Lennar Corp (LEN) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

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

[OPERATOR INSTRUCTIONS].

As a reminder, this conference call is being recorded.

Today's conference call may include forward-looking statements that are subject to risks and uncertainties related to Lennar's future financial and business performance.

These forward-looking statements may include statements regarding our business, financial condition, results of operations, cash flows, strategies, and prospects.

Forward-looking statements represent the Company's estimates only on the date of this conference call and are not intended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described under the caption "risk factors relating to our business" contained in our most recent annual report on form 10-K, which is on file with the Securities & Exchange Commission.

Please note that Lennar assumes no obligation to update any forward-looking statements from past or present filings and conference calls, and I'll now turn the meeting over to Mr.

Stuart Miller, President and CEO.

Please go ahead.

Good morning, everyone, and thank you for joining us on our first quarter 2007 conference call.

In the context of what continues to be difficult market conditions, we're very pleased to share with you some of our thoughts on the progress and performance in both our company and the home-building industry.

I am joined this morning by Bruce Gross, our Chief Financial Officer, who will provide additional detail on our numbers.

Also this morning Diane Bessette, our Vice President and Controller will participate with an update on our asset reviews.

I am also joined by Jon Jaffe, and Greg Beckwitt and they will be participating as well in our question and answer period, as requested.

As always we would like to thank all of you for your participation and request that you limit in our question and answer period, to just one question and one follow-up so we can be as fair as possible to all participants.

Of course we welcome you to rejoin the queue if you have additional questions, and we'll attempt to answer as many questions as possible in the one hour we've allotted for the call.

Let me begin by saying that these are difficult times for the home-building industry.

We have recently completed our quarterly operation reviews with our division management team, and based on these extensive business plan and execution reviews, I can say first hand and with certainty that market conditions are very difficult across the country.

As I listen to many of the leaders in the industry speak, that is our competitors, and as I listen to economists and analysts and investors, the message is becoming very unified and that is although we see some sporadic indications of firming in some markets, and we all look forward to seeing a firm foundation from which we can build forward, the reality is that market conditions are still challenging at best, and in some markets, continuing to deteriorate.

Simply stated, the supply of homes available for purchase has continued to climb while demand has been sharply reduced.

On the supply side, the market, once driven by speculative build-up and demand and purchases over the past years spurred -- and purchases that over the past years spurred more recent build up in inventory, supply from speculators then put increased supply as they put homes back on the market and created the supply overhang in an overall climate of customer caution.

On the demand side, the investor/purchaser part of demand has all but evaporated.

Primary purchasers are either on the sidelines or demanding better pricing before purchasing.

Because of the rapid deterioration of the subprime lending market, an additional component of demand has now been sidelined because of the inability of a customer to qualify for a mortgage or because the purchaser of a customer's home needed for closing cannot qualify.

What is clear is that supply and demand have shifted and are continuing to shift in many markets more rapidly than expected, and the inventory over hang will have to be absorbed before conditions normalize.

This is not new information.

There remains a sizable amount of work to be done before our market finds an equilibrium.

This also is not new information.

What is new information is that we have not yet seen evidence that the much anticipated winter/spring selling season has yet kicked in.

Home pricing is continuing the process of being recalibrated in many markets through the use of incentives, broker's commissions and price reductions, and the industry is continuing to be challenged to adjust home prices and land values as well.

This recalibration process has not yet stabilized.

Furthermore, it is unclear today whether there is another shoe to drop.

Questions remain as to whether the economy will weaken in the housing led recession or perhaps if supply and inventory overhang will be exacerbated by the resetting of mortgage rates on the many adjustable rate mortgages that have fueled the market over the past years.

Rate adjustments are creating payment stress concurrent with home prices falling and equity evaporating.

On the other hand, the liquidity that exists in today's financial market is a real wild card and could be a critical mitigating factor alleviating negative market forces and restoring balance.

Lennar's strategy has been certain and consistent as we have seen these market conditions unfold over the past year.

We have consistently focused primarily on protecting our balance sheet first and foremost.

We have maintained day by day focus on our business operations.

We have continued to refine our business model in each of our markets.

We've mapped out a strategy to regain our margins in this new market environment, and we are determined to be properly positioned for recovered market conditions.

Our overriding strategy is defined by our focus on our balance sheet.

Our company has intensified the focus on generating strong cash flow at the expense of maintaining margins.

The best way to generate cash flow is to deliver our inventory, that is completed homes, homes under construction, and developed land.

By reducing market price to market pricing and converting inventory to cash.

We have vigorously pursued this objective by using incentives and price reductions to sell homes and back fill cancellations.

While margins have eroded, our balance sheet continues to improve with inventories remaining low while homes currently under construction have declined materially from the prior year.

Our careful balance sheet-focused management approach has kept our inventory low and controlled while we've continued to close homes and enhance our balance sheet and liquidity.

We've been able to maintain operations at planned revenue levels through the first quarter while we strategically and materially have tapered back production to meet the reduced demand levels in the market place.

In fact, our starts year-over-year are down some 38%.

Our revenue has been maintained in order to avoid the build-up of inventory on the books.

Low inventory levels have enabled us to maintain our production machine, while we have continued to sell and deliver our land inventories, though at reduced prices.

We have delivered our backlog and continued to pare down our land position strategically.

Our 30.9% debt to total cap versus 36% last year, and our exceptionally strongly liquidity reflect our commitment to our balance sheet first focus and position us well for better times in the future.

Simultaneously, we have reviewed our business plan with each division, considering sales, starts, closings, inventory and asset base, and we have and continue to adjust production levels so they are tailored to each division's unique position.

Within each Lennar division, there is a daily morning meeting where sales starts, closing, inventory and asset base are carefully reviewed.

This review dovetails with a daily executive meeting at 5:00 eastern time, where the same elements are reviewed on a company-wide basis.

Our backlog and land assets are reviewed and scrubbed daily.

An even flow production model has been crafted to ensure that scheduled production is managed efficiently so that subcontractor pricing concessions and operating efficiencies can be used to preserve margin.

Each division plan has been carefully designed to calibrate production so that inventory remains low, higher-priced land positions are depleted, and market conditions are not unduly forced.

Division programs are reviewed and refined daily and quarterly at both the division level and at the corporate level.

Concurrently, we have aggressively reassessed every land position, every joint venture and every deal under option or contract within the Company.

Our reevaluation is designed to ensure that our balance sheet is conservatively stated as market conditions adjust and to underscore and separate those assets that should be reduced, repositioned, replaced or written down, versus those that should be preserved and held for market recovery.

Along with this reevaluation process, we have strategically restricted all new land acquisitions across the country.

New land deals are underwritten to new market metrics and subject to very different risk profile evaluations.

We have not completely stopped purchasing new property, because with new pricing and terms, there is a market out there, but new purchases as well as properties yet to be taken down are scrutinized to ensure future profitability.

Our land source deal has added additional liquidity at this to our balance sheet.

The ability to simultaneously enhance liquidity, protect valuable land positions in what is one of the few better markets in the country, and revalue significant option deals to current market valuation is an unusually creative and valuable additional step in preparing the Company and our balance sheet for the future.

As we continue to protect and enhance our balance sheet, we're also remaining focused on rebuilding margins within the current market condition.

We continue to recalibrate to new market realities of pricing and sales pace as we rework our pricing structure.

From our quarterly operation review to say our daily plant meetings in each division to our daily corporate calls, we are focused on what we call the four legs of reengineering margins.

It starts with salesmanship, driving our salesforce to shift from order taking to going out and finding sales and driving sales price and pace.

Next, we are rebidding our construction costs, some in the press have suggested that we have been somewhat heavy handed in this record.

Unfortunately, as we're coming off very strong market conditions, intensity is required if we really want to get costs in line with current market expectations and affordability.

We're also negotiating and renegotiating every land deal both on the books and in the pipeline, and finally we are reducing and rightsizing our overhead in order to meet restructured demand.

Central to reclaiming margins is what many of you know as Lennar's everything's-included business model.

We are refining and redefining our product offering, meeting market desires and requests in current market conditions by starting with intense research.

Additionally, we are making sure that we uncover the 20% of the options that 80% of the customer base really wants and really needs and we're including those features in our home product offering.

This creates simplicity in the production process, and enables us to gain cost advantages relative to a well-defined spec sheet.

It just seems logical to us, especially with cancellations so high, that if we can research, choose the most popular specs and include them and breed simplicity in the field, we will be able to gain the best cost advantages and deliver the best value to our customers.

Within each of our divisions we have continued to focus on this logical operating model.

In conclusion, let me reiterate that we are focused on the strength of our balance sheet as a foundation for defining both stability in a difficult market and also future opportunity and growth in better times.

We are confident that if we vigorously focus on liquidity and financial strength, we will be very well positioned to reload as the market returns.

And it will return.

As we look ahead, our challenge continues to be -- to recalibrate to changing market environments.

We have to continue to renegotiate land pricing, rebid subcontracts and materials, refine and redefine product offerings and reduce overhead even further in order to meet a restructured demand and reclaim acceptable margins.

Make no mistake, demand exists.

The fundamentals that drive our business remain strong, and I believe continue to delineate a healthy long-term prognosis for the industry.

Interest rates are low, unemployment remains low, and wages are increasing while the economy remains reasonably healthy.

Demographers continue to point to long-term population trends as an industry driver.

With a strong financial position and a lean inventory position, Lennar will be well positioned to change and to adapt to meet the opportunities and challenges of a new and at some point recovering environment.

With that, let me turn it over to Bruce.

Thank you, Stuart, and good morning.

I would like to touch on three topics today, first, the results of our balance sheet first strategy, second, details on our earnings for the first quarter, and third, I would like to give some additional color on our financial services operations, and particularly the current well-publicized topic of subprime mortgages.

Starting with our balance sheet first strategy, as a result of the careful inventory management, where we converted inventory to cash and generated significant cash flow during the quarter, I want to highlight how this ended up in our results.

With this inventory reduction strategy, we ended the quarter with no borrowings on our $2.7 billion revolving credit facility, and additionally had $264 million of cash.

As Stuart mentioned, our debt to total capital improved significantly to 30.9% versus 36% in the prior year while our net debt to total capital was 28.6%, positioning the Company with ample liquidity.

Our EBIT to interest coverage ratio for the trailing four quarters was 6.3 times coverage and our debt to EBIT leverage was 1.7 times.

These calculations exclude the impact of impairments as they are non-cash items.

Stuart described the details of the balance sheet first strategy outlined in early 2006 to carefully manage inventory which decreased from $9 billion at the end of the first quarter of 2006 to $8.3 billion at the end of the current year quarter.

The results of this strategy are reflected in the inventory detail.

The dollars in construction and progress, which includes homes under construction as well as completed decreased 21% year-over-year.

This result reflects the success of our strategy of converting inventory that was started, or land that was developed and ready to start, to cash as quickly as possible by bringing back salesmanship and price in our homes to current market conditions in order to very quickly reduce the all-in portion of our inventory.

As the year unfolded, we were tapering back our starts to adjust to weakening demand and increased supply as demand weakened and there was increased supply in the market, and this tapering back of starts continued into the first quarter of 2007, and as you look at our start reduction, you can see the results of this strategy as starts have decreased 38% year-over-year in the first quarter including unconsolidated joint ventures.

New land purchases were also significantly reduced during the quarter other than those that were renegotiated transactions reflecting today's current market conditions.

Our home sites owned and controlled declined significantly year-over-year from 345,000 to 266,000, a 23% decline.

Included in this number are 79,000 home sites controlled by option with third-party land sellers, which is a 41% decline from the prior year as we continued to renegotiate these home sites for a walk away in order to reset land prices to reflect current market conditions.

The current quarter option deposit walk away expense was $21 million.

This active asset management strategy positions our inventory balances appropriately to rebuild margins in the future.

Turning to the earnings for the quarter, earnings per share was $0.43 per diluted share versus $1.58 per diluted share in the prior year.

There were two large items to mention in the first quarter.

First, we closed Land Source transaction as expected and generated $176 million of pretax profit during the quarter with the potential to earn an additional $400 million in future years, in addition to the profits from our continuing interest in Land Source.

As Stuart mentioned, we created a land entity with strong sponsorship positions to purchase favorably priced large land parcels at an opportune time in the cycle.

Second, we recorded a $91.6 million pretax charge related to FASB-144 as well as write-offs of option deposits and pre-app costs which Diane Bessette will cover in more detail in just a minute.

Our 10% decrease in revenues from home sales was due to a 4% decrease in wholly-owned deliveries and a 7% decrease in average sales price on wholly owned homes from $326,000 to $303,000 year-over-year.

This decrease was a result of increased sales incentives from $14,000 per home in the prior year to $46,000 dollars to home in the current quarter.

The average sales price by region is detailed as follows: the east region was down 7% from $338,000 to $313,000, the central region was down 5% from $218,000 to $208,000, and our west region was down 14% to $415,000 from the prior year's $480,000.

Our gross margin on home sales percentage before the $48 million of homebuilding impairments decreased from 24.9% in the prior year to 15.6% in the current quarter.

The gross margin percentage decreased in all of our operating regions with the east at 17.8%, central at 17.7%, and the west at 13.7%.

This decline in margin was driven by the increase in sales incentives from 4% in the prior year to 13.1% in the current quarter.

These incentives were broad-based with increases in all of our regions year-over-year as we've seen an increasingly competitive market as builders work towards reducing our inventory levels, resulting in higher than expected sales incentives.

During the quarter we had a loss on land sales totaling $26.5 million versus $49.1 million in the prior period.

The current quarter number is net of $21 million of option deposit and preacquisition cost write-offs related to the land that the Company does not intend to purchase as well as $13.2 million of land valuation adjustments.

Our joint venture results decreased to a loss of 14.2 million from a profit in the prior year's quarter of $38.2 million, and this number is net of $6.5 million of valuation adjustments to certain investments and unconsolidated entities.

The SG&A percentage as a percent of revenue from home sales increased 110 basis points during the quarter to 14.1% versus 13% in the prior year.

This increase was primarily due to a 10% decrease in revenues as well as higher broker commissions and partially offset by lower personnel related expenses.

Our associate head count year-over-year is down approximately 19% from the peak in the second quarter of 2006.

Our new orders declined 27% with weakness in most of our markets, the cancellation rate was at the high-end of our typical range, at 29%, which improved slightly sequentially from the fourth quarter's 33% cancellation rate.

Homes in backlog decreased approximately 50% at quarter end, and although the average sales pricing backlog was approximately $355,000 per home, we do not expect the average sales price for 2007 to exceed the average sales price in 2006.

Turning to the third topic, our financial services profits increased from $10.6 million to $15.9 million during the quarter.

This was driven by an increase in mortgage profit from $8.7 million in the prior year to $14.4 million in the current period due to an increase in our capture rate from 62% to 70% as well as an increase in the percentage of fixed rate loans from 56% to 72%.

Recently the topic of subprime mortgages has received a lot of attention.

Subprime mortgages are defined as mortgage loans to borrowers with FICO credit scores below 620 reflecting their poor credit histories.

Within our mortgage subsidiary, Universal American Mortgage Corporation, we capture 70% of loans originated to purchase our homes.

We fund approximately 85% of these loans, and immediately sell these in the secondary market.

Approximately 15% of the 70% of our loans are brokered to third party mortgage companies, and the combined subprime percentage for this 70% of loans that we fund or broker is less than 5% for the Company.

The remaining 30% of mortgages that we do not capture are originated and funded by third party mortgage companies.

We do not have statistics on the percentage of subprime mortgages with these outside mortgage companies.

However, we do expect that these mortgages have a higher percentage of subprime than the less than 5% of subprime with our in-house mortgage company.

In addition to subprime mortgages, there are mortgages that fall under the classification of alt A.

This category is defined as higher credit borrowers, over a 620 FICO score, but less than full documentation required to apply for the loan.

Alt A has many different mortgage products.

The riskier products in this category require little or no down payment and little or no documentation.

Although these products exist and are riskier, it is unclear how the underwriting for these products will change or whether home buyers will need to shift to other mortgage products.

We do know that some of these riskier mortgage products were the mortgage of choice for speculators, and they have essentially left the marketplace and may already be accounted for already in our previously indicated decline in home delivery volume anticipated for 2007.

Historically, FHA was a more popular choice for home buyers with credit and down statement challenges.

We are already seeing increases in FHA mortgages, and we are hopeful that the FHA program becomes more flexible and with higher loan limits to assist first time home buyers.

Additionally, mortgage insurance will become more popular to assist home buyers to qualify with loan down payments.

The home buyers included in our 70% Universal American Mortgage capture rate have an average FICO credit score of 711 with 75% of the home buyers having a FICO score over 680.

Included in this average are subprime, [Alt A] and prime loans.

The average FICO score for our home buyers selecting Alt A mortgages is over 720 which bodes well for them to be approved for mortgages with higher documentation requirements.

Although there is some mitigation to the liquidity contraction we're seeing in the mortgage market, it is too early to understand the true impact on our business.

We have also received questions as to the ongoing liability with loans we originate and fund and then sell in the secondary market.

This is called early payment default exposure and typically involves liability back to the loan originator if the first few payments are not made by the new home buyer.

Our track record of loss has been extremely low, and as a result of this track record, we were successful in eliminating over 95% of current and past exposure on early payment default liability.

Hopefully this helps to clarify some of the questions that might exist in the mortgage area.

As we indicated, we're not providing a goal for 2007 earnings at this time, due to uncertain market conditions.

However, we will remain committed and focused on generating strong cash flow as we continue to focus on the strategies of rebuilding margin.

Let me now turn it over to Diane Bessette, our Vice President and Controller.

Thank you, Bruce, and good morning, everyone.

We thought it might be helpful to provide you with a summary of the results of the asset valuation review that was completed in the first quarter of 2007.

We employ an orderly, regular and comprehensive process for reviewing asset values, identifying impaired assets and assessing the recoverability of these assets.

This process is based on a quarterly corporate asset by asset review performed division by division.

Additionally, and perhaps most importantly, face-to-face operations reviews are held immediately after the end of each quarter.

During these operations reviews, the management team members of each home-building and land division meet with our senior corporate management team to review the performance and valuation of each asset.

The quarterly operations reviews provide true connectivity between the knowledge embedded in our operational associates closest to the assets and current market conditions and corporate management's goal of ensuring that our financial statements are properly stated.

As a result of the corporate asset review and the quarterly operations reviews, we determined that additional valuation adjustments were necessary in the first quarter of 2007.

The adjustments were primarily the results of two factors, 1, further deterioration in certain markets, and 2, additional write off of option deposits and preacquisition costs as we continue to diligently reevaluate and renegotiate option contracts.

Based on the approach I just summarized, let me provide you with the results of our first quarter valuation review of the assets in each of the following categories: option deposit and is preacquisition costs, wholly owned inventory and investments in joint ventures.

For the first quarter of 2007, we wrote off approximately $21 million of options deposits and preacquisition costs, which represented approximately 4,000 home sites.

The segment detail is as follows: for the east segment, $14 million, central segment, $1 million, west segment, $3 million, and other $3 million.

The second category of assets we evaluated was wholly-owned inventory.

For the first quarter of 2007, we recorded approximately $61 million of valuation adjustments, split between home-building, which was $48 million and land, which was 13 million.

The segment details for the impact on homebuilding is as follows: east segment, $19 million, central segment, $11 million, west segment, $17 million, and other $1 million.

The segment details for the impact on land is as follows: east segment $10 million, and the west segment $3 million.

There were immaterial valuation adjustments recorded in the central segment and other.

The third category of assets we evaluated was our investments in joint ventures.

For the first quarter of 2007, we recorded approximately $7 million of valuation adjustments.

The segment detail is as follows: in the east segment, $4 million, the west segment, $3 million.

There were no valuation adjustments recorded in the central segment and other.

As we look ahead, what do we see with respect to future impairments?

That answer is embedded in market conditions that are still moving and are uncertain.

No one can predict what lies ahead.

We will continue with the processes as we just described.

We will maintain our corporate review of the assets on our balance sheet.

And through our quarterly operations reviews, we will continue to maintain an open dialog with the associates that are closest to market conditions, and can provide us with realtime information to properly assess the recoverability of our assets.

Through these processes we will continue to follow our balance sheet first strategy to ensure that our balance sheet is accurately and conservatively stated as market conditions continue to evolve.

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

[OPERATOR INSTRUCTIONS].

For our first question, we will go to the line of Ivy Zelman.

Please go ahead.

Good morning, gentlemen.

Appreciate the clarity on the call.

Just had a couple of questions.

First of all, do you guys measure or have you accounted for the backlog that has fallen out because of financing, the inability to close a loan in the quarter?

I think there was roughly 3,000 cancelled units.

Yeah, we actually don't have that exact number.

Okay.

If we look at your all day breakout, you did a good job of breaking out the subprime.

What was your all-day exposure for your mortgage subsidiary and also what you farm out?

And also what was the percentage of your Alt A product that are a 95% or higher combined loan to value?

I well, a couple of things.

In looking at Alt A and I think different people describe Alt A a little differently, but again going back this is less than full documentation loans, and Alt A percentage in total for what we captured was in the 40% or so zone, but the FICO scores of these Alt A home buyer going through your mortgage company were higher than the Company average.

We would expect they would be able to actually qualify for other programs if some of the programs they're looking at did not exist any more.

In terms of what was the loan to value for the Alt A product, I don't have the exact percentage that something we could follow up with afterwards as far as what the down payment percentage was for the Alt A programs.

Does that answer your question?

Yes I think that helps.

Also, if you can follow up with your spec production, what exactly it was and how much it was as a percentage of your total under construction in the quarter?

Of our total inventory under construction, let me look at that number.

We had approximately -- hold on a second.

We had a total of approximately 13,900 under construction.

A little less than half of those were sold, but keep in mind that some of those started off sold and might have cancelled, and our focus has been to manage this every day in our plant meetings to make sure we're starting the right level of homes based on demand in the marketplace, and again the total starts are down 38% overall year-over-year.

Okay.

And just the last question in terms of those cancellations, back to the first question, I know that prior to this quarter the leading reason for cancelled backlog was the inability to sell the existing home.

Has that changed?

Is it now a financing issue since you can't break out the exact percentage?

Would you say that financing is a leading reason for cancellation now or is it still existing homes contingencies?

The financing has really not yet started to impact.

I am not saying that it is going to start.

Actually as we did our operation reviews, we look very specifically at exactly that question on a division by division basis, and as we looked through the first quarter, there was actually a very, very small percentage of our homes that cancelled because of mortgage products that had evaporated or subprime issue.

Right.

As we look ahead, we can certainly see that that would become a more sizable -- it would have a more sizable impact, but as we went through each division, it still seemed like -- it still seemed this was going to be fairly contained, and so the answer to your question is really going to be one that answers itself over the next quarter or two and we'll all have to wait and see.

Thank you very much, guys.

You're welcome.

Thank you.

Our next question from the line of Carl Reichardt with Wachovia Securities.

Please go ahead.

Good morning, Carl.

I wanted to ask about the margin versus volume tradeoff, Bruce, this quarter, with unit orders down substantially relative to some of the quarters you've seen.

As I look at this going forward now, I am really torn as to whether or not the margin protection strategy you're operating in will result in order drops that are similar to what we saw in this quarter or more similar to what we saw last year.

Can you help me think about how you're thinking about the price versus volume trade off broadly speaking, and I have a short follow-up.

Our primary focus, Carl, has been again to make sure that we're losing moving inventory that is on the conveyer belt that has since started or is finished home sites where we put in the time and the dollars and are ready to go.

That's where we've been trying to convert inventory to cash as quick as possible, and as we look forward, and look at the price versus volume question, one of the things to keep in mind is that the biggest item that has been impacted in our margins has been the higher land costs, and that's where we've focused a lot of attention on renegotiating our land prices and we start seeing more of the benefit of that in the second half of this year.

Just to add to that, Carl, I think if we look backwards over the past year, I think that there were periods of time where we might have questioned how much of a price reduction or an incentive we gave in order to move inventory.

As we look backwards, sometimes we think that perhaps we didn't do enough given the way the market has evolved.

I think that in many instances we definitely feel that we were ahead of the curve in doing and making some decisions that worked very much to the benefit of our balance sheet, and by delivering that conveyer belt of both homes under construction and land that was in process, we feel that we will be -- that we'll be having less of a margin impact over the long haul, and that has been our strategy.

Now, how are we dealing with that in the current market environment as we said today, well, number one, we've moved through a lot of that inventory.

We're happy that we did.

Number two, we're looking at it on a division by division basis.

As you know, we have quarterly review and is daily reviews where we're kind of operating in a market-specific way to address that issue making sure that the inventory that should be moved through is moved through, but at this point in most markets, we're very comfortable with our inventory position.

All right.

As a follow-up, have you bottomed your gross margin ex-writeoffs, or when do you expect that as you think about things to happen?

Unfortunately the answer to that question is partly determined on how the market evolves.

Is the market going to stabilize, move forward, are we going to see some spring selling season?

Will the markets continue to deteriorate or is there another shoe to drop?

All of those questions will find their way into the answer of whether or not our margins have bottomed.

We feel we've taken them down pretty decisively, and we feel that we're more on the comeback trail at this point even ex-land writedowns.

But I can't represent that at this point.

I can't guide to that because the market is still fluctuating.

Thanks a lot.

Our next question from the line of Tim Jones from Wasserman & Associates.

Please go ahead.

Good morning.

Good morning, Tim.

Can you give me the number of employees you say they were down 19% from year ago?

That's a little less than your competitor, they were down 25 to 30, but what is your level of employees this year and last year and what was the peak?

The peak, Tim, was approximately 14,000 and just over 14,000 in the second quarter of last year, and now we're down below 11,500.

Keep in mind that we have a title operation that has significant associates as well in addition to the home-building and mortgage operations you're familiar with.

How much would you say the title people in the 11,500?

Approximately 2,000.

2,000?

Yes.

That's good information.

You sort of went through this, but the only good things about even flow production, but isn't that making you to keep your spec building higher than most builders, to keep that even flow production?

Absolutely not, Tim.

The even flow program is the program that is geared towards taking the production that we're going to have and spreading it evenly and consistency -- consistently as we build.

It doesn't mean that we don't taper back on the number that we have in place on a regular basis.

In fact, if you were to look at the homes that we expected to start at the beginning of this year, and the homes that we actually started this year, you would see a material reduction based on the recalibrations that we have gone through as the spring selling season did not -- or the winter selling season did not reveal itself.

There is nothing that gets locked and loaded or etched in stone in our expectation for production or in guiding our even flow production model.

It is just a model that says where we're going to produce homes we want to evenly spread them and evenly distribute them so that we can breathe consistency and simplicity in field operation.

Thanks for the detailed information.

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

Please go ahead.

Good morning, guys.

Good morning.

A couple of things.

One, I think it was Stuart referenced in his prepared comments about you have new metrics for buying land.

Can you just give us an idea what those are and how you're monitoring the risk?

Well, it is interesting.

As you ask the question people here are smiling because my metric has been a 20% internal rate of return every 15 minutes for any use of cash that's kind of what we talk about in the Company.

The fact is we're going to use cash.

Cash has a different risk profile than it has had for a very long period of time.

So our metric is that in order for us to do any kind of deal using our capital right now, until we have certainty in the market, the returns have got to be absolutely extraordinary based on realtime today information on what pricing is and what costs are, so we make no assumption that costs come down.

We make no assumption that prices go up.

We look at the market condition as it exists today.

We look at the market and get a sense of whether we think that that market feels volatile or feels like it is stabilizing, and that's specific to each market, and then we attach a very high risk adjusted return to that evaluation, and that would probably be north of 25, 30%, so we really haven't had to test those edges right now.

Probably safe to assume that you're not buying land this year?

Very, very limited situations, Margaret.

Okay.

Second question I had is follow-up on the land value, but relative to what you are seeing as you have your daily with the regional presidents and we're seeing the fallout from the lenders which we get every time there is a correction, and I am just wondering many of the homes that are already vacant in the system are going to see overlap between the houses over the last foreclosed, so when do you think or do you agree with that statement, and when do you think inventory might peak and we might get to a point that home prices plateau or bottom?

I am not quite following that.

I want to go through your logic just so that I make sure I understand I am answering the right question.

What Bruce was saying is that a lot of speculators were using the old base model which is true and usually there is about 1% of the housing that's vacant and for sale, and that would be about 1 million homes but today there is over 2 million homes that are vacant.

And it seems to me a lot of the homes already vacant are the same houses that will be foreclosed so I wonder if inventory is going to go up much more than where it is already, and I am wondering if you have any insight on that in your market?

I think it is really hard to say right now.

I think that, as I said in my opening remarks, I feel like you get a sense that there is stabilizing, and then you get a sense that stabilizing goes away, and I think it is the same feel that we get relative to the size of inventory.

It feels like inventory at certain points is being -- it is not increasing.

It is being absorbed, and then it seems that you very quickly turn around and find that it is actually greater than you expected.

I would have to say that in our hands-on regular discussions with the division, we're still not able to say that the inventory has bottomed, but there are sporadic signals that there is some firming in that situation, and we're just going to have to wait and see.

Okay.

Thanks for that.

Just to follow up, with the times you're proving up and recording on your balance sheet, at what point do you think you may be able to pull it to work meaning when do you think that land prices may bottom and given that this cycle is probably going to be extended more because of the lending drying up.

Do you see land developers or land holders, smaller builders that are distressed now that may not make it through the extended downturn?

Well, the question of land firming, land prices firming is definitely going to be market driven, and I think that's another wait-and-see statement.

I would just highlight in that regard that's one of the great opportunities presented by Land Source is as land prices firm and as people start to take a lower price and opportunities present themselves, Land Source really affords us an opportunity to be involved in those markets.

In terms of smaller builders not being able to make it, or other builders not being able to make it, we haven't seen that distress, there have been some isolated instances.

There are some builders that were in distress before the downturn really started.

They're in even greater distress today, but by and large we're just going to have to wait and see.

Liquidity to me remains the biggest wild card out there in that how -- there is a lot of capital available to big small builders, to everybody within the system to home buyers, land holders, and that liquidity is the wild card in determining how these things are going to shake out.

Is there any sense of that liquidity is going to dry up?

No, not -- well, not that I have seen yet.

I mean, other than the obvious, and that is the kind of noise that has been an offshoot of the subprime situation, but other than that, I don't think that we've seen -- I don't know, John, Rick, have you seen liquidity play a negative impact in the market yet?

This is Jon Jaffe.

Not at all, Stuart.

We have not seen any builders that have the inability to access capital to stay their position, stay their course.

Rick?

Same?

Yes, I would agree with that, although we're probably just getting to the point where we're starting to see better deal flow out there at realistic prices.

And most of that stuff is coming from folks who have gotten into trouble before the cycle started, the downward cycle started, as Stuart mentioned, Margaret.

Thank you.

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

Please go ahead.

Hey, guys, two quick questions.

On the inventory, at I think you said $8.3 billion at quarter end down from $9 billion last year, but I think up from $7.8 4Q, is most of that, I would imagine, seasonal and would you expect by year end that inventories at year end '07 will be lower than year end '06?

Steve, the question about the inventory in the first quarter being up sequentially.

Just as a start willing point, there is seasonality there if you look at the first quarter of last year.

Inventory went up about 1.1 or $1.2 billion from Q4 '05 to Q1 '06.

So, part of it is seasonal.

The other part is we have been successful in renegotiating some of the land, and we also did see quite a bit of progress as we took down some significant home sites in the Valencia area which was part of Newhall land and farming acquisition where we're taking down home sites based on the favorable pricing that we have in that program which we're excited about, and will lead to deliveries the second part of this year.

Just a quick follow-up, does that feed into some of your thoughts about potentially or trying to firm margins in two halves even with everything going on it is too hard to call?

Well, last conference call that's what we laid out, and what we're saying this conference call is the market conditions are uncertain, and we'd go with your statement of it is too hard to call, but that's clearly what we've been focused on.

On the inventory, a pattern that you saw last year, sequentially some up and then as you work through the year bring it down, it wouldn't be unusual to see that this year?

That's correct.

Okay.

And then secondly, just to follow up on Carl's earlier question on the orders, it sounds like from your commentary that as you've already moved through a fair amount of some of the higher cost inventories and presumably some of your better order trends last year versus some of your peers, was it an effort to move through that?

Is it fair to say that some of that order decline year-over-year in this quarter is a fact that you're -- is reflective that you haven't had to push as hard through some of that inventory because you're already in a better position, or have you been pushing equally hard to move it to get the cash or is this a reflection of how much worse the market is today than six months ago?

Go ahead, Jon.

I think it is market by market and it's some of both.

In some cases it is the condition where we're very well positioned.

We have extremely low inventory levels, and there is no need to push in an effort to try to improve margin, we are brought that sales pace down, and in other areas we've seen continued declining conditions and are pressing just as hard and seeing lesser of results because of the market variation.

Roughly some mix between the two.

Yes.

Our next question from the line of Michael Rehaut with JPMorgan.

Please go ahead.

Good afternoon.

Thanks.

First question and then I have a follow-up.

The first question is, you mentioned initially about sporadic indications of firming in some markets and you also mentioned that other markets continue to deteriorate.

I was wondering if you could give some more clarity or review, kind of go over some of the markets that potentially looks like they're firming and which ones are worsening, and then I have a follow-up.

I think, Mike, that if you look at some of the markets along the eastern seaboard, you have seen some moments of feeling out there that there is firming going on, and then next week or next month will go by, and it feels like maybe the market really isn't as firm as we thought.

We've seen that in a number of places.

In northern California, there seems to be a stronger foundation than perhaps on the other markets.

On the negative side there are markets like I would say that maybe two of the weaker or weakest markets in the country would be the West Coast of Florida, that is, Naples, Fort Myers, those markets are very, very weak at this point, and maybe, maybe alongside of that, the Palm Beach North market here in Florida as well.

Some of the Florida markets have continued to show additional softening.

Rick, would you --

I would agree with that, but then we've got the markets like Orlando that are doing fairly well, so it is somewhat choppy.

I think that we're pretty well positioned having gone through a lot of our inventory in some of the markets in repositioning ourselves, but it has been hit or miss over the last couple of months.

Great.

Thanks.

And the follow-up, if I could get more detail, Bruce, you kind of reviewed some of the issues with regard to subprime.

I was wondering if you can explain a little bit more about the early payment default exposure.

You mentioned that you eliminated all but roughly 5% of the loans from the exposure standpoint, and what you generally pay year to year, if anything, on this liability and what -- which loans or how much do you have necessarily in terms of what you haven't been able to eliminate from a liability standpoint?

When you think about, it Mike, the early payment default, you're selling a home at that a new home buyer, and the question is whether ear they're going to make their first 1, 2, 3, mortgage payments.

If they're going to go through the trouble of buying a home, typically they're going to make those payments.

Our experience has been extremely low where we had issues in the past, year-over-year, and to be honest with you, it is not an item that was highlighted because the numbers have been so small.

So as we look at eliminating 95% or more of this exposure, where there is a minimal exposure, it typically tends to be 30 days, so you're talking about the making their first mortgage payment, and we managed this very aggressively last year, making sure that if things did get a little bit tougher in the mortgage market, we certainly did not want to be exposed, particularly to the riskier product, which is where you tend to have an extended period, more than maybe a 30-day period with respect to that early payment default.

So which amount of loans exactly -- when you say you've eliminated, do you mean it is just that those loans are out of that early payment period, or you have somehow moved the liability off your books or -- and what and how are we to think about from a numbers standpoint what you haven't eliminated?

Well, what we did is in our agreements, where we originate, and fund and sell the loans in the secondary market, in those agreements where we sell in the secondary market, we eliminated the exposure in those agreements.

That's what we mean when we say that we eliminated the exposure.

It is contractual when we actually sell these loans.

The numbers, like I said, are extremely small, in some cases you might take fewer basis points when you sell the loans to be conservative and eliminate that risk, and that's the posture that we took in 2006 and continue into 2007.

Thank you.

Our next question is from the line of Dan Oppenheim with the line of Banc of America Securities.

Please go ahead.

I was wondering if you can speak more about the issue in terms of the reduction of new starts this career relative on what you expected?

You mention land came down.

Can you quantify that?

Yeah.

If you look at our start pace, we started the year -- if you just look at the planned starts versus where we started our fiscal year versus what we actually did in the quarter, we were down about 15% over what our plan was going into the year for the quarter.

That was something that was done on a month by month basis, community by community, division by division.

Thanks very much.

One final question relating to the mortgages, have you seen any issues with appraisals and as far as going to appraisal coming in lower than purchase prices?

That is a good question, Dan, and it is something we've been [hident] to look for, and you certainly have some in different situations, but that has not been a significant issue so far through the first quarter of this year.

Thanks very much.

Our next question come from the line of Nishu Sood with Deutsche Bank.

Please go ahead.

Thanks.

First question, sort of on your orders into pricing, in the second half of the year, I am sorry, the second half of '06, your order pace was better than your peers by a significant margin.

One argument would be because you were had much ahead of the curve in terms of adjusting your pricing to market levels, you were able to sustain a higher volume pace.

That gap between your order pace and your competitors is likely to narrow this quarter.

My question is this.

Are you beginning to see your competitors generally catch up in terms of significantly adjusting their prices downwards to what the market is demanding?

I think we're going to let them speak to their programs, but there is no question that the competition in the market is very strong.

Okay.

Just a second question.

I know you referred to this in your dialog.

Out in Sacramento there is obviously some well publicized reaction to your request for cost reductions.

Are you looking at, or using similar tactics you're using there in all of your markets, and I guess related, is was the reaction there you think just a local phenomenon, or does that reflect broader difficulties you think you might face in getting your suppliers to accept lower prices?

I think pricing on the way down is always very sticky, particularly where you're not on the front lines, meaning we have the product we're selling to the customer, the customer chooses to either buy or not buy.

We're coming out of the strong market conditions, the subcontractor base we would like to maintain their cost structure.

It is just not practical at this point, and it is going to take some very strong measures in all markets to make sure that costs are adjusting in line with where the market has gone.

It is a painful process.

It has been in past cycles.

We have been through it before, and I think when you speak in terms of tactics, it almost sounds like a negative.

I think that across the board we're having some very serious and very frank conversations with people, if they would like to be a part of our future, they have to be partners with us as we go through these difficult times, and some might want to bill that as unfair.

It is just -- what they're really saying is it is just not fun.

Thanks a lot.

Our next question is from the line of Alex Barron with JMP Securities.

Please go ahead.

I wanted to ask you, how many communities did you guys impair this quarter and how many did you do the last couple quarters?

In the second quarter we -- I am sorry, the first quarter, we impaired roughly about 50 communities, and in the fourth quarter it was probably slightly higher than that, maybe closer to 60 or so.

Okay.

And do you have any for the third quarter?

The third quarter of last year, you know what, I don't have that number, but the dollar amount was very, very small, so I think it would be probably just a handful.

I don't know for sure, but the dollar amount was so immaterial, that I can't imagine it was more than a handful.

Okay.

Got it.

And I wanted to ask about orders, just kind of what the order trends look like in the quarter and into March and also why do you suppose your orders were down in the 20-something percent range when they had been sort of flattish?

Did you guys kind of stop cutting prices?

As we said in the past, it has been our consistent message that our program has been very strategic.

We sold -- we delivered our backlog.

We delivered the conveyer belt of inventory, both land and homebuilding, and as we have gotten that delivered, we have tapered back our production machine, which is very closely tied to where we see market conditions.

As Rick has already mentioned, we stayed very tied to current market conditions by each market on a day by day basis, and so as we have seen market conditions continue to pull back, we have also pulled back on our production machine.

Earlier last year or towards the second half of the year, it was very clear that market was -- the market was subsiding.

Rather than build up inventory we kept the sales machine moving forward because we felt that we had that much inventory on our conveyer belt.

Today we're matching and making sure that we're not building pack up that conveyer belt, but instead continuing to keep our inventory low and pulling back the production machine itself.

When did the order trends look like for the last I guess three months and also into March?

The first quarter I think we laid out in the press release was down, I think 27% with a cancellation rate of almost 30%.

We generally don't comment on order trends into the next quarter, and so we'll just leave it at that, but I think that the quarter speaks for itself.

Thank you.

Our next question from the line of Jim Wilson with JMP securities.

Please go ahead.

This is Cindy Rubin in for Jim.

I was hoping you could describe a little bit about what you have seen as far as cost savings or cycle time improvements?

Jon.

As you would imagine, it varies by market across the country, but we've seen so far pretty significant opportunities for cost savings on both labor and commodities, particularly in the markets that were more heated.

As you look at California, Florida, some of the northeast, we've seen double digit percentage-wise savings in those markets on both the labor and materials side of the equation, and we're working very closely with our large vendors, our national partners, programs to adjust pricing to reflect where today's values are.

Okay.

And what percentage of your land source assets are in California?

Let's see if we have that number handy.

It's the vast majority of the land source assets -- let us come back.

Okay.

Hang on one second.

I tell you about 75% of the assets.

Thank you.

The next question is from the line of Ken Zener with Merrill Lynch.

Please go ahead.

Good morning.

Good morning.

I am interested in impairments in the east which for you guys is largely Florida.

Looking at the assets, not the options, you've taken about $210 million or roughly 50% of your impairments so far.

I heard you, Rick, saying Orlando was doing fairly well, but Tampa and Orlando have record levels of inventory, about 15 months supply of homes in February, so my question is in general, other builders haven't taken as many impairments in Florida as you have, and do you think it demonstrates a less astute investment record on your part or more realistic assessment of profitability going forward?

If it is the latter, it seems like your cost basis would be lower than others given greater charges and you can tie this into the competitive position in that region?

Listen, I think that by and large we try to keep our eyes focused on our own programs and not be confused by things that are out in the marketplace.

I don't think that we can speak to anything that might be being done by our competitors or whatnot.

I think that you would have to ask each one of them.

I think that relative to our assets, we have taken a realtime market by market asset by asset approach, and without being distracted by noise or macro kind of questions, we've looked dispassionately at each asset for what it is and we've done what we think is the best job of underwriting and assessing that asset relative to impairment.

I think that our numbers are very real and very current.

I appreciate that.

Basically, Bruce I asked you this last quarter when you guys roughly had $270 million of impairment in the fourth quarter, about how much of that benefit would fall into '07 and you said roughly two-thirds or what at the time equated to about $0.70.

Do those comments still stand given your lower deliveries?

Well, again, these are comments from the fourth quarter that you're referring to, Ken?

Correct, where as the percentage of impairments on assets that you had taken would fall into the next twelve months deliveries?

Yes, yeah, I think we said they would fall into '07 and '08, and, you know, to the extent we haven't given an exact delivery number, but we said on the fourth quarter is we expected deliveries to be down at least 20% year-over-year, and we haven't updated that.

If deliveries are lower than expected, obviously that would push some more of that benefit into '08.

Thank you.

Our next question from the line of Rashid Dahod with Argus Research.

Please go ahead.

Thanks for the call.

Regarding your subprime loans, are you seeing any concentrations in terms of geography?

In terms of geography, it is a very small percentage of what we originate, but most of that small percentage that we originate tends to be in states such as Texas and Carolinas.

Okay.

And another question.

In terms of the buyers that you cater to the first time, the move-up, the active adults, are you seeing any increase in activity, whether it be traffic or orders in one type of buyer as opposed to the other?

This is Jon Jaffe.

Not really.

I think that as traditional with the active adult market in these uncertain times that tend to be pretty cautious because they don't have an urgency to buy and they're not buying out of a need to be in a school system or job relocation, and so what we're seeing in the markets that tend to cater to the active adults is no greater or lesser urgency or demand as compared to primary markets.

Okay.

Thanks.

We go next to the line of Chris Hussey with Goldman Sachs.

Please go ahead.

Thanks for your patience on the call today.

One last question, since starts are down 31%.

You guys say the backlog is down 50% on a unit basis.

What are you thinking as the year goes on that starts number could do for you?

Do you think it would remain down at that pace of 30% or temper as time goes on?

I think that I am still anxious to see if there is a spring selling season that emerges.

I think that what we tried to convey here this morning is that any questions that look forward we are answering on a day by day basis in the field, division by division, so the real answer to that question, at least from my vantage pointed is I don't know what's going to lie around the corner in terms of starts.

I can tell you that within our company it is going to be directly tied to realtime market information, and it is going to be driven by what's actually happening or unfolding relative to market conditions.

I know that's probably not the answer you're looking for, but I feel as uncertain about what's coming around the corner as perhaps others do that's why we're so directly tied day by day to what's happening in the field.

I am always looking the candid answer, so that's a good answer, but I guess what we've seen so far, though, what we can say is that it got about 15% worse than what you guys thought.

So it started the year you dropped your starts 15% from what you thought your market was going to shape up to be?

If you think back to our conference call, we had based our expectations on a kind of normal balance forward in the winter/spring selling season, something we hadn't really seen.

So the answer is yes, we've adjusted where we thought we would be by about 15%.

Rick, would you answer that?

I would agree with that.

We entered the year thinking that we were going to have our start pace off somewhere in the 20 percent range in the year basis.

In the first quarter we were -- we did and adjusted starts an additional 13% on an aggregate basis.

Given the fact that we haven't seen the pick up in the sales season as we've anticipated, some of that start reduction in the first quarter was reflective of that.

We're going to monitor it daily through the ops calls, corporate calls, and the divisional plant meetings, and if we need to bring starts down further than 15%, we're going to do what we need to do to take advantage of maximizing the cash in our inventory and making sure we don't have speculative build up.

Recognize still early as we look out March now and your guys look into the field, and they think about the amount of field labor out there working on Lennar homes today, is it reasonably okay to say you have about 30% less field labor sitting out there today than you did a year ago?

That's reasonable.

It is a guess.

It is a wild guess.

With starts down 31%, there is no indication that --

Maybe it is not quite that high because it hasn't yet quite filtered through.

There is still the overhang of what's being built from last year.

It is hard to say what's happened relative to the rest of the industry.

We can only speak to what we've done, whether it is 30% or 20% or whatnot.

As a broad guess, maybe that would be reasonable.

This is Jon, let me add to that that we have seen our cycle time improve as we focus on our business and you combine that with a lowering of starts.

I think that you are going to see that kind of reduction in the forces out there in the field.

That's very helpful, thanks guys.

Let's take one last question please.

Our last question is from the line of [Myron Kaplan], an independent, please go ahead with your question.

Hi, guys.

Hi.

Good morning.

I guess as this pretty much addressed, but I guess land prices, even though you're not avidly looking to expand our inventory of land, I guess land sellers and so forth are still in the painful process of lowering reluctantly and tardily lowering prices so that it is not really -- you can't really achieve the deals the returns you would like to achieve in a potential deal.

Number one, land prices have been sticky on the way down and remain that way.

There hasn't really been a catalyst of illiquidity that inspired the land sellers to want to reduce their prices themselves.

Additionally I'd highlight that the very unique component of the Land Source deal positions us extremely well to be participatory in new acquisitions, even though it might not be what we primarily would like to do relative to our balance sheet.

It is exactly the business that Land Source will be in as we go forward.

So we really do have a strategic opportunity to participate if and when land prices do come down.

So you would look to -- that would be a model for future strategic alliances also?

Yes.

Jon?

I just want to add to Stuart's comment.

I think that we should note, Myron, there are situations there where sellers, due to the logic of recognizing today's values and is adjusting land prices appropriately and in those cases although they're limited, we are moving on those opportunities and working out transactions that we think will bode well for our margins and our position in the future.

Sure.

Okay.

Well, hope there will be better stabilization.

Thank you.

Yes.

And with that, thank you, everyone, for joining us.

We're hopeful as I am sure all of you are, that we have better news to report as we move forward and as we get back together for our second quarter.

Thank you.

Ladies and gentlemen, that does conclude our conference call for today.

Thank you for your participation and for using AT&T's executive teleconference service.

You may now disconnect.