Lennar Corp (LEN) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the third quarter 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.

If you should require assistance during the call, please press star 0.

As a reminder this conference is being recorded today, Monday, September 20th, 2004.

I would now like to turn the conference over to our host, Mr. Stuart Miller, Chief Executive Officer.

Please go ahead, sir.

Thank you and good morning everybody.

Welcome to Lennar's third quarter conference call.

Let me start by just reading our disclaimer information regarding forward-looking statements.

The information that we are going to discuss this morning 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.

And we, as a company, urge you to look at those disclosures.

I want to say once again, good morning.

Welcome to Lennar's third quarter conference call.

I am joined this morning by Bruce Gross, our Chief Financial Officer, who will discuss our financial results in more detail, and this morning also I'm joined by Jon Jaffe, who is Lennar's incoming Chief Operating Officer.

And in deference to Jon's being here, I'm going to keep my comments very brief and Jon will speak more definitively and in more detail about our current operations and how we're proceeding forward.

But I do want to make a few comments.

First of all, we're very pleased to announce another record quarter for our company.

As you can see from our press release, revenues are up 21%, generating earnings growth of 12% for the Company.

At the same time, our backlog dollar volume is up 35% year-over-year to $6.1 billion.

And this gives us excellent visibility into our fourth quarter and 2005 earnings picture.

Accordingly, we're increasing our guidance for '04 to $5.70 from $5.50, and 2005 to $6.60 per share from $6 per share.

Before I turn it over to Jon, I'd like to cover just 3 quick areas.

First, as it relates to sales in the homebuilding industry in general, as we look at the picture today, interest rates remain stable, the economy remains stable, affordability remains strong within the homebuilding markets across the country.

We continue to look at a record-setting pace at very strong sales, very strong homebuilding programs across the country.

And while there are some markets where we are seeing a little bit of sluggishness in demand, and Jon will cover in this more detail, across the country we're seeing relative strength in the homebuilding market.

Now, against that backdrop, we recognize that our sales pace has increased about 1% year-over-year, which is a little bit of a pull-back for us.

We had noted in prior quarters that we were going to be slowing our sales pace a little bit so that we can properly match our sales pace against our construction pace, as we move ahead.

We have, in fact, done that, and we have made -- we continue to make sure that we are not selling too far ahead of ourselves as a company.

At the same time, we have seen that most of the markets across the country remain very healthy and very strong, but with price increases accelerating across the country, and in some of our strongest markets we have seen some pull-back in sales pace, reflecting somewhat of a breather, I would say, in terms of adjustment to sales price in some of those markets.

And, again, Jon will speak a little bit more about that in just a minute.

Many of you have asked questions about the hurricane activity that we've seen in Florida.

The impact of that hurricane activity has been very small as it relates to our third quarter results.

It will have a little bit greater impact as it relates to fourth quarter; and into 2005, we'll see some adjustment to our community count as we look into 2005, but overall the impact should be relatively contained.

We think that we will see some impact to material prices and labor availability, but we think that we'll be able to ride through these adjustments as we go into 2005.

The second thing that I'd point out is our land sales program continues to remain strong as we look at land sales in relation to where they have been year-over-year, and how they've grown through the year, and our land activity in general, we continue to balance our program of acquisitions with a very strong land sales program, very much in accord with our Lennar process of making strategic acquisitions, using land sales to pare down our balance sheet and to properly balance our land positions as we go forward.

Jon again will give you a little bit more color on that.

But our land sales activity continues to reflect strength in the homebuilding market in general across the country.

We continue to build on a strong national reputation of being able to make good land acquisitions, and not only provide a strong land position for our own homebuilding activities, but also be a resource for land purchases for some of our competitors in the industry.

The final point that I'd like to cover is the fact that there has been a somewhat significant development, kind of, outside of Lennar, but relative to Lennar Corporation, and that is the sale of L & R Property Corporation, the spun-off independent company of our company from 1997.

And the relevance the sale of L & R property is the fact that -- is threefold.

Number one, it provides an excellent validation for the joint ventures as the valuation of the joint ventures that exist between the two companies.

As many of you might remember as you look backward, we have entered many land joint ventures with L & R Property Corporation, where the strength of both companies have reflected on our ability to make a good acquisition and to provide good value for both companies.

In underwriting the sale of L & R, the acquiring company has done more than validate the values that are embedded in those ventures, but that sale is really acting as a proxy for the tremendous buildup in value that we've seen in those ventures over time.

And, of course, from a Lennar perspective, the increase in market valuation of those properties will continue to reflect on positive earnings growth for the Company.

Additionally, many of you might have noted that the rating agencies have expressed concern over time for the fact that there's common ownership between the two companies.

The Miller family, in conjunction with this sale, will adopt a much more passive role -- a completely passive role in continuing interest in L & R going forward, and we believe that this will very positively impact the outlook on the credit side of Lennar Corporation for the future, relative to the rating agencies.

And then, of course, finally, my role as a dual executive of both Lennar and L & R Property Corporation will cease to exist, and my focus will be purely on Lennar Corporation, and many view that as a positive as well as we go forward.

Overall the outlook for the Company is strong and looks good.

We feel very well-positioned across the country to be able to continue to grow earnings and continue to report good quarterly results as we go forward.

And with that, let me turn over to Jon Jaffe, who will give us some operating color.

Thank you, Stuart, and good morning, everyone.

As noted on our earnings release, our earnings success was in both homebuilding and land, and I'd like to start with a discussion of our homebuilding activity by taking you through a review of our markets.

As Stuart mentioned, we did slow our new orders to match our construction pace.

There was some minor effect to this from the hurricane and weather in the East, but primarily in our stronger market on the East Coast and West Coast we were ahead -- our backlog was ahead of construction, and we really had to match the pace of our new sales to get our backlog more in line with that construction pace.

Starting on the West Coast, I'd like to discuss California, which is really diversified into 3 different markets: northern California, southern California, the central valley.

In southern California, which has seen the greatest price appreciation over the past year, we have seen some moderation of that market to a more normal, healthy market.

We are still seeing strong sales activity, but we are seeing a slowdown in the pace of price appreciation.

And northern California continues to be very strong.

It didn't see as healthy a run-up in price appreciation as southern California, and as you might expect, we're seeing the sales continue to be stronger in northern California by comparison.

In the central valley, which is the most affordable of the three major market areas in California, we continue to see very strong sales pace activity in our markets of Bakersfield and Fresno, where we're represented in the central valley.

Continuing in the West, in Nevada and Arizona, we continue to see very strong activity in all of the markets there in those states.

In Colorado, we continue to see somewhat of a choppy market, particularly in Denver.

In northern California, and a little more strength in Colorado Springs area and southern Colorado.

And Texas continues to remain soft.

We see continued pressure on the demand side of the equation as there is continued pressure downward on job growth in Texas, which keeps the supply and demand very much in balance and puts pressure on pricing and margins in the state of Texas.

In the mid-east in Minneapolis and Chicago, we continue to see strength and stability in those markets as we move forward, and as we move to the East Coast we again see continued strength from New Jersey to D.C. and the eastern seaboard.

We see those markets continuing at a very healthy pace.

As we move further south along the East Coast, Carolinas is the one weak spot along the East Coast, and we continue to see somewhat of a soft market in both northern and southern Carolina.

And then with respect to Florida, we've seen, through the third quarter, very strong market.

We did see at the end of the third quarter some interruption in that sales pace due to the impact of the 3 hurricanes, and we expect we'll see some interruption of that going forward, but fundamentally we see a very healthy market in Florida as we look to the future.

We also have 3 new markets for us at this point, we feel are fully integrated and running smoothly.

Two of those are through acquisitions, in both Jacksonville and San Antonio.

Those transitions have gone well, and we look forward to good, strong production from those markets in the future.

And then organically, we have grown into the Reno, Nevada, market, and that is now fully running, and, again, expect good strength from the Reno market.

First we'll give some more detail later on our gross margins, but I did want to comment particularly on construction cost increases which a lot of you have asked questions about.

And relative to our backlog that was existing in spring, which delivered this past quarter for us, we did experience some significant increases in both raw materials and the transportation costs related to the delivery of those materials.

On the labor side of the equation, we found that pricing remained relatively stable, but we did see overall the increases that I mentioned.

During the spring and summer, however, we did have the ability to increase sales prices, particularly in our stronger markets that will offset those price increases, and we should see that reflected in our margins that we'll produce in the third -- I'm sorry, in the fourth quarter.

Moving on to the land side of our business, I want to discuss that activity.

And with respect to land sales, and so that we are continuing the Lennar process of both growing for the future by identifying opportunities, while at the same time paring down to improve our balance sheet.

This is evidenced not only by the recurring profits that you've seen in our land sales, but also by the number of home sites both owned and controlled by the Company.

At this point, the number of home sites has increased from 196,000 to 256,000, with 36% owned and 64% controlled.

We feel this positions us very well as we control an increasing number of home sites, particularly in the constrained markets on the east and west coasts, and gives us good visibility to our ability to both meet and exceed our own expectations of our earnings in the future.

With that I'd like to turn it over to Bruce to give you some further discussion on the details of our financial results.

Thank you, Jon and good morning.

I'm proud again to report record results for the Company this quarter.

And our scorecard continues to be driven by our Lennar process business model, which focuses on strong earnings, high returns on capital, and a strengthening balance sheet.

We reported record earnings of $1.36, and that was versus our goal of $1.30 that we discussed in our last quarterly conference call.

Our return on net capital was 21.1%, and our return on beginning equity 28.4%, and these were both for the trailing four quarters.

Additionally, we diversified and strengthened our balance sheet as we issued debt during the quarter, which reduced our borrowing costs and enhanced our maturity schedule while maintaining low leverage.

As we look to homebuilding, the 21% increase in home sales revenue was a result of a 16% increase in deliveries and a 4% increase in average sales price.

As we continue to gain market share in our existing markets, all 3 of our regions noted higher deliveries.

The average sale price increased from 257,000 to 269,000 year-over-year has a regional comparison as follows: The east region was up to 253,000 from 252,000 in the prior year's quarter.

The central region was down slightly to 196,000 from 204,000 in the prior year's quarter, and the west region was up to 346,000 versus 315,000 in the prior year.

As we indicated on last quarter's conference call, the third quarter gross margin would be similar to the prior year's 23.7% gross margin.

And the 80% basis point decline in the gross margin, however, was primarily due to warranty expense increased related to the successful resolution of a litigation matter.

We are bound by a confidentiality agreement and are unable to discuss the details about the matter, except to say that did it not involve a construction quality concern or a mold, it was more of a technical item.

Again, as we said on last quarter's conference call, we expect our fourth quarter gross margins, however, to increase significantly and although hurricanes and construction cost increases have presented some challenges, we still are on track to achieve a 25% gross margin in the fourth quarter of this year.

The community count for this quarter averaged 754, compared to 744 in the prior year.

And we are still on track to end the year with our original goal of community count to be between 815 and 835 communities.

Land gross profit increased 46.1 million, and that is before SG&A expenses, compared to the prior year.

While equity and earnings from joint ventures actually decreased 15.4 million during the quarter, compared to the prior year's quarter.

In addition to lower joint venture profit, the majority of the joint venture profit this quarter came from home closings in the joint ventures as opposed to land sales in the joint ventures as was the case in the prior year.

And as we indicated in the second quarter conference call, our land sales were not as back-loaded as they were in 2003, and, therefore, as I give the goals in a few minutes, you'll see that the land sales in the fourth quarter of this year will be significantly lower than the prior year's fourth quarter number.

SG&A cost as a percentage of home sales revenue was consistent this quarter with the prior year's number at 10.8%, and, again, SG&A includes costs from both our homebuilding and our land divisions.

Turning to financial services, we earned 23.3 million this quarter compared to 49.3 million in the prior year.

And as we previously indicated, we were in a robust refinance market in 2003, and that had bolstered our Eagle Mortgage and North American Title operations, and now refinance activity has declined to a more normalized level, which is around 11% of our financial services profit, as opposed to -- in the prior year it was approximately 26%.

Additionally, as refinance activity has declined significantly from the prior year, the mortgage business is more competitive initially as loan agents previously focused on refinance transactions have switched to focus on the purchase side of the business.

The percentage of variable loans increased also, which are less profitable than fixed rate loans, and currently the relationship is approximately 65% fixed rate mortgages, and that number was about 80% last year.

The majority of the variable loans are hybrid loans which have fixed terms for up to 10 years.

On the mortgage side, our Universal American Mortgage Company achieved 13 million profit this quarter, versus 24.7 million in the prior year.

Our capture rate did increase from the prior quarter, and is now at the same level as it was in the third quarter of last year at 71%.

Our goal by the fourth quarter this year continues to be to focus on increasing our capture rate into the mid-70% range.

Eagle Mortgage ended up with 600,000 of income, versus 8.2 million in the prior year, and as I indicated Eagle is a little more sensitive to the refinance slow down.

Originations for our mortgage companies were 1.9 billion versus 2.2 billion in the prior year.

And our title operations achieved 10.7 million of profit versus 14.9 million in the prior yea, and as we mentioned that was primarily due to refinance slowdown.

Our Strategic Technologies division, although we did not monetize any cable subscribers this quarter, we did continue to grow our cable subscribers to 7500 from 5400 in the prior year's quarter, and personal insurance line business continues to start up and grow a little more profitable.

We had a $300,000 profit versus 100,000 last year.

Turning to the balance sheet, during the quarter the Company issued $200 million of three-year floating rate notes at LIBOR plus 50 basis points, and 250 million of ten-year fixed rate debt at a 5.5% coupon.

Proceeds were initially used to pay down our outstanding balances under the Company's revolving credit lines, and our shareholders equity increased by about 700 million during the quarter, and our ratio of debt to total capital was 35%.

Our credit coverage ratios on a trailing four-quarter basis also improved this quarter as EBIT to interest incurred improved to 11.4 times from 9.3 times in the prior year, and debt to EBIT improved to 1.1 times, from 1.3 times in the prior year.

The Company had approximately 387 million of cash at quarter end, and zero outstanding on its $1.2 billion revolving credit facility.

Our inventory balance at quarter end increased to approximately 5.2 billion, and that positions us well for fourth quarter deliveries and next year's activity.

Turning to our goals for 2004 and 2005, as Stuart mentioned the fundamentals remain strong for the homebuilding industry and for our company as well.

And, therefore, we have the confidence to increase our EPS goals for '04 and '05.

And it starts off by looking at our backlog.

Our backlog dollar value at quarter end, which was up 35% to 6.1 billion, provides excellent visibility into the remainder of this year and into the start of 2005.

As a result, of reviewing this backlog, we're increasing our goal for this year from $5.50 to $5.70, and that higher goal provides for deliveries of approximately 36,500 for this year, as there are some post-hurricane challenges that will result in some delivery delays, as Stuart illuded to earlier.

Our average sales prices are increasing, and we estimate they'll be approximately 290,000 in the fourth quarter, and the gross margin, as I stated earlier, in the fourth quarter, we're projecting that the margin increase over the prior year will be significant, and should be approximately 25%.

Our land profits will be considerably lower in this fourth quarter versus last year, as I mentioned, and that will probably be between a range of $5 to 18 million versus the prior year's 48 million.

Our joint venture profits will be in the mid-40 million range, versus the prior year being at 37 million, and that will come from both land and housing as well.

And our financial services profits we expect to be about flat with last year's fourth quarter at 34 million, and our dilutive share count for the fourth quarter will be approximately 167 million shares.

As we look ahead to 2005, as Stuart mentioned, we're increasing our goal from $6 to $6.60.

And this equates to over $12 billion in revenue, and approximately 1.1 billion of net income.

Our delivery range targeted for next year, we expect to be in the range of 42,000 to 42,500.

And this was, again, a result of some community opening delays that we have seen in the latter part of this year.

Our average sales price for next year we expect to be in the mid-280,000 range.

And our homebuilding operating margins we expect to improve to 13.25%, approximately.

Our land joint venture management fee category will be a little bit lower than this year, but will be in the 225 to 250 million range for those three categories combined.

And our financial services estimate is to be in 130 to 140 million profit range, and we are assuming that there will be probably about a $5 to 10 million sale of some strategic technology subscribers in that number.

We are not predicting a change to corporate G&A as a percentage of revenue or our tax rate, and our dilutive share count we estimate to be about 168.5 million.

And the growth in community count we expect to be similar to the growth we noted in 2004 over 2003, which will be in the 10 to 15% range.

And one final comment, as previously discussed, the Newhall transaction will begin contributing positively to the bottom line as we've been stating all along, in 2006 for us.

So we are well positioned for 2005.

We will provide more quarterly breakouts for 2005 on our fourth quarter conference call, which we are current planning for December 15th at 11:00 Eastern Standard Time.

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

Thank you. [Caller Instructions].

Our first question comes from the line of Michael Rehaut with JP Morgan.

Please go ahead with your question.

Good morning.

Good morning.

Just wanted to get into a little more detail, if possible, on the order trends in the quarter and particularly in the West Coast.

Jon in particular, you had mentioned, you know, breaking out the three different regions in California, and wanted to see if you could explain a little bit in the southern region, you said there was some moderation in pricing, and I think a little bit later you said that the pace of price increases had, you know, either slowed down or died down.

Wondering if you could sort of hit on some of the main metro areas and, in particular, if pricing has -- if I'm getting that right, if pricing has kind of just stabilized, or has it in some regions, you know, fallen back a little bit?

In general I would say, Michael, that it has stabilized, and it has -- it's very specific to the markets within southern California which, by themselves, are diverse.

If you look at, you know, for example, San Diego and Inland Empire, which had the greatest run-up in price appreciation year-over-year, some of those communities that are at the higher end of that scale of appreciation, we've seen the moderation that I spoke to, to where prices have not fallen back, but we're not able to push the prices forward as aggressively as we were.

As we open up new communities in those same markets, however, and bring those to market, we are finding that there is sufficient demand to bring those new markets -- new communities to market, and there's sufficient demand to see price increases in those new communities.

However, I would note that it's not as strong as the price increases we saw, perhaps six months ago.

Thank you, Jon.

And also, in Texas, would you say that order trends are -- you had said the market is soft, pressure on demand.

So I was wondering if you could give us an order of magnitude in what your order growth or order declines have been and, you know, which markets in particular within Texas has been giving you the most trouble.

I would think, in terms of new orders, we would expect to see it relatively flat.

We would expect not to see a decline in our orders in that market, but there is continued pressure on the market.

I would say Dallas is the weakest of the markets that we're in, and it continues to see the most job erosion of the markets in Texas.

Austin appears to be a little healthier, particularly at the lower price points, and in San Antonio appears to be healthy as we get into that market, and then Houston, which is our biggest market, again, we're seeing consistent levels of sales, and not quite the same pressure on pricing that we see in the Dallas market.

Great.

And, I'm sorry, just one follow-up on California.

Were there areas -- you had mentioned northern and central valley, demand was a lot stronger.

Did you see order growth in those areas during the third quarter?

Yes, and again it would depend, community-specific, Mike, in terms if we already had sales far ahead of construction pace we may have moderated, but in terms of new communities, or where we were better timed in sales, backlog related to construction status we saw the ability to sell into that market, both in central and in northern California.

Thanks very much.

You're welcome.

Thank you.

Our next question comes from the line of Stephen Kim with Smith Barney.

Please go ahead with your question.

Hello?

Good morning, Steve.

Hey, how are you?

Congratulations on a good quarter.

We're sort of holding our breath on this one.

You guys came in well.

Couple of questions.

I guess let me follow up a little bit on Mike.

Basically we did analysis last week on looking at price bubbles, you know, in the country over the last 30 years, and we weren't able to find any examples where you see pricing on a real basis decelerate, let's say flatten out, and then go up again.

Typically, what we have found was that, you know, in those markets where you saw rapid price appreciation they kind of go up and stabilize for about a year and a half, two years, then they start coming down on a real basis.

Your comments seem to suggest that you think you're going to see pricing in those markets return.

Can you just sort of talk about, you know, maybe anecdotal experience, you have a lot of years under your belts there, cumulatively, and just wanted to see if you could provide us a little bit more anecdotal evidence from the past as to why you feel pricing is going to pick back up again?

Steve, I think that -- just as a general comment, maybe Jon will add something more specific, but as a general comment I think that in most of these markets we're seeing somewhat of a slowing in the acceleration of pricing, in the wake of there being a fairly rapid pace of acceleration.

But what we're not seeing is a deterioration in the economic factors underlying the demand and -- the demand for housing in each of those markets, particularly in southern California.

So while the economy remains strong, what we're seeing is that as prices have gone up rather rapidly, the demand for homes in those markets is likely to continue to be driven by economic factors that are supported by still relatively low interest rates and everything else.

And perhaps what's come on a little bit more is there's a new source of competition as prices have gone up very, very quickly, the existing home market has kind of created a new source of supply, at least temporarily, from people who have found that the appreciation in their homes is so great that they almost have to become sellers.

So it's our anticipation that with a strong underlying economy, a lot of demand for homes in those markets, a limited supply of land, and new community availability, we think that the market is taking a step back, and more likely to start accelerating again in the future as demand factors kick in and as some of the existing home supply is absorbed.

Jon?

I would just underscore that.

Steve, perhaps in you research, you may have noted in the past when prices have actually declined it's typically been tied to an economic impact of job loss within that market.

Absolutely.

More recently, for example, northern California, when we had the dot-com collapse we saw pull-back in the Bay Area, specifically, although we didn't see that impact in the balance of California.

Because there wasn't the job impact in the balance of California.

But to underscore what Stuart said, whether it's California or D.C. or other strong markets, you have seen a lot of people put their existing homes on the market, and I think that's a very good indicator of what we're talking about, because those homes that are put on the market that are priced properly sell in short order.

Those homes that are trying to take advantage of what they perceive as an opportunity to get a very high price, perhaps, for their home, are tending to sit on the market a little bit longer, but do get absorbed as well, it just takes longer.

Great.

That's absolutely a fair comment about the -- particularly about the economic cycle tying to the price cycle.

The second question I had relates to the land sales, Bruce.

You indicated, I think on your last conference call that land sales, while they are lumpy, you seem to have a fair amount of confidence that the third quarter was, you know, going to see a deceleration in terms of land profit, and we didn't really see that here this quarter.

I was curious as to whether, you know, you could sort of suggest -- give us an indication as to sort of why you had the sort of big jump relative to what we had been expecting, because clearly, you know, the market sort of sees something like that and says, Well, if they can't predict it, then maybe we shouldn't put a multiple on it, and you're giving guidance for that line item going forward.

Can you give us commentary as to why we can put a lot of confidence behind that guidance?

Let me speak to that, Steve.

I think that, you know, as we look ahead, we're going to continue to try to give guidance that is conservatively embedded in where we see things kind of unfolding as we look ahead, but I think that the land sales picture that you're seeing relative to this quarter and even relative to most of our year this year is a reflection in the fact that the fundamentals underlying homebuilding overall across the country are very, very strong, and all of the builders are looking for new opportunities to expand community count and to grow their programs, and in as much as we are a resource to the industry for communities coming on line, we have consistently bought land particularly well.

Newhall's an excellent example of that.

It's going to provide land sales generation in the future for us.

You know, you're really seeing that land sales number reflect the fact that there is a very, very strong desire to grow within the industry and we're meeting the demand that is out there, that is, in some instances, exceeding our own expectations.

I think you have to kind of balance what you're seeing relative to our land sales with an understanding that if you look year-over-year at our land owned and controlled, we're continuing to expand our land sales while expanding our own position in land across the country.

Last year at this time we owned and controlled just under 200,000 home sites.

As we looked at our position this year, we are just over 250,000 home sites.

So not only are we positioning our company for future growth, but we're using our expertise in that area across the country to be producing land and communities for some of our competitors as well.

We have excellent relationships with our competitors.

I think that we're well respected as a land buyer and developer.

And on a quarter by quarter basis, particularly as the market expands and as demand is very strong, we're going to do our best to exceed expectations in that part of our business as well.

Great.

Well, thanks a lot, and congratulations on a very strong quarter.

Thank you.

Thank you.

Our next question comes from the line of Ivy Zelman with Lennar.

Please go ahead with your question.

Actually, I don't work for them yet.

[ LAUGHTER ]

I want Stuart's job.

Good morning, everybody.

Stuart, you make some broad comments regarding land, just to follow up quickly, then I'll go to my original question.

One of the things I always find it hard to believe is that builders are spending today, with land so inflated in many markets, you're willing to buy land right now, but you're selling land you bought some time ago.

You're still willing to buy land right now, so you obviously still think land is still an attractive asset.

When you look at your overall expenditures on land, how much are they accelerating versus a year ago spending you did on land, versus that -- offsetting with it some of those land sales?

Is it accelerating, or is it stable?

Our land purchases are accelerating, but accelerating in relationship to our overall growth.

I think that as we continue to grow the overall company, we're going to continue to see -- if you just take revenues and look at a 20 or 25% of revenue number, that number is going to continue to grow overtime.

But one of the things that we're seeing more and more, Ivy, and I think that you'll see this -- or hear this from all of the homebuilders, it is becoming increasingly difficult to buy smaller communities and positions that are of a smaller scale.

And the biggest advantage that the largest builders have with our capital position and our expertise and sophistication in land is the ability to work on larger land purchases, to be able to strike deals where we are not taking entitlement risks, but at the same time use our capital base to be able to purchase in some instances more land than we might need for our own purposes and position ourselves for our own future and also to be able to sell to some of our competitors as we grow.

Real quick, in terms of entitlement, what percent of your land purchases have, you know, entitlement risk still incorporated?

Is it 5%? 10%?

Probably under 5 or 10%.

It would be a very, very, very small portion.

And with respect to your, you know, broader abilities, let's say as a public company and your expertise, when you get into a market where the market's already consolidated by the publics and the great, you know, dominant position, obviously the playing field is pretty open, or pretty level with the other publics having the same advantage as you have.

Maybe you guys are better at it, in terms of tiering you, but realizing if you have a southern California which is clearly showing signs of, I guess, digestive issues, with pricing up so much, or you have a Dallas that's challenged, and you're buying land right now at today's prices, clearly the margins can't be as good in those markets as they were, let's say, last year or the year before on the same purchases that you were able to pass along price increases.

So how do you think about the returns on today's land?

Do you expect them to accelerate?

Are they going to be stable?

Or do you think there will be some pressure on your returns because land prices are obviously higher than a year ago, but there may not be the same pricing ability?

I think you have to recognize that underlying all of these guesses that we might make about the future is there are certain fundamentals that kind of are remaining constant.

One of those is the fact that land remains very scarce, particularly in those markets.

And the other side of that is that as we look ahead, we continue to look at a growing demand picture, just from a demographic standpoint just about every study that I see suggests that we're looking at a demand for over -- for as much as or over a couple million homes -- new homes per year for the next decade and beyond.

So, you know, with limited supply and expanding demand, I think that you have a fundamental picture that looks like we're going to be able to generate very responsible, if not greater than consistent margins in land as we go forward.

And while there might be fluctuations in market conditions over smaller periods of time, maybe over a year or two years, we believe that over the longer period of time, the proper acquisition of land and positioning ourselves with strong land positions, particularly in constrained markets, is going to reflect very well on our bottom line.

So, do you have a shorter answer for me?

Are returns going to go up or down in today's land environment without getting price in, let's say, the next 6 to 12 months?

Well, we believe that returns are going to continue to go up over the longer -- over a long period of time.

Will there be short-term fluctuations?

Perhaps.

Do we see short-term fluctuations over the next 6 to 12 months in our position?

No.

Most of the positions that we're selling were negotiated or bought sometime ago, and there are some pretty --

No, I mean on -- obviously that.

I understand that but the land you're buying today.

Will returns in land when it works its way through the P & L, it will be higher on land that you're buying today, in your best opinion?

Once again, you know, Ivy, the land that we're buying today was generally negotiated sometime ago.

Land that we're negotiating today --

That's what I mean.

-- probably won't be sold in the next 6 to 12 months.

That land will probably be sold over the next, let's say, one and a half to 3 years.

And, again, I say that over a broader period of time, we think that land is going to continue to be a valuable commodity.

Okay.

I'll move on, because I do have another area of questioning, if I can.

Just with respect to your softness in Dallas and some of the near-term challenges, markets are now indicating or being faced with as the market softens somewhat.

What type of incentives do you choose to use first?

Do you go after the financing incentives with options to, you know, people pay for the closing costs?

What's your first course of action when you see a soft market when it comes to incentivizing?

I think it tends to be market by market driven, and we tend to work with incentives that are market competitive, so it really depends on in that market what the competitive field is doing.

So, Dallas for example, what are you doing there?

Ivy, this is Jon.

In Dallas what you have said is where most -- ourselves and other builders are focusing in the area of financing.

That's where most of our buyers are in need of support, but, again, it can even get down to a community-specific level, depending on the price point within a Dallas, as to what you're dealing with in terms that customer profile and the competitive field.

What percent of the base price do you right now offer in Dallas with respect to overall incentives, would you say?

I don't know that --

5%? 7%? 10%?

Is it in that range?

I don't think we have a specific answer on that one.

Okay.

With respect to the quality of today's buyer, would you say that today's buyer is stretched even in markets like Houston or Dallas where pricing has not been so excessive, and why is it that the market in some places are slowing?

Do you think it has anything to do with the ability for people to finance their homes with quality of buyer as a, you know, issue today?

We've seen pretty good stability in our FICO scores across at least the last year and a half, 2 years.

That's company-wide.

What about in the softer markets?

How are those FICO scores doing?

David, do you have --

They're consistent within their markets.

Okay.

You don't see any quality of buyer issues or any financing challenges that might be resulting in some of these softer markets sales slowing?

That's significantly different within each market.

No.

So market by market, we've seen consistency over the past 6 to 8 quarters.

And what percent of your business today are ARMs versus fixed mortgages?

About 35% are ARMs, Ivy, and the majority of those are the hybrid loans that are fixed, anywhere up to 10 years.

And what was it a year ago, Bruce?

Year ago it was -- the ARMs were about 20%.

And what do you attribute that increase to?

I would attribute the increase just personal choice as people are looking at the different products that are available to them.

We're still seeing affordability reasonable within our markets.

I think that there has been a question right, as to whether people should be spending more money on a fixed rate mortgage.

They've seen relative stability in mortgage rates over time, and I think Chairman Greenspan kind of started the debate about a year ago, I think, that maybe it works to people's benefit to go ahead and have a floating rate lower cost ARM.

Actually, chairman Greenspan referred to the back in February of '04.

So the increase that we've seen began back in the summer of '03.

So you guys don't think it's affordability being constrained that's driving any of this?

You think it's more that people are savvy and smarter about the loan that they're getting today?

Yeah, let's not even call it savvy and smarter, let's just say that I think they've seen stability in interest rates for a very long period of time, and perhaps they're becoming more comfortable with something that adjusts over time.

Okay.

I'll let everybody else ask.

Thanks for the time.

Okay.

Thanks, Ivy.

Thank you.

As a reminder, please limit yourself to one question and one follow-up question.

Our next question comes from the line of Margaret Whelan with UBS.

Please go ahead with your question.

Good morning everyone.

Hi, Margaret.

Congratulations on your promotion, Jon.

Thank you.

Welcome to the call.

I'll take the opportunity to grill you, then.

In terms of the warranty issue, I understand that it's sensitive, you don't want to give us a lot of details, but we never heard anything about it before, which is concerning, by my calculation costs you 12 cents this quarter.

So, can you give a little bit of detail in terms of why it's recurring versus non-recurring earnings -- how we can be confident that it's not going to come up again, and whether or not it was included when you provided us with the third quarter guidance?

I can talk to you what was included with respect to third quarter guidance.

We were not aware of this issue as of the last conference call, and, therefore, there was nothing to comment on the issue, and at the time that it was resolved, and it was fully resolved, we were bound by a settlement agreement, so we were not allowed to discuss it at the time.

We were still on track with our earnings for the quarter, so we didn't think it was an issue to make any other kind of public statement at that point.

I would just add, Margaret, that it -- I don't -- we're not concerned about it from a recurring perspective because it was not a quality of construction issue.

It wasn't related to the type of concern that might rise to something that would be recurring, but instead dealt with specific technical disclosure kind of issue that is very confined and is a one-time issue.

And as with anything related to our customers, as soon as we found out about it, we got involved, dealt with it quickly, and brought it to a quick resolution.

So it was customer related?

Pardon me?

It was customer related?

Yes.

But, again, Margaret, more of a technical disclosure-type issue as opposed to anything that had to do with the construction, you know, a construction matter.

It certainly wasn't mold or anything like that related.

Will you be able to provide more information later, maybe?

No.

Okay.

But it wasn't included in the guidance, and because we had heard from several of our contacts that you were aggressively selling land towards the end of the quarter, and it just seems to be a short-term strategy, given your own observations that we're probably going to need two million homes over the next 10 years.

I'm sorry, what's that question?

The question is we heard from many of our contacts that you guys were aggressively selling land towards the end of the quarter, and 20 cents of the earnings this quarter came from land sales versus our expectation for 5 cents and your own guidance for a much lower number, then you took this negative hit of 12 cents.

I'm just wondering why you wouldn't have been more up-front about it and why you were selling land to meet your estimate.

Seems like a very short-term strategy.

I don't know where the information comes from that we were aggressively selling land towards the end of the quarter.

I think that we're aggressively pursuing all of our businesses at all times during each of our quarters.

And there was -- there was not any unusual activity this quarter versus other quarters in terms of the way that we have approached the sale of land or the sale of homes or any other component of our business.

So that there wasn't a rush to make an adjustment or anything else relative to this settlement or anything else.

It was really normal course of business.

Okay.

That's different from what we're hearing, but we can talk about it later.

The second question I have is, do you have any sense for what the hurricane costs you?

Is it quantifiable at all, in terms units this quarter that you'll make up next quarter and the early half of '05?

I think the costs from the hurricane are not quantifiable at this moment and not likely to be in the immediate future.

And that's because the costs will affect us in a number of different ways.

We didn't lose all that many closings this quarter.

We'll lose a few more next quarter.

And it will come much more -- much more from the delayed impact than it will from any direct construction or, you know, any kind of wind damage that we suffered in any of the homes that were under construction.

Within Florida, we expect to see a shuffling of labor and materials to the most affected areas of the state.

And while the market kind of works through those adjustments, it will impact the course of construction in almost all of the markets across the state.

How that will actually shake out, we're going to have to wait and see.

We have areas of Palm Beach that are still trying to get their power back.

There are other parts of the state that we are not building in directly that are still kind of suffering from some of the damages that came about through the hurricane.

And it's people and materials that are going to be shuffled around to cover the most impacted areas that are going to be in short supply for those areas where we have our production underway.

Are you seeing a lot of delays in the permit process down there now?

It's a little bit too soon to tell, but, you know, certainly in a place like Palm Beach where you had a little bit more direct impact, we're going to see some delays in permits and other things.

But whether it impacts other areas of the state, we're just going to have to wait and see.

Okay.

Another line of questioning.

Did you give the community count in the prepared comments?

I missed it.

Yes, we did.

May I have it again, please?

Sure.

It was 754 was the average.

And that was compared to 744 in the prior year's third quarter average.

And what did you end the quarter with?

We ended the quarter -- hang on one second.

Let's just check that. 749 is where we ended the quarter, but we're still on track to end up with the range that we set out at the beginning of the year, which is 815 to 835 by the end of the year.

Is my number right?

Did you have 790 at the end of the May quarter?

So sequentially you were down about 5%?

Is that right?

No, the average for the second quarter was about -- also about 754.

So it's kind of flat from an average standpoint.

Okay.

And then can you talk just a little bit about the orders on the West Coast were down?

I mean, the East Coast we can explain somewhat by the weather but on the West Coast and how you compensate the business managers there, and how they think about order growth?

The biggest impact to that, I think, had to do with particularly our stronger markets where we were sold out phases in advance, and strategically managed to slow that down so that we did not get too far ahead of the construction pace.

We saw that in California, we saw in that Las Vegas, and to some extent also in the Arizona markets.

Okay.

And just the last question for Stuart.

How involved do you think you'll be in the land sale opportunities that L & R sees going forward?

Do you think much will change now?

No, I think that there's a terrific alliance between the two management teams, and that's a program that works well for both companies.

The new buyer of the company, service group, it seems very committed to continuing to grow the business that has revealed itself as being a very successful one, so we think there are a lot of opportunities for joint ventures moving forward, and that's a positive because across the country there are a lot of pieces of land that require both residential and commercial expertise.

There are not a lot of groups that are able to buy complicated pieces of ground that have both opportunities, and this joint venture is well equipped to be able to do exactly that.

Okay.

Thank you very much.

Good job.

You bet.

Thank you.

Our next question comes from the line of Lorraine Maikis with Merrill Lynch.

Please go ahead.

Thank you.

Just one final question on the warranty issue.

Do you expect to increase your accrual rate going forward, or was this truly a one-time item?

No, we believe this was a one-time item, Lorraine, and our accrual rate should remain at a similar level.

Obviously, as home closings go up, the accrual will go up in the future, but it will be at the same rate per home.

Okay.

And then could you just talk about your cancellation rate during the quarter and any specific trend you saw in the west or in Florida?

Sure.

The cancellation rate remained at the low end of our range, and we have not seen any significant change in cancellation rate in any of the markets.

It still remains at the very low end of our typical range.

And the typical 20 to 30%?

Yes.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Jed Barron with Smith Barney.

Please go ahead with your question.

Just a couple here if I could.

First of all, you guys have generally talked in the past about having a fairly balanced strategy, I think, in terms of how you deploy cash, whether it we for acquisitions or share buy backs or dividends or what have you, and I'm just wondering if you could maybe just refresh us on that again, and tell us if basically the strategy remains the same as you've outlined it in the past.

Yeah, Jed, our strategy remains very consistent, and today as we look ahead we continue to see unique opportunities to grow forward as opposed to shrink our business.

You've seen that our stock buy back program has been fairly limited, and it is primarily because we see the opportunities out there to continue to grow the business, both in markets in which we are currently operating and in new markets.

As opportunities to continue to generate a very, very strong return on capital invested, and we kind of view our primary mandate as growing the business and continuing to diversify.

Right.

Okay.

And other question on your cash.

Looking back the last couple of years it looks like you've seen a pretty decent increase in your cash balance sequentially and, you know, having your large cash balance at the end of the year.

With that in mind, would we be safe to assume the same type of trajectory here in your cash for this year, and if so do you have an estimate for where cash may be at year end?

We usually don't put out an estimate on projecting cash, Jed.

As you'll note where we ended last year, over a billion dollars of cash at the end of the year, we increased our dividend rate to $1, that was pre split, 50 cents after the split.

We invested approximately couple hundred million in Newhall, and we're growing at a fairly rapid clip, and our deliveries are more back-loaded at the end of this year.

So as we get to the end of the year, we are not expecting to have the same cash balance that we had at the end of last year, but we're going to be very well positioned with respect to home sites owned and controlled to continue to grow at 15% or better over the next couple of years.

So we won't give out an exact number because that will change a little bit depending on how land acquisitions end up the last couple of months of the year.

Okay.

Great.

Thanks very much.

You're welcome.

Thank you.

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

Please go ahead with your question.

Thank you.

Just one quick question, guys.

What was the community count at the end of fourth quarter last year?

Or average fourth quarter last year.

Okay, hang on a second, Steve.

You know what, if I could call you back with that, I don't have that handy, but I'll pull it off of what we have.

Yeah, that's fine.

Thanks very much.

Okay.

Our next question comes from the line of Rick Murray with Raymond James.

Please go ahead.

Good afternoon, guys.

Hi, Rick.

Just a couple quick question.

One I guess, with regard to the land sales, could you guys maybe talk a little bit strategically with regard to where the land sales in the quarter occurred and if there's any associated repositioning of the land position in association with those sales?

Sure.

In this particular quarter, more of the land sales were in our west region, and it's also one of the regions where we had a consistent growth in home sites owned and controlled.

So it's not really a repositioning pare-down, it's a pare-down in concert with the process Stuart laid out where we're paring down assets but we're continuing to position ourselves for future growth.

Okay.

And then can you discuss perhaps where you're geographically looking to, you know, maybe redeploy those proceeds?

This is Jon.

I would say that we're always looking at opportunities in all of our markets.

We're particularly focused in the markets that we feel have the greatest strength as we look forward, but across the board, we are looking at growing market share in all the markets we presently are in, and constantly looking at new market opportunities.

So there is not an allocation of deployment of that, but more of looking at the opportunities as they present themselves and our underwriting of those opportunities.

Okay.

Great.

Thank you.

If I could, just one final question.

Following up on Ivy's earlier line of questioning related to credit scores, I was just looking back at my notes and the transcript from last quarter, and I see you guys mentioned last quarter that FICO scores had become more challenging and were actually starting to trend down last quarter.

Is it fair to say from your earlier comments that that has reversed itself?

If I could just make the comment, Rick, as David mentioned last quarter, he was asked the question about FICO scores, and they went down slightly, but it was a very small number.

They've actually -- our FICO scores have actually been very consistent over the last couple of years.

So it's nothing that would be in the order of magnitude that significant that anyone should draw any conclusions on.

Okay.

Thank you.

You're welcome.

Our next question comes from the line of Timothy Jones with Wasserman.

Please go ahead with your question.

Good afternoon.

Hi, Tim.

How you doing?

Okay.

Here we go.

Just a couple of short ones.

But I think important.

I am completely flabbergasted on what is going on with your backlog conversion, especially going from 52% to 48.5, given the fact that you slowed down your sales.

I don't think you've changed your specs that much.

But what I really don't understand is that your backlog conversions in the west, where you have $400,000 homes, are roughly the same as the company average, and in the east, where they're $150,000 less, it's 31% versus 38.

I mean, you've got a 10-month construction cycle.

What is going on?

Well, one thing that I could comment on, Tim -- this is Bruce -- with respect to --

I know it's Bruce.

-- on the east region, there was more of a focus in southeast Florida to focus on some of the urban areas, and some of our joint ventures where we sold ahead of construction where we're dealing with more of a mid-rise type of building.

So some of that backlog that's related to joint ventures we did expect will deliver out more in 2005.

And that was by design to make sure that we had the backlog in place before we started construction.

I mean, a 31% backlog conversion, I mean, I think Toll, which sells homes twice as expensive as that -- more than twice as expensive -- gets a 31% conversion rate.

This is really -- it keeps slipping down.

And isn't it -- I mean, what is happening to the Lennar process, which is, you know, the everything included, which was -- is supposed to do the opposite and increase the backlog conversion.

Well, again, Tim, I think the lion's share of that is due to some of the focus on some of the [inaudible] opportunities in Florida, but we continue to focus on -- and we said it early this year, as our backlog did get a little ahead of itself and the sales pace was stronger, we noticed that and we slowed it down.

If you look at our new orders for this quarter, they were slower in the east region, and part of that was the design of trying to slow up the Florida backlog because it was stronger than we were able to meet from a construction standpoint.

We did recognize that, and it is something that, as we noted, that we're trying to slow up to make sure that construction and sales are on pace with each other.

The other thing, the backlog conversion in the central is 93 versus 82.

I mean, it's three times faster.

Is there -- do you pre build or spec a bunch of houses there?

Why is this enormous difference between these two markets, especially between that and the Company average?

This is Jon.

Primarily that's driven by the Texas market and the conditions there where we are -- we don't have that backlog in front of us so you're seeing a much higher conversion ratio.

All right.

Last real quick question is, on the technical disclosure issue and the fact that you said you didn't -- that you were surprised by it, is this something like what happened to WCI a couple of quarters ago where they said they changed something in a community and did not send it out to the shareholders, and a bunch of people then, you know, something like -- related to that, where they were able to cancel or something because they didn't give them the proper notice, something of that nature?

Without getting too specific.

No, I don't want to get into guessing games, but it was not a condo-related issue where they had a rescission period or something like that.

It wasn't the same kind of an issue.

It had more to do with homes that were delivered and closed and let's leave it at that.

Okay.

Thanks a lot.

Okay.

Bye-bye.

Thank you.

Our next question comes from the line of Alex Barone [ph] with JMP Securities.

Please go ahead.

Hi.

Good morning.

Congratulations.

I was hoping you could elaborate a little bit on your joint ventures.

I was noticing in general that your backlog keeps growing in terms of units, yet you don't seem to be delivering, I guess, on the same pace as you're taking orders.

I was hoping you could help me understand that.

And also if you could provide the backlog dollar value, excluding the joint ventures, because it seems like you're mixing apples and oranges there.

Sure, Alex.

Starting out with the question about the joint venture backlog increasing, that is by design where we have more density in some of the joint ventures that we have.

They're more redevelopment areas or infill urban areas where they might be mid-rise or high-rise-related, and we do typically sell in front and we wait for sales to be at a certain level before we start construction.

So that is by design, and that's something, you know, as we might have seen in your neck of the woods in San Francisco when we've gone on a tour, is we do tend to sell pretty far ahead of ourselves to make sure we understand the market before construction dollars go out.

The backlog dollar value without the joint ventures is approximately 5.4 billion, and that compares to 4.2 billion in the same period last year.

Okay.

And I guess given your comments about the issue this quarter, is it fair to assume, all else being equal, the quarter a year from now we should gain back those 80 basis points, or something close to that?

As we look out to next year, our guidance for 2005 is that our gross margins would be slightly higher.

We said an operating margin, at the gross minus the SG&A on home sales to be about 13.25%, whereas this year we're projecting it's going to be just under 13% by the end of the year, for the year.

Now, we haven't broken that out by quarters, but the trend in margin is still a positive trend going forward.

Okay.

And if I could ask another quick one, in terms of -- some builders have started to show more operating leverage, their SG&A seems to be going down, you know, at a somewhat faster pace than what you guys are showing, and I'm wondering when we could expect to see SG&A as a percent of sales start to go down?

Well, one thing that did hit us earlier this year is that we did have to accrue for compensation, incentive compensation, on land sales, to our land divisions, where as last year we were more back-loaded with the land sales.

So that did impact the first nine months of this year.

We do expect to have a positive comparison in the fourth quarter of this year relative to the fourth quarter of last year with respect to SG&A percent.

Okay.

Can you elaborate?

How do you compensate the land people, what you were saying just a minute ago?

They are compensated based on bottom line profitability, return on net assets, and customer satisfaction.

So as we are generating profits earlier in the year, we are making sure that we're fully accrued with respect to the profits in those areas.

So it's basically a percent of the operating profit they generate?

Correct.

Yes.

Okay.

All right.

Thank you very much.

You're welcome.

Thank you.

Once again, as a reminder, please limit yourself to one question and one follow-up question.

Our next question comes from the line of Stephen Kim with Smith Barney.

Please go ahead with your question.

Yeah, I had a couple of quick follow-ups, if I could.

It relates to '05, I guess particularly.

Bruce, when you gave your guidance you said 13.25% margins.

Typically, what we have seen, you know, on a quarterly basis progressing through the year, is that you have a pretty significant ramp in your, you know, your operating margin where it starts off relatively low and you make up a lot of ground in the back half of the year.

Was wondering, yeah, I anticipate you'll probably have something like that again next year, so I was wondering if you have some sort of early read on, you know, what kind of a, you know, ramp you might see, or put it a different way, what kind of sort of differential you might see in your gross margin?

Because we can figure out your SG&A, between, let's say, the fourth quarter and the first quarter, because I would anticipate if you don't do that, otherwise you're going to have a lot of analysts getting out there with some pretty robust first quarter estimates you're going to have to take down.

December 15th when we have our year-end conference call, we're going to break out the quarters a little bit better for everybody.

But it is fair to say that we -- if you go back many years, we typically have our highest gross margins in the fourth quarter and they typically, from a seasonal standpoint, will be lower in the first quarter.

So I would say that it's still fair to expect that our first quarter margins will be lower than our fourth quarter margins, even though the margin trend overall is positive.

By a pretty wide margin, like, you know, 300, 400 basis points kind of thing?

I don't think it's going to be that dramatic, Steve.

I think it's going to be a lot tighter than that.

Oh, good.

And we'll give that out on December 15th.

Okay, good.

My next question related to sales price guidance.

We have not necessarily seen the same trend in sales prices where your sales price, you know, always drops between the fourth quarter and the first quarter of the following year.

I was wondering whether or not, you know, you had any visibility given the dramatic ramp we've seen in your backlog price per unit, it sounds like, you know, we could have a pretty healthy ramp in sales prices.

I was wondering whether or not you could indicate whether you would foresee any sequential type drop in closing prices, again, from the fourth to the first.

Well, this past year, there wasn't that drop.

That's right.

But in the past we have experienced a drop off on a regular basis from the fourth quarter to the first quarter each year, and I would suspect, though, continue to be a drop off in average sales price.

I don't think it will be as -- necessarily as dramatic as we've seen in the past, and, you know, again, we'll try to give a little bit more detailed guidance as we get to December 15th.

Okay.

Great.

Thanks.

You're welcome.

Thank you.

Our next question comes from the line of Michael Rehaut with JP Morgan.

Please go ahead with your question.

Hi, it's Jon Barlow on Mike's behalf.

Just had a couple of questions.

First, object your community count, you're expecting it to accelerate in the fourth quarter.

What would you expect in terms of order trends?

Would you expect them to accelerate, and if so, by how much?

We have not provided any guidance or goals for new orders in the past, so it's not a number that we have put out.

We're in a good position right now with our backlog, but it's not a number that we've ever given a goal on because it does vary from quarter to quarter.

Okay.

And secondly, on your gross margins, have you estimated what they would have been excluding the warranty expense?

Yeah, without the warranty expense we would have been right about where we were last year at the 23.7% level.

Okay.

Great.

Thank you.

You're welcome.

And why don't we make this our last question.

The next one.

Thank you.

Our next question comes from the line of Ivy Zelman with Lennar.

Dennis Magilexian [ph] for Ivy.

I'll make it pretty quick.

Just curious on the incentives earlier, Jon, that you had talked about.

If they're through the financing subsidiary, do they hit the mortgage cogs, or will that be reported on the homebuilding cost of sales?

Any sales incentives that were given out, these show up in the home building line as a reduction in margin.

So even if it's paying closing costs or anything related to the mortgage, it will still be homebuilding related?

Yes, whatever it is, it shows up in homebuilding.

Okay.

And then just, Bruce, if you could, the cap interest for the quarter included in cost of sales both for land and homebuilding.

Yeah.

Cap interest as a percentage of inventory continues to go down, and at the end of the quarter I believe it was 2.7%.

No, I'm looking for what you amortized through to cost of sales.

Oh, I'm sorry, interest expense.

Yeah.

Okay.

Hang on one sec.

Does this answer your question, sir?

I think he's getting the answer.

Yeah.

The interest expense from sale of homes going through the cost of sales line is 32.5 million.

Okay.

And the remainder being in line?

Right.

Thank you very much, guys.

You're welcome.

Thank you.

Our next question comes from the line of Myron Kaplan [ph].

Please go ahead with your question.

I saw some published speculation that the land sales recently that part of them came from pieces of Newhall, and I'm wondering if you would comment on it.

It's belief that you're not selling pieces yet.

That's correct, Myron.

The land sales have not yet started to be generated from Newhall in any substantial amount.

So the West Coast land sales are, you know, otherwise?

That's correct.

And as you look at Newhall, and this is consistent with what we've said since we first announced Newhall, is Newhall, although they might have some land sales along the way, the bottom line profitability will not be positive to Lennar until 2006, and that has not changed.

Right.

Also, can you give any amplification about developments in Boston and your proposed acquisition of Fan Pier?

I think that most of what we have to say has, you know, been out in the press already, and we continue with our due diligence program on that particular program, and, you know, I think that relative to the overall company it's just another community.

And how about Mare Island?

Is that about -- what's the schedule?

Mare Island will see its first home site deliveries that will produce construction the beginning of this coming year, Myron, so we'll actually have our first closing in 2005 on Mare Island.

Very good.

Looks like your progress is great.

I guess the audience is not convinced, unfortunately.

Well, we'll keep proving it up, Myron.

Thanks very much.

I think that just about concludes it.

I want to thank everybody for joining us and look forward to reporting on our year end in about three months.

So thank you.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 2:00 p.m.

Eastern Time today, through October 4th, 2004 at midnight Eastern Time.

You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701, and entering access code 745798.

International participants please dial 1-320-365-3844.

Those numbers again are 1-800-475-6701, and 1-320-365-3844, access code 745798.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive TeleConference.

You may now disconnect.