 billion dollars, our land position is very well-positioned for future deliveries.

And as well our balance sheet, our net debt to total capital ratio decreased to 23.6% and we remain very liquid with approximately $600 million of cash on the balance sheet at the end of the third quarter.

While we're very pleased with our past performance, we are even more pleased with the way that we are positioned for the future.

Even with recent increases in interest rates, with increases in the price of lumber, and the slowdown in the mortgage refi business, we feel that the market continues to present numerous opportunities for the home builders and particularly Lennar to continue to grow our business.

We have an extremely strong capital base, and we have an excellent platform to deploy that capital at very attractive returns for our shareholders.

We have a carefully balanced program of investing our capital and growing our company both through organic and acquisitive action and both our dovetailing well to produce excellent bottom line returns.

Additionally, we have various internal corporate initiatives which are designed to leverage the benefits of being a larger and more diversified national home builder into additional bottom line growth.

Before I turn over the call to Bruce to further examine our financial performance, I'd like to talk briefly about our investment strategy and just highlight some of our internal strategies.

As we look ahead, we continue to see strategic opportunities to grow and diversify our business while we continue to pick up market share.

Organically we are continuing our ongoing program of making strategic land purchases and land constrained markets to position our company for the future.

We make these purchases both as straight land acquisitions and sometimes through the acquisition of companies that have multiple land positions that we can purchase in bulk.

We estimate that we are currently purchasing and developing some $2 billion of land each year in order to grow our business for the future, and we have an excellent team of professionals finding and underwriting these purchases.

Our recently-announced acquisition, though not yet closed acquisition of Newhall Land and farming is an excellent example of how we're using our very strong position to find unique opportunities while we use innovative partnering structures in order to limit the risks associated with large land purchases.

Our dual marketing platform of everything's included and design studios competing side by side in each of our major markets represents another important opportunity to invest capital and grow market share.

In most of our 40 strategic markets, we expect to be running both marking strategies by the end of the year 2004.

We are currently operating both platforms in only 19 of these 40 markets and this represents a strategic opportunity for us to grow.

The counterpart platform in the remaining 21 markets will be established either through organic growth initiatives similar to the way that we've done it in Palm Beach County, Florida, and as you under the, Texas, or we will purchase a new company to become a member of the Lennar family of builders as we've dawn in Chicago and the Inland Empire, California.

In all instances the presence of both platforms of our dual marketing strategy in any given market has enhanced our ability to invest capital at company standard return levels in order to reduce costs while improving the quality of each of our homes.

It is also increased our absorption of land assets, and therefore has improved our returns on our land assets in each of those markets.

We also continue to look at acquisitions as an attractive vehicle to enter new strategic markets for the company.

As you know, over the last 18 months we have added companies to the Lennar family of builders that have expanded our presence in new markets, such as Chicago, Illinois;

Bakersfield, California; and Fresno, California.

So on the growth side, we seal that we continue to have numerous opportunities to grow our business and to invest capital while we maintain very high returns on that capital and at the same time continue to protect and grow a strong and strategic balance sheet. sheet, always positioned for future opportunities.

Aside from growing top line, we feel that there remain numerous opportunities to improve our bottom line by continuing to focus our attention on how we lever our growth, diversity and size into cost savings and quality increases in the future.

To that end, we, like most of the largest home builders, have various initiatives in place that are designed to enhance our bottom line in the future.

National purchasing efforts continue to add to our bottom line.

In order to expand the positive impact of our focus on various line items that we have begun in more regional focus on the cost side of our business and begun the process of looking at unit pricing, dismantling bulk purchasing arrangements, and evaluating distribution programs in order to bring new and greater efficiencies to our business.

We feel that you'll all of these efforts will result in a new wave of bottom line improvement not only for Lennar but for all of the large home builders in general.

At the same time, let me underscore our well-known strong corporate culture that we continue to improve and continue to use to enhance our management process and program.

The Lennar Process is well-known for staying very bottom line focused at the division level and being focused on due diligence while we put people first creating a great work environment and enabling our company to produce excellent bottom line results.

As you have seen through the acquisition of new companies over the past 18 months, Lennar has been able to integrate those new family members extremely well into our already-existing very profitable program.

Additionally, we continue to effectively leverage our Lennar Financial Services group.

This is well reflected in our continued increasing bottom line results.

As we look ahead, however, we remain cognizant of the fact that interest rates have moved up in and the refi market has been affected by that increase in interest rate.

While Lennar Financial Services continues to perform excellently and leverage our home building business producing additional bottom line and bottom line growth for the company, we recognize that some of the, some of the weakness in the refi market could reflect itself in future financial services bottom line growth.

Of course, no discussion of our company and our performance would be complete without reflecting on the successes that we have had at the management level.

I can't reiterate enough how valuable it is to be working with an excellent management team that is focused on building a better business as we grow from coast to coast.

And, of course, that team is led by the best chief operating officer in the business, bar none, Bob Strudler, and there is simply not enough we can say about the value that is brought to the table every quarter year after year by his great efforts.

So in constitution, all is working very well here at Lennar.

The Lennar Process is commenting and working and producing the bomb line results that you can well expect from us, and the future is looking very bright as well, both at the top line and the bottom line.

And with that, let me turn it over to Bruce.

Thank you, Stuart.

I'd like to discuss our third quarter results and then update our goals for 2003 and 2004.

I'm proud to again report record earnings for our company this quarter.

The 33% increase in earnings per share when compared to the prior year is only part of the story.

However, our store card is driven by the Lennar Process which focuses on three metrics.

Strong earnings, high returns on capital, and a strengthening balance sheet.

As Stuart mentioned our return on net capital for the trailing four quarters was 21.8%.

These strong earnings coupled with the high returns is reflected in our balance sheet as our net debt to total capital improved to 23.6% from 44.2%.

Additionally, however, our shareholders' equity increased by $1 billion compared to the third quarter of 2002, which is a 50% increase over the prior year.

Our record earning were balanced with strength in home building, our joint venture activities, and our financial services.

Starting with home building, home building success was driven by a 21% increase in revenues and an 80 basis point increase in Gross margin excluding interest expense.

We achieved higher deliveries due primarily to our growth in California and Illinois.

While Gross margins remain strong in many of our markets, we noted particular strength in the most land constrained markets, such as California but also New Jersey, Maryland, Virginia, and Minnesota.

Markets which are on the softer side would be Texas and the Carolinas; however, I would note that the Colorado market demonstrated strengthening throughout the quarter.

Overall we have a very did I diversified and balanced program in home building with respect to our price points, our product, and our geography.

The average sales price was higher year-over-year in each of our three regions.

The average sales price in the East was $252,000, in Central $204,000, and in the Western region $315,000.

Although our Gross profit on land sale activities was down slightly from $8.2 million to $7.8 million our equity in earnings from joint venture activity increased from $4.2 million to $25.1 million during the quarter.

Our joint venture results comprised home building activity that is active in the joint ventures, resulting in the $6 million profit, and land sales in our joint ventures totaling $19 million of profit as we are regularly selling home sites to third party builders.

Turning to financial services, we earned $49.3 million during the quarter compared with $30.1 million in the prior year's quarter.

As our home building operations grow, we have matched the growth in our financial services operation to provide ancillary income as home building as grown as well.

This quarter, as we had eye 45-year low in interest rates and that resulted in a robust refi market, that significantly increased our results in our title and mortgage operations.

Turning to mortgage first, our universal American mortgage company which focuses primarily on Lennar business, generated a $24.7 million profit versus $19.9 million last year's third quarter.

No. that is way 24% increase, and that is pretty much matching the growth on the home building side.

Turning to eagle mortgage, we saw an increase to $8.2 million of profit from $3.7 million in the prior year.

That's 122% increase and that's really driven primarily by the robust refi market I mentioned.

Our Lennar capture rate on mortgage originations to Lennar home buyers was 71% versus 80% in the prior year.

Our goal, as we transition our recent acquisitions, is to be back in that 75 to 80% range as we go through 2004.

Mortgage originations was $2.2 billion during the court versus 1.5 billion dollars has year are our average loan amount for Lennar customers where we originated mortgages was about 186,000 versus 184,000 last year.

And our fixed rate mortgages originated decreased from 89% in the prior year's quarter to 79% of total mortgages originated in the third quarter of this year.

Turning to title, we had $14 million of profit this year's third quarter versus $6.6 million in the prior year, and our title transactions increased to $120,000 versus $75,000 in the prior year.

Again, the refi market strength is noted in our title results, but one thing I'd point out is we now have title operations in all of our home building markets other than the Carolinas, New Jersey and Minnesota, so, again, we've tried to match our ancillary income growth with the growth on the home building side.

Our strategic technologies and personal lines business both showed small profits as they continued to grow their businesses as well.

In our previous guidance we expected the solution for our contingent convertible security; therefore, while computing earning per share for this quarter please note there was an add back ago previously expected of approximately $2.9 million relating to interest on our convertible securities.

As a reminder, if our average stock price is above $63.75 in the last 20 days of the third quarter, we would receive solution for our contingent convertible security.

Our diluted share count for the quarter was 84.2 million shares, and our assumption on a go forward basis continues to be future dilution for the contingent convertible security.

Additionally, I'd like to point out that the SEC performed a routine review of our public filings this quarter, and although our presentation of our financial information was consistent with many of our pierce, they peers, they did request some ranges which were classes of particular line items and did not result in any adjustments to earnings.

Their requests were to move the interest expense line items to be included in cost of sales and to move equity and earnings of joint ventures out of the revenue section and down below the line.

We have adhered to their request and we will file an 8K showing the re-class of these category for the past six quarters which again have no prior adjustments to earnings.

Additionally, we added a line to separate management and other income from our land sales category to provide more transparency to that category.

Turning to the balance sheet, during the quarter the company called for a redemption of its 3 and 7/8 % zero coupon that was due 2013.

While holders of the debenture converted their bonds into common shares resulting in approximately $271 million transferring from debt to shareholders' equity.

EBIT to Interest incurred to the third quarter improved to 9.3 times from 7.2 times in the prior year's third quarter.

Net debt to EBIT for the rolling ten months ended August 31, 2003 improved from .95 to 1.3 in the prior year.

And additionally the company had approximately $600 million of cash at quarter end and 0 outstanding on its billion dollar revolver.

Tone controlled increased from $154,000 in the prior year's quarter to $196,000 in the current period.

The percentage of home sites decreased to 39% with 61% controlled as we continue to focus on return on capital.

Our community count averaged at, during the quarter 744 which compares to 639 in the prior year.

New orders, as we have previously released, increased 22% during the quarter; however, I'd like to add that our cancellation rate was just under 20% for the quarter.

Our backlog dollar value at quarter end was up 17% to $4.6 billion.

And the backlog of 16,700 homes at quarter end provides excellent visibility for the next couple of quarters.

Looking at our goals for 2003 and 2004, we are increasing our 2003 goal from $8.50 to $8.90 per share.

An update of some of the line items are as follows- As previously stated, we were targeting a delivery range of 31,500 to 32,000 deliveries for all of 2003, and we continue to believe that's the right range.

Our average sales price we believe will be approximately 257,000 for the year, and our operating margin percentage, which includes interest deducted from this number as the SEC has asked us to put in this line item going forward, we expect to be around 12 and a quarter percent.

Our financial services profit for the year we believe will be around $150 million and our joint venture land management fee and other income grouped together we believe will be around $130 million for this year.

Our diluted share count we believe for the year will be approximately 81.8 million shares, and the interest add back on our convertible debt will be about $8 million.

We believe we will end the year with a range of community count between 760 and 780 communities.

We believe we are well-positioned to achieve our previously stated 2004 goal of $9.50 per shear, and as we previously stated, we were targeting deliveries of 37,000.

We continue to believe that's the right range.

As we look at our product mix, we believe our average sales price is coming down a little bit from this year as we continue to grow in certain markets that have slightly lower average sales prices, and we believe the right number for next year is about $250,000.

We believe operating margin percentage, including interest as an expense item in this category, will be approximately 12%.

And we believe our financial services activities as a result of a slower refinance market offset by some of the new business lines, we believe that will be about $140 million for next year.

And our joint venture land and other categories will be approximately $120 million for next year.

Our diluted share count we believe will be approximately 85 million shares.

Our add back for interest on our convertible debt, approximately $8 million.

Our community count range at the end of next year, somewhere in the range of 815 to 835 communities.

And our other line items, such as corporate G&A, interest, and the like, interest I mentioned was already deducted from operating margin, but corporate G&A should remain about that same 1.2% of revenue.

As we mentioned in our press release, although there are challenges that confront our company, such as higher interest rates, a recent increase in lumber costs, and a significant decline in refinancing, we remain focused on the initiatives that Stuart laid out earlier, and we are going to be very focused on achieving or exceeding our goal of $9.50. $9.50 for 2004.

One final note that I'd like to make, we are planning to provide the information a little quicker to our shareholders at year-end.

We have the comp of the processes and systems at our company and we are planning to release our year-end earnings approximately December 15 as opposed to what we normally did in early January.

So in conclusion, we have the associates in place, the Lennar Process is working well, the communities are lined up.

We have a $4.6 million backlog and a lot of balance sheet liquidity positioning us well to again have another record year in 2004.

So with that, I'd like to open it up for your questions.

Ladies and gentlemen, if you would like to queue up with a question, please press star, then 1 on your touch tone phone.

You will hear a tone indicating your line has been placed in queue.

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

As a reminder today please limit yourselves to asking one initial question and one follow-up question.

Thank you.

Our first question is from the line of Steve Fockens, Lehman Brothers.

Please go ahead.

Hi, good morning.

Just a quick question, I wonder if you could elaborate a little more on what you're seeing in the area of lumber prices with plywood and OSB being up fairly dramatically recently, what that may , is that going to impact what you're thinking about for next year; and probably more important in longer term from your experience in there this, do you see the price increases more as a cyclical trend that will probably moderate or something secular that you guys will have to deal with going forward?

Steve, you know, I'm not sure how to answer the second part of that.

I think that anticipating commodity prices is an art that I haven't quite perfected.

But I will say that the price of lumber is certainly going to impact us in the industry.

And there is certainly going to be an associated cost increase.

We have seen the price of lumber and plywood go up materially over the past month.

And we're taking that into account as we look at our next-year numbers.

There will certainly be offsets as we continue to improve our cost structure as we look at mechanisms for using our size to bring costs down in other categories.

Plus the increase in the price of lumber is something that's going to filter through the industry over the next months and quarters, and we're just going to have to wait and see if it's here to stay at these high prices or if it's kind of a temporary glitch.

Fair enough.

Maybe a quick follow-on.

Assuming -- well, who knows where they roll out, but in terms of trying to offset that, do you look more to price or do you look more to either different ways of purchasing or perhaps even different ways of building the home?

Which is do you think the more likely way to try to offset over the next 12 months .

It's an interesting question.

Certainly pricing is one mechanism for absorbing costs, and to date we and others have been able to increase prices in order to pass on some of the cost increases to the customer.

But there will ultimately be a point at which you can't.

In terms of looking at alternative materials, we have some initiatives primarily in California right now where we are looking at steel frame construction and actively have three kind of test communities under build in those markets.

We have felt for quite a long time, we've been working on steel as an alternative material for a long time.

We have felt for a long time that we did not want to be subject to the fluctuations in lumber prices should they start moving up.

But these are the kind of initiatives that are -- that we're working on and others are working on across the industry in order to diversify the business and to become less susceptible to these kind of changes.

I might just add one point on the lumber discussion.

One is typically, for the remainder of 2003, the recent rise in lumber prices shouldn't have much impact on our results because we do contract out a little bit ahead of ourselves, so it's primarily 2004 issue.

And it really varies from geography to geography where in certain markets, because of the local building code such as Florida, we have plot construction on the exterior of the home and the interior walls are built with steel.

So this is very much a, more of a regional issue as you look at the company and therefore it's hard to come up with an exact change in what the cost structure is as you look at it overall for the company at this point in time.

Great.

Fair enough.

Thanks very much, guys.

The next question is from the line of Carl Riechardt with Wachovia securities.

Hi, guys.

I don't want to keep harping on lumber here, but as a percentage of sales what's bum lumber costs for you all?

As a percentage of sales, lumber runs somewhere around, call it roughly 3% for the lumber material, Carl.

That's generally Lori guess because you guys have more Florida exposure.

Plywood versus studs, assuming the plywood's been seen the most significant pricing but studs have seen less so, is it maybe one-third plywood, two third framing lumber?

Yes, somewhere between 25% to a third is plywood and the reminder are studs.

Beautiful.

And two of the question, I may have missed this but did you guys get a lot count at the end of the quarter earned an option?

Yes, we did.

The home site count at the end of the quarter was approximately 196,000, I think was the number, and that compared to 154,000 last year, and, again, 39% of the 196,000 was owned and 61% controlled.

Sorry about that.

And the one last question, if I look at everything's included versus the traditional design center business and one were to, let's say one assumed that rates have moved you up significantly, do you think you would see a shift into the design center business because you've got lower base prices in that business and away from EI and how do you notice anything like that in terms of a change in buyer preference?

No.

Actually, the EI program was designed and conceived at a time when the market had really shifted into a downward shift.

And I think that both programs will hold up very well even if the market does shift because interest rates go up or for whatever reason it might move around.

And I think the EI program in particular has proven itself to be particularly resilient. as the economy does shift.

Its a value focused program.

Okay.

All right.

Fair enough.

Thanks guys.

We have a question from the line of Michael Rehaut with JP Morgan.

Good morning.

I was wondering if you if you could go over kind of the pluses and minuses that you're assuming in terms of the operating margin assumption for next year in terms of you had mentioned lumber and I guess refi doesn't go into it but perhaps lumber being a negative next year and perhaps some additional cost savings being a positive.

We haven't broken those out by line item, Mike, but it's a combination of everything that goes into the cost structure and the process.

It's all blended together.

We haven't broken that out line item by line item, which obviously is going to be different from market to market and product to product for us.

I think overall, Mike, we are still seeing additional costs reductions while we improve quality from our national purchasing programs.

There is still some mileage to be gained in what you might call some of the big ticket purchases.

But then you start looking at things like the bulk purchasing or the bulk contracting programs that we have in some of our markets, and as Bruce says, this is a market-by-market kind of evaluation, but breaking those apart and doing unit purchasing on things like drywall and lumber and other things, there's a lot of -- there's a lot of money to be picked up on the cost side from some regional initiatives that are rally just getting underway.

Okay.

I guess as the follow-up, then, maybe trying to get into the operating margin assumption, what are your assumptions for Gross margin and SG&A?

Through the use of positive and negative?

I guess asking the question another way, also, is, is the operating margin contraction also because of a matter of mix shift?

Well, to break that out for you, Mike, if you look at the Gross margin, and I'll break it into three components, Gross margin, SG&A, and interest, so it's not confusing to people, the Gross margin, again, we said an operating margin including interest of about 12%, so as you look at that, you're looking at somewhere around close to a 24.5% Gross margin and a 10.7% SG&A percentage for 2004 with the balance being interest expense.

So, you know, does that help answer your question, Mike?

Yes.

I believe so.

I mean, it appears that, you know, perhaps Gross margin would fall a little bit, SG&A would fall, also; and perhaps interest expense as a percent would rise.

Yes.

Interest expense as a percentage we believe will be fairly, fairly constant at somewhere around 1.7% of revenue.

SG&A percentage, somewhere close to where it's been this year.

And Gross margin, coming down probably about 30 basis points.

And that takes us from the 12 and a quarter% in 2003 estimated down to about 12% for '04.

Great.

Thanks a lot.

You're welcome.

Stephen Kim, Smith Barney.

Thanks a lot.

I was wondering if you could give us a little bit of an update.

You said on your buyer profile.

You said that the, I believe the fixed, the percentage of fixed mortgages was 79%.

Can you give us an idea of how much business you do with the zero down payment and the FHA, VA product?

Sure.

With respect to the FHA product, I believe we're somewhere around 15%, which includes down payment assistance programs that have been discussed in the past which we believe are running somewhere, you know, around 2 or 3% of our total.

And this is with respect to the mortgages that we originate where we contract that, which is, you know, it's been 71% of the total of Lennar's deliveries.

The other 29% we assume is probably pretty close to that but we don't have the same intelligence on that piece, Steve.

And with respect to your without outlook for Gross margins I understand you didn't take up your guidance for 04.

I guess some people are wonder whether that implies you are intentionally trying to decelerate I guess the growth rate for the company or the projected growth rate of the company.

I would assume that's probably not the case.

But if you could just sort of provide some color maybe on what you're baking into your Gross margin assumption which you see declining.

First of all, in Stuart areas opening remarks he talked about for lack of a better comp special op type ventures which could be additive to your Gross margin.

I'm assuming your not adding any of that in your out outlook.

And also I assume you assumed a deceleration, same on same in your communities with some mix shift dragging it down.

But can you just sort of break this out a little bit more specificity as to what is driving your Gross margin decline assumption?

Well, you know, going through that in a little bit more detail, as we were commenting earlier, there's a lot of line items that are going through that mix.

We have certain initiatives that Stuart mentioned, even flow production, we have national and regional purchasing.

We have steel framing initiatives.

We have value engineering.

These things are all offsetting what we would expect will be slightly higher lumber costs.

We're taking lumber costs that we've seen here recently and we have assumed that that there is going to be an increase in our cost structure next year am as a result.

We don't know where it's going to land.

But we've looked at all those together and looked be at our product mix shift, and that's where we came out with about a 25% reduction in the operating margin.

Obviously, we'll update this further as we get to the end of year in our planning process is completed in more detail and we'll be able to refine that in mid-December for you, Steve.

Okay.

Great.

Thanks.

And we have a question from the line of Margaret Whalen, UBS Warburg.

Good morning, guys.

Nice quarter.

I know you don't like to talk about sales placement the quarter has been ended in September but maybe you could give us a little bit of a breakout in terms of some of the regions that have been weak like Denver, Dallas and then the southeast has been strong.

Can you give us a little bit of an idea of what's happening in those markets?

As far as new orders in.

Not even since September but in the August quarter how each of them shaped up.

Sure.

You know, as we looked at our markets, we're still seeing a lot of strength, and I think one of the things, as rates started going up, we still have a very constrained land supply in a lot of our markets, and we are seeing continued strength in most of our markets.

In markets such as Texas and the Carolinas, throughout the quarter we didn't see them getting any worse, you know.

We just saw what was a little bit of a softer market.

And, again, in Texas it was primarily in the Dallas area, but what we have done to try to counter that is we have a broader array of products that we've been focused on, and we are focused on a lower average sales price in particular with some of the growth in the Texas marketplace. as well as enhancing the dual marketing strategy and very much focusing on using those market share gains to help bring down costs.

The Carolinas, that's a new market to us, so we knew going into that market and in our investment decision to go into that market, we understood that it was a slightly weaker market at this point.

Again, we didn't see it get any worse during the quarter, but it's still a will it bit softer.

On the Colorado side, we actually saw some strengthening in Denver.

And what that meant is sales incentives which are still present in that market have decreased a little bit, and we do think that market is coming back.

Okay.

That's exactly what I wanted.

Thanks.

And the second side of set of questions is when you talk about the opportunity for margin expansion, I guess the special ops, whatever you want to call it, I guess there's two parts of it you've got going downstream to your suppliers, and getting better scale on your procurement and then you've got going upstream in terms of how you build your homes and the whole construction process and maybe even factories or different manufacturing processes.

In terms of margin expansion from here, what percent will come from downstream versus upstream would you expect?

Oh, I think, I think, Margaret, that you're going to find that at different homes moments you're going to see different amounts come from one versus the other, and I don't think you're going to be able to separate it.

It's not going to be a nice, neat pattern of cost reductions that happen all at once.

It will all be very intertwined.

Can I think that's the experience that we're having so far.

The first step has been national purchasing and that's what all all of the home builders have immediately gravitated towards, and you've seen some cost reductions that have come from that that they're uniquely isolatable.

But as we go through the process of doing, Unit costing, doing some bulk purchasing of certain materials, whether it be drywall, lumber, or other things, as we go through the efficiencies that are garnered from value engineering on the other side of the equation, those things are going to kind of trickle into the cost equation.

And at some point they're going to do nothing but offset price increases from things like lumber, commodities going up and at other times I think that you're going to see some significant cost savings across-the-board, and there will be reflected probably by all of the largest home builders.

But so I guess it's just kind of 50/50 is what you're saying in.

You know, for lack of a better percentage, I think that you can argue that you'll see cost reductions in equal proportions coming from both sides.

That would be a stab in the dark.

Yes.

No, I understand.

And just finally, it seems to us you're sandbagging a lot oft earnings estimates.

Have you got a lot sandbags for the hurricane in North Carolina if it hits?

Well, those are two different kinds of sandbags, and we do have sandbags available for the hurricane.

But, you know, as it relates to our '04 expectations and our 03 there performance, I think that year very well positioned.

I think that we've seen interest rates move around a little bit.

We've seen the refi market tapering off a little bit, lumber prices going up.

I think that our expectations for '04 are good expectations, good goals for the company.

And I think that we're extremely well-positioned to meet potentially exceed those expectations.

For '03 we're of course very comfortable with where we're positioned.

We've got a great strong backlog.

We know where our margins are.

And I think that this is a good time to kind of -- we don't want to raises mats for next year.

We think that we feel very good about next year, though.

So do we.

Thanks.

Great job are, guys.

And we have a question from the line of Carlos Ribeiro, with Credit Suisse.

Good morning, gentlemen.

Congratulations on the quarter.

Most of my questions have already been answered, but with respect to your closing at this quarter, you closed about 54% of your backlog which is the lowest level I think on record with respect to closings in any of your third quarters.

Is that experience on weather-related delays or is there something else with respect to that lower closing number?

No.

You know, as we looked at our deliveries and consistent with the goals that we laid out in the past, it's actually right in line with what we thought we were going to be delivering for the quarter.

And as you look at the fourth quarter and for the year, that range of 31.5 to 32,000 is exactly in line with what we were thinking.

One thing to keep in mind is as you look at our backlog, you know, we did have some sales that were relating to joint ventures in some of our infill programs where we're building some higher density and some of those deliveries are a little bit further out, so when you look at backlog conversion, you have to kind of take that into account as far as what are those info programs versus others, but as far as we're concerned we're right on track and if you look at our backlog conversion that's expected for the fourth quarter compared to last year's fourth quarter we expect it will be somewhere right in line with last year's convergent ratio.

Fair enough.

And lastly you briefly gave us some information on obviously the amount of refi’s that benefit your financial services.

Do you have ah percentage of reties for the percentage and how that compares with last year's number in.

You know, the refis are benefiting in two ways.

It's benefiting our title operations which we talked about, and then on the mortgage side it's primarily in our Eagle mortgage subsidiary.

Our universal American mortgage is almost entirely Lennar business, Lennar home building business.

So if we broke originations between Eagle mortgage and UAMC for this past quarter, let's see, our originations -- let me just see if I have that broke broken out between eagle couple.

It's usually been about a third is originations from eagle mortgage which has purchased and refi business; however, in the last quarter the majority of eagle's business was related to the refinance side.

So what you'll see happening is their business will start shifting back to the purchase side.

In terms of number of loans originated, let's see, in the third quarter, Carlos, I'd say it was about -- we did about 11,700 loans, about 6500 came from universal American and a little over 5,000 were eagle mortgage.

And if you looked at '02, we had about 8400 loans originated and it was about 5900 universal American mortgage and about 2500 from eagle.

So you can see the increase in eagle.

Eagle about doubled, and a good portion of that was refi related.

Great.

Thank you very much.

Welcome.

Joseph Sroka Merrill Lynch.

I guess this is for Bruce, too, just a follow-up.

So in both the title and the mortgage business that's non-Lennar home buyer focused, you are doing existing home sales, if you will, original origination in.

Absolutely.

We have an excellent franchise that is based in Seattle called Eagle mortgage and they focus on purchase and refinance business.

And as refinance has been hotter lately that's been a bigger percentage of their business.

But as we have seen in prior years, as there's a shift and interest rates go up as we saw from 99, May '99 to May 2000 we is you a 200 basis point increase in our interest rates, we very quickly shifted the business from refinance to the purchase side, both in our title and Eagle mortgage operations.

So there will be in future quarters a much higher percentage of those originations coming from purchase business.

Fair enough.

And then lastly, is your 8K with historical statements going to be out today in do you know?

I would say that it will be out over the next week.

If you have any specific questions, we're happy, if you want to call us after the call, there's nothing material, so that's information we can give out if you needed to include that before then.

Fair enough.

Thank you.

Myron Kaplan, private investor.

Hi, Stuart and Bruce.

Remarkable performance continues.

Will you please, if you can, enlarge on the Newhall purchase if you have any information regarding its likely or the kind of, if you have the scheduled deployment of units, sections to be sold in the future in '04 and '05.

And secondly, I'd like to can with ask your opinion of kind of the flavor of market conditions because we've seen the end of the artificially low mortgage rates, and yet there, of course, has been little significant pick many in the economy overall, especially the job growth, and so it's kind of a royal mixed up kind of picture.

Well, first, Myron, relative to the Newhall program, we haven't released any additional timing or information, but we remain enthusiastic about that opportunity.

I would remind you that the impact of Newhall, as we laid it out, is not expected to be very significant in 2003, 2004, and certainly it isn't going to have I any am packet on 2003 at all.

But it is expected to have very little impact on 2004.

I think that we said in our press release that we had thought that we'd be closing the Newhall deal sometime in the second, third quarter of 2004, and I think that that guidance pretty much is what you should rely on.

And we just expect that the Newhall acquisition by the joint venture between ourselves and L&R will be a terrific positioning at any time for the company in what is perhaps the most constrained market in the country.

And I think it also represents another great opportunity for us to invest capital strategically in a new unique joint venture platform where we're going to see some very strong returns on that capital investment.

As it relates to kind of the macro view of the world today, you know, interest rates have moved around a little bit it's not entirely accurate to say that they've moved up because they've moved up and now they've moved down a little bit, and where they're going to go from here is anybody's guess, and certainly the economy is presenting some opportunities for us to evaluate as well.

Looks like there might be some general economic improvement, but I don't know that the job picture has gotten any better.

As we look at the market in general, it's remained strong.

We've had a strong summer.

As you see reflected in our sales numbers.

And as we look ahead, we don't see any reason for there to be a significant change in the way that the consumer views the possible acquisition of a home or move up into a new home, and we think that the housing market's going to remain strong.

Remembering that the demand is still fueled in large part by growth in the overall pop population which remains healthy and we are living with a very constrained land picture so that that land constraint will keep supplies short.

All right.

Thank you very much.

You're welcome.

We have a question from Rick Murray, Raymond James.

Good afternoon, guys.

I guess I really had one big question, and that was kind of given what you're balance sheet looks like and how you've kind of been de-leveraging the company here recently, I guess I'm curious if this trend is likely to continue and kind of where you see longer term the optimal capital structure for the company.

Well, you know, it's always been our perspective that a healthy balance sheet and a lot of liquidity positions us best for the opportunity that exist in the marketplace, and whether those opportunities are opportunities to buy back stock or whether they're opportunities to buy the next Newhall Land program, we just feel that that strong balance sheet has given us the strategic advantage to be able to purchase when we feel there's something unique out there and the opportunity to be sidelined when we don't.

And that strategic positioning of being able to do deals when they are right for the company is what really drives the strength in our return on capital and return on equity numbers.

So, you know, as we look ahead, it's going to be that unique balance that we've been able to strike between generating positive growth, positive earnings growth, and at the same time generating those strong returns on capital, return on equity. equity, and maintaining a very strong and liquid balance sheet that is going to drive our company.

So there's going to be that consistency.

I'm sure you have you're going to be reluctant to comment but I have to try.

Is there anything that you're currently looking at right now beyond the Newhall deal?

Let me put it this way.

There is everything that we're looking at right now beyond the Newhall deal.

We're certainly not sidelined.

We feel very encouraged by the opportunity to close that deal.

We think that the Newhall people and the Newhall assets are a wonderful strategic opportunity for the company, but at the same time our mandate is to continue to grow our business but to do it with an eye on both income and balance sheet.

And I think that, you know, we're constantly in discussion talking about new opportunities and next opportunities to position the company.

Just for the record, Rick, that's probably the same way Stuart's answered that question for each of the last several years.

Thanks, guys.

We have a question from Jim Wilson, JMP Securities.

Good morning, guys.

Maybe I you had should just have a little follow-up or ask a little differently on the last question.

Strategic opportunities maybe more from a ground level, I'm sure you've been very good, historically very good long-term at an miss anticipating changes in individual local market throughout the company.

Is there any shift in where you see investments or community openings across the country where either up or down in the net number you talked about to get to 815, 830 next year where you're definitively increase can exposure or places where you are pulling back a little butt that you might want to talk about?

Yes, it's an interesting question.

And I would just all the are one thing that you said.

I don't know that we have been, you know, perfect at anticipating shifts.

I think it's much more a matter of the process that we apply to the way that we invest our capital.

In each of the markets the mandate through the company is to invest capital based on a very stringent, strict program of generating return hurdles commensurate with the risk associated with the type of deal that's being invested in, and the due diligence underwriting is very, very thorough.

We do not, we do not in our due diligence project tremendous increases in prices over time.

And where we do project any increase in price over the life of the investment, there's a lot of due diligence into the constraint and the demand components of that marketplace that enable us to kind of get over that hurdle.

So what I'm really saying is it's a matter of natural organic process that generates our relative in investment in various markets.

And to answer your question directly, are there shifts of investment towards certain markets and away from certain markets, that's happening every day on a very dynamic basis.

So if we were to look backwards, we'd probably have seen more investment in some of our California operations and perhaps a little bit less investment in Colorado and Texas, but those shifts will like likely, as we look ahead, adjust in a different direction as the underwriting and due diligence for each acquisition kind of reveals that the markets are recovering and starting to move forward.

That answers the question.

Thank.

Timothy Jones, Wasserman and associates.

Good morning.

First of all, you basically said in August that your orders, I think you implied, were pretty much the same as they were in the prior months or so.

Are you saying that your strong markets remain strong.

Your weak markets did not get any weaker?

Is that a correct assumption?

Yeah, I think that's a pretty correct assumption.

I think Bruce did mention that Colorado was starting to show some signs of coming back.

Well, if anything, it got a little bit stronger, but again I'm just going on this ISI survey which dropped 14 points and I can't figure out what's going on because I thought that virtually every builder and the vast majority say they didn't have any fall-off, and you're basically saying the same thing.

By the way, with respect to that survey, Tim, we would like to note that we are a participant in that survey.

That's fine.

I mean, it's just, I just don't -- I can't understand why they went into a very, very strong big drop in the last two weeks when virtually no builder, certainly 85% of them say there have been no falloffs, and you've just confirm it too.

Secondly, I'm a little confused about your 3% number on lumber.

The average 2,000 spare foot home has about a 6%, about $12,000 of lumber.

Are you just looking at a framing lumber or something?

I know you do block building in Florida, but still it's about half the number I normally have.

I'm sorry. , Tim.

You said about 3% of your price is in lumber.

Right.

Which I assume at $200,000 it would be $6,000, and the average builder that I've talked to, it's about twice that much or around 6%, and I'm just wondering what the difference is with you people.

And maybe you're not including interior lumber.

Maybe this isn't including framing.

I don't know what.

I think if you look at our average sales price, that's been closer to $260,000, and you take 3% of that, you know, it's been closer to $8,000.

And, you know, so it's -- I think what you're ailing ever seeing is partially the fact that we have a very large Florida position where the block construction and the steel interior studs as well as the higher average sales price, you know, it's probably somewhere closer to $9,000.

Nickels and dimes.

And lastly, the 950, are you assuming any price increases for next year in that number?

Well, what we're doing, Tim, is we're looking at the way our communities are positioned and either for the communities that are opening up where we expect the pricing to be based on our underwriting or what's currently in backlog, and that's from the bottoms up is what's leading us to the comfort with that 950 goal for next year.

And, again, why, just out of curiosity, why did you raise this one a year by like 50 cents and didn't touch next year?

Is it a case of just looking far off and being conservative and not being sure what the heck the economy is going to be like or something?

Is that part of it?

I think there is an Element of that, Tim, that, you know, I think as we look ahead, interest rates have moved around a little bit; lumber prices are up a little bit.

You know, growth in financial services earnings is going to be somewhat impacted by the refi market.

And it seemed that we had a good goal out there, one that we were comfortable with, and now is not the time to be making an adjustment.

We felt that if we're going to make an adjustment, let's do it at the end of the fourth quarter when the picture is a little bit clearer.

I thought that would be the answer.

Thank you.

Thank you.

From the line of Mike Tenders, Citigroup.

Yes, just had one follow-up question which is you gave EBIT numbers for the quarter and for the nine months.

Do you have a D&A number to go with that?

Our D&A number is always very low but the D&A number for the third quarter was about, let's see, year to date, so it's about $12 million. , 12 million for the third quarter.

Great.

That's all I had.

Thank you.

Thank you.

And maybe one more question.

Our last question is from the line of Tony Campbell , knot partners.

Good morning, gentlemen.

Congratulations.

I don't want to beat this ISI thing to death but since you guys have a tough time getting credit for our great results I would urge you to get the guys at ISI to look at this on a quantitative basis rather than a qualitative basis because I think it's not really truly reflective of what's going on in your business or really the top home builders.

Good point.

Duly noted.

Thanks a lot.

You're welcome.

That had conclude our question and answer session for today.

I would once again turn the call over to Mr. Miller.

Once again, we would like to thank all of you for joining us for our third quarter conference call.

We look forward to reporting our year end.

As Bruce noted we expect to be doing that around December 15th and of course we'll update that information.

And, of course, if you have any additional questions, Bruce and I are available if you'd like to give us a call.

Thank you again.

Goodbye.

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