Lennar Corp (LEN) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the fourth-quarter year end and earnings release conference call.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time. (OPERATOR INSTRUCTIONS) 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 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 forward-looking statements.

The company urges you to look at them.

I would now like to turn the conference over to your host, Mr. Stuart Miller, President and CEO.

Please go ahead.

Good morning, everyone, and we would like to welcome you to our year-end and fourth-quarter conference call.

We appreciate your attention and consideration of Lennar Corporation.

I would like to say that I am here joined by Bruce Gross, our Chief Financial Officer, and also our Chief Operating Officer Bob Strudler, who we are happy to each year have participate as our year-end conference call.

As soon as I give a couple of opening remarks, I am going to turn it over to Bob, who will talk a little bit about operations; and then to Bruce, who will give some further financial color.

In any case, as we came to year-end 2003, we are very pleased to report another record year of revenue and earnings.

As you can see from our press release, earnings are up to over three-quarters of a billion dollars; up 38 percent year-over-year, on revenues that are just under $9 billion.

For the quarter, our revenues are up 13 percent and net earnings up 26 percent.

While we have been producing strong results on the earnings front, we continue to strengthen our balance sheet.

Our balance sheet today is reported to have a net debt-to-total-cap of under 10 percent; a debt-to-total-cap of some 32 percent.

We have fewer dollars outstanding on our revolver, which is just under $1 billion, and $1.2 billion of cash available for growth and the planning and liquidity of the company.

As we look at these results, we feel it is important to reflect on the fact that these results are very much a part of what we have defined as the Lennar process of running our business and focusing our attention in management on the way that we manage and grow the business.

That process begins and ends with a very strong balance sheet orientation; what we have always said is that Lennar is a balance sheet first company.

We have a high liquidity strategy, and that is reflected very much in the balance sheet that I just described.

At the same time, we remain focused on growing our business and growing the company.

We have seen those strong components of growth woven in everything that we do it.

We like to say that we have the most diversified growth strategy that works to our benefit in a number of ways.

As we have grown our business, we have focused on a balanced approach of both organic and acquisition growth.

We focus on each of these strategies as opportunities present themselves.

When the opportunities present themselves to grow through acquisition, we have been able to find new acquisitions that are attractively priced, that work well with our balance sheet, that are well positioned in strategic markets, to be able to move our company forward.

At the same time, in each of our operations come we have been able to grow organically and find new land acquisitions to augment positions that we already have in place and to take advantage of excellent management teams that are running our business.

This opportunistic approach to growing our business affords us tremendous flexibility to being able to react to market inefficiencies as they present themselves, and it works well not only for our earnings growth, but also for the growth of our balance sheet, the growth and liquidity in our balance sheet.

As we look at our business, we recognize that we're really defined by a position within the homebuilding world.

It is a terrific time to be a homebuilder and in particular be a well-capitalized large cap homebuilders.

We have said that strategically the largest builders are really exceptionally well positioned to continue the path that we have been on for quite some time now.

As we look at market conditions in general, we look at them with a view of optimism; and we see that optimism reflected in our expectations and goals as we look ahead to years 2004 and 2005.

Accordingly, we have increased our earnings goals for 2004 to $10.50; and 2005 we're projecting a goal for the company of $12 a share.

This is somewhat optimistic view is rooted in our view of the market in general.

We think that the marketplace in general is looking strong as we look out ahead.

We think that overall in the homebuilding business there is long-term market visibility that is defined by very strong demand trends over the next period of time.

Certainly over the next ten years.

Also defined by the fact that there is relative land constraint across the country.

We continue to find that it is more and more difficult to be able to supply the demand that is out there in most strategic markets, and the ability to find new land parcels is working increasingly in favor of those builders that are well capitalized, able to react quickly, and have the sophistication to be able to handle more complicated situations as they go forward.

We have used the liquidity in our balance sheet to strategically position our company for the future, taking advantage of the land positions that are available.

As you look at our land bank today, we have over 200,000 home sites owned and controlled, which position our company well for future growth.

We have about a two-year supply of owned, and a three-year supply of controlled land, and that land bank is becoming increasingly more valuable as the supply becomes more and more constrained.

You see that reflected in some of the land profit that we have begun to report and begun to see in our earnings results and that are going to become a larger portion and a recurring portion of what we report in the future.

Additionally, as large homebuilders, and given the marketplace in which we are operating, strong liquidity continues to drive growth and operates in favor of the larger homebuilders.

Across the board the larger homebuilders are better and better capitalized with a strong right-hand side of the balance sheet that is well diversified, but supported by growing earnings and growing equity in the company.

Leverage is reduced across the board; and of course we are seeing that in our balance sheet as well.

And these components are driving our ability to be able to react nimbly and to define our business as we go forward and be able to grow most effectively.

Finally, I say that within the industry and in particular for Lennar, we have been focused on a return on capital model that, again, is working in favor of growing our business in a more stable way as we go forward.

We see that reflected in our return on our net capital, which has grown (technical difficulty) 23.2 percent and continues to define a business that is growing its earnings and growing its returns well in excess of its cost of capital; and doing so on a consistent basis as we grow forward.

So, as we look at Lennar and our results, and as we look at the homebuilding industry and how we are positioned and how the industry is positioned to move forward, we feel that there's a lot of reasons to be optimistic about the future.

We have looked backwards on results within the industry that are really defined by returns over the past ten years that have been in the plus 20 percent range.

Growth in revenues that have been over 25 percent over the past ten years, industrywide.

And as we look ahead, we think that the industry is poised to continue that trajectory and to be able to continue to define itself as a growth industry, evolving from what has been viewed as a cyclical industry in the past.

And, what that, I would like to turn it over to our Chief Operating Officer Bob Strudler, who will talk a little bit more about what is going on inside the company.

Thank you very much, Stuart.

As Stuart alluded to, '03 was a record year for us marked by strong performances throughout our entire company.

As we look at this performance and as we look ahead, we understand that it is always a time for us to refined and refocus on those areas of opportunity for us to enable us to sustain this record of growth.

As I look at our company, and as I look at the next year, the areas that I think are fertile grounds for our expansion and continued record of profitability, I look at areas such as cost savings.

Several years ago we started with a national purchasing initiative that today has 27 exclusive agreements in effect and has produced contributions to our bottom line throughout the entire company.

As we look at the success of this program, we really have now refined that to three other fertile areas where we think we can enable ourselves to reduce our costs 2 percent per year, while improving the quality of our homes.

As I look at those areas, one is in the area of regional purchasing.

Following up on our national purchasing success, we have now taken this program to areas such as drywall, lumber, and concrete, and are achieving some of the initial success at producing regional profitability levels in these areas.

We are also looking at the unit costing system, so that we can aggregate our volume while improving the quality; enabling us to work with the distribution system that is in effect today and refine our profitability for each unit that goes into the costing of our homes.

The third area in this area is to really refine our value engineering of each of our homes, so that we maximize the profitability of each home that we deliver while using the best practices in our entire company.

So I believe that one of the things that you're going to see us doing in '04 is capitalizing on these initiatives which we started in '02 and '03, to produce and enhance the profitability on a per-home basis and in our gross margins as we move ahead.

A second area that I think will continue to contribute to our enhanced profitability and our success is the dual marketing.

We announced several years ago that we were going to take this dual-marketing concept, which commenced with the acquisition of U.S.

Home by Lennar, and spread it throughout our company.

We have been done that to approximately 50 percent of our geographic markets at this time.

Over the next 12 to 18 months, it is our goal to complete the distribution of our dual-marketing system throughout the entire company.

This enables us to enhance our returns on capital throughout the entire company.

And we have achieved great success with our Everything Included program, selling directly across the street from our Design Center initiatives.

So, I think this is a continued area that can add to our record of profitability.

The third area Stuart alluded to, which is our land controlled today, it is not only the sheer number of 209,000, but it is the distribution of this number, and in the geographic areas we serve and continue to expand to, out of our existing markets.

We have gone very successful in California into the central California Valley, expanding our geography while being able to sustain our growth in that California market.

We are entering markets such as New York and Pennsylvania out of our existing Jersey and DC operations, enabling us to enhance our profitability in these marketplaces.

This land affords us tremendous opportunity.

It also affords us the opportunity to serve a much more diversified marketplace.

If you look at what we are delivering as a company today, as compared to years ago, you see a very diversified product line in effect.

Our homes now range from six and ten-story multifamily programs in markets like Chicago and San Diego, to starter homes in markets like Texas in the 90 and the 110,000 marketplace, to traditional retirement communities throughout an entire country that we serve right now.

So, I think you'll see that this land affords us not the opportunity of just sheer volume, but a diversified approach to serving all constituencies in the marketplace.

So, as I look at '04, and I look at what we have accomplished, I still think the opportunities lie ahead of us if we refine and refocus some of the initiatives that we have put in place.

I will also say that in the area of Lennar Financial Services, even though this year will see the negative impact of not having the refinancing activity that categorized the marketplace, there still are opportunities for us to continue to expand as we expand our homebuilding business.

We have made certain initiatives into the insurance arena, servicing this same body of customers, and into credit enhancement for our customers, and we will continue to expand this area.

So, as I look at '04 and as I look forward to '05, I see a world of opportunity still facing the company.

We are blessed with a very significant number of strong geographic markets that we serve, with an excellent management team that has produced outstanding records for us year after year.

So, I look forward to '04.

I will turn it over to Bruce to put some light on that.

Thank you very much, Bob.

I'm proud to report record results for our company this year.

Our performance once again demonstrates our ability to achieve uncommon results on a regular basis.

What is uncommon with our results is that, in addition to the 38 percent increase in earnings in 2003, our return on net capital improved to 23.2 percent and our net debt to total capital improved to 9.7 percent.

The Lennar process that Stuart talked about really focuses our company on a balanced approach to achieving superior performance, and these are the three metrics that combine together as the scorecard for the Lennar process.

Today I would like to cover three items.

First, I will provide a little additional color on fourth-quarter results; and next I will talk about our strong balance sheet position; and then third I will provide some more details on 2004 and 2005 goals.

Beginning with the fourth quarter, our homebuilding earnings increased 40 percent, receiving a diversified contribution from both homebuilding and land operations.

Revenue from sales of homes, we noted in the press release, increased 12 percent as a result of a 14 percent increase in deliveries; partially offset by a 2 percent decrease in average sales price.

A little more color on the deliveries.

Deliveries were higher in all three of our regions, with the largest state increases in Texas and Florida.

The average sales price by region was 245,000 in the East; that is a 3 percent increase over the prior year's quarter, and that was really driven by Florida and New Jersey higher average sales prices.

In the central region, the average sales price was 197,000; that is a 3 percent decrease year-over-year, and it is primarily because in Texas we were focusing more on our first-time homebuyer product in this particular quarter.

In the West, we had a 307,000 average sales price, which is a 4 percent decrease; and that is because California's expansion this year was primarily in the Central Valley area and the Inland Empire, which has a lower average sales price than the coastal markets.

The gross margin percentage increased in all three of our regions, with the strongest improvement this quarter in the central region compared to the prior year's quarter.

However, the highest gross margin percentage in the company this quarter is in the East region.

The good news is that the three areas which we have for the last several quarters discussed as being soft, Texas, Colorado, and the Carolinas, we're seeing strengthening in all three of those areas.

The gross margin in our backlog continues to improve; and that provides good visibility as we look forward into 2004.

Interest expenses as a percentage of home sales revenue decreased from 2 percent in the fourth quarter of '02 to 1.5 percent in the current quarter.

And as we noted previously this year, it is now included in the cost of sales.

Our SG&A percentage as a percentage of home sales was 9.9 percent for the quarter versus 9.8 percent in the prior year; and this is primarily a result of achieving a highest bonus hurdle rates in the majority of our homebuilding and land divisions, which as we have noted in the past is tied to bottom-line profitability, return on net assets, and customer satisfaction.

Our homebuilding operating margins for the quarter were 13.8 percent versus 13 percent in the prior year's quarter.

That is an 80 basis point increase.

Turning to land sale profit, the gross profit from land sales increased significantly in the quarter to 48.2 million compared to a flat 2002 quarter.

The land sale revenue increased 111 percent; and we did recognize profits in all three of our regions, with the highest increases in both the East and the West regions.

One thing to point out that is not reflected in that 48 million is there are over $10 million of expenses excluding any G&A expenses that are attributable to this $48 million profit; and that is in selling, interest, and minority interest expenses.

Although we had increased land sales, our home site position, as Stuart mentioned, increased.

It actually came in at 209,000 for the quarter versus 158,000 at the end of the prior year's quarter.

Of these home sites, 35 percent were owned.

The supply constraint environment in our industry continues to place Lennar in the position of providing home sites to other builders.

We manage our land divisions on a separate bonus structure from homebuilding, maintaining a business process discipline to regularly sell home sites to third-party builders within the return on capital model that we were talking about earlier.

Joint venture earnings increased from 25.6 million to 37 million; and during the quarter, included in this number, we closed 206 homes in joint ventures, which compares with 198 homes in the fourth quarter of 2002.

However, the joint venture profit from home deliveries increased to 7 million this quarter from 2 million in the prior year.

Our backlog of homes in joint ventures at year increased from 441 in the prior year to 1,226, with an average sales price of 300,000.

This is primarily due to an increased number of new orders in 2003.

One thing to point out here is that we have expanded our in-fill communities in this area, and they tend to have a higher margin as a result of the more significant land constraint; and therefore we expect the contribution of homebuilding profits in our joint ventures to continue to grow.

The Newhall Ranch acquisition which Stuart mentioned is planning to close in the first quarter of 2004, which is contingent still on California Public Utilities Commission approval.

We remain excited about this acquisition, which will also create a pipeline of additional joint venture earnings in the future, as well as allowing us to establish a homebuilding division in the L.A. market in addition to the existing homebuilding division that we have in that market today.

We do have committed financing in place to close this acquisition at this time.

Management fees and other were 6.3 million versus 7.9 million in the prior year.

The major item in this category is recurring management fee income.

But I do want to highlight that the current quarter included $5 million of minority interest expense from a consolidating joint venture, where the profits showed up in land sale profits.

The combination of land, joint ventures, and management fees continue to be growing businesses for our company, although the quarter to quarter results may vary do to the timing of land sales.

Turning to financial services, earlier this year, we projected that declining refinance activity would impact our financial service operations.

However, in the fourth quarter, we exceeded our goal for financial services.

Our financial service pretax was 33.6 million versus 47.4 million in the prior year.

It is broken down as follows.

Mortgage in the current quarter was 25.5 million versus 30.9 million in the prior year.

That breaks out as follows.

Our Universal American Mortgage Company, which is primarily Lennar buyers, was 23.5 million this quarter versus 24.7 in the prior year; and our Eagle Mortgage, which tends to have a higher percentage of refinance activity this past year, came in at 2 million pretax for the quarter versus 6.2 million in the prior year.

Our title operations were 7.1 million pretax this year's fourth quarter versus 10.4 million in the prior year.

Strategic Technologies had about a half a million of profit this year in the fourth quarter versus almost 6 million in the prior year's fourth quarter, because we did sell about 3,000 subscribers in the prior year's fourth quarter.

Our mortgage originations were approximately 2 billion versus 2.2 billion in the prior year.

Our mortgage capture rate for the quarter was 73 percent versus 80 percent in prior year's fourth quarter.

And this includes any of the recent acquisitions we have made over the last year and a half or so.

Our average loan amount was approximately 188,000 in both years.

Our fixed mortgage was about 71 percent, versus last year 89 percent of our mortgages originated were fixed.

One thing to point out is a new business line in this area; our personal insurance doubled from 2,500 policies written in last year's fourth quarter to 5,000 policies in the current quarter.

Our profits and that business increased 118 percent to about 200,000.

New orders, we had strength in all three regions as we increased 19 percent for the quarter.

Our cancellation rate remained at the low end of our range during the quarter, which is approximately 21 percent.

Our average community count was 743 during the quarter, compared with an average of 672 in the prior year.

Our backlog, which came in at a record 3.9 billion, is up 21 percent from the prior year.

I wanted to point out that the largest dollar value backlog at year end were in two of our highest gross margins states, Florida and California.

The average sales price in backlog, which always tends to run about 5 percent higher than our actuals, increased in all three regions and every state where we operate.

Our joint venture backlogs had 770 homes in the East; about 100 in the Central; and about 350 in the West.

The average sales price of our backlog joint ventures is about $300,000.

Turning to the balance sheet, our EBITDA for the quarter was 1.4 billion versus just under 1.1 billion in the prior year; and our EBITDA margin in the fourth quarter this year was 15.7 percent, versus 14.8 percent in the prior year.

Interest incurred was flat and about 132 million; and our interest coverage for the trailing four quarters improved to 10.6 times versus 8.3 times in the prior year.

Our debt to total capital was 32 percent versus 41.6 in the prior year, and as we mentioned net debt to total capital was 9.7 versus 27.7 percent in the prior year.

Our cash at year-end was 1.2 billion versus 731 million in the prior year; and our equity increased over $1 billion to 3.3 billion at the end of 2003.

Return on beginning equity was 33.7 percent in 2003.

We have tremendous confidence in our 2004 and 2005 goals as a result of visibility in our business, and I would like to walk through some of those assumptions that we are making looking forward.

Starting with 2004, we have a goal established for $10.50 which we have increased today $1.00 from the previously established $9.50 goal.

We are assuming deliveries of approximately 37,000.

This is a 15 percent increase over the current year; and we have great confidence as we look at our backlog and the communities that we have in place.

Our average sales price we believe, as we look at this backlog and we looked at our mix, is increasing a little more than we thought recently; and we would expect will be somewhere around 265,000 per home delivered.

That would be over $10 billion of revenues.

Our operating margin, as Bob Strudler mentioned, we are very focused on initiatives to reduce cost, and we are comfortable saying that our operating margin should increased about 50 basis points over 2003 actuals to approximately 12.8 percent is the goal that we have established.

Our Lennar financial services operations we think will earn somewhere between 145 and 150 million pretax; and within this assumption we have already assumed that refinance activity, the profits which were 27 percent of our financial service operations in '03, will drop to about 10 percent of our total financial services pretax in '04.

Additionally, in this number we are assuming that our strategic technologies operations will sell some subscribers and our alarm and cable operations, and will generate at least $10 million pretax within the number.

We expect that our joint venture land and management fee category will be about flat with this year, approximately 177 million.

However, we will have more joint venture home deliveries within the number in 2004, as we will have approximately 1,000 homes delivered in joint ventures; and where we had about 7 million of profit relating to home deliveries, that should probably triple in 2004.

Our corporate G&A we expect will be around 1.2 percent of revenues in '04.

And our tax rate is increasing slightly, as a result of more business in California and Illinois, to 37.9 percent.

Our diluted share count, we expect to average approximately 84.7 million shares, which includes full dilution for our contingent convertible.

We would expect that the interest ad back on this convertible debt will be about $8.5 million.

Our community count, we expect to end the year somewhere between 815 and 835 communities, and I would spread the ranges of our $10.50 goal approximately $1.55 to $1.65 in the first quarter of '04; $2.15 to $2.25 in the second quarter; $2.70 to $2.75 in the third quarter; and $3.90 to $3.95 in the fourth quarter.

Turning to 2005, we established a goal with our press release of $12 a share.

We would assume deliveries of approximately 43,000.

Within that $12 projection, we are assuming some slight improvement in operating margin; some slight improvement in financial services; but about the same level of joint venture and land activity.

That would build to $1 billion of net earnings with this goal in 2005.

So, that is the detail I would like to lay out for '04 and '05 goals.

I would just like to conclude that we still believe that our stock is at a very low level.

It's increased this year based on fundamentals, and we think at some point, as we continue to improve our fundamentals, we will see multiple expansion, which hopefully will drive our stock higher in the future.

So, with I would like to open it up for any questions.

(OPERATOR INSTRUCTIONS) Joseph Sroka, Merrill Lynch.

Good morning everyone.

Bruce, when you said 37,000 deliveries and then you said the 1,000 joint venture deliveries, is the 1,000 in the 37,000?

Yes it is, Joe.

Then you said JV land and management, the contribution will be about the same in 2005 versus 2004.

Should we assume then that JV home delivery income keeps going up?

And then you maybe sell less land or something?

I would assume that there will continue to be a growing percentage of home deliveries within that number.

So, that is a fair statement.

Can I sneak one more in?

Do you have any thoughts on a year-end or targeted community count range for the end of '05?

I have not laid anything out.

But generally as our volume is increasing 10 to 15 percent a year, community count, which always bounces around, will probably be somewhere within that range.

Okay.

Thank you,

Greg Nejmeh from Deutsche Bank.

Good morning Bruce and team.

Bob had some comments regarding cost-saving initiatives that could produce a 2 percentage point improvement.

I'm wondering, and perhaps you covered this; but I'm wondering how much of that improvement is contained in the '04 and '05 guidance?

Secondly, I'm wondering exactly how that figure was arrived at?

And the reason I ask that question relates to the fact that a number of other builders have suggested that cost savings could be considerably greater than that over time.

So, I'm wondering if you feel that is an intermediate goal; and whether or not on a longer-term basis it might not prove to be conservative?

That number is a number that we're going to see evolve over time.

I think that at first blush, that 2 percent number is kind of an estimate of where we see things going right now.

But there is no question in our modeling as we look ahead, two, three, and five years, we think that there are much more significant dollars to be saved from just finding efficiencies in the production process.

It's going to take some time to actually bring those dollars to the bottom line.

But as we look short-term and try to look over the next year or so, we think that a 2 percent number is going to be achievable.

But we definitely think that number is going to be greater over time.

Care to speculate a little bit, Stuart, as to how much greater it might be over time?

Some builders have suggested that the basis point differential between the cost profile of a large builder and that of a smaller builder, let's say, could be as much as 6 to 700 basis points on an all-inclusive basis.

Could you share with us whether or not you think those are realistic stretch goals or longer-term goals?

I think that we're all seeing this.

Those are very realistic numbers.

The gap between the larger and smaller builders is really starting to define itself.

We feel that it could be anywhere from 2 to 5 percent as we move ahead.

Where it's actually going to end up?

Anytime you're looking at more than six months or a year, you're getting into some speculative territory, and I don't want to kind of gauge anything in, hardware or anything, that is not already kind of in place and very definable.

Our estimate for our view is that as the larger builders continue to define how volume is used to redefine the purchasing structure, the cost structure of the company, and to redefine the quality process, that the cost (indiscernible) differential is going to become larger and larger.

I would not be surprised to see us surpass even the 6 to 7 percent that we mentioned.

Great.

Thank you.

Carl Reichardt with Wachovia Securities.

Bob, when you talked about return on invested capital, for the operations with dual marketing as opposed to those without, can you give me a little more color on the differential there?

As a follow-up, Stuart, I wanted to ask about you mentioning that you expect that the land sales is a larger recurring portion of what you report in the future.

Does that mean that you expect more stability or less volatility in that earnings stream?

Higher margins?

What are you looking at for the next couple of years?

Let me get first and I will turn it over to Stuart.

Historically as we back over the three years that we have had the dual marketing, and I don't have an exact quantity handy; we will check that and give you a number going ahead.

But right now, we know from looking at the markets where we have put in dual marketing, that we have greatly enhanced our ability to absorb our property and that we have therefore increased our overall returns on the capital.

There is no question that we have seen the ability, if we take the typical community where we are doing 60 homes in a product center, to deliver in that same community as much as 100 to 130 homes in the community.

We have not seen it take away at all from our existing product lines, but really enhance the absorption.

With that as a background, it becomes very evident that our returns are greatly enhanced where we have that.

But, I don't have an exact number to give you right now.

Relative to land, I think that the land picture is really becoming clearer and clearer with each passing year.

As land is more and more constrained, it is more and more of a challenge to find the right land opportunities.

And you are hearing this from all of the large builders.

I think you are going to hear more and more how land is playing a central part in defining how margins are driven and how our positions are staked out across the country.

This is working to the benefit of the larger builders, who have capital and have the ability to react quickly; who are not dependent on financing; who are able to find niche opportunities in difficult strategic markets; and who have the sophistication to be able to handle larger pieces of land, underwrite them properly, develop them with the right managerial controls in place, and to take a disciplined return on capital approach to working with the land resource.

Now, because land is more constrained, and because the opportunities are more challenging and challenged, it affords another opportunity to those who are able to handle the land process particularly well.

Of course, we been in the land business as a primary business for a lot of years.

But, that new definition of business is providing developed home sites as kind of an incidental ancillary business to other builders, both larger and smaller.

Of course, while we have been doing that for some number of years, what we're finding is, as we move forward and as we continue to grow our company, and stake out larger land positions, those opportunities are presenting themselves more and more.

If you look at our numbers for 2003, even while we're selling land to other builders, and finding an increasing amount of land profit in those land positions, we are continuing to grow our land bank to be able to sustain both our current growth trajectory and more.

That I think is revealing the fact that land is going to continue to be a more significant profit center as we go forward.

Fair enough.

Thanks, Stuart.

Steve Fockens, Lehman Brothers.

Stuart, maybe if you put some color around a longer-term outlook, beyond '04 and '05?

We have heard over the last couple of months some of the other builders starting to talk about some -- look on paper to be some pretty aggressive numbers, either from an earnings or unit basis multiyears out.

Not that I am asking for OE, earnings expectations; but kind of what you think about with Lennar in terms of the long term.

Where you might grow to in terms of units, beyond which it might get harder?

Any kind of color you can give in terms of your thinking longer term would be helpful.

There are a couple things that I can highlight in answer to that.

Number one, I think as we look at demands trends out beyond 2004 and 2005, any study that we look at is basically showing that growth in the United States, population wise and household wise, remains very strong and consistent with what we have seen over the past ten years.

This is really defining a very healthy environment in which particularly the largest builders are well positioned to be able to grow.

Because along with the population and household formation growth, you're looking at land constraint working in favor of the larger builders.

You have a consolidating environment with pressure on margins.

So we think this is a really healthy compact environment which should be able to continue the kind of growth trajectory that we seen over the past ten years.

Now, people ask what might be the limitations to growth for the larger builders?

I look backwards to perhaps 10 or 15 years ago when there was kind of an invisible ceiling on how large a builder could grow, at about 10,000 homes a year.

Something significant has really changed in the composition of the large builders over the past ten years.

Perhaps it is two fold.

Number one, the systems and controls are in place with the large builders have been enablers, in terms of our being able to grow past that 10,000-home threshold to 20, 30 even beyond; in terms of size, being able to handle the business growth with simple consistent, centralized controls that works in favor of developing a good corporate controlled environment that works well for a company that is on such a growth trajectory.

Everything that we see right now suggests to us that we within our company would be able to grow significantly beyond where we are.

We could double and maybe triple the size of our business without significantly altering the management controls and corporate controls that are in place.

That is not to suggest that we are going to be growing at that right; it is just to suggest that we have the capacity to control the business that is moving in that direction.

Then, additionally you have look at the capital composition of the largest homebuilders, and us in particular.

We are extremely well positioned from a capital structure to be able to handle the capacity of growth well beyond where we are.

In fact would say that we are underutilizing our balance sheet today, which we would not disagree with.

We like that position for where we are, but it is an enabling position in terms of being able to move to a next level and do it comfortably, without stressing our balance sheet and without stretching the limits of our investment-grade rating, which we also think is very important to a company growing in our position.

So, overall, looking out beyond 2004 and 2005, there is capacity, there is a strong market, and we think the opportunity exists for continued growth along the lines that we've seen over the past ten years.

One quick follow up to that.

Is there a certain level where the various builders together get to be a certain size, where you might think internally within Lennar, we can double or triple, but do you think a U.S. housing market can support five or six builders that are building 60 and 70,000 units apiece?

That is an interesting question.

We're going to sit back and watch.

But I think part of the definition relates to Greg's question earlier.

And that is, to what extent do you see the gap widening between the cost structure of the largest homebuilders and those that are smaller?

There is always going to be a market for the smaller homebuilders who find their niche in major markets.

But the question is, where the gap widens in terms of the cost to build the home and finance the home and everything else, I think that more and more there is going to be a concentration of deliveries in the hands of the largest builders who are able to deliver the very best value to customers, with a controlled environment that yields the best quality.

So, as we look to next year, it's hard to define 5, 70,000 homes (multiple speakers) As we look five, six, or seven years out, there is an evolutionary consolidation that I think makes sense because of the way the cost structure is going to work in favor of that consolidation.

One quick follow up.

When you guys gave initial or at least the 9.50 guidance last quarter, I think you had expressed at that time some concern about plywood and OSB prices and how those might impact margins.

Have those concerns diminished or gone away?

No, I think we have not seen a repositioning of the lumber market yet, but we think as we look ahead, it's a commodity.

There are going to be fluctuations.

I think that just like any of the other component parts of our home, as those prices remain high, there will be impact on margins.

Okay.

Thanks very much.

Ivy Zelman, Credit Suisse First Boston.

Actually Dennis on behalf of Ivy.

I'm just trying to get a handle on your growth in the communities, and where those are going to play out.

Can you give us an idea of what states maybe you are going to devote the largest amount of the growth to?

And specifically maybe give us an update on the Pacific Century acquisition, which at the time you commented, it was largely an asset play; but there was some work to get things in order there.

Is that acquisition moving along?

Or those assets, I should say?

The asset are fully deployed at this point in time between two operating divisions in that area.

One being an Everything Included and the other being a Design Studio builder; and contributed to last year's results.

Those assets are really been deployed in all areas.

As far as geographic expansion in the marketplace, if you look at where we are and where we have come, there really is more opportunity than people have really looked at.

We were in California for years and people said you could not grow in California because the coastal areas did not permit it.

But, if you look now you are seeing we have gone into the Central Valley and we have expanded in these areas.

There really is, I think, further growth for us.

Stuart has a comment on that.

One of the things that I point out on growth is what we have said is that our growth strategy is a very well-diversified growth strategy overall.

So to highlight today which markets we will be concentrating our capital in, would be in contrast to the way that we have typically grown our business.

We are opportunistic in our approach to growth.

All of our divisions are competing for capital, looking for new opportunities to grow organically.

At the same time we always have our cork in the water relative to acquisitions both small and large.

So, the answer to the question as to where we will be concentrating our growth, it will be in those areas that generate the highest return on capital for the overall company and help make our company a better company as we go forward, capitalizing on some of the things that we talked about, including the ability to generate additional cost savings while we improve quality.

Is it fair to say that inherent in the community count you laid out, that 815 to 835, that largely you have an idea of where those are going to be geographically?

I guess I'm not necessarily talking long term; but specifically '04.

Are we looking largely at being California, Florida, maybe the Northeast where you mentioned you were expanding? (multiple speakers) not necessarily broad-based in all of your markets, I guess?

Rough order of magnitude, if you look at '04, California, Texas, and Florida will each have somewhere 7 to 8,000 or so deliveries.

Those will continue to be the three largest states; and then we will continue to grow in the other states that we are in.

In that 37,000, we have not assumed any new states to get to the 37,000 at this point.

Very quickly Bruce, two numbers, the capitalized interest and cogs, if you have that?

And also on the financial services, where are you assuming that margins go for '04?

Capitalized interest is approximately 3.4 percent to which is down.

Last year it was 4.6 or so.

So, we continue, as a result of our low leverage and lower borrowing rates, we continue to see interest capitalized to inventory going lower.

Obviously that will be a positive impact to margins on a continuing go-forward basis.

I am sorry, Dennis; your second question again?

The margins in the financial services segment?

If you were to compare that to (indiscernible) the 27.5 in '03, where are you forecasting those to go?

When you look at financial services, there will be more pressure, particularly in our Eagle Mortgage and title operations in particular.

I would assume that there will not be a tremendous impact on our Universal American Mortgage, but it will be more competitive because of fewer refinance transactions and the fact that there are more brokers competing for more of the business.

There will be more variable loans projected than fixed-rate loans.

I would suspect that the margins will come down a little bit from where we achieved in '03.

Thanks very much, guys.

Michael Rehaut, J.P. Morgan.

John Barlow (ph) on behalf of Mike.

I just had a question regarding home prices.

Are you currently seen the same rate of inflation that you have in the past year or two?

It's never apples-to-apples, because we have different product mix and different geographic mix, so it is not an apples-to-apples comparison.

What I would say is we are still seeing the ability to raise prices and we're still seeing strength in most of our markets.

So potentially there could be higher average sales prices.

What we have assumed in our '04 projections is what we are seeing today, based on today's pricing.

We are not assuming any additional inflation in the '04 average sales price number that we put out.

My follow-up question regards the capitalized interest and COGS.

Now, you said it was 3.4 percent versus 4.6 last?

Yes.

That is 3.4 percent of?

Of inventory.

Do you have what was actually amortized this quarter in your homebuilding cost of goods sold?

Yes.

About 40 million.

Okay.

Thank you.

Steve Kim, Smith Barney.

Congratulations on strong results.

Question I had is for your JV deliveries;

I just went to make sure I got this right.

You said it kind of quickly.

You used you are going to be delivering close to 1,000 units in the '04 period, which is not substantially up from what it looks like you delivered this year.

But, your profits you said could triple?

I just wanted to make sure that I got right; and what that profit number would represent in dollars?

What we're seeing is, as our joint venture communities going forward are more focused on in-fill, where there is more supply constraint margins tend to be higher, I'm seeing, looking forward to '04, that the profit in JVs from the home deliveries will be approximately 20 million or higher, compared to 7 million this year, -- I'm sorry, the 7 million was in the quarter, the fourth quarter this year; versus 2 million in the fourth quarter last year.

That is going to grow to over 20 million in 2004 for the year.

Okay, got it.

I was confused.

On your operating margin guidance, similarly you said that you were targeting a 12.8 percent operating margin.

That compares with what for fiscal '03?

I just want to make sure we are talking apples-to-apples.

That compares to 12.3 percent in fiscal '03; so it is a 50 basis point improvement.

For the full year?

Correct.

Your cash balance stands at well over a billion.

I know about 200.5 is associated with hopefully the upcoming acquisition of Newhall.

I know you upped your dividend substantially, it is probably going to speak for a little less than 100 million.

But you have still got a lot left over.

Can you talk about what your goals are and what level of cash you are comfortable holding on a normalized basis?

To answer the last part first, I don't think that -- we don't feel that there is a need to be holding onto any cash.

I think that we want to be properly levered as a company, and we are growing our earnings and therefore our equity at a substantial rate.

So certainly if we were to deploy our cash and even begin using our revolver, we would not feel that that put us at, at all, an uncomfortable rate of leverage.

In fact, our debt to total cap is at 32 percent; and if we increased our borrowing on our revolver as we went through the year, we would certainly (inaudible) well within our comfort zone of a debt-to-total-cap of 35 to 45 percent.

All of that, we say that we're comfortable with a tremendous amount of liquidity to be able to whatever we find opportunistically works best for our company.

What will we do?

How do we look at the market ahead?

I think that you know that we're very opportunistic in our growth expectations of ourselves.

We are primarily focused on improving our return on capital; if not immediately, over a shorter, over a relatively short period of time.

We are consistently focused on building a better company.

We are not just looking for growth for growth's sake.

But we do feel that growth is an important component of being able to be able to continue to redefine the cost side of our business and be a participant in a growing reconsolidating industry.

So, we are looking for opportunities.

We're looking for opportunities to deploy an increasing amount of the capital that we have out there.

And we're very comfortable with the debt-to-total-cap range of 35 to 45 percent, which really says that we have the capital to be able to whatever opportunistically presents itself.

Great.

Thanks very much.

Myron Kaplan (ph), Kaplan Nate & Company.

Wonderful results.

It seems, though, the approach you're describing in regard to land or land investment is that you are heading more or somewhat to a kind of land investment company.

By that I mean there is a kind of a dual strategy, if you forgive me, in regard to the land, where you're going to acquire and entitle parcels of substantial size; and then with an eye to your standard of ROE, divide the parcels and decide whether you build them or you turn them over opportunistically to smaller builders.

I wouldn't actually pose that as a strategy for going forward.

We are certainly not becoming a land company.

It is more incidental to the growth pattern that is evolving organically for the company.

We are participants in larger parcels of ground in certain areas.

As we start building some of those out, there are opportunities to sell parcels at very advantageous prices.

Being opportunistic as we are, we will sell to other builders or other participants at strong pricing.

But, I don't want to map it out as a new business line, where all of a sudden we're thinking of ourselves as a land company.

We certainly do not.

It's just that incidental to the business that we are already in and focused upon, land is going to become an additional piece or an additional source of revenue and earnings for the company.

In fact, it already has become, so to speak.

That's right.

Well said.

So this will be in an adjunct, let's say.

So that at certain times it will be difficult.

You'll be faced with offers that you cannot -- literally don't want to refuse, because the returns are substantial enough that there is very little to be gained by following through on the final construction and sale of the actual home.

Right.

That is correct.

I think that is pretty much the evolution you're looking at.

It is incidental, but it is nonetheless -- given the constraints on land, given the appetite for land parcels by others, particularly developed home sites, it gives us an opportunity to sometimes sell something for more money than we would ultimately make on building the home as well.

Would you say that the value is really -- an increasing amount of the value in the businesses is inherent in the actual entitlement process of the permitted lot?

Land because it is so scarce is becoming more and more valuable.

The process of having land and holding land is becoming one that is defining its own profit.

And we will continue to see some of those profits flow through our earnings, not necessarily as a separate business but as an adjunct to the business we're in.

Keep up the good work.

It is certainly showing marvelous results.

Thank you.

Jack Kasprzak, BB&T.

Congratulations on a great year.

First, you guys have said you have plenty of capital to grow you.

But you said you have assumed no entry into no new states in your projections for '04.

Why wouldn't you pursue entry into new states?

And are there any in particular maybe that look very attractive to you guys for longer-term planning?

I think that the statement we make is that we do not project entry into new states from the standpoint of business planning and putting our numbers together.

I think that basically comes down to the fact that we don't force entry into a new state or to new opportunities.

We look opportunistically at geographic expansion.

So, as the opportunities present themselves on an attractive basis, where there is a cultural fit as well as a financial fit, we are prepared to move forward.

Are there any states that we think are attractive?

There are a number of states in which we do not currently operate that we think that we would like to find operations.

We have highlighted the Eastern Seaboard.

I think that last year (technical difficulty) Carolinas and have moved comfortably into that area.

We still have not entered the Atlanta market, which is one that we have highlighted.

There are some on the Pacific coast that we have also considered attractive.

So there are a number of markets into which we can continue to find new opportunities.

But we are going to look for the right opportunity so we are not mapping them out right now.

Fair enough.

Secondly, can you talk about your traffic during the quarter?

How it is currently or how was it at the end of the quarter?

I don't know if you guys quantify the level of traffic.

Maybe if you could talk about how the traffic pace is in some of the markets that have been weaker, like Colorado or the Carolinas?

We saw very good traffic through the last month in the fiscal year.

In fact, surprisingly strong.

As we went through the quarter, we saw traffic improve and our sales performance improve as we went through the fourth quarter.

So, I have been very pleased with that level.

As far as where in particular, Colorado has held its own through the year.

It was one of the tougher markets as we started (technical difficulty) it has been a very competitive market.

But we are still seeing good business in that marketplace.

Basically, most of our markets have seen fairly sustained levels of activity through the year.

Florida and California in particular have been strong.

We did have some sporadic weaknesses in areas in Texas, but we are seeing that level off also at this point in time.

And we have seen some reinvigoration in our Carolina markets as we have come through the year.

Right now, the marketplace seems fairly strong.

Great.

Thanks a lot.

Rick Murray, Raymond James.

Great quarter.

My first question relates to your expectations to roll out the dual-marketing strategy in the remainder of your markets.

I was just curious if you have already -- I guess obviously you have; but if you have identified the strategy from a branding standpoint, etc.?

Also, what you see that gives you the confidence in your ability to roll that out over the next 18 months in the other half of your markets, whereas it has taken you a couple or a few years to roll it out in the first half.

That is a great question.

I think that we are gaining more and more confidence in our dual-marketing strategy as we move forward.

The question of branding is a particularly interesting one.

We are testing some branding strategies in some of our individual markets, to still-test (ph) how we want to roll these programs out across the country.

But, branding is very much at the top-of-mind in our company, inasmuch as we have basically assembled a group of brands across the country that are kind of more loosely tied together under a corporate umbrella but not necessarily separately identifiable.

We are working and testing some branding decisions along those lines in some of the markets, and that will redefine our branding strategy as we go forward.

Why do we feel that we will be able to roll out our dual-marketing strategy more efficiently as we go forward?

We have been working very hard on defining and redefining the actual programs and how they work for Everything's Included and Design Studios.

We're feeling very confident in our ability to structure ourselves along each of those brand lines in new markets as we go forward.

We have gained experience.

We're feeling that we have much more efficiency to bring to the table in the way that we roll them out.

Now, I think that what Mr. Strudler is that we don't expect to be in 100 percent of our markets by year-end '04, but we expect to be in 75 to 80 percent of our market over the next 12 to 18 months.

Beyond that, we will continue to roll out dual marketing and in either new markets that we are operating in, or the remaining existing market.

It is a real growth opportunity for the company.

One other quick question pertaining to the guidance.

Given your comments regarding liquidity and wanting to stay nimble should opportunities arise; should I interpret that to mean that you have not included in the acquisition assumptions in your guidance nor have you earmarked that remaining 900 million or so dollars of cash on the balance sheet?

That is correct.

Thank you.

I think we have time for one more.

Jim Wilson, JMP Securities.

Sorry the questions have been so long.

The last one would be, Bruce, quick on the financial services.

The rough split of title income versus mortgage income?

Actually for the quarter or the end year?

For '03?

Yes.

For '03, I put that out earlier.

Let me just look back for the entire year.

I'm sorry, I laid out the quarter.

Mortgage for the entire year was a pretax of about 110 million; and title insurance was about 41 million; and miscellaneous and the other categories.

Just a final one, and this has been asked sort of in different ways, Stuart.

But how do you look at currently, with all the various alternatives you have with your cash, how you think of return on invested capital of the different options?

Or do you really think of it that way, when you decide whether to increase stock repurchase versus land acquisition versus company acquisition versus even dividend payout?

As we have said in the past, we think that our proxy (ph) is to grow the company not to shrink.

We have focused on growing the company as the primary directive.

So in terms of looking at stock repurchase versus buying new land versus acquisition versus dividend, we have tried to remain opportunistic.

We have kept liquidity within the company to position ourselves for opportunities as they present themselves.

As we grow as a company, I think we are gaining confidence that growth will reveal itself as opportunity to continue to consolidate within the business, and that will produce the highest return on capital for the company and for our shareholders.

Okay.

Very good.

Thanks.

I think we're going to take one or two more.

Timothy Jones with Wasserman & Associates.

I thought you were going to not let me get on.

Always room for you, Tim.

First of all, Bob, it is lovely to hear your dulcet voice again.

Thank you, Mr. Jones.

First of all, I see a trend here going and I'm just perplexed.

Perhaps you could help me out.

They have been about three builders that have reported, and they have all raised the estimate.

Two have sort of lowered the first quarter, and of course backloaded everything.

Your first-quarter estimate is about in line with the street estimates of 165 when they were carrying 950; and you have raised the estimate for the rest of the half.

Why is everybody sort of being cautious on this first quarter?

I might answer that, Tim, that we have not getting previous guidance to the quarters with respect to 2004.

This is the first time we are throwing it out.

So the street may have been high.

As we look at the year-over-year growth, the range we gave is the range of 13 to 20 percent increase in the first quarter, year-over-year.

So that is right in line with what we think we're looking at.

It is actually a little higher than the overall number for the year, year-over-year.

So, this is the first time we roll it out.

There is no reason that anything should be backloaded.

The environment is good; the backlog is strong; and we have good visibility.

It is just the first time we are rolling out the numbers.

(technical difficulty) have in the last two years on this conference call.

So you put a lot of information out.

Secondly, let's get back; you're making 3 percent on your cash; you are using around $1 billion.

You easily could take that billion, another billion from your line of credit, and you have 40 million shares available because you have changed your Class B's so that you can go up to 125 million, which could be easily another 2 million.

What are the changes of you making a mega-acquisition in the $4-billion range?

Maybe you don't want to answer it.

What are the chances?

You're one of the very few companies that has the potential to make such a large acquisition.

Look, just to answer as directly as we can, we have clearly positioned our company to be able to take advantage of any opportunity that might present itself that helps build a better company that is positioned to take advantage of the opportunity surrounding being a larger cap company and being a larger volume company, reducing costs, improving quality, and building a fundamentally stronger base.

As I said before, managerially, I think we are equipped and positioned to be able to handle a lot more.

Structurally I think the company is structured to be able to do a lot more.

But, it is all a question of opportunity and finding a way to do something with our capital base that just really makes for a better company, not just a larger company.

So the answer to your question is, should the opportunity present itself to do something that is strategic and works well for the long term, we are positioned to be able to look at it and act on that kind of opportunity.

So we are certainly not fishing for the big whale.

We're out there looking at all opportunities, both organic growth and small acquisitions at the same time.

I think you would agree with me that the U.S.

Home acquisition was a home run and a lot probably easier for you than the nine small acquisitions you made; just on a logistic basis.

So I think, would you agree that if a large acquisition of a good company at a reasonable price became available, that that would be looked on favorably?

We had a wonderful experience with U.S.

Home combination.

We had a wonderful cultural fit.

It was a good financial deal.

It was one of those opportunities that is exactly what I'm speaking of.

It was the right opportunity at the right time.

Now, I don't think we'll ever find another opportunity that comes with the land, the positions and everything else; and Strudler to boot.

And Strudler to boot, right.

I would agree with that.

There is no question, we're out there looking at all opportunities and we are positioned to be able to take advantage should the right one present itself.

Big, small, land, organic, whatever.

All right.

You dodge and weave very nicely.

Tom Crowley (ph), Putnam Investments.

On your '04 and '05 guidance, you do not assume any price increases?

Correct?

That is correct.

We are assuming the environments that we see today, looking at our backlog and looking at the communities and where we believe they will be priced, as we either open up new communities, or where we are priced at, at this point.

That is zero percent appreciation?

That is just to be conservative, or is that what you are actually seeing and that is what you expect?

One thing you've got to keep in mind, Tom, is communities that are opening later in '04 or '05, based on opening prices, there might be some inflation that is included in there.

But basically, our assumption is we have a backlog that has an average sales price of almost 280,000 which tends to run 5 percent or so higher than actuals.

So, based on what we're seeing in our backlog, we are assuming the environment that exists today is the environment we're seeing for '04.

As you go out to '05 you have mix and other things.

It is kind of hard to break it down exactly apples-to-apples.

But we are pretty conservative on the pricing that we are including.

Thank you very much.

Well, I would like to just concluded by saying thank you all for joining us for year-end.

We were pleased to be able to present our performance for your consideration.

As we look ahead, we feel comfortable with the environment and with the position of the company, and look forward to reporting again at the end of the first quarter.

Thank you.

Thank you, ladies and gentlemen.

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