Lennar Corp (LEN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second 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. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

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

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

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

The Company urges you to look at them.

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

Please go ahead, sir.

Yes.

Good morning, everyone, and thank you for joining us for our second quarter conference call.

I am joined here with Bruce Gross, who will give a financial overview.

Let me begin by saying that the story remains consistent for both the homebuilding industry in general, and for Lennar in particular.

Across the country, in all major markets, demand for new homes remains strong, driven by a broad set of fundamentals that continue to create a favorable environment for the new home customer.

Moderate interest rates, together with positive demographics, strong job growth, and as well, income growth, positive consumer confidence and a generally strong economy are continuing to propel the overall homebuilding market to consistently positive performance.

Limited supply of available land continues to limit inventories and speculative building, while generating pricing power going forward.

Now while the consistent strength and success in the national housing markets have given rise to a lot of discussion about a national housing bubble, credit quality and interest rate hikes, the industry has shown tremendous resilience as the drivers of stability and growth rest in the growing population across the country that needs a place to live and the aging stock of existing dwellings to house that population.

While we do believe that the rate of price increases will moderate over time, the population is generally employed and incomes are increasing and that population is going to find a way to afford their new home.

With a limited supply of land to satisfy demand the market appears to have excellent long-term prospects.

Against that backdrop, we are very pleased to announce, yet again, record earnings for Lennar for both the second quarter and for the first half of 2005.

As you can see in our press release, revenues were up a healthy 25% and that together with a 150 basis point improvement in gross margins fueled a 34% increase in homebuilding operating earnings.

As we look forward to the second half of 2005, we derive a great deal of confidence from our $7.3 billion backlog, which is up 25% year-over-year, and gives us excellent visibility to guide 2005 earnings to $7.80 a share, up from our prior guidance of $7.15 a share.

Strategically we are very well-positioned in all of our major markets.

Our excellent land position, particularly in land constrained markets where there is an increasing shortage of entitled home sites, will drive future growth and earnings for the Company.

Our community count is growing and will continue to grow throughout the year and into 2006, as many of our excellent land positions translate into active communities.

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

All of these factors continue to drive strong and sound returns on capital and on equity that benefit the Company and our investors for the long-term.

Our well recognized franchise and land acquisition continues to provide excellent growth and land position for the future growth of our Company, while simultaneously adding to our overall profitability as we sell excess land to others as part of our well-known pare-down strategy.

The Lennar Land Machine, as we call it, has positioned our Company with unique opportunities in some of the most constrained markets in the country, such as Newhall land, El Toro in -- and El Toro in California and Roseland in New Jersey.

These create excellent visibility into our future.

Strategic deal structures and unique alliances have continued to enable us to capture profitability from these positions, while limiting the use of capital, and most importantly, limiting risk to Lennar.

As we've grown our business and continue to enhance land position, we have continued also to be very focused on building our balance sheet strength.

We continue to operate at a very conservative leverage level and have maintained great liquidity for future growth and/or uncertainties.

We remain a balance-sheet-first focused Company, even while we position for future growth.

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

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

And now let me turn over to Bruce for a financial review.

Thank you, Stuart, and good morning.

We established an earnings per share goal for Q2 of $1.25 in last quarter's conference call for the second quarter.

On a comparable basis, we achieved $1.55 from continuing operations.

Our goal and our results both exclude the impact of the $0.13 charge on the early retirement of our 9.95% debt, which was an expected transaction.

Our business model remains focused on achieving strong EPS growth, higher return on net capital and a strengthening balance sheet.

The scorecard for those three metrics for this last quarter, earnings per share increased 27%, return on net capital for the trailing four quarters was 21.3%, and our balance sheet leverage remained strong as our debt-to-total capital was 35.4% with ample liquidity.

The strength in the quarter was really from the homebuilding side.

We had a 48% increase in operating earnings from the sale of homes, which was an increase from 233 million in the prior-year's quarter, to 346 million in the current-year quarter.

The increase was a result of higher deliveries, higher average sale price and higher gross margin.

Deliveries increased 16% year-over-year and we exceeded our goal for the quarter by 300 homes.

The increase in deliveries was noted in all three of our operating regions, East, West, and Central, and average sale price increased 10% year-over-year.

The East was up 15% from 246,000 to 283,000.

Our Central region was down 5% to 189,000.

And that was a result of a higher product mix coming from Texas, where average sales price is in the 160,000 range.

And the West was up 16% from 335,000, to 388,000.

The Company has experienced continued favorable pricing conditions in our stronger markets which drove a 150 basis point improvement in gross margin percentage.

The highest gross margin percentages during the quarter were noted in the following states -- In our East region, Florida, Maryland and Virginia; in the West region, California, Nevada and Arizona; and in our Central region in Minnesota.

Our backlog gross margin percentage remained strong, particularly in the states mentioned above.

Our SG&A percentage of revenues also showed improvement during the quarter.

It was a 30 basis point improvement from 12.1% to 11.8% in the current year, as we leveraged this additional volume.

Our gross profit on land sales during the quarter was 72.7 million versus 56.5 million in the prior year.

However, this includes a land sale from a consolidated joint venture with a gross margin of $21 million.

However, there is an offsetting minority interest expense for our partner's share of the profit of approximately $10 million.

If the joint venture was not consolidated, this sale would have been shown as a net $11 million to the earnings and unconsolidated entities line item on our income statement.

The revenue for this land sale was 30 million the related cost of sales was 9 million.

So for this quarter, as a result of the minority interest expense, I would suggest combining land and the management fee and other category, and that comparison would be 64 million for the current year versus 75 million for the prior year.

Our joint venture profits increased from 14 million to 21.7 million, and this was driven by homebuilding activity in the joint ventures this quarter.

Home deliveries and joint ventures increased 60% from 162 deliveries in the prior year to 259 deliveries.

And our joint venture profit related to these home sales increased from 2 million in the prior year to 12.6 million.

Average community count during the quarter increased 11% year-over-year, which is right on target with the projections that we've given of 10 to 15% community count growth.

This puts us in excellent shape to achieve our projected 2005 deliveries.

Our new orders for the quarter year-over-year were expected to be flat, however, we exceeded that expectation and were up 5% year-over-year.

We have focused on tightening up our sales and construction pace as we've talked about over the past year, and this led to an improved backlog conversion ratio of 53% for this quarter versus the prior year of 50%.

Turning to Financial Services, our Financial Services pretax decreased from 32 million to 19 million year-over-year, and our mortgage profit decreased from 17 to 10 million.

The mortgage market, as we know, remains competitive with fewer refinances, a higher percentage of variable loans and more broker competition.

Our mortgage capture rate was 68% for the second quarter versus 71% in the prior year.

And of those mortgages that we capture, the fixed versus variable relationship was 47% versus 53%.

However, of those variable loans, 83% are fixed for between three and ten years.

Our FICO scores were relatively unchanged from the prior year.

And our title pretax earnings increased from 8.8 million to 9.7 million.

In Financial Services we sometimes acquire noncore assets as we grow our core business.

And we will strategically sell noncore assets to remain focused on our primary business.

However, through excellent management we generally end up creating value and profits upon sale.

In the prior year, as you might remember, we monetized alarm contracts totaling 6.5 million of profit, and in the current year we sold a title subsidiary focused on exchange transactions resulting in a $15.8 million pretax profit.

The sale of this title subsidiary is reflected as a discontinued operation.

The profit earned in all of fiscal 2004 from this operation was 1.6 million on a pretax basis.

Turning to our balance sheet, as Stuart mentioned we continued to be a balance-sheet-first Company, and in the second quarter we generated EBIT of approximately 438 million.

We have deployed a balanced approach to deploying our cash and the uses of cash during the quarter included our primary goal of growing the business.

We talked about the number of average communities increasing 11%, that went up to 835.

The success in opening these communities and having starts in the ground is driving the predictability that we have in delivering our 20,536 homes in backlog.

And the total number of home sites owned and controlled increased 31% to approximately 298,000 versus the prior year.

And of those, approximately 31% of those home sites are owned in the Company and 69% controlled.

We continue to balance the short-term growth with a focus on long-term positioning to fuel continued community growth.

Additionally, during the quarter, we repurchased 2.4 million shares of Class A. stock at an average price of approximately $52 per share, without compromising our conservative balance sheet leverage.

Debt-to-total capital was 35%, which is at the lower end of our targeted 35 to 45% range.

During the quarter, as expected, we redeemed 322 million of 9.95% coupon debt, and we issued 300 million of 10-year notes at a 5.6% coupon.

Additionally, in June we renewed our revolving credit facilities.

The new facility was increased to $1.7 billion from the previous 1.4 billion, and the maturity was extended to a single five-year multi-year facility.

We now have 39 banks in the facility.

Our strong balance sheet, high cash flow generation, and ready access to the capital market enhances our credit profile, and during the quarter a couple of the credit agencies upgraded our credit.

Fitch upgraded us to BBB+.

Standard & Poor's upgraded the Company to BBB and Moody's continues to have a positive outlook with a Baa1 rating.

Our EBIT to interest coverage improved to 12.1 times during the quarter versus 11.4 times in the prior year.

And debt to EBIT leverage was 1.1 times and that's unchanged from the prior year.

So turning to the goal for 2005 for the rest of the year, these numbers exclude the impact of the 9.95% notes of course.

And if you remember, at the start of our first quarter this year, we raised our earnings per share goal from $6.60 to $6.90.

At the start of the second quarter, we raised our EPS goal from $6.90 to $7.15.

And with the success that we've seen here in the second quarter, particularly from the homebuilding side, we once again are raising our EPS goal from $7.15 to $7.80.

And a couple of the numbers supporting that increase are as follows -- We had a delivery target for this year of 42,000 to 42,500.

We are now increasing that to a range of 42,500 to 42,750.

We were very successful in our second quarter of bringing 300 deliveries that were originally scheduled to be delivered in the third quarter into the second quarter.

And as a result, our delivery goal by quarter is 10,800 for the third quarter and 14,800 for the fourth quarter.

The average sales price, and this is based on what we are seeing in our backlog, where our backlog average sales price on wholly-owned homes is 352,000 and 416,000 on joint ventures.

And, remember, this typically runs higher than our actuals, but based on this and based on when these homes would close, we are increasing our average sales price estimate to 307,000 in the third quarter and 325,000 in the fourth quarter.

Based on our improvement in the second quarter gross margin percentage, we are increasing our gross margin percent goal for the remainder of the year.

The gross margin in the third quarter should be at least 200 basis points higher than the prior year to approximately 25%.

While the fourth quarter should grow to approximately 25.6%.

SG&A percentage and corporate G&A percentage we expect to be consistent with the prior year.

Our joint venture earnings, we are remaining at our previous goal of 115, and actually a slight increase of 115 to 120 million for the year.

Our management fee and other, 20 to 25 million for the year.

Our land sale estimate is 165 to 175 million.

And Lennar Financial Services profit, we estimate to be 105 to 110 million.

As far as share count goes, the average share count that we would expect for this year to be 164 to 165 million shares.

And our goal does not project any additional share repurchases in 2005.

As a result of the visibility that we have and our updated goals, our new goal for the remainder of the year is by quarter, third quarter, $1.85, which is a 36% increase over the prior year.

And for the fourth quarter, $3.24, which would be a 41% increase over the prior year.

In summary, we are proud to report these strong second quarter results, and we remain well-positioned to achieve our increased goals for this year and to be positioned to achieve our targeted business model goal of a minimum of 15% earnings per share growth as we look forward to 2006.

With that, we would like to open it up for questions.

Certainly. [OPERATOR INSTRUCTIONS] And our first question comes from Stephen Kim with Smith Barney.

Please go ahead.

Thanks.

First of all, congratulations on a great quarter.

Thought this was really encouraging.

I guess my first question relates to your delivery outlook.

Bruce, the way I model your unit volumes, I do it on a consolidated basis.

And I just wanted to understand your deliveries, what are you sort of assuming from JVs, both for the third quarter and fourth quarter?

Okay, Steve.

Let me just get to those numbers for the JVs.

I know that actually there's been a lot of concern on the part of many investors that you guys are going to have trouble hitting that.

But it looks like with your delivery conversion ratio this quarter, you are on the right track.

Yes, we are.

We've been very focused on tightening that up.

As we look for the remainder of '05, we have talked about deliveries from joint ventures this year somewhere in the 1,200 to 1,300 home range.

And so far to date, we are somewhere around -- a little over -- close to 500, and we would expect that that would be split pretty evenly between Q3 and Q4.

You said so far to date you have 500, so, okay, got it.

So maybe another 400 in each quarter, something like that. 350, 400.

Between 350 and 400 each quarter.

Okay, good.

And with respect to your share repurchases.

That was kind of a welcome surprise.

I was wondering, you mentioned in your guidance that you weren't factoring in additional share repurchases.

But I was wondering if you could sort of give us a sense for what -- sort of what drove the share repurchase this quarter and are you basically saying that we -- you don't intend to buy shares back in the back half of the year, or that you are just simply leaving your options open?

I think we are leaving our options open.

Of course, Steve, you know that we balance our thinking between maintaining a very strong, very liquid balance sheet position.

We clearly want to remain invested in the future, in the future growth of the Company.

We want to be prepared for any eventualities that come around the corner.

One of the nice things is we are still finding wonderful opportunities to invest for future growth.

And, of course, you know that we view our primary mandate to -- as one of growth the Company.

And to the extent that we can find those opportunities that generate strong investment returns, that's where we are going to be investing capital.

But nonetheless, the repurchase of shares is a competing investment alternative.

And we from time to time think that it's a good time to invest in that avenue.

Good.

Well, great.

Thanks.

Very good quarter.

Thank you.

Thank you.

Our next question comes from Ivy Zellman with Credit Suisse First Boston.

Please go ahead.

Good morning, guys, actually Dennis McGill.

Just wanted to touch on the issues.

You kind of went through the margin strength and weakness by region and in the Central I guess you indicated that they were a little softer than the other regions, and it sounds like probably led by Texas and maybe Chicago, but that's also the region that your growth in orders is the strongest.

So I'm trying to understand if the growth in orders is the same regions that you are experiencing the tough margin comps.

Let me just start by saying that when we look at Texas, we haven't seen a weakening in Texas.

Texas margins are below the Company average.

Houston, San Antonio, Austin have slightly improved.

Dallas and Fort Worth have not seen much improvement there.

So I just wanted to clarify that for a second.

And then as far as the new order growth, I think as we look forward and as we've focused on where we are deploying capital, I think we have a pretty consistent focus on generating new communities in all of the markets across the country where we are operating, and I think you are going to see a pretty balanced program going forward.

We can assume that the order growth in the last couple of quarters has been evenly spread around those -- the Chicago, Minneapolis and Texas markets?

I would say by region you will see some consistency there.

You will see strength in orders from all three of the regions.

But we shouldn't be concerned that, just from a mix standpoint going forward, that some of the volume growth is occurring in the markets that have below-average margins.

No, because as we projected, our gross margin percentage is growing, so that kind of confirms that it's a pretty balanced program going forward.

Okay.

And you didn't highlight the Chicago market with some of the stronger margins.

Is it more just corporate average or how has that market been recently?

No, that market has been below the Company average for us.

And then if I could, just to two clean-up items on the inventory line on the balance sheet.

And then also if you could give us the percentage of the ARMs that you mentioned that it would be interest only.

Okay.

The inventory line item is an approximation at first because before we filed the 10-Q we have to go through a search for unrecorded liabilities.

So this is an estimate, and it's approximately 6.5 billion.

And the good news is most of the increase in the inventory we are seeing in the construction and progress area, which has been the focus on really tightening up and getting the starts in the ground to give us predictability of deliveries for the remainder of the year, so we feel pretty good about that.

And as far as interest-only loans, we talked about the ARMs and we said that looking at the ARMs, 83% were fixed for three to ten years.

As far as interest only, that number is approximately 27%.

That's 27 of the ARMs or of the total?

27% of the total loans are interest only.

And we've certainly seen -- we've seen a preference for people to go down this path, but again, as we look at our loans and we look at the credit that people are bringing to the table, the credit hasn't deteriorated at all.

The vast majority of our loans are fixed.

People are selecting a shorter period for the fixed, and people prefer not to pay that small portion of principal is what we've been finding, and that's showing up in these statistics.

Okay.

Just quickly on the Florida, you were speaking to the inventories on the work in process.

When do you expect that the Florida market will be back to kind of a normal construction cycle?

What we've said is the second half of this year, basically the fourth quarter, we expect to have a backlog conversion ratio in that Florida market which is back over 50%.

And as we've been saying for awhile, it's been in the low 30% range.

So we are very optimistic that we've turned the quarter in there and we are back on track and we are excited because we are very well-positioned in Florida and we have some strong margins coming out of that marketplace.

Great.

Thanks a lot, Bruce.

You're welcome.

Our next question comes from Carl Reichardt with Wachovia Securities.

Please go ahead.

Good morning, guys.

How are you?

Good morning.

Bruce, the SG&A to sales leverage that you're expecting to be consistent with last year, but you are a little more back-end loaded delivery-wise this year than you were last, I think, so why should we expect some better leverage there?

I think as you look at that, Carl, number one, I think as you look at our performance this year, there are a couple of variable costs that factor in.

One is, compensation-related expense based on the performance that we are hitting, which is a variable cost.

And I think as you look at the communities that we are opening in the second half of the year, our conservative accounting, which might be slightly different from some others, we do expense all the costs as we are opening up new communities.

So that's preparing us well for next year.

So that won't relate perfectly to just the revenue line item.

Okay.

So it's the variable portion there.

And then could you just give us a -- either Stuart or Bruce, an update on where you are with Newhall in terms of lot sales opening for traditional community sales, maybe who you are dealing with most aggressively in terms of the other builders there?

Just give us a sense of where you are?

Newhall continues to be an evolving and very positive story.

As we look ahead, our guidance was to begin delivering finished product at Newhall in 2006.

We still feel very confident that we will have some of our first deliveries in 2006.

Exactly how many is still moving around a little bit.

The entitlement process continues to be the most challenging part of any picture relative to land, and we will just see as we come into 2006.

In terms of dealing with other builders or other programs, I think we are a little bit early for that relative to some of the future parcels, but as it stands right now we think that we will be developing out a good portion of the properties in Newhall.

And they'll be reflecting in some of our results as we get into next year and beyond.

And just to clarify for a second, Carl, on the land sales; we haven't changed our thoughts as far as when we would start selling land to third-party builders which is still a few years out.

That would come from the Newhall Ranch portion and that is still on track.

But if you remember, Lennar was optioning the home sites at the Valencia Ranch portion of Newhall, which is the activity for the next several years.

And then as Newhall Ranch is ready to sell home sites, that's the point a few years out where we will begin selling home sites to third-party builders.

So that timing hasn't changed.

Okay, good.

That's what I needed to know.

Thanks a lot, guys.

Appreciate it.

Our next question comes from Dan Oppenheim with Banc of America Securities.

Please go ahead.

Thanks very much.

Was wondering if you can talk about the community count growth in the East, where you're talking about growth overall of 11%.

Are you seeing the communities coming on line in the East that will see positive trends there and orders coming up in the ensuing quarters?

As far as the -- we don't project the new order growth, but as far as looking at community counts coming on line, we are seeing balance in how they are coming on line in the various regions, and we talked about Florida's position, which is more fourth quarter where Florida picks up more in terms of new orders.

But otherwise, I think you see a balanced program across the Company.

Okay.

Thanks very much .

Our next question is from Steve Fockens with Lehman Brothers.

Please go ahead.

Good morning, guys.

Bruce, I just wanted to follow up a little on Florida and some of the comments earlier.

You talked about, I think, the closings catching up as you get the better backlog conversion in Florida in the back half of the year.

I'm sorry, I may have missed the last question.

Does that include an assumed pick up in the order pace in Florida in the East in general in the second half as well?

Yes, the last question, it's really the fourth quarter where you see that pick up in Florida.

Now Florida is very strong and we are feeling pretty comfortable as we get to the fourth quarter with our backlog conversion ratio going up to release more home sites in what are proven very strong communities, and we would expect some strong growth as we get out to the fourth quarter in Florida.

But in general, I guess I should -- given that you've had four quarters of somewhat soft orders in the East as you wanted to match construction to sales pace, are you pretty well through that?

Is that a fair interpretation?

Yes.

This is Stuart.

I think that we are reaching the back end of that and I think that it's a combination of a couple of things.

We have held back some of the openings of new phases so that construction can pick up.

Additionally, we've had some slower openings of some of our excellent new communities going forward.

And we will start to see some of that as we get to the back end of this year.

I think that the trend in some of these -- in the Eastern part of the country, particularly Florida, is going to start to change.

Thanks.

And one sort of longer-term question.

As you guys look at the land buying market today, have you changed your internal hurdle rates at all in terms of new projects relative to the last few years, especially in some of the hotter markets?

And if you haven't, does that necessarily mean that in the future it's possible that your margins could be a little lower because projects come through as planned as opposed to what I imagine have come in above plan?

No.

I think that our hurdle rates have remained fairly consistent.

I think as you see price increases moderate a little bit, you might see a little bit of adjustment in some of the end results, some of the gross margins.

However, I think that you are seeing some pick up -- there are a lot of moving parts in the gross margin calculation, commodities prices, labor prices.

I think that while we might see a little bit less from the land side as prices moderate, we will continue to see improvement generated from cost structure and improvement in productivity.

Great.

Thanks very much.

Our next question is from Margaret Whelan with UBS.

Please go ahead.

Hey, guys.

It's actually Dave Goldberg on for Margaret.

How you doing?

Was wondering if you could give us a little more detail on how Roseland is coming along?

And are we still on track for '07 deliveries?

Sure, David.

Roseland, which is the transaction of 15 properties up in the New York and Boston area, we are very excited about.

It's right on track.

And we expect that we are right on track with deliveries starting in '07.

Okay.

And then just one quick question on the capture rate at 68%.

Have you guys kind of put some plans in place to try to raise the capture rate or how should we think about that moving forward?

Well, the capture rate has been hovering around that 70% mark, and we continue to focus on it, but as you know, it's been a very competitive market as the re-fi activity has dried up, a lot of those brokers have moved over and focus on the purchase business.

So we want to do smart business, and I think it's realistic to assume, at least in the short term, that close to that 70% mark is about where we would be with capture rate.

Okay.

Thank you very much.

Great quarter.

Thank you.

Our next question comes from Lorraine Maikis with Merrill Lynch.

Please go ahead.

Thank you.

Can you talk a little bit about what triggered the consolidation of that joint venture that sold the land during the quarter?

Sure.

As we go through the accounting, Lorraine, there's some various accounting factors, not to get too technical, and what is important is all the components of not only our equity ownership, but how profits are shared, how decisions are made, and the way we focus is let's always conduct and structure the best business transaction, but sometimes the way it's structured we might have to consolidate that.

And that's what we had here is when you added up all those factors, it showed that based on our control of that entity, it went over that 50% mark and we ended up with a consolidation situation.

Okay.

And then just looking at your joint venture guidance, you raised it despite the fact that those land sales weren't included in joint ventures so actually looking a lot stronger than I think you had initially expected.

Could you just comment on, I guess, what's going right there and what you view as your opportunities on the joint venture front?

Sure.

A lot of our joint ventures are in supply constrained markets and they are focused on infill opportunities, where we are delivering homes in the joint ventures.

And these tends to be very successful programs and that's what we are finding is that we are delivering very high gross margin percentage from these joint venture deliveries.

And that business is going very well.

So you are seeing the upside there really driven from the home deliveries in the joint ventures.

Thank you.

You're welcome.

Our next question comes from Michael Rehaut with JPMorgan.

Please go ahead.

Good morning.

Just a quick question on some numbers here.

If you could give us an update on, I think you mentioned FICO scores were -- averaged flat year-over-year, but if you could give us what that number was exactly?

And also LTV and cancellation rates?

Sure.

Versus year-over-year?

Yes.

The FICO scores, Mike, year-over-year have remained in the very low 700 range.

That's been consistent for the last couple of years.

We haven't seen much change there overall for the Company.

As far as cancellation rate, the cancellation rate remains below our average, which we have said normalized was 20 to 30% and we've remained below that level.

And as far as Loan to Value, we are still in the low 80% range.

So we are still seeing pretty stable Loan to Value from our Financial Services group.

This is for loans that our Financial Services operation provides on -- to and our home buyer.

So it's for the 68% that we are capturing.

Okay.

And in terms of the community count growth, do you expect that to accelerate in the second half and can you give us any initial ideas about 2006?

Sure.

Our base case, Mike, is to be somewhere between 10 and 15% community count growth, and I would expect that we will be somewhere within that range in the second half of the year.

And as we go forward into next year, we will be about the same, 10 to 15%.

And that's on an average community count basis year-over-year.

Okay.

And lastly, Bruce, just more of a comment, I guess.

I think other people might feel similarly about this, but in terms of how you break out your closings and backlog and orders where you have JVs consolidated, and I in particular find it pretty helpful if we can also get those numbers without the JVs, given that really that's what's flowing into your financial statements and the JVs are coming in basically on one line.

So to understand how, on a regional basis, your fully-owned operations play out I think would just add some additional color and also make it more comparable to other builders.

Okay.

Well, we have footnoted in our press release the total number of joint venture homes in each of the categories of deliveries, new orders, and backlog, and from a regional standpoint, the number has been fairly low, but it's really been primarily in two areas which is in the West and in the East is where most of the activity has been.

But we are happy to comment if you look at this quarter, we had 134 deliveries in our Western region.

We had about 61 -- 71 in the East and the remainder in the Central, which was 54.

And that's deliveries, Mike.

And we're happy to break that out on our conference call.

Yes, that would be really helpful in terms of orders as well, it saves time on the conference call.

I appreciate that -- that break out.

And lastly, if you could just provide us with the cash balance quarter end.

Sure.

Our cash balance was 77 million at quarter end.

Great.

Thanks a lot.

You're welcome.

Our next question comes from Greg Gieber with A.G. Edwards.

Please go ahead.

I just want to follow up on the previous speaker's recommendation that you give the JVs regionally or take them out of your regional orders and closing numbers, it would make it easier for all of us, I think.

I want to double-check, the 42,500 to 42,750 target for closings, that includes or excludes JVs?

That includes JVs, Greg.

It includes between 1,200 and 1,300 home deliveries from JVs.

Okay.

Next question I had, can you tell me what your number of lots you had, or the percentage that was optioned a year ago?

The 69% is high, is that an increase from last year?

The 69% is an increase from last year.

Last year was 62%.

Okay.

Do you have any -- can you give me a rough idea of what you would like to consider, your best guess or ideal guess as to what your lot count will be at the end of this year, and maybe as you are buying land for next year what lot count you might want to have for the end of next year?

That's an item that we don't project, Greg, because it's not very meaningful because it depends where you are controlling them, what price, and therefore, we don't want to mislead anybody so we don't put a number out there that's projected.

We are constantly looking at great opportunities to take into our discipline and we know that number is going to be growing as we move forward, but we don't give any projection on that.

So it would be safe to -- I mean, because it has to grow in line with your sort of community or closing number, I'm just trying to get a sense of what you are targeting for on a longer-term basis here and what you might be able to deliver.

Yes, but --

On a trend basis.

Sometimes you can tie up a large piece in a particular area with very little nominal dollars and it could be misleading just looking at that number on an absolute basis.

So I think the trends is, continued to be up, we are very excited about the positioning of those home sites, but it's not something that is easy to drop into a model because they are in all different locations.

I understand.

Last question I will have.

Bruce, three months ago you said it would be 1.25 for this quarter, came in $0.30 higher, about 24% higher.

That's a large error, I think, while it's a nice error to have, I was wondering if you could break down where you were wrong on the assumptions that went into that $1.25, and what came out that was higher?

I know the closings added -- the 300 extra closings, back the envelope I get about $0.08, but I was wondering if you have some other sense, give us a reconciliation of $0.30.

Sure.

As we went back to that second quarter, if you remember earlier in the year we had some wet weather out West and we talked about moving 300 or 400 deliveries into the second half of the year.

Our guys in the divisions were very focused and we were actually able to pull in 300 deliveries that we had pushed back, so that was part of it.

Between those deliveries and the focus on higher gross margin, that was about $0.17 of the $0.30.

The share buyback was about $0.02.

And land sales and some other small miscellaneous items would make up the remainder.

That's helpful.

Thank you very much.

You're welcome.

Our next question comes from Timothy Jones with Wasserman Associates.

Please go ahead.

Good morning.

I missed just a part of your call, but I'm sure this hasn't been covered, or I don't think so.

The Homestead Act, there is talk here in Florida of them transferring people's homestead that are homesteaded, to transfer their taxes if they buy a new house, which of course would be a boom to the industry.

Have you heard anything about that?

No.

No, we haven't.

Maybe it's just a rumor, unfortunately.

Did you give your cash this year versus last year?

Yes.

Cash this year was 77 million, and last year was 141 million.

Okay.

The reason I want to -- and I'm sure you probably covered it, but if you go into it a little more.

Most builders' debt to equity has gone down and yours, in fact, has gone up about 5 -- 5 percentage points.

I'm sure you probably went into it, could you go into a little more detail?

Was it inventories, in the inventories was it land or what specific markets or what changed that debt-to-equity ratio?

Sure.

Yes.

The debt-to-total capital, which we try to target a range of 35 to 45%, went from 31.4 last year in the second quarter to 35.4 this quarter.

And a couple of things drove that.

One is construction in progress increased.

That's the component of inventory that really saw the growth.

And that's because we focused on getting starts in the ground and matching our sales and construction pace tighter, which is pretty good predictability in this year's deliveries.

And additionally, we did by back some stock that was about 125 million in the second quarter as well.

The construction in progress, is that across the Company or is it in specific markets that you are improving?

And obviously, that should turn your backlog conversion, improve your backlog conversion ratio.

It's pretty balanced across our markets, Tim.

Is it weighted one way or to the Everything Included model, or the U.S.

Home design model, is it weighted one way or the other or is it across the board that way, too?

No, it's pretty balanced.

There's not one item that stands out there.

Okay.

What are you exactly doing?

Where are you getting the construction?

How are you getting it?

How are you -- I mean, this is an important factor, how are you getting that, what are you doing specifically to improve that?

Get more construction in progress?

We've been focused on opening up for sales as we are starting a home, so we have tried to expedite the starting of homes as best we can.

And that's the challenge that we have in the industry is opening communities timely and getting the starts in the ground, and that's what we've tightened up in all our operations as best as we could.

Good.

Thank you.

You're welcome.

Our next question comes from Rick Murray with Raymond James.

Please go ahead.

Good morning, guys.

Bruce, and let me just say it's -- at the outset here that I don't mean to challenge your guidance, I just have a couple of concerns as it relates to the closing volumes implied in the fourth quarter, and I just wanted to kind of get a sense of what makes you feel comfortable that you guys will be able to do that?

Which by my math implies that you will have to close somewhere in the ballpark of 80% of your backlog, given that labor in a lot of places, a lot of big markets is already tight.

Here in Florida, labor is very tight and we've just had in the recent legislature, a lot of hurricane relief Bills passed that are going to be pouring a lot of money into rehabilitation and other construction efforts within the state.

I'm just curious as to what you see that is going to allow you to substantially accelerate the ability to close homes?

This is Stuart.

I think that we've now been through this for a couple of years where we've seen the tight labor market operate to make closings in latter quarters more and more difficult.

We've made a lot of strides over the past year, as we have -- as we have kind of caught up construction to where sales were; made a lot of strides in having a production group that is prepared for the upswing in delivery activity in that fourth quarter, and I think that we have a lot of -- I think we have pretty good visibility into what we are going to be able to deliver.

The increase in inventory is indicative of the fact that we have these homes in the ground a little bit earlier than we might have in prior years and that, of course, is a positive footing us a little bit more time.

Now, there's no question that there are always uncertainties relative to production.

Of course, last year we had a number of hurricanes through Florida to contend with.

We can have particularly wet seasons that can slow us down, but I think that we probably built a little bit more buffer into this delivery cycle than in prior ones.

Okay, fair enough.

And if I could just follow up with a housekeeping item.

Where is your finished spec count at the end of the quarter?

And what are your -- what is your spec as a percentage of your WIP?

Well, our completed unsold homes continue to average about one per community.

And as a percentage of WIP, it's not a very large percentage.

We are still averaging what we've been saying for the last couple of years.

We are managing completed unsold very tightly, and I don't have the math on that, but it's a very small percentage of WIP.

Thanks, guys.

You're welcome.

Our next question comes from Myron Kaplan.

Please go ahead.

Hi, guys.

Very good quarter.

Thank you.

You referred to the Lennar land bank, which makes the Company really stand out from your other public competitors.

Your sales of land have been relatively larger than those of all of them.

Do you anticipate that you are going to continue to make such sales of relatively large tranches of your land positions?

Yes.

I think that we will be continuing to have land sales be an important part of our program.

I think you kind of have to remember that the model, the way that we acquire land has been consistently one of buying strategic positions.

But managing the risk profile of those positions, even through some of our structuring activities, or more importantly, through our pare-down strategy.

It's not so much that we are selling off pieces of property that we would otherwise put into use for our own account, but we are buying positions where we take care of our current needs or our medium-term needs, and we're selling off excess land as very much a part of an investment strategy to manage our risk.

So expect that that will continue to be part of the program going forward.

So since this is part of the business, Wall Street regards this part of the business as unpredictable and relatively -- and the earnings are relatively insignificant.

And let's just say it's predisposed at the present to ignore these kinds of earnings even though they are real, if anything, they are probably lower risk cash earnings.

So are you concerned at all or is this just something that Wall Street is going to have to learn to appreciate?

Well, I think it's -- look, I think it's one of the strengths of the Company that we are able to find ourselves into very good land positions, and yet at the same time, manage the risk profile so that we employ the healthy returns and end up in some of the best positions across the country.

But, look, we view it as a positive.

It's very much part of our strategy and we hope it's understood.

Sure.

And also because of your unique scale, because of your superior scale, let's say, that you are able to do this.

So it's kind of a distribution function, as well as a manufacturer of housing, you might say.

Right.

I mean, you would tend to agree with that?

I would agree with that.

Because you are uniquely situated or positioned as you would say and so forth.

That's right.

Well, it's awfully encouraging.

Thank you.

Thank you, Myron.

Our next question is from Joel Walker with Carlin Financial.

Please go ahead.

Hi, guys.

Good quarter.

Just wanted to talk to you guys about the lot sales -- actually not lot, but just lot costs in the third and fourth quarter versus 2004, just how much percentage increase do you see those coming in?

When you look at the homes that are delivered and you look at the land costs coming through cost of sales, you are seeing pretty consistent around 20 -- we've always said a range of 20 to 25% and we haven't seen significant changes.

Now, land is certainly going up, and you might see more density in our markets or other ways that we deal with increasing land costs, but as a percentage of our finished home price, it's still somewhere in that 20 to 25% range.

20 to 25.

So year-over-year in the third and fourth quarters you still -- you think it's going to be somewhere or just overall percentage increase around 20 to 25?

It's been fairly consistent, 20 to 25% of the finished home price.

So you just see that being pretty consistent then?

Yes.

All right.

Thank a lot.

We have a follow-up question from Stephen Kim with Smith Barney.

Please go ahead.

Thanks.

Bruce, you gave some pretty good guidance both for the year and for the quarters, but one thing that I thought was a pretty important variable that I didn't hear you give was land sales by quarter.

And I know that that's somewhat unpredictable, but clearly when you are giving your EPS guidance for the third quarter of $1.85 you got something in there for land sales.

Can you share what that something is?

Sure, Steve.

As we look at the third quarter, we think land sales are going to be somewhere in the 25 to 35 million range.

With the balance in the fourth quarter.

And the management and other?

Because that obviously gyrated a lot, is it expected to get back more towards the 10 million per quarter kind of range?

A little bit lower in the third quarter.

It's between 10 and 15 million in the fourth quarter, and fairly low, just a few million in the third quarter.

Good.

And then what was your ending share count at the end of the second quarter?

Fully diluted?

Well, fully diluted, so you are not looking for weighted share, you are looking for --?

Ending.

Ending -- now you said ending -- you want ending actual or ending diluted.

Diluted.

Okay.

Well, the number of shares outstanding at the end of the quarter were 153.4 million.

And then --

Like 9 million or something like that?

And then we typically add somewhere around 13 million.

13.

Okay.

For the dilution.

You said 154?

153.4.

153.4.

Okay.

Got it.

Good.

And then lastly, I was wondering if you could comment on where you see the JV income going over the longer term, more like '06 and '07?

It's been kind of moving up here over the last few years and -- or more than that actually, and was wondering whether or not you expect that pattern to continue into '06 and '07?

We would expect it will move up.

We will give more guidance as we lay out more specific details on '06 in next quarter's conference call.

Okay.

But as we have opportunities, such as Roseland and Newhall and others, we would expect that we will see joint venture profit moving up going forward.

But we haven't given out exact numbers at this point.

But a Newhall would clearly show up there, right?

For the third-party land sales, that's correct.

And how about for -- okay.

Got it.

Right.

Good.

Thanks.

And we would like to take one more question, please.

Our final question comes from Alex Baron with JMP Securities.

Please go ahead.

Thank you.

I wanted to see if we can focus a little bit on your orders in the West region.

And hoping you can just give us a little bit more color there, maybe by state; what you are doing?

And I wanted to look into as you look forward where you expect your new communities to come out in California, like what part of the state?

Well, Alex, I don't have that broken out for this call as far as exactly where in the state our new communities are opening up, but I would say that when we look at the second quarter for new orders, our West is California, Arizona, Nevada, and Colorado.

And we did see strengthening certainly throughout California in new orders year-over-year.

And we serve Nevada as well as Arizona in the West.

But you feel the bulk of the increase came from California?

The bulk of the increase in terms of new orders this quarter came from California.

And in terms of product mix as you go forward, would you expect that to be kind of more affordable homes in California?

I guess I'm just trying to figure out if you guys are going to be building more inland?

It's pretty balanced.

The thing we love about our California position is the number of divisions that we have spread out through the state, both inland and in the coast, all the major markets from Sacramento through San Diego.

So we are very balanced throughout the state.

And as you look at our average sales price in the state, you've seen some balance as a result.

And lastly, did you guys give the lot count and percent owning in options?

Yes, we did give that and it's 31% owned and 69% controlled.

And the total home sites owned and controlled is 298,000 at the end of the quarter.

Okay.

Great.

Great job.

Thank you.

All right.

Well, we would like to say thank you for joining us on our second quarter update.

We look forward to continuing the trend into the third and fourth quarters.

And, of course, if you have additional questions, please feel free to call us at any time.

Thank you.

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