Lennar Corp (LEN) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and year-end 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 conference, please press star and then 0.

And as a reminder, this conference is being recorded.

I would now like to read disclaimer regarding forward-looking statements.

The information that Lennar Corporation is going to discuss will include forward-looking statements.

As is always the case with regard to forward-looking statements, Lennar's actual results may differ materially from those that are projected in the forward-looking statements.

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

The Company urges you to look at them.

With that being said, I would now like to turn the conference over to President and CEO of Lennar Corporation, Mr. Stuart Miller.

Please go ahead, sir.

Yes, good morning everyone, and we'd like to welcome you to Lennar's fourth quarter and year-end conference call.

I'm joined this morning by Bruce Gross, our Chief Financial Officer, who will discuss our financial results in more detail.

I'm also joined this morning by John Jaffe, who is now officially, as of year end, our Chief Financial Officer and in that regard -- I mean, our Chief Operating Officer, sorry, Bruce, and in that regard I'd like to offer my congratulations to John and as well to Bob Strudler who is now the Chairman of our Board of Directors.

In deference to John's being here, I'm going to keep my comments brief and introductory and John will speak more definitively about and in detail about our current operations and how we proceed going forward.

To begin, let me say that we are pleased to report a fundamentally very solid fourth quarter result for the Company.

And in that regard I'd extend a hearty thank you to all of the talented Lennar associates across the Company and across the country who have made that happen.

As you can see in our press release, revenues were up 21%, generating an increase in earnings of some 34%.

Driving these results was a strong increase in our gross margin, which was up 190 basis points year-over-year, while at the same time, we end the year with a very strong year-over-year 30% increase in our backlog.

As we stand today, with excellent visibility into 2005, and with a fundamentally strong homebuilding market in general, we're pleased to increase our 2005 guidance as we anticipate another record year for the Company with earnings of $6.90 and more than a 20% year-over-year growth rate.

Our comfort for 2005 derives from a belief that the homebuilding markets across the country remain very strong.

Demand is high, driven by historically low interest rates, strong employment numbers, generally strong economic conditions, and an increasing appetite on the part of American families to own their own home as both a primary place to live, and as well, a wealth accumulation vehicle.

Additionally, fueling confidence in our future is our excellent land position, particularly in land-constrained markets, and the increasing shortage of entitled home sites to satisfy a growing population and an increasing propensity towards homeownership.

The outlook for housing for the next year, for the next decade, and well beyond that is very strong.

Even as questions are raised in the industry about bubbles, about credit quality, increasing use of variable rate mortgages to purchase homes, speculative purchasing, commodity price increases, and interest rate fluctuations, our industry overall has shown great resilience because the drivers of stability and growth rest in a growing population in the country that need a place to live, an aging stock of existing dwellings to house that population, a generally employed population that can and will find a way to afford their home, and a limited supply of land to satisfy that demand.

Lennar continues to be very well positioned to benefit from continued strength in market conditions.

Our backlog-driven visibility is excellent for 2005.

Our community count is growing and will continue to grow throughout the year as many of our excellent land positions become active communities.

Additionally, our always strong balance sheet and cash position afford us at the unfettered opportunity to continue to build on already strong market share position, while we continue to look for opportunities to continue to consolidate the industry and to grow into new markets.

In conclusion, we remain very optimistic about the future for the homebuilding industry in general and for Lennar in particular.

It is our sense that we will continue to see record results for the foreseeable future.

And now to give you more of a market-by-market overview, I'd like to turn over to John Jaffe.

Good morning everyone and thank you, Stuart.

Building on our strong fourth quarter performance, we are well positioned in each of our markets across the country as we look forward to 2005.

Florida, Texas, and California, which are our biggest states, will produce almost 60% of our growth in 2005.

In Florida, the different markets are performing very well now and we are well positioned for the growth throughout the year.

We enter the year with a strong backlog in Florida and control land position to grow our active community count.

Central Florida has successfully grown deliveries and margins with our dual marketing platform throughout the Tampa and Orlando markets.

In Southeast Florida, which is very land constrained, we have grown our premier position with infill communities that have augmented the growth of our primary communities.

We've seen this lower our backlog conversion ratio as these infill communities have a longer cycle time.

In Southwest Florida we have an outstanding land position with a very strong market and probably one of the more land-constrained markets in all of Florida.

The markets in Texas remain consistent with what we saw in 2004.

We continue to have a high backlog conversion ratio as we use incentives to drive sales in the Texas markets.

Houston is the strongest performer of the markets in Texas and represents almost 1/2 of our business in Texas.

San Antonio, which is a new market for us, is also one of the stronger markets in Texas.

The Dallas-Fort Worth metro area continues to be the weakest of the Texas markets and sees the most incentives continuing in that marketplace.

California as a whole continues to be a strong market that is very land constrained.

Southern California feels as though it has stabilized as we saw strong sales activity towards the end of our quarter.

We're well positioned here and will continue to grow both our traditional marketplace as well as the infill markets and grow our market share in both of those areas in 2005.

Central California continues to be very strong and we're very well positioned in the Bakersfield and Fresno markets in Central California.

These markets continue to provide a more affordable alternative to the coastal markets in California.

In Northern California, that market continues to perform very well also.

Our master-planned communities in Sacramento keep us with a very good presence in that market, which is one of the stronger markets in all of California.

The Bay Area continues to be strong as the tech market continues to stabilize.

And I'd like to note that recently we opened for sales at our Mare Island community, which is the first naval base that we have redeveloped as a company and those sales were very well received by the marketplace with a sell-out of our first phases in the communities at Mare Island.

Before leaving California, I'd also like to note that Newhall is progressing very well.

The transition has gone great.

We should be bringing our first home sites on line towards the end of 2005 with our first home deliveries in 2006.

In the mountain region, Colorado continues to be a little bit sluggish, but we're very well positioned from a land position as that market becomes more and more land constrained due to entitlement restrictions.

Phoenix is a very strong marketplace driven by job growth and affordability compared to the rest of the Western markets.

Vegas is settling down, as we're making new sales with varying degrees of incentives.

We are able to resell cancellations that have occurred in that market, in most cases at equal or higher prices to the original sales price that we sold those homes.

In the Mid-Atlantic area, we continue to benefit from constrained land market there with very strong land positions.

Our D.C. operations this year will be expanding into Delaware with some active adult communities that we're very excited about.

And our New Jersey-based operations will be opening new communities in New York state this year as well.

Also the Chicago-Minneapolis markets continue to perform well and we're well positioned to grow both our deliveries and margin in these markets.

In summary, our operations have strong land positions to grow community count throughout 2005 positioning us for a strong operating year in 2005.

And now I'd like to turn it over to Bruce Gross to discuss in more detail our operating results.

Thank you, John, and good morning.

I'm proud to again report record results for our Company this quarter and for the full fiscal year.

Although we crossed the threshold of $10 billion in revenue in 2004, our focus remains disciplined to our execution of the Lennar process business model.

The Lennar process balance is strong net earnings growth up 26% this year with a high return on net capital of 22.5%, while our balance sheet strengthened with debt to total capital of 33% and cash of 1.3 billion on the balance sheet.

These were achieved while positioning the Company for another record year in 2005.

I want to talk about 3 areas today.

First, a little more color on the fourth quarter results.

Second, details on our strong balance sheet.

And finally, some more details on our 2005 goals.

We started 2004 with an earnings per share goal of $5.25, and it increased to $5.70 by our third quarter conference call.

Although we shifted about 300 homes into 2005 as we talked about in our mid-quarter press release, we were still able to achieve our 2004 EPS goal of $5.70.

Beginning with homebuilding, homebuilding operating margin on sale of homes increased 47% to 537 million.

This was driven by 26% increase in home sale revenue and a 220-basis-point improvement in homebuilding operating margins.

The revenue increase was due to a 12% increase in deliveries and a 13% increase in average sale price.

The average sale price increased from 255,000 to 287,000 year-over-year, with a regional comparison as follows: The East, 263,000 average, and that was up 7%.

Florida was up slightly.

Maryland and Virginia was up the most in the Eastern region.

The Central region was flat at 197,000.

And Texas was slightly down in that region.

And in the West we were up 22% to 376,000, and all of the markets in the west increased primarily California and Nevada.

We indicated on our last quarter conference call that we expect our fourth quarter gross margin to increase significantly, and although we had challenges from hurricanes and construction cost increases, we were still able to achieve a 25.6% gross margin.

That's 190-basis-point increase year-over-year, and of this increase only 10 basis points was due to lower interest costs as a percentage of revenue.

We continue to see the strongest gross margins in the most land-constrained markets such as California, Mid-Atlantic, Nevada, Florida, and Minnesota also has high gross margins.

And the markets which have typically lower margins are on the softer side, as John talked about, Texas, Colorado, and the Carolinas.

Our community count during the quarter averaged 766 compared to 745 in the prior year.

That was up about 3% on average.

However, we did end up with 823 active communities open at the end of the year, and that was within the range of 815 to 835 which was our goal prior to the hurricane activity that we talked about in this past quarter.

So we're pleased with where we ended the year in that respect.

As expected also, our land sales were more front-loaded in this fiscal year, so our fourth quarter land gross profit decreased to 13.2 million from 48.2 million in the prior year.

Equity and earnings from joint ventures increased to 61.8 million from 37 million in the prior year, and this increase was due to both an increase in home deliveries and an increase in land sales in our joint ventures.

We closed 492 joint venture homes in the quarter versus 206 JV homes in the prior year.

And in the current quarter, we had 17 million of the joint venture profit coming from the home sale deliveries, whereas it was only 7 million in the prior year, so that was a 10 million increase from home sale deliveries in joint ventures.

Our homesite position is strong as our home sites owned and controlled increased from 209,000 to 256,000 with 34% owned and 66% controlled.

This positions us well as we're increasing our number of home sites controlled, particularly in supply-constrained markets.

This not only gives us visibility for community openings, but also visibility for recurring land profits in the future.

Our standing inventory of completed unsold homes continues to remain very low, averaging less than 1 per community.

And we did see some leverage on our SG&A costs this quarter as SG&A as a percentage of home sale revenue decreased this quarter to 9.6% from 9.9%.

Financial services.

We earned 33.7 million compared with 33.6 million in the prior year.

And as we break that down, if we look at mortgage, our Universal American Mortgage Company ended up with 22.8 million of pretax versus 23.5 million in the prior year.

And our Lennar capture rate was 72% in the fourth quarter versus 73% in the prior year.

Although mortgage originations increased from 2 billion in the last year fourth quarter to 2.4 billion in this year's fourth quarter, we continue to operate in a competitive mortgage environment as refi activity has slowed significantly and there's more competition for purchase activity.

Additionally, there's a higher percentage of variable rate loans which have increased to about 47% of the total loan count in the fourth quarter, and we do earn less per variable loan than fixed-rate loan.

Eagle Mortgage earned $0.5 million of profit versus 2.1 million in the prior year, and as we've said before, Eagle is the most sensitive to the refinance slowdown that we noticed over the last year or so.

Our title operations were strong this quarter.

We earned 11.1 million versus 7.1 million in last year's fourth quarter and we've been successful in shifting to more purchase-related business to replace some of the loss of refinance activity over the past year.

And additionally, our newer personal lines insurance business showed 0.5 million of profit versus 200,000 in the prior year.

Turning to the balance sheet, we continue to focus on liquidity while maintaining a strong capital structure, and we're proud to say that our shareholders equity grew to $4.1 billion this year at the end of the year which is an $800 million increase over the prior year.

Our book value per share at year end was $25.94, a 25% increase over the prior year.

And our debt to total capital leverage ratio was 33% and we ended the year with over 1.3 billion of cash and no borrowings on our $1.3 billion revolving credit facility.

Opportunistic capital market transitions during the year enhanced our capital structure.

We have a diversed debt structure and comfortable maturity schedule with a weighted average maturity of 7 years and weighted average cash pay interest rate below 6%.

Strong cash flow generation improved our coverage ratios.

EBIT for the fourth quarter was 655 million versus 496 million in the prior year, a 24% improvement, and EBIT to interest incurred for the fiscal-year 2004 improved to 12 times coverage from 10.2 in the prior year.

Debt to EBIT improved to 1.22 times from 1.15 times in the prior year.

And our return on beginning equity was 29% in 2004.

As we look forward to the goals that we have for 2005, we have a lot of confidence entering 2005 as we increase our goal from 6.60 to 6.90.

And Stuart talked about that confidence being based on the backlog in place and understanding the backlog gross margins that we have, having a strong community count going into the year, we have visibility to land sale profit and we have very good visibility as to the home sites we own and control.

So as we look to 2005, we expect to exceed $13 billion in total revenue and over 1.1 billion of net income.

We expect deliveries to be in the range of 42,000 to 42,500 homes.

Our average sales price we expect to be over 290,000.

And as you compare that to the backlog, which on wholly-owned backlog homes, we have an average sales price of 315,000, that seems reasonable because we generally will deliver below what the average sales price in the backlog is.

Our homebuilding operating margin as we look to 2005 once again we expect to improve by 50 basis points to 13.5%, driven by a 50-basis-point improvement in gross margins.

Our land gross profit we expect to be in the range of 140 to 150 million, which is slightly lower than 2004.

And our equity from earnings of unconsolidated joint ventures we expect to be in the $100 to $110 million range.

However, the land sale component in our joint venture activity we expect to be flat at 60 to 65 million, while our homebuilding activity and joint ventures we expect to see a significant increase from 27 million in 2004 to 40 to 45 million in 2005.

And this is a result of what John was referring to which is our focus on infill opportunities in our most constrained markets.

Management fees and other we expect to be in the $20 million range in 2005 versus the 58 million in 2004.

Lennar Financial Services we expect to be about 115 million pretax.

And we are not expecting any change to our corporate G&A percentage of revenues or our tax rate, which is 37.75%.

These goals for 2005 do not assume the retirement of our 9.95% senior notes, which are callable at 105 in the second quarter of 2005 if we did retire those notes it would be approximately a $35 million impact pretax.

Our dilutive share count we expect to be about 168 million in 2005, and interest on our convertible debt will be about 9 million.

Our community count, as we focussed throughout the year, we expect to end the year in the 10 to 15% increase range as we get to the very end of 2005.

As some of you have asked for additional breakout by quarter, the quarterly breakout information we expect based on what we know today, to be as follows: The first quarter we expect to be approximately in earnings per share of about 99 cents.

Second quarter about $1.34.

Third quarter, about $1.73.

And the fourth quarter, about $2.84 to build up to the $6.90 goal that we have for 2005.

As we know, deliveries will shift from quarter to quarter, but as we look at the first quarter and we have taken into account losing 41 deliveries as a result of the recent fires in Maryland, we expect to be approximately 7,700 deliveries; the second quarter approximately 9,300 deliveries; the third quarter approximately 11,000 deliveries; and the fourth quarter approximately 14,200 deliveries.

We expect the homebuilding operating margin, which again is gross margin less SG&A percent, to be about 12% in the first half of the year and averaging between 14 and 15% in the second half of the year.

Land sales we believe will be more weighted to the second half of the year with half of this year's land sales occurring in the fourth quarter.

And Lennar Financial Services earnings spread as follows: 10% of their pretax in the first quarter, 20% in the second, 30% in the third, and approximately 40% in the fourth.

So we are excited about 2005, as the Lennar team of associates are focused on executing what we believe will be another record year and these goals position us to have another outstanding Lennar process scorecard in 2005.

Over 20% earnings per share growth again, over 20% return on net capital again, and a balance sheet that again has grown stronger.

So with that, I'd like to open it up for any questions that you might have.

Thank you. (Operator Instructions).

And our first question will come from the line of Jim Wilson with JMP Securities.

Please go ahead, sir.

Oh, thanks.

Good morning, guys.

Was wondering particularly, Bruce, if you'd look into '05, if you could color a little bit of geographic expectations built into the model where, not in absolute detail, unless you want, but sort of where volume is likely to be growing in the way of deliveries, where it might be shrinking a bit for different reasons, and, likewise where margins might be improving and margins might be stagnant or not improving.

Sure, Jim.

Approximately 60% of our volume increase in terms of deliveries in 2005, will come from our 3 biggest states, Florida, Texas, and California, with the lion's share of that amount from California.

And then we have a balanced approach in our other markets.

The one new market that we're looking to see activity in 2005 is, we just delivered our first homes in Reno, and that's really the only other new market that we're looking at having a significant improvement.

But really as you look to 2005, Jim, you're seeing significant organic growth on top of the markets we've entered more recently.

The California growth a big portion of that is coming from Fresno and Bakersfield.

We've integrated those acquisitions very quickly.

We've positions ourselves well with land, and we're growing very nicely going forward, and that's true in the other markets as well.

As you know, we bought 14 companies over the last couple of years in different markets, and they've all been integrated very smoothly, and we're implementing dual marketing strategies and growing very nicely on an organic basis in those areas.

And in any of that shift as it relates to margins I would sort of think all other things being equal, with Fresno and Bakersfield picking up in California relative to what you've been closing the last couple of years, you might actually have lower margins as it relates to Orange County and other places typically higher margins.

Is that actually true or how would you color that?

Jim, this is John.

I would think in terms of margin percentage you're probably looking at pretty comparable margins in terms of the absolute dollars there's a difference because of the sales price in those markets.

Okay.

And part of that, Jim, is our focus on infill opportunities in some of these markets.

So although there's been nice price appreciation we've been very focused, as a company, of making sure that we're investing in infill opportunities in these areas.

Then just one final question for the quarter, since with your November quarter and as it relates to Florida, I'm sure the order activity in September was most impacted.

Could you kind of compare how it's changed through, you know, November compared to where it dipped to in September?

Well, as we look at Florida for the quarter, new orders in Florida were down 14% for the entire quarter.

But as we look at -- you know, we don't give monthly new orders, but that number was a positive as you look at the month of November in Florida.

Okay.

So a fairly big negative in September turned around, has become positive by November?

That's correct.

Okay.

Great.

Thanks.

And our next question will come from the line of Stephen Kim with Smith Barney.

Please go ahead.

Thanks a lot.

Congratulations, guys.

Great quarter.

Thank you.

Couple of questions.

One, let me ask you about the SG&A guidance and the corporate guidance.

You basically had a pretty nice improvement this quarter year-over-year, 30 bips, despite the fact that you lost some in the way of revenues.

I guess I was wondering whether or not if you actually have as robust revenue growth as you have planned, it looks like, for next year?

Is it possible we might begin to see some of the SG&A leverage and corporate leverage next year even though you haven't planned for it?

What I would say, Steve, we're seeing all of the homebuilding operating margin leverage on the gross margin line is what we're expecting for 2005, and as you look at that, the SG&A percentage for next year for '05 we're expecting to be about the same for the entire year at 10.9% of revenue.

And that's a result of it depends when communities open will vary with which quarter has leverage or not, and which quarter has more land sales than other quarters, because we're accruing for bonuses in quarters that have more significant land sale profit.

So I would expect for the entire year to be flat with respect to SG&A, I think that's a fair assumption given where we are at this point.

Got it.

Right.

Yeah.

The community count and the land sales which drives G&A.

That's right.

I hadn't thought about that.

The second question relates to your guidance with respect to volumes.

The numbers you gave I assume incorporate JVs, right?

That's correct.

Those are including joint venture homes within all of those total deliveries.

Right.

So in order for us to actually have a model that makes sense, we need to make some assumption as to what your JV contribution is going to be.

Can you give us a sense for what that's going to be for the full year, you know, in rough terms and how would you expect to see that spread over the year?

Sure, Steve.

This year we had about 1,000 deliveries coming from joint ventures.

We expect that to be about 30% higher next year.

And we're expecting that if you look at the year, it's going to lay out that the third and fourth quarter will have a little bit more than the first and second quarter.

So maybe in the first half of the year, about 500.

In the second half of the year, about 800 or so.

And those are primarily in our supply-constrained markets, the East Coast and the West Coast.

Got it.

Great.

Well, I'll queue back in.

Great quarter, though, guys.

Thank you.

And our next question from -- will come from the line of Dan Oppenheim with Banc of America.

Please go ahead.

Thanks.

Was wondering if you can comment briefly on the expectation for order trends as we look towards the first quarter, in that the 5% increase in the fourth quarter won't assume it probably would have been higher single digits without the hurricanes in Florida and just if you could confirm that.

Then looking -- you think there's a lot of pent-up demand in Florida that will show up in the first quarter numbers?

And also given the growth in communities relative to the fourth quarter average, are you expecting that we'll then see an accelerated pace of growth?

I think that as we look at order trends going forward, remembering that we have a very strong backlog as we enter the year, we're still managing and carefully controlling the rate at which we have -- that we open new phases.

So, you know, we're kind of looking at tempering our sales expectations, our new order expectations for the first -- as we enter the new year for the first quarter, just based on our own view that we want to match up sales pace with deliveries, and there's still some catch-up in some of that as we move forward, and so we're kind of moderating our view as we look into the first -- into the first of the year.

Okay.

Thanks.

And our next question will come from the line of Ivy Zelman with Credit Suisse First Boston.

Please go ahead.

Hello, guys.

Dennis McGill.

I just wanted to kind of follow up on the community count question.

You had talked 10 to 15% for the run rate by the end of the year; is that right?

Or is that what you're expecting year-over-year kind of as you progress, or will it ramp up to that?

That's what we expect by the end of the year, and, you know, as you look throughout the year, Dennis, because depending on sales pace and other things, you know, it's going to move around a little bit, but where we ended at 823 we expect to end the year just over 900 to somewhere in that mid-900 range hopefully.

And that would be weighted towards the second half versus the first half is the way to think of it?

I would say that that's fair.

When you're modeling out the expectations for orders, what type of absorptions do you kind of model into the assumptions maybe relative to last year or the last couple of years?

It really varies, Dennis, from area to area, and it's specific to each division and community.

That's not something that we speak about as a general.

There's not a general assumption that's used there.

It's very local, what assumption is used.

I guess what I'm kind of asking, in a market that maybe has seen a pretty strong pace, like Phoenix lately or maybe Las Vegas earlier in the year, would it be more likely that you were to assume a conservative pace of sale going forward, or do you typically hold the sales rate constant?

I think the answer there, Dennis, is that we're probably focusing on managing our sales pace relative to the production pace, and in some of these markets, the production pace is the limiting factor.

Given, you know, materials and labor, it's not perfectly easy to just ramp up at kind of will.

So while there might be pent-up demand and is pent-up demand in some of these market places, as you go to places like Las Vegas, production is very much a limiting factor.

Certainly in Florida you have production as a limiting factor today.

You wouldn't want to bring on certain communities or phases just because you're still dealing with a sluggish production pattern here and I think it's going to be that way through the first quarter.

Just one last question.

I was wondering if you couldn't kind of in the way that you look at your major markets, give us a sense from both maybe an operating margin and a return on capital standpoint what the spread would be from high to low, and if you want to give the absolute markets, appreciate that as well.

Well, I'd say it's fair to say, Dennis, that as you look at our supply-constrained markets, that's where you're going to have the highest gross margins and that's been consistent, and that would be the markets in California, Nevada, it's been Maryland, Virginia, it's been parts of Florida, New Jersey, and Minnesota.

You wouldn't want to go into kind of just what the absolute level is either returns or margins, just to give us a sense of kind of how much higher?

I realize those markets are obviously above corporate average, but just to kind of put it in context versus the corporate average.

We haven't -- I don't have that information.

That's not something that we've gone into in the past.

But it's very fair to say that, you know, you have those markets are consistently going to be above the Company average.

And, you know, the other markets that we talked about, Texas, Carolinas, and Colorado, have been below the Company's average, and that's been a consistent story for the last couple of years.

Okay.

Thank you very much, guys.

Thank you.

And our next question will come from the line of Margaret Whelan with UBS.

Please go ahead.

Good morning, guys.

Good morning.

Tough quarter.

Well done.

Thank you.

And you were very -- Stuart, or both of you, I guess, were very thorough in your prepared comments, and I'm wondering can you give us community count by quarter?

Do you have any sense for that?

We haven't laid that out by quarter, Margaret.

But, you know, I think as you look at the year and we're talking about a 10 to 15% increase throughout the year, you know, I would guess that you're likely to see 10 to 15% throughout the entire year.

Okay.

So we'll just put in an average.

And then the second thing I had is, you know, you're saying the ASP on the deliveries will be around 290 relative to the price embedded in your backlog is closer to 325, and I'm trying to figure out, is there -- 2 questions, I guess, is there any 1 market where on an apples-to-apples basis you're selling homes today for a lower price than a year ago, or versus the last couple of months?

Then secondly, how much is mix going to play an impact in this in terms of trying to achieve higher affordability or target higher homeownership rates in bigger markets?

Margaret, this is John.

There aren't any markets where on the apples-to-apples basis product is selling for less, but really you hit on the important point, which is mix.

In some of our markets we are targeting a more affordable product profile, an attached product or in the California example, inland or Central California markets we'll be bringing down our average sales price as a whole, but that will be because of different products or market profile of our product.

And that doesn't necessarily mean they're lower margins?

That's correct.

Thanks very much.

Well done, guys.

Thanks.

Next we'll go to the line of Carl Reichardt with Wachovia Securities.

Please go ahead.

Good morning, guys.

Good morning.

What's your attached/detached mix right now, total Company, and within the joint ventures?

We probably have somewhere 15 to 20% that's attached.

And that's changed and up a bit versus years prior; is that correct?

It's up a little bit, that's correct.

And is that -- that's total Company?

I'm curious whether or not you'd be putting more of the attached into JVs or putting more of the infill project into the JVs given the risk profile tends sometimes to be a little higher.

That is correct.

More of the JV activity is relative to infill location.

Okay.

And attached product.

Last question.

This quarter and for the year, if we break out the joint venture income, what percentage of it is associated with pure land sales and what is associated with more traditional homebuilding?

Looking at 2004?

Yes, sir.

Okay. 2004 we had a total joint venture profit of actually 61 million for the fourth quarter.

Now, you asked for the year or the quarter, Carl?

Both, Bruce, please.

Starting with the fourth quarter, homebuilding was 17 million of that 61, and land sales in the joint ventures were the balance, about 45 million, rounding.

And for the year, we had a total number of 91 million, of which homebuilding was 27 million and land was the balance of about 63 million.

So as you can see, the land portion in 2004 as a total year is flat with 2003, which was also 63 million, so the growth that we're seeing both in '04 and as we move into '05 in the joint ventures has been more of the focus on infill, more deliveries from joint ventures, and it's being driven by homebuilding profit increases.

Perfect.

That's what I thought.

Thanks so much, Bruce.

You're welcome.

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

Please go ahead.

Thank you.

Just to follow up quickly on Margaret's question, do you expect your average selling price to decline sequentially as the year progresses?

Well, typically, Lorraine, if you look over the past several years, we typically have an average sales price that starts out a little bit lower the first part of the year and increases as the year goes on with the fourth quarter being the highest average sale price.

And we typically go from a fourth quarter average sales price to something lower in the first quarter.

Now, for this year, we're going from a 286 -- 287,000 average sale price and we believe that we might actually be a little bit higher than that in the first quarter.

And we believe for most of the year we'll be around that 290,000 range or slightly higher.

So sequentially throughout 2005, it really depends on product mix, but it looks like sequentially it's likely to move up a little bit with the fourth quarter being the highest average sale price.

Thanks.

Then just looking at your earnings growth through the year, looks very back-end loaded.

Your backlog being up 30%, and then the earnings guidance for the first half of 2005 was only up about 13, can you just talk about what you expect to change in the second half of next year, or in fiscal '05, and what gives you the visibility to come up with a 25% growth rate for that time period?

Well, as far as the way the quarters lay out, Lorraine, if you look at homebuilding, deliveries are balanced in terms of the increases throughout the year.

In fact, we may be delivering just a slightly higher percentage towards the earlier or middle part of the year.

What's driving the fourth quarter growth is more in financial services and more in land sale profit, where as this year land sale profits were more front loaded at the beginning of the year.

It's more back loaded towards the end of this year.

Now, it is possible that some of those land sales, particularly if some of the buyers are looking to buy those communities sooner, there's an opportunity that some of that could move up earlier in the year.

But based on what we know today, we are projecting that the majority of the land sales, about half the land sales for this year will occur in the fourth quarter.

And that's what's driving the big fourth quarter increase.

Thanks.

That helps a lot.

And just finally, can you talk about your cancellation rate in some of the markets that you had commented on in early November, like Southern California and Las Vegas and how those compare with your overall Company cancellation rate?

As we normally say, our cancellation rate is typically 20 to 30%.

In the fourth quarter, we were actually below our normal range.

So we're very happy with where the cancellation rate ended up.

Now, with the blip that happened in the marketplace in Las Vegas, for example, we did see the cancellation rate spike up there for awhile in the fourth quarter, but the good news is that we were able to resell those homes at higher margins than they were existing in backlog previously because they were sales from earlier in the year.

So although we did have an adjustment both in Las Vegas.

And in Southern California, I guess we have more markets to look at there, the cancellation rate in Southern California didn't change significantly, but again the good news is we were able to sell -- resell any of those homes that did cancel and end up with as strong or stronger margins in both of those markets.

Thank you.

And our next question will come from the line of Jack Kasprzak with BB&T.

Please go ahead.

Mr. Kasprzak, your line is open.

And we'll move on to the line of Greg Gieber with A.G. Edwards.

Please go ahead.

I notice that you've given your delivery schedule or plans for 2005.

Any chance you might want to share us your thoughts on what would happen to your volume order pattern during the year?

We have not put out the orders by quarter, Greg, but, you know, starting the year with a backlog up 30% we feel very comfortable to achieve the total deliveries that we laid out for the year.

But we have not laid out how those new orders are going to work from quarter to quarter.

Do you have a number for the year as a whole?

We have not put out a number but I'd have to say that we would expect for the year, just like our community count is growing 10 to 15% we would expect our new orders to grow probably that same type of range.

In order to achieve the goals we laid out.

And you would expect those orders, again, to be largely concentrated in those same 3 states you mentioned, Florida, Texas, and California?

Proportionately, with 60% of the increase in deliveries coming from those 3 states, I would expect that deliveries -- I'm sorry, orders in those 3 states will also be up and be the lion's share up probably about the same.

Now, I assume since '05, pretty much on cruise control now to some extent you're starting to think about '06.

Could you talk about just, you know, what you're doing in the way of buying land?

Is there any shift in the markets you're buying in?

And if you were to look at the end of '06, what sort of, you know, sense of community count would you want to have by the end of '06?

I would say generally, Greg, our model, our Lennar process of growing earnings 15% a year, the base model is to grow community count roughly 10 to 15% each year to get there.

Okay.

Then if I could ask you a question on Southern California, you say that was better there, but could you tell me where you're finding that improvement?

Is it in the more coastal sections of Orange County and San Diego, or are you finding more of the strength for yourself to be in further-out areas like the Inland Empire?

Greg, this is John, and it's very mixed.

As I mentioned on last quarter's call, even within the same geographic areas as you just described, you could have communities selling very well and other communities that have tapered off some.

It really has to do with how accelerated the pricing had become at any particular community.

And the softening that now appears to have been absorbed had to do with those communities that were in the latter stages had reached very high price appreciation and to work through those.

So it's fairly consistent throughout the markets in the way that they're performing from coastal Orange County to inland to San Diego in terms of the relative performance.

And in those markets of Southern California, what are you doing with your sort of the type of price point for the new communities that you're opening?

Are you increasing densities and reducing square footage?

Or are you still building more of a larger product?

In general, I'd say we are trying to target a lower price point through increased densities.

Okay.

Thank you much.

And our next question will come from the line of Michael Rehaut with J.P. Morgan.

Please go ahead.

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

Just wondering if could you give a breakdown of your community count by region for the fourth quarter and for the fourth quarter of last year as well?

John, we haven't broken out community count by region in the past.

So it's not a breakout that we have.

Okay.

Can you talk about at least, you know, whether your community count in the East region was up or down year-over-year in the quarter?

As far as region goes, the community count in the east was down, the average active community, and, you know, again, a good portion of that is some delays that we had as a result of hurricanes in Florida areas and then the community count in the Central and the West region were up year-over-year.

Okay.

In terms of the progression of your community count in your East region throughout the quarter, by the end of the quarter I assume, you know, it improved, you know, month-to-month and maybe you had it up year-over-year by November?

It did improve throughout the quarter.

And by the end of the quarter -- by the end of the quarter it was still down a little bit year-over-year.

Community count in Florida is going to continue to be impacted.

The hurricanes are gone, but the impact of the hurricanes have really slowed the ability of the municipalities to get approvals and to bring things forward and that's going to continue to have an impact probably into the first and second quarters.

The slowing down of community count in Florida is not something that's going to evaporate.

So we're really encouraged.

The bright side of that is that we're -- we have a strong community count as we came to year end, in spite of the fact that Florida is off and expect to see this trend continue as we go into the first 2 quarters of next year, even with the slowdown in bringing on new communities in Florida as well.

We think towards the end of the year we're going to see a pop from Florida on top of that.

Great.

Thanks.

And our next question will come from the line of Rick Murray with Raymond James.

Please go ahead.

Hey, good morning, guys.

Good morning.

Just a couple of quick questions.

One, if you could break down the average FICO score during the quarter and how that compared to a year ago.

Sure.

You know, as we've been saying for several quarters, our average FICO scores have been in the low 700 range, and they continue to be in that same range, so we haven't seen degradation of credit quality as far as looking at average FICO scores.

Okay.

Thanks.

And the other question I had was, could you give us a breakdown of the geography of the land sales in the quarter?

I guess the real question is just trying to get at why the margin on those land sales look to be a little bit lower than you guys typically achieve.

Sure, Rick.

As we look at the quarter, and, again, these are the land sales for the fourth quarter that totaled about 13 million, if you look at the geography, it's really very diversified across all of our markets.

There's not 1 market that stood out as having anything significant.

So it was balanced really throughout all of our regions.

So from a margin perspective, the margins do vary from quarter-to-quarter, and, you know, again, we're also writing off expenses in land development activities as we go.

So 25% gross margin, I wouldn't say is necessarily out of the ordinary, but it will vary depending on particular land sales that might occur in any 1 quarter.

Okay.

Thanks.

You're welcome.

And our next question will come from the line of Myron Kaplan with Kaplan, Nathan & Company.

Hi, guys.

Marvelous year.

Thank you.

Just like to ask a question in regard to the November 5th caution in regard to the Q4 guidance.

How did things develop so that you were able to go from, let's say, a slippery slope because of the storms and so forth, to what I would call you were able to -- you must have chopped a lot of wood, you might say, to be able to complete the year in stellar fashion, as du.

Well, you know, as we said at that time, Myron, it was going to be very hard for us, even November 5th, to gauge exactly what the impact was going to be.

It was really a day-by-day kind of evaluation.

Some of it had to do with just things as simple as getting electricity turned on in some of these markets.

And so, you know, I think that the end result was a lot of people did work hard.

We've really got to admire a lot of the people -- a lot of our people here in Florida that in the wake of some very difficult local conditions and on top of that, the personal anxiety of having gone through the preparation and weathering of multiple storms, people kind of stepped up and did what would be expected of them, but actually worked well above and beyond what might have been thought would happen.

But, you know, we had to -- we had to come to the market and say that there were some risks out there.

In fact, we did lose a number of closings, you know, in the wake of the hurricanes, but we didn't loose the full 600 that we thought might kind of be the downside.

Some of that was a result of a lot of hard work.

Some of it was market conditions kind of correcting themselves as we went through the fourth quarter.

But there are going to be some lingering impacts, as I said, production continues to be challenging in some of the Florida markets.

We're going to continue to see some sluggishness in that regard, and that's going to impact our sales pace, because we're tying sales pace to our deliveries.

And additionally community count continues to be difficult to bring on line just simply because some of the municipalities are slow on the approval process because they've geared up in other areas to kind of counter-balance or compensate.

So it's been a great effort by a lot of people.

There's still going to be some sluggishness but even with all of that I think our numbers are very strong as we look ahead.

There's no doubt they're really strong.

So would you say, for instance, in Vegas, as you were able to remarket these -- some of these cancellations advantageously and so forth?

I think that's the bright side of the story, certainly in Las Vegas and Southern California, maybe we lost some of our closings due to some cancellations and stuff like that, but the bright side is that we've been able to sell those homes at higher prices than they were originally sold for, benefiting from some of the appreciation even though there's been some pull back in pricing.

It's still higher prices than we started out with.

And those deliveries will come in as we go through the beginning of '05.

Well, you're doing marvelously.

Once again, it's a great -- it's just really well done.

It's a marvelous position that you've put the Company in, and obviously the shareholders are benefiting.

Great.

Thank you.

Thank you.

And our next question will come from the line of Joel Lockert with Carlin Financial.

Please go ahead.

Hi, guys.

Great quarter.

Just wanted to say that first.

Second of all, I just wanted to know what you guys model material prices for in 2005 versus 2004.

For your guidance, of course.

You know, we're expecting there will be some movement in material prices, but, you know, there are going to be some ups and some downs, so to kind of go through, you know, commodity by commodity predictions, we're expecting that the cost of goods, the cost of our homes are going to probably stay in line with price increases through the year, and that's about the best that we can say.

It's an art, not a science.

I'm sorry, so you can't give any kind of rough percentage on material?

I guess your land prices are locked in, but no kind of rough estimate on just the basic material side of it?

This is John.

For the most part our material price is locked in as well for our inventory, so a good portion of the year, that's fairly stable.

Lumber price would be locked in.

As Stuart said, it really varies up and down even by market with materials.

Concrete is different in Florida than it is out in the West in terms of its pricing and availability, so it's -- I would think that it would be very hard to pick a percentage because of the way it does vary in each individual markets.

Right.

Because you have the cement increase in January 1st for most of the markets, and I guess gypsum probably also headed towards going up.

Just wondering if you had factored those in or if those are going to be flat or increased or what you've modeled in?

We have -- where we were aware of increases have already been brought to us by our suppliers, those are factored in.

As you go through the year there will be -- we expect there will be fluctuations up and down.

Some of those price increases will hold, some of them won't.

So we're relatively flat overall, but, again, it will vary by market and by commodity.

Right.

Just a follow-up question just on actual land, and just development, based on your IRR models and whatnot going forward, if you were to use that 1.3 billion in cash, where do you find the best geographies around the country just based on land prices, affordability and all those factors?

From my perspective, the best markets in terms of producing returns are the land-constrained markets.

And the other side of that is the best markets in terms of creating production machine in the leverage of that machine are in the less constrained markets.

So we take a perspective of balancing across those markets because of those different results that you get from them, and they're both desirable results.

Do you guys weight, say, affordability ratios, or home price to income levels, I mean, a good amount or is it mostly based on land constraint?

I'm not sure I understood the question, if you could repeat it, please.

Oh, do you guys base it just mostly focus it on land constraint only, or is a lot of it affordability ratios within each region and, say, price -- income to price of the house level?

Do we base what?

Just base your model and where the best investments are for your raw land or just the developed communities years out.

I think what -- I think I understand what you're asking.

I think that what we do is we look at demand patterns within a market.

Pure affordability is not necessarily a great indicator of where the great strength of market is going to be.

It's as simple as a demand and supply relationship where we see strong demand, population growth, work force increase, job formation, things like that, and we see a counter balancing very limited supply of available land which is in most of the coastal markets.

We think that the opportunities to purchase and to earn good return on our purchases is probably going to be the highest.

So, you know, in those markets what you're going to see is affordability is going to actually shrink in those markets, but there's a growing demand nonetheless and people can afford to pay for the homes in a shrinking supply at the same time.

That's where we're making some of our most strategic investments.

Thanks a lot.

You bet.

And our next question will come from the line of Matthew Zucker with Quattro Global Capital.

Please go ahead.

Focus for a moment if we can to your liquidity position and get your thoughts on your dividend.

I realize that you just increased it last quarter, but given that some of your competitors have increased their dividend over the past few weeks, want to get your thoughts on use of cash for shelters.

Yeah, we constantly have, within our focus, the concepts of increasing dividends, increasing -- or embarking on some kind of a stock buyback.

We still think that the opportunities to make strategic investments, to be a strategic consolidator within the industry, to grow into new market places afford us very strong returns on the use of capital.

We still view our mandate as one of growing the Company and growing the franchise, and so we're probably predisposed to find opportunities to use the capital within the Company.

Doesn't mean that we're not considering the other alternatives, but for right now I think that we're looking at opportunities to grow.

Okay.

Just in terms of your strategy or your corporate strategy, do you have a target?

Do you like to trail the S&P by a certain percentage?

Do you focus on that at all?

On the dividend yield that is.

There's no specific formula.

We're weighing all the components in how we decide to increase as we get together with our Board of Directors each quarter.

Okay.

That's great.

Thank you very much.

You're welcome.

And our next question will come from the line of Timothy Jones with Wasserman & Associates.

Please go ahead.

Good morning.

Good morning, Tim.

Hi.

How much -- did you sell very much land from Newhall last year, and how much do you intend to sell this year?

No, as we've said, Tim, we really didn't expect much of Newhall to be available or to come on line until late '05 or into '06, and, of course, we're adhering to that.

So the answer, no, we really haven't sold very much at all at Newhall.

And when you start delivering in '06, roughly how many deliveries would you expect in the first year and what type of an average price, just to give me an idea of the magnitude of the size?

Probably 500 to 1,000 homes in '06.

What rough average price?

The average price is going to be higher than the Company and the California estimate.

It's -- currently we're in the 400,000 average sale price in California.

These homes are going to be higher than that by probably 100,000 or so.

I think we're going to have to wait to answer that question until market conditions, you know, unfold in that marketplace.

We're certainly going to be building product that is geared towards market conditions at the time, and I think it would be premature to put a pricing matrix on them.

You can just expect that it will probably bring the Company average up.

Yeah, you've given me close enough, just an idea of the relative size.

Now, these JVs continue to get more important.

Are they located in a handful of land-constrained markets, or how do they fall out, especially the homebuilding part?

For the most part, the homebuilding joint ventures are, as Bruce mentioned earlier, in the more land-constrained urban infill markets where we're doing the higher density, the mid to high-rise type of product.

That's California mostly?

You'd see it in Southeast Florida, you'd see it in Chicago, and you'd see it in both Southern California and the Bay Area.

Okay.

Chicago.

That surprises me.

Okay.

And lastly, how does your relationship with L&R work now?

Do you just buy like you used to, buying some land or buying -- you do it the way you used to do it, market price?

The only thing that changes in the relationship between Lennar and L&R is the perception that they are both controlled.

The fact is that they have both operated as independent entities even within the joint venture environment, and as we move forward we have an excellent joint venture partner over at L&R and we expect that relationship is going to remain strong and positive.

But is that the -- L&R, is that the reason for your projected decline in management fees?

No, that's -- they're unrelated, Tim.

Could you tell me why they're projected to decline in that management fees?

Well, in management fees and other, we did have a sale of land option contract or 2 throughout the year that we talked about in earlier quarters.

That was part of it.

And also, you know, there's other items, you know, a lot of items that will go into that category, not one that stands out.

And potentially if we utilize our capital throughout the year there's opportunities that, you know, there might be some areas in there for growth above what we indicated.

Great.

Thank you.

And our next question will come from the line of Fred Taylor with Lord Abbott.

Please go ahead.

Yeah, I think at this point most of my questions have been answered.

Just as a data point, if you didn't say it, thanks for giving the debt and equity numbers at the end of the press release.

Do you have the dollar amount of inventory at '04?

Yes, we do.

Inventory is going to be approximately 4.9 billion at the end of November.

And would you have, given -- you gave some great guidance on deliveries and things like that, kind of what you might think it would grow to during the year and be this time next year?

Well, we haven't modeled out the inventory number, and the reason for that is, you know, it's very dependent on how the community growth is settling from quarter to quarter and how many particular land opportunities end up wholly owned in the joint venture, so we have not given a number, but as we've grown the Company 10 to 15% as a baseline, you can expect that inventory is certainly likely to grow, and it might be within that 10 to 15% or not, but that's a good baseline to start with.

Okay.

And just following up on a couple of, you know, the excess cash, would you want to keep your debt-to-cap ratios about where they've been, go lower, go higher?

Given the right opportunities I think that we'd be fine with a higher debt-to-total cap ratio.

But we're, as always, we're very methodical in the way that we make investments.

We look to be strategic and opportunistic, we're looking for unique opportunities, but under the right set of circumstances we've always felt that kind of 35 to 45% as a debt-to-total-cap ratio is the right place for us to be.

Thank you.

Thank you.

Next we have a follow-up question from the line of Carl Reichardt with Wachovia Securities.

Please go ahead.

Hi.

One other I wanted to ask about everything's included and its performance relative to design studio over the course of the last year, John.

Any particular change relative to past?

I think we're excited about, as we've said before, the dual marketing platform and continue to expand that into our markets that don't yet have the dual marketing platform, and we find that both of them are executing well and are very excited about the performance of "Everything's included," if that's what you're specifically asking about.

Just to augment that, I think that as you look across the industry, with production as -- operating at as high a level as it is in most major markets, the simpler approach is operating very efficiently and very effectively in affording us a nice opportunity to kind of manage our way through some of the trickier markets. "Everything's included" has performed extremely well.

It's a simpler operating platform, it's limited number of model homes that we're building, limited changes in options, making the construction process simpler, and I think that in a lot of instances we're seeing more people kind of go in that direction.

So the "Everything's included" model has performed very, very well.

Okay.

Thanks.

And next we will go to the line of Alex Barone with JMP Securities.

Please go ahead.

Thanks.

Good job.

Question on your land positions in terms of your planned investments for this year, as well as in terms of dollars, as well as whether you plan on increasing or decreasing the number of years of land and the percent owned versus optioned, what your thoughts are there?

Our land investment has remained fairly consistent over the past years, have accommodating a combination of ongoing operations and growth as well.

We expect as we look ahead that it will be about the same.

I think that in terms of number of years of land owned and controlled, we're remaining fairly consistent with where we've been over the past couple of years.

But probably with more of a propensity to option a little bit more and own a little bit less, and I think you'll see that trend continue as we go forward.

Okay.

And you mentioned that in terms of you might want to grow into new markets.

What specific areas are you thinking about that you aren't in right now that seem attractive to you?

Well, we've consistently said that we keep an opportunistic eye on the growth into new markets.

We think that the opportunity to expand will present itself at appropriate times and we're always looking for unique opportunities to combine with a group that is well positioned within a marketplace.

We've identified the Pacific West Coast, Northwest, as a potential target in the past, we've also identified Atlanta.

There are some other markets, whether it's Nashville or some others that with the right opportunity we would jump on it and enter.

Great.

Thanks a lot.

Okay.

Last question.

And that last question will come from the line of Scott McCullough with ING.

I was curious if you had a total lot count as of year end and what percentage was owned versus controlled?

Yes.

The total home site count at the end of the year was 256,000, and 34% of that was owned, and 66% controlled.

Thank you very much.

Great quarter.

Thank you.

Okay.

Well, thank you for joining us for our fourth quarter and year-end conference call.

Again, as we look ahead, we're -- we feel very good, both about the home building industry and about our position.

We look forward to discussing more in our first quarter conference call.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 2:30 p.m.

Eastern time today until Wednesday, December 29th, 2004, at midnight.

You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 760042.

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

Again, those numbers are 1-800-475-6701 and area code 320-365-3844, entering access code 760042.

That does conclude our conference for today.

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

You may now disconnect.