Lennar Corp (LEN) 2007 Q4 法說會逐字稿

Good morning and welcome to Lennar's Fourth Quarter Earnings Conference Call.

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

After the presentation, we will conduct a question-and-answer session.

Today's conference call is being recorded.

If you have any objections, you may disconnect at this time.

I will now turn the call over to Mr.

Scott Shipley, Director of Investor Relations for the forward-looking reading statement.

Good morning and thank you.

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

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

Forward-looking statements represent only Lennar's estimates 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 manners that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could cause Lennar's 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 contained in Lennar's annual report on form 10-K for its most recently-completed fiscal year on file with the SEC.

Please note that Lennar assumes no obligation to update any forward-looking statements.

I would like to introduce your conference host, Mr.

Stuart Miller, President and CEO.

Sir, you may begin.

Yes, thank you, Katherine.

Nice job, Scott.

Perfect greeting.

Thank you, everyone, for joining us.

I would like to say good morning and thank you.

To start, let me say that it is apparent now that 2007 has been a very tough year for homebuilders and now our 2007 fourth quarter and year-end results reflect a difficult and arduous reconciliation of our company's position with the difficult market conditions that started the year and deteriorated throughout the year.

You know, in the context of market conditions, they continue to be difficult at best, we'd like to share with you our thoughts on home building industry market conditions and the strategy in progress of Lennar in particular.

I'm joined this morning by Bruce Gross, our Chief Financial Officer, who'll provide detail on our numbers and Diane Bessette, our Vice President and controller, who will also participate with an update on our asset reviews and impairments as she's done for the past quarters.

Just as a housekeeping note, I would like to request that in our question-and-answer period that will follow our opening remarks, that you please limit to just one question and one follow-up so that we can be as fair as possible to all participants.

And then, of course, you can rejoin the queue if you have additional questions.

Now, as noted in our press release that we issued this morning, the housing market has continued to deteriorate throughout 2007 and throughout our fourth quarter.

Our fourth quarter results reflect a very strong and definitive movement by our company to deal with the realities of the market conditions as they exist and persist and to try to get ahead of the curve while we expect market conditions to remain soft and perhaps continue to deteriorate as we go into 2008.

In fact and in retrospect, market conditions have been consistent throughout 2007 and what we now know has required us and the entire industry to reconsider our positions, our sizing, our asset base and our strategy.

The market has given us cause to pull back to retrench, to reconsider and to position for another day.

And that's exactly what we've done.

Our overall strategy throughout the fourth quarter was to address the component parts of our asset base while we drove to turn hard assets into cash.

And this is consistent with our long-standing focus on our balance sheet first.

This meant continuing to impair property values, to properly state every asset on our books so it can contribute to profitability in the future.

It meant reconsidering the value and the risk of each and every joint venture and it meant generating cash from home deliveries, asset sales and of course, a bulk sale of assets to a Morgan Stanley fund that we previously announced.

While the fourth quarter report card is disappointing, we made a great deal of progress in preparing for 2008 and beyond.

Let me talk through some of those components.

We have impaired our land positions on our books to reflect the continuing decline in the market.

The evaluation process has been difficult to say the least.

As with each additional move downward in the market, a re-examination of prior impairment charges has revealed in some instances, the need for further charges.

Certain assets that were underwritten to a positive margin in prior quarters have required an additional charge this quarter to keep up with the market slowdown.

In the fourth quarter, we again reviewed our assets aggressively and impaired to the full extent of the current market slide.

Additionally, we curtailed all land purchases where possible and we walked from option deposits on land contracts and rode off preacquisition costs.

We reconsidered the composition and contribution of every one of our joint ventures in the fourth quarter.

Our ventures were established with the objective of either diversifying risk or gaining access to strategic assets through co-ownership.

For the most part, our ventures were levered conservatively and were positioned for stability.

In evaluating these assets, we've moved aggressively to dismantle any ventures where the strategic reason for being had been frustrated either by the deterioration of the underlying asset value or through the lack of performance of a partner in their obligation.

In all instances, we've shared downside risk with our partners and in most of the partnerships, they've worked exactly as originally intended.

We've also generated cash in a variety of ways.

First, the company has remained focused on keeping inventories low.

We've rigorously pursued this objective by using incentives and price reductions to sell homes and backfill cancellations.

While we've slowed the starts and sales paces to what -- so that we can right size our operating division to the reduced demand levels in the market, our sales year over year are now down 50% while our starts are down similarly.

And our inventory is maintained at very low levels.

We've also generated cash by selling land assets that, because of reduced volume, would not be needed for many years to come.

While most of these assets sold for prices below their stated book value, due to the drop in market prices and the look of demand for land assets, we believe that the cash value of these sales has far outstrips the value of the land asset on our books.

Additionally, we generated cash by selling a bulk group of assets to a fund created by Morgan Stanley and ourselves.

While this group of assets was also sold at a price below our stated book and while we will be optioning some of the homesites back from this fund, we believe in this instance as well, that the availability of the cash generated from the deal is far more valuable than the hard asset on our books.

Finally, and incidental to the execution of the sale of assets, we collected substantial cash just after year end by recovering taxes paid in prior years through losses generated in 2007.

As noted in our press release, we've actually collected the $852 million recovery relative to our losses for 2007.

What is not included in our press release is that the rapid recovery of this cash is due primarily to the trierless efforts of Mike petro lino and an outstanding tax team that drove this recovery effort to completion.

While our financial results for the fourth quarter are disappointing, they are reflective of our strategy for dealing with these market conditions and preparing for the future.

We've continued to deliver our backlog and maintain very low inventory levels while we've reduced our start pace to reflect the sales pace in the market place.

While revenues for the quarter were down 49% to $2.2 billion, our balance sheet continues to remain strong with our home building debt to total capital ratio standing at 37.5%.

And while we've recorded a loss of approximately $1.3 billion for the quarter, it is reflective of our aggressive assessment of every land position, every joint venture and every deal under option or contract within the company and reflective of the cash generation strategy designed to position us for the future.

As we look ahead to 2008, we're now prepared to readjust our primary focus back to the day to day home building operations that will define position and profitability for the future.

We know well how to build homes profitably.

It requires the right price for the underlying land, the correct product on that land, free price construction costs and SG&A properly sized for the operation.

We've refined our business model in each of our markets and we've mapped out a strategy to regain margin of our now lower land cost spaces.

We've revamped product offerings in many of our markets.

We've aggressively rebid construction cost and we've lowered SG&A by reducing our work force by over 50%.

We've reviewed our business plan within each division and have made meaningful progress in repositioning each individual division for profitability.

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

And this review dub tailed with regular executive management meetings where the same elements are reviewed on a companywide basis.

Our strategy overall has been recalibrated to match our pullback in each market.

From our quarterly operations reviews, to our daily plant meetings in each division, we're focused daily on the fact that two factors will define our ability to be profitable in the near future.

First, our land position rewritten to current market values will enable profitability.

And second, our division management team's focus on product construction costs and overhead elements are more within their control to reposition and harvest value.

While we know that for the first half of 2008, results will continue to be challenging based on the pricing and position that are already baked in our backlog, we are confident that the latter half of 2008 will begin to show evidence of the tremendous work that has been put forth this year.

In conclusion, let me say that while it would be easy to become disheartened by the black and white numbers on the paper that define our fourth quarter and year-end results for 2007, I am instead encouraged by the truly outstanding efforts put forth and the progress made by the many outstanding associates of our company.

I'm encouraged by the everyday leadership of John Jaffe in the West, operating as the company plow horse relentlessly working through assets and some of the most impaired markets in the country, while in his spare time, working through the due diligence process of putting together the Morgan Stanley fund.

I'm encouraged by Rick Beckwitt in the East, a relatively [newcomer] to this company.

Carrying the company flag as if he attached it together himself.

Not a criticism nor distraction in working around the clock to fix an asset base that he didn't create.

I'm encouraged by Bruce Gross and his treasury group working through the night to reposition a credit facility that had been suddenly turned upside down.

I'm encouraged by Emile Haddad, our Chief Investment Officer, with his asset management group, assessing, positioning and sometimes selling one asset at a time to position our company for a future.

I'm encouraged just to have Jeff Craignou back working with us.

He's just the smartest guy I know.

I'm encouraged by Diane Bessette and David Collins leading our accounting team to report accurately and with absolute integrity, making sure through days and nights and weekends that there's back-up for every reported number.

I'm encouraged by the sporification of our board of directors with the recent addition of Cheryl Hudson, a past sinned Managing Director of Deloitte and Touche, and now the CEO of TECO Energy in Florida, joining our Board of Directors.

I'm encouraged again by Mike Petrolino and his tax group bringing home an $850 million check from the IRS in record time.

And why?

Just because it's his part of the plan.

And I'm encouraged by the many regional presidents and division presidents and their teams who have responded to the countless requests from corporate for information that never seems to end as we try to get our hands around these turbulent market conditions.

While they continue their charge to innovate product for the market, reduce construction costs and of course, at the same time, reduce overhead and head count.

For all of them and many others in the country -- in the company, it would have been easier for them to put their heads in the sand and avoid the harsh realities of these difficult market conditions and let someone else clean it up.

But I'm encouraged because they have chosen to engage to the challenge and confront the storm that's been heaped upon us.

They work nighttimes, weekends and holidays to get the job done.

They canceled holidays and family time and took personally the responsibility of fixing what has been broken.

And they did it with less compensation and without a sound.

These are truly the 24/7 soldiers of Lennar and because of them, their tireless efforts, their conviction, their love for this company, they will build upon the progress that has been made in 2007 and I am personally enthusiastic about the prospects not only for our recovery but also our prosperity in the future.

With that, let me turn over to Bruce.

Thank you, Stuart, and good morning, everybody.

I'm going to discuss our balance sheet including some detail on our joint ventures and in our fourth quarter results.

Let me start with the results of the balance sheet first strategy that Stuart articulated with the focus on converting inventory to cash.

We have continued to carefully manage our inventory levels as they have decreased from $7.8 billion in the prior year's fourth quarter to $4.5 billion during the current quarter.

The finished homes and construction and progress inventory category was reduced approximately 50% from $4.4 billion to $2.2 billion year over year.

Land under development was also reduced approximately 50% from $3 billion in the prior year's quarter to $1.5 billion in the current fourth quarter.

Consolidated inventory not owned increased from $372 million to $820 million.

However, it would have also declined if not for the accounting treatment of the Morgan Stanley land transaction which increased consolidated inventory not owned by approximately $525 million.

We have continued to manage starts to today's realistic volume levels and as a result, we have reduced starts 68% in the fourth quarter compared to the prior year's quarter.

Homes under construction also declined 68% from 17,000 in the fourth quarter of 2006 to only 5500 in the fourth quarter of 2007.

Unsold inventory under construction was reduced by approximately 66% year over year and we were also able to reduce our completed unsold homes to 762 homes at 11-30-07 which is a reduction of approximately 900 completed unsold homes since the first quarter of 2007.

As a result of our aggressive focus on asset management, we have reduced homesites owned and controlled by 197,000 homesites from the peak in the first quarter of 2006.

And that's a reduction from 346,000 to 149,000, a 57% decline.

Included in the 149,000 homesites that are remaining are 63,000 homesites owned, 23,000 controlled by option with third party land sellers and 63,000 option from joint ventures.

This quarter's option deposit walk away expense was $218 million and represented about 12,500 homesites.

Our strategy of converting inventory to cash strengthened our balance sheet as follows: Inclusive of impairments, our net debt to total capital was 30.2% as of November 30, 2007.

Our debt levels have been reduced by approximately $318 million since the prior year's fourth quarter.

Additionally, we generated significant, positive operating cash flow of over a half a billion dollars in the fourth quarter of 2007 and this excludes approximately $450 million of cash which we did receive by November 30th but is not included in the operating cash flow section of our cash flow statement from the Morgan Stanley land transaction.

There was $642 million of cash on the balance sheet of November 30th and subsequent to year end as Stuart mentioned, we further strengthened our cash position with the receipt in hand of an additional $852 million in cash relating to a tax refund from the carry back of net operating losses to recoup taxes paid in our peak earning years of 2005 and 2006.

Additionally, we ended the quarter with no outstanding balance on a revolving credit facility.

And we completed an amendment of the company's senior unsecured revolving credit facility and given our liquidity position, we were comfortable reducing the company's borrowing capacity from $3.1 billion to $1.5 billion and we also amended certain debt covenants.

As a result of the two rating agency downgrades to below investment grade in the fourth quarter, we were required to be in compliance with the borrowing base covenant in our senior unsecured credit facility.

As a result of the borrowing base covenant as well as impairments that were taken, we modified the minimum tangible network covenant, the borrowing base covenant and the maximum leverage ratio covenant.

These modifications, along with our cash position, provide the company with the necessary flexibility and liquidity to operate in these challenging times.

We have continued to increase the transparency regarding our joint venture debt obligations.

Our 10-K, which is due to be filed next Tuesday, will provide a detailed breakdown of the categories of our joint venture debt.

We have made meaningful strides in reducing our joint venture indebtedness from $5.5 billion in the third quarter of 2007 to $5.1 billion by the end of the fourth quarter of 2007.

Of this, $5.1 billion of joint venture indebtedness, $3.4 billion is nonrecourse indebtedness of which, $2.3 billion or 68% is specific to three large joint ventures whereby our ownership percentage for these three joint ventures is approximately only 15%.

The company has been very focused on reducing its recourse JV indebtedness reduced from $1.8 billion at the end of the fourth quarter of 2006 to $1 billion at the end of the fourth quarter of 2007.

Our strategy is to continue to aggressively reduce, particularly the recourse joint venture indebtedness, and we have agreed to further reduce the amount of this JV recourse indebtedness by $300 million in 2008 and $200 million in 2009 as part of our bank amendment.

We have reduced our ownership percentage in the aggregate equity of our ventures from 39% at the end of 2006 to 34% at the end of 2007.

Additionally, the number of joint ventures have been reduced from a peak of approximately 270 joint ventures in 2006 to about 210 joint ventures at the end of 2007.

and we're focused on considerably reducing the number of joint ventures again in 2008.

During the fourth quarter, there was $3 million of remargining payments made relating to joint venture recourse indebtedness and that brought the total for all of 2007 to $84 million.

Turning to the operating results for the quarter, Diane is going to walk through the evaluation adjustment detail in a few minutes.

However, excluding these valuation adjustments, we had approximately 42 cent loss for the quarter.

Our results are barely detailed in the press release.

And as you will note, the results tie into our strategy of pricing to market to move inventory as we delivered over 7,000 homes during the quarter and as our sales incentives increase to about 59,000 per home from 47,000 per home in the prior year's quarter.

As a result of our gross margin before impairments, that was 12.1% versus 14.4% in the prior year's quarter and gross margins were down in each of our segments as this was a broad-based decline.

Texas is probably the one market where gross margins were more stable and remain closer to its historical performance.

The results in joint ventures are primarily related to impairments which Diane will cover.

Turning to SG&A, we've been very focused on right sizing SG&A and we've consolidated many of our home building operations through our markets and the numbers relating to the 50% associated head count reduction was from over 14,000 associates at the peak in 2006 to, at this point, we're under 7,000 associates to date.

This focus, along with reduced variable selling expenses, are the primary drivers leading to reduced SG&A expenses of $186 million or 38% compared to the same period last year.

Additionally, we have incurred unusual and nonrecurring expenses this quarter, primarily from severance and lease termination costs of about $12 million.

As a percentage of revenue, SG&A increased to 15.1% during the quarter, primarily as a result of the 51% decline in revenue.

New orders were down 50% during the quarter compared to the prior year and new orders weakened in all of our regions.

As I mentioned, it was a broad-base decline, experienced in all of the regions and the same goes with backlog as well which declined 65% and was experienced in all of our operating regions.

The cancellation rate was 33% for the quarter.

And turning to financial services, profits decreased from $42.9 million in the previous year's quarter to a loss of $18.7 million this quarter.

The loss this quarter included approximately $5 million in severance and lease termination costs which we expect to be nonrecurring.

Mortgage decreased from $35.6 million to a loss of $7.8 million.

This decline and profit, was due to a 45% reduction in mortgage origination dollars.

However, we did increase our capture rate from 70% to 78%.

Average scores remained in the low 700s.

This quarter, fixed rate loans increased considerably to about 97% of the loans we originated compared to 70% in the prior year and jumbo loans were only about 4% of the total loans.

The percent of FHAVA loans increased to about 36% in the current quarter from 11% in the prior year and subprime loans are only about 2% of the loan volume but these are agency eligible product.

They also was reduced considerably from 46% in the prior year to about 6% during the current quarter and any product that we originate requires significant downpayment as well as higher credit scores than in the past along with partial or full verification of income.

Title profits decreased from $5.7 million in the prior year to a loss of $11.8 million in the current quarter and that was a result of fewer transactions due to the slow market conditions.

As a result of our operating loss, we recorded a tax benefit for the quarter and we have adjusted the tax benefit to a tax rate of 37% for all of 2007.

We did not have a FAS B109 tax evaluation reserve this quarter as we concluded it is more likely than not that we will be able to realize our deferred tax asset from future earnings.

However, at this time, we are not providing a 2008 earnings call due to the current uncertain market conditions.

We will, however, remain focused on generating strong cash flow, carefully managing our inventory, right sizing our overhead and positioning for profitability when the market stabilizes.

Now, Diane is going to provide an update on our impairment numbers.

Thank you, Bruce.

Good morning, everyone.

In conjunction with our balance sheet focus, we continue to evaluate and reevaluate our assets each quarter.

Throughout our fourth quarter, the housing market continued to deteriorate.

Therefore, it was important once again to maintain our comprehensive and rigorous process of division by division, asset reviews to ensure that our assets are properly stated.

In this morning's release, we outlined our fourth quarter valuation adjustments by segment.

However, let me quickly review the categories once again.

In the first category, the Morgan Stanley land transaction.

As Bruce and Stuart both mentioned, in conjunction with the strategic land investment that we formed with Morgan Stanley, we recorded a valuation adjustment of $740 million on the properties acquired by the venture.

The portfolio consists of approximately 11,000 house sites in 32 communities located throughout the country.

The segment details of the valuation adjustment is as follows: In the east segment, $170 million.

The central segment, $28 million.

West segment, $509 million and other, $33 million.

The second category's additional land that we sold or intend to sell to third parties.

Consistent with our strategy of converting inventory into cash, we identified land that we sold during the fourth quarter or intend to sell subsequent to November 30th.

We applied the standards of FAS 144 to that land and recorded evaluation adjustment of $230 million.

The segment detail is as follows: East segment, $65 million.

Central segment, $34 million.

West segment, $75 million and other, $55 million.

The final category related to land is option deposits and preacquisition costs.

We continued to evaluate, reevaluate and renegotiate deposits on land under option as markets continue to decline.

For those option contracts, we were not able to adjust or readjust the terms to a level that would lead to an acceptable return based on current market conditions.

We made the decision to walk away from the contract as we have done in past quarters.

As a result, we wrote off $218 million of option deposits in preacquisition costs which represented approximately 12,500 homesites.

The segment detail is as follows: East segment, $45 million.

Central segment, $8 million.

West segment $146 million and other, $18 million.

Then turning to the home building side of our business, we once again applied the standards of FAS 144 to land that we intend to build homes on and recorded a valuation adjustment of $225 million.

The segment detail is as follows: East segment, $67 million.

Central segment, $31 million.

West segment, $116 million and other, $11 million.

In the fifth categories are joint ventures.

We focused on the recoverability of our investment related relative to the market conditions that exist today.

We applied the standards of FAS 144 to the assets in our joint ventures including the evaluation of discounted future cash flows.

Additionally, we applied the standards of ATV18 to our investment balance related to the ventures.

As a result, we recorded evaluation adjustment of $277 million and the segment detail is as follows: In the east, $64 million.

Central, $28 million.

West, $177 million and other, $9 million.

And finally, good will.

We recorded a write-off of good will related to our home building operations in the amount of $174 million.

This goodwill impairment was due to a significant decline in the estimated fair value of our reporting units subsequent to our third quarter which resulted from significant deterioration and market conditions and a decrease in our stock price.

The segment detail is as follows: The east segment, $46 million.

Central, $28 million.

West, $44 million and other, $55 million.

And so with that quick overview, we'd like to open it up for questions.

We're going to open it up to questions.

Katherine, are you available?

I am.

We will now begin the formal question and answer session.

(Operator Instructions) Our first question is coming from Ivy Zelman of Zelman and Associates.

Good morning, guys.

Good morning.

Thank you very much for the opportunity.

I'm very impressed with what you've done on the balance sheet with reducing your debt to capital post 11/07 which actually showed a 15%.

And also, I'm happy about your continuing to reduce the JV exposure and simplify it and wondering, realizing you still have a billion dollars of recourse debt and your plan is to continue to reduce that further.

How do you give the market assurance that your balance sheet is as strong as it appears to be when so much concern relates to taking the assets today that are JV's and not only the recourse debts but all of the rest of it basically at risk of being put back to you?

And I realize it's difficult to convince the market that that's not an issue but if there's any way to assure us or give us any of your thoughts on that, it would certainly be of help because it appears that your balance sheet is a lot stronger than the market gives you credit for.

And then just to elaborate, I guess this is a sneak of the second question, but you mention that you're expecting all of your hard work to come to fruition in the second half of '08.

Wondering if you can elaborate, Stuart, on that.

Listen, I don't want to overstate that, Ivy.

We'll, of course, it's still going to be subject to market conditions but, as we look ahead, we've really focused on getting each of our divisions and positions -- in position to have a clear profitability model and that profitability model is focused on every home that goes under production right now on homesites that should be properly priced.

Positioning themselves with the right product and construction costs, they should be able to be profitable as we turn into the second half of the year.

But if the market continues to deteriorate at accelerated paces, we're simply not going to get there.

I personally have some hopes that there's going to be some actions by the fed, by the federal government that will shore up some of the market conditions even as they still have a tendency to slide.

And as we get to the back after a year, I do not expect to see sales and home prices accelerate but I'm just -- maybe I'm just hopeful.

I'm hopeful that the slide does not continue at the accelerated rate.

And I think that we are currently well-positioned in each division to be able to start battling back.

As it relates to the first part of your question, as it relate joint ventures, you know, one of the strong things that we have in our favor in times like these is that we worked hard on our balance sheet through the good times to be able to withstand and absorb some pretty steep shots.

And even as we've gone through the recalibrations that we've gone through, we've still been able to maintain a balance sheet in pretty good shape and very good shape.

And we've been able to generate cash both from operations and more importantly, by things doing some heads up things in the market place.

What's going to ensure that the balance sheet will remain strong as we roll forward?

I think the answer to that lies in the very exacting evaluation that we've applied, not only to our balance sheet assets but also to our joint venture assets to date.

Nothing is going to isolate us completely from a complete meltdown in the market place beyond where we are.

But to the extent that assets retain any value at all, we've taken the charges to date that we think are appropriate.

And for any kind of market conditions with some softening ahead, but not with an exaggerated softening ahead, we think we're very well-positioned to move forward and to remain stable.

Let me just add some numbers behind what Stuart is saying.

As you look at the joint ventures, Ivy, looking at the total joint ventures we talked about, there is a total of $5.1 billion of debt of which $3.4 million is recourse debt.

But there is also $2.7 billion of equity and this is after we've gone through the review just like we do with our wholly-owned assets of our joint venture investments, investment by investment, for any potential impairments and there have been impairments, as you know, over the last two years to bring down the investment to the appropriate stated value, we have taken significant evaluation adjustments.

So, there is significant equity and then there are hard assets that are additionally supporting the debt within those joint ventures.

Although it doesn't mean we can't have a remargining come back to us as we mentioned, we had $84 million this year, there are hard assets, there is significant equity.

And the net recourse exposure has continued to decline to the company as well.

In addition to the JV recourse indebtedness coming down to a billion, we've also reduced net recourse exposure to the company from last year at $1.1 billion to $795 million.

When you say there's $2.7 billion of equity, that's not all our equity.

Correct.

The equity in large part that is partners equity.

The point that you're making now is that the ventures were established with fairly conservative debt put in place.

A lot of equity in these joint ventures.

And there's a lot of equity to go through before the debt associated with any of those ventures becomes threatened.

Right?

Correct.

Ok.

Just a follow-up on that.

I think that makes obviously people should make them feel better but realizing that you have taken impairments each quarter and it looks as if you've taken less home building impairments this quarter, and to your point, Stuart, even if things get worse but not materially worse, you think you could have -- hopefully with your asset evaluations, if I'm hearing you correctly, your arms around maybe the impairments peaking and seeing a lot less impairments going forward.

And with that said, the 10-K that you're reporting on Tuesday, hopefully -- what type of increase transparency will we get on the JVs?

I guess that's a two-folded question.

Let me talk about the joint venture transparency.

We do go through and identify all of the different categories of joint venture indebtedness.

And we have again significant detailed disclosure on all of these, on the joint ventures, the various categories, the balance sheet, the debt side.

And you know, I think you'll find that there is -- there is significant increase in the transparency from where we've been in the past.

That should be filed Tuesday of next week.

Great.

Ivy, I think the point that you're highlighting is you know, we've really made an effort here to get ahead of the curve.

I simply don't want to die the death of 1,000 cuts.

I guess that's a little cliche but it is really the way that I feel.

I think that it is almost axiomatic that you cannot make money on land that is improperly valued.

It doesn't matter how good your home building operation is.

you know, we're really positioning to get ahead relative to some of the land positions that we have and joint ventures that we have.

And I think that we've made some credible steps going forward.

You know, I have to qualify everything that I say by the uncertainties that lie ahead in the market place.

And then as it relates to the uncertainty, relative to joint ventures on our books, we're certainly making additional attempts to improve the transparency in our 10-K and in all of our disclosures so that people do get a good sense of comfort for the fact that we have a balance sheet that really is in good steps.

Great.

Thanks very much.

Thank you.

Our next question comes from Carl Reichardt, Wachovia Securities.

Good morning, guys.

How are you?

Hi, Carl.

Thanks for taking the question.

Back on the issue of joint venture, Stuart, maybe one higher level, as you look forward at the business under the impression we recover in '09, do you expect Lennar to be more active in joint ventures to try to shrink the size of the land position on the balance sheet or less active because you're going to be taking advantage of fully-owned positions at the bottom to expand your business.

I think what I'm struggling with is whether or not joint ventures will be a more important larger part of your business in future years or less significant part given this downturn and what has happened to this point.

I'm trying to think about your strategy, utilizing these going forward.

That's an interesting question, Carl.

I think that -- I think you would have to cut your question a couple of different ways.

Number one, I think it is absolutely the case that as we go forward, we will use fewer joint ventures in terms of the numbers of partners that we will have.

I think that having fewer of the smaller type joint ventures would make administrative -- would make it administratively much more manageable.

And I think that we would be less inclined to use joint venture structures at the individual property level.

Let me also say that certainly for the next many years, the joint venture structure and other structures are simply not going to be needed.

There's nothing to be land available.

And so I think that for many years, we're going to be very inclined to take advantage of the market condition that exists where there will be developed homesites available and I think that we'll build our business off of that so in terms of the number of joint ventures, we'll be less inclined to use smaller ventures in terms of the need to use ventures, it simply won't be there.

So, it will be a much smaller part of our business.

With that said, and using our transaction with Morgan Stanley as a proxy, while I qualify -- while I classify that more as a fund, I do think that the opportunities that exist in the open market today to be engaged in the real estate business and to be opportunist in troubled times is something that we have a real expertise in.

The joint venture experiences that we have had have given us a great platform for being able to be in a very effective fund manager and I think that there will be opportunities for us to put together pools of capital that seek to engage the risks associated with land but buying land at the bottom of a market condition and I think that we will use those kinds of vehicles to take our expertise and to lever that with land assets that are positioned for recovery.

So, we will use the venture structures in one form or another.

I think it will be more in line with a fund concept than with an individual venture concept.

Then second, last question, thinking about that recovery scenario, do you expect as you see it now Lennar will deepen its existing market footprint or even shrink and then redeepen it or do you expect to expand that geographic footprint as you look out?

Right now, Carl, we're very focused on the footprints that we have in place.

I think if you have to characterize the attitude within our company, it is about looking at what we have got and getting it back to efficiency.

I think we've spent the better part of 2007 focused on being asset managers.

We positioned ourselves now to get back into the primary focus of running operating divisions the way we know how as profit centers.

And I think that we're looking at the existing footprint.

We're not looking beyond it.

We're not looking to materially shrink it either.

But we're looking at the platform we have.

We have scaled back from a head count standpoint by almost 50%.

We're really left with the eight players in all of our markets and that's what we're going to work with in terms of really refining the footprints that we've got.

Ok.

I appreciate that.

Thanks, Stuart.

Sure.

Our next question comes from Ken Zener, Merrill Lynch.

Good morning.

Good morning.

With your corporate liquidity rising, can you address your expected cash output for land development that you own and some of the required lot takedowns that you have coming from options or from other joint venture structures that are required in '07?

-- '08, excuse me?

Let me comment on what's required with our option program, they are, in fact, options.

And there isn't a requirement with respect to those takedowns.

So, just as we've walked away from a very significant portion of our options over the last year plus, those options that we have remaining continue to remain options.

That optionability is still remaining there for us.

There might be no specific performance with respect to any takedown requirements.

The other part of your question, what is our required outflow with respect to homesites that we own?

There isn't a number per se to put on the table.

I'm assuming you're talking about development dollars required with respect to homesites owned, Ken?

Correct.

Ok.

We don't have an exact number there but our focus has been to very tightly manage to the current demand in each local market with respect to any development that we're taking on and we've aggressively reduced as we mentioned, the number of homesites, the number of starts so we're going to manage that very tightly with respect to the demand that exists in our markets today.

Ok.

I guess -- another angle on that would be completion guarantees that you do have within your joint venture structure.

Could you comment -- I realize the banks will contribute the majority of these -- the capital to complete these projects.

Can you give us a sense of how these banks are responding on some of the completion guarantees given that they're the largest capital contributor.

Are they just saying let's not move forward even though you have a completion guarantee?

And could you give us some of the different dynamics around that?

This is a fair question.

Unfortunately, it hasn't quite ripened yet.

And every situation really is unique and different in that regard.

Each of those completion guarantees is being managed differently and separately.

And we're going to have to -- I think we're going to sit back and wait and see and you're right.

A lot of it is funded by the underlying venture or debt itself.

But each one is going to be looked at specifically.

In some instances, some of the properties that you're talking about, Ken, are properties that are really well-positioned and should be developed for current absorption and so the completion not only guaranteed but opportunity is one that is probably the right thing to do at this point.

And we'll act accordingly.

Additionally, there are other properties where it is very clear to both us and the banks and everybody involved that the strategy is to not go forward and to not put more money in the ground at this time.

We might be talking about an excellent property but it simply doesn't make sense to put the money in the ground.

And in those instances, there are pullbacks.

So, each of these deals is being dealt with very individually.

Ok.

I appreciate that.

If you could comment, how much of the Morgan Stanley land sale of $1.3 billion has a carry value had been impaired before?

Thank you.

That number was about $150 million in total.

Previously.

So, the original purchase price was $1.45?

Approximately.

Thank you.

Our next question comes from Michael Rehaut, J.P.

Morgan.

Hello?

Hello?

Mr.

Rehaut, your line is open.

You may ask your question.

Let's go on to the next.

One moment.

Mr.

Rehaut?

Yes, I'm here.

okay.

Thank you.

Your line is open.

Alright.

I was talking the whole time.

I guess there was an issue there.

Just first question was related to the tax refund, the cash tax refund and also, the statement about the FAS 109 that you determined that you'd be able to utilize that asset and this is certainly at least from -- I guess I have a couple of questions here.

If you could just walk through the rationale on the 109 approach because certainly the other builders are kind of looking at as, you know, the peak earnings of '05 roll off, you know that you would have between '06 being a lower year and '07 being a very large loss year, the only way that you wouldn't enter into a three-year cumulative loss position in '08, the only way you would be able to prevent that is was having a nice earnings year in '08 and that's been the rationale for the big tax FAS 109 write-off.

So, I was wondering if you could walk through how you're getting to a different answer on that front.

And similarly, you know, the large cash tax refund, you know, how you were able to recoup such a nice number post-year end.

Let me start with the easier one.

As Stuart said earlier, we have an incredible tax team led by Mike Petrolino who worked around the clock after year end to facilitate the quick recoupment of the taxes that were previously paid.

And that was just a lot of hard work effort, planning, in order to shepherd that through appropriately in order to get a quick inflow of cash.

With respect to FAS 109 which has been a hot topic here lately, from the perspective of the literature as we've looked at it and our auditors have looked at it.

You have to determine that it is more likely than not that you will be in a position to realize that tax asset in the future.

One very strong negative piece of information is if you have cumulative losses over a certain period of time based on the cyclicality of your industry.

And based on the cumulative losses so far, we're actually positive for the three years but based on the cyclicality in the business, we're not looking at a three-year period.

We believe that we can go to a four-year period and again, that's one piece of information and we'll have to look at 2008 and see how that plays out and at that point, we'll be able to conclude one way or the other if there is a potential valuation adjustment depending how 2008 plays itself out.

Ok.

Thank you.

Second question, if you could just walk through what the changes were to the tangible net worth requirement and some of the other covenants?

I could get into the details probably easier, Mike.

We're filing an 8K with respect to that amendment that will have all of the details relating to those items, you know, over the next day or so.

You know and minimum tangible net worth is an easy one.

It was basically a reset based on our equity value at the end of November plus a provision in case there is a valuation reserve in the future relating to FAS 109.

Ok.

Let me sneak in one more if I could then.

The benefit in gross margins from prior impairments, Bruce, would you happen to have that?

No.

You know, Mike, that's not something that we report on.

Because as we look at it, there are land positions, they get renegotiated.

Some are new deals or old deals and you know, it is just not something that we track.

Ok.

Thanks.

our next question is coming from David Goldberg, UBS.

Thanks.

Good afternoon.

Hi, David.

How you doing?

You mentioned in your opening remarks that most of your JV partnerships have worked out as they were planned to work out.

Was wondering if we could focus on the ones that didn't work out the way you thought they would.

Maybe give us an idea of what goes wrong and how they play themselves out?

Well, you know, something, thanks for bringing that up, David.

It might not have -- maybe I didn't say it quite right.

They clearly haven't worked out the way we had hoped they did.

Our evaluation for the assets certainly wasn't to see in a loss position.

I was really talking about the mechanics of the joint venture.

In most instances has really worked out .

We got what we bargained for.

That's a shared risk position with a joint venture partner.

What happens when they don't work out and we do have some that have not worked out.

You have a partner that, because of the shift in market condition, finds themselves in financial difficult and can't uphold their end of a -- of day to day operations or of funding interest or something like that.

And we have to sit and talk and renegotiate.

It really puts us in a position relative to the partnership and relative to the bank relationship to sit down and negotiate respective rights and obligations and to reposition our position and the partnership in

I guess as my second question, thank you for that, Stuart.

This is for Bruce.

In terms of bringing down the recourse that of the JVs, can you talk about the mechanics behind how you achieve that in the next two years?

Is that just the renegotiations, switching it from recourse to nonrecourse.

If so, is it more expensive for you to do?

Maybe you could describe on how you took it from $1.8 billion to a billion now?

Sure, David.

You know, it is from several different areas.

The primary way that that is reduced is in dealing with the assets in the joint venture which our partner might purchase.

We might purchase.

We might both purchase or a third party can purchase.

That's the primary way that we will deal with the joint venture debt.

So, once those assets are purchased, there is enough capital to pay down the recourse indebtedness at that point.

Less so from transferring it to nonrecourse indebtedness although we did refinance some of the recourse indebtedness in the past year and some of that has been moved to nonrecourse going forward, it is more dealing with the assets in the JV, focusing on reducing the number of JVs, and that's how we're going to bring the number down and we've been making a lot of progress already along those lines.

We're comfortable we'll achieve the goals that we set out and committed to with our banks.

Let me say this, David.

You know, this is not a smoke and mirrors program of moving debt from one bucket to another.

Each of these ventures is really being worked and focused on.

Some of the ventures that we have in place have just lost their reason for being.

It was that maybe we were sharing risk in equity with a partner and today, because of the shift in the market, the shared risk is really just -- has really just gone away.

It could be that a venture has become -- has moved from a responsibly levered partnership to a highly levered partnership just by the loss in equity.

In each of these situations, we're sitting down with partners and figuring out the right construction for moving forward.

I will tell you that in some instances, we have bought land or the land asset from a partnership at what we think are an attractive price.

Having written off equity and position in the venture.

In other instances, we have sold our equity to a partner who has taken on the debt and moved forward.

So, you know, in all instances, we're looking at fundamental alteration of the partnership.

Some of our partnerships are excellently, excellently positioned.

And while there will be trials and tribulations going forward in working through a difficult market condition, they still have properly sized debt and properly positioned partners to be able to make the best of the assets.

That's great.

Thank you.

You bet.

Our next question comes from Nishu Sood from Deutsche Bank.

Thank you.

I had a few questions on some of the land transactions.

First, I wanted to start with -- I was wondering if you could give us some more details on the 8300 lots, I believe it was, that you sold in Florida to metro development I think it was.

Specifically, the kind of basis of that land on a preimpaired basis and what you realized for it:

Sure, Nishu.

Let me take that one.

What we did there is we had 8300 homesites that were controlled for the future.

They were longer term takedowns and strategically, what we did is we converted those 8300 which was one transaction and you know, for a similar dollar amount, what we did is we actually purchased some shorter term homesites that were able to be put in production on a more current basis.

The total dollar amount of each of those transactions was in the $20 million range.

So, it was not significant at all even though it was highlighted by the media just given that it was shortly after -- it was picked up shortly after the Morgan Stanley transaction which had significant dollars involved and about 11,000 homesites.

I see.

So, it was more of a swap really in terms of -- of when the land can be put into use.

Well, there were two separate transactions but it was a repositioning as we've looked at around the country with our asset base, you know.

It wasn't exactly a swap.

It was more of a repositioning of assets where we were more focused on shorter term assets that could be put into production sooner and generate cash flow quicker and not to be as far going out -- going out as far just given the fact that there is more land available as we look forward.

My second question, wanted to ask also about the land that was involved in the Morgan Stanley venture, kind of look at it qualitatively, if you work with the numbers -- the numbers that you folks provided, $1.3 billion and the 11,000 lots, we get a pretty significant number I think 120,000 per lot which is a pretty significant number for lots which are in different stages of development.

So, does that tell us that those -- the lots that were dealt with here were in higher price markets, mostly in California?

Or perhaps more A grade lots?

How do we reconcile that in terms of understanding what types of lots were involved in that transaction?

Nishu, as you do look at the geographic breakdown of those homesites, the starting point is in our lower-priced market where is we typically use rolling lot options like in Texas and the Carolinas, there were no homesites that went into the program.

So, you are correct.

These were primarily end markets where land is more expensive in more of the coastal markets, that's where the geographic breakdown of these 11,000 homesites would split out more appropriately.

There were quite a few end markets like California as well as, you know, Florida and various other coastal markets in particular.

Ok.

Thanks a lot.

You're welcome.

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

Thanks very much.

Was wondering if you can talk about the inventory clearly done great things to generate cash and reduce debt.

If we look at the backlog which in a county.

Regions is below the order where is we presume the spec homes are sold, how would you look at -- how many homes are in construction right now.

How many finished homes you have.

Just give us absolute numbers.

Also relative to where we were either six months, a year ago for some perspective on that.

Ok.

Just a couple of those numbers.

Which I had laid out at the start of my section.

Homes under construction declined 68% from a year ago.

There were 17,000 homes under construction in the fourth quarter of '06 and 5500 at the end of Q4.

Of '07.

The homes that were completed unsold have come down considerably as well.

Actually, the first quarter of '07 we were about 900 completed homes higher than we ended the year and we ended the year with 762 completed unsold homes.

Thanks.

And if you can talk then in terms of your goals -- or strategy in terms of sales at this point.

How do you describe it and certainly it is switched to one where it is less aggressive and mothballing communities?

What would the strategy be at this point?

The strategy with respect to sales and you mentioned mothballing, so you're referring to with the land that we have remaining in our inventory.

Our strategy as we've indicated has been just to match to current market demand levels.

Thanks.

Our next question comes from Stephen East, Pali Capital

Thank you.

Just a couple questions.

Bruce, on the $500 million on free cash flow, which was pretty good and that was before the Morgan Stanley, how would you split that out between home building versus land?

versus land sales?

I don't have that -- we don't split that out on the cash flow statement, Steven.

Ok.

Just, you know, generally speaking, is it the majority of it from home building?

Would that be a fair assumption?

Yeah.

I think that's probably a fair assumption.

Ok.

And then on the Morgan Stanley transaction, the inventory stays on your books.

Can you help me out a little bit?

If the inventory stays on the books, obviously the cash can't come on the books as well.

So, how do you -- how do you relieve the inventory and how does the cash flow through and how do we see it hit and for the same thing on the tax benefit, do you get that immediately or does that have to flow through over time at a later date?

Let me just make one comment and then I'm going to have Diane walk through the mechanics.

You indicated the cash isn't exactly on the books.

The cash actually was received and we did receive that cash and it is on the books as of 11-30-07.

But let me turn it over to Diane to walk through the mechanics of how this will work in the future.

Ok.

Just trying to keep it simple.

The reason it ended up staying on our books is if you look at the accounting rules under FAS 66 which speaks to sales of real estate, we have what is called continuing involvement.

What that really means is it is a moment we have option agreements and rights of first offers on all of the land.

Now, certainly, that's not an obligation.

It is truly is as it is stated, it's an option or right of first offer.

What will happen is as we decide to exercise or not to exercise those options, the land will then either, you know, come off our books and we'll have a sale or it will stay on our books and we'll be building it out.

So, it will really be determined on an option by option basis and whether we choose to exercise that or not.

Ok.

Just one last question, Stuart, you talked in the past that you know, you wanted to get your balance sheet in a position to take advantage of opportunities that come along.

I guess as you look at the market and you look at your balance sheet, when do you think the markets start presenting those opportunities in a meaningful way?

Is this just in your opinion, is this an '08 event, an '09 event?

That's a really interesting question.

I'm not sure yet, Steve.

I think that -- I think there's still time.

I think there's still reconciliations.

You know, I think that the home building world has been a little bit ahead of the curve.

The land world has been a little bit behind.

Liquidity in the market place in general has stabilized or artificially stabilized land pricing.

You know, relative to where I think it is still going to go.

And I think that we still have some time before we start to see opportunity.

I know that we're not going to compromise our balance sheet today by chasing opportunities as the market is still trying to find a bottom.

So, I think that we're still driven by finding ways to take advantage of down markets as we're in right now.

But we're not inclined to pull the trigger too soon.

And I think that right now it is a little too soon.

Ok.

Thanks.

That's helpful.

Our next question comes from Timothy Jones, Wasserman and Associates.

Good morning to all of you.

Hi, Tim.

Hi.

One thing, Carl Reichardt asked my two questions.

I did that on a prior call to him so it all works out.

To get one thing straight, on 109, before i ask the question, isn't Deloitte allowing you to take 205, 206 and 207 for your three-year base year and not have to take 208 right now?

In looking at that, Tim, again, the literature of 109 discusses the fact that you need to look at whether it is more likely than not that you'll be able to realize the benefits and as you look at that and evaluate it.

It has been the company's conclusion and Deloitte's conclusion that in a cyclical business as ours as we've looked at it, you know, three years is a guideline but based on the cyclicality of your industry and what you've experienced potentially, you can end up with a different number than just three years.

So --

Are you using the 205 number?

You know darn well that 208, there is a 1% chance that 208 will remotely to resemble 205 in earnings or look of them.

or lack of them.

As we look forward, we would look to include 2008 based on the cyclicality as we evaluate 109 going forward.

So, we're looking at it as I indicated before, over a four-year time period and looking at one of the components although it is a strong indicator with respect to whether or not you have evaluation reserve or not and that is that cumulative loss.

So, we look at that as a four-year period based on the cyclicality that we've experienced in it the industry.

Ok.

My two questions.

My first one, I think your tax man should be sanctified.

But my question there is I don't understand how you got $850 million of tax refunds.

I understand how you got the $250 from the Morgan Stanley deal because you realized an actual loss.

But for the rest of the stuff, most of these losses are noncash charges and you really have not realized a loss.

Therefore, how can you take the tax benefit from the IRS?

What we had a lot of focus on, Tim, this year, is actually taking what was noncash charge and as we've actually concluded transactions converting inventory to cash and you could see that from the large reduction in our inventory.

We've concluded transactions at which time you realize that deferred tax asset and it becomes an income tax receivable.

Tim, I think the thing that you might be missing is that in many instances, we made an active decision to take what might have been an impairment and turn it into a realizable tax loss by actually concluding a sale transaction relative to the underlying asset.

So, while the Morgan Stanley asset sale has received a lot of attention, there were a number of asset sales that lay more behind the scenes that were part of creating the transaction, the sale transaction that resulted in the tax recovery.

Why in the world didn't the rest of the home builders do this?

So, we worked hard in the fourth quarter and --

Great job.

Why didn't the other ones do this?

They lost those benefits.

You would have to ask them.

You're going to have to get on some other calls, Tim.

Ok.

One last thing is your joint ventures, you've got at nine months, had you about a billion and a half of -- you had about a billion and a half of payables.

That's an awful high amount.

What does that consist of and what is your responsibility on that?

We don't have that detail right now.

Maybe that's something we could follow up after the call.

Ok.

I'll talk to you of off the line.

Ok.

We'll take one more call.

Thank you.

Our last question will be coming from Eric Landry of Morningstar.

Great.

Thanks for taking my question.

Sure.

First, let me mention that I'm shocked at the speed at which you've received that tax rebate and I think it is a testament to the management down there in Miami so congratulations.

Thank you.

But just say Mike Petrolino's name one more time.

He really did an excellent job.

Wonderful work.

Stuart, I'm lucky enough to not have to have covered the industry back in the last downturn in the late '80s, early '90s.

So, I'm hoping for hoping for a bit of historical perspective.

It appears to me that the big builders today, several of them are extraordinarily well prepared for whatever the market has to throw at them over the next several quarters or even years or what have you.

Was this the case back in the late '80s, early '90s?

No.

There's some significant differences right now.

First of all, in prior downturns, the capitalization of most of the big homebuilders was in the 60%, 70%, 80% range going into the downturn.

Most of the big builders in the current fields started at the beginning of the downturn with debt to total cap ranges in the 30%, 40%, 50% range so the starting point was a better capitalization.

Secondly, the capitalization in prior downturns was always defined by short-term debt.

In the current markets, all of the big homebuilders are capitalized with longer term fixed rate debt as a base to their base business.

So, those two factors are significant shock absorbers for the homebuilders in this downturn.

And really it's creating a lot more stability.

So, basically, vastly more well-prepared this time.

Yeah, dramatically better prepared.

I think that lessens of the past -- lessons of the past have been heeded in a lot of ways.

It doesn't mean that there has been mistakes made but the severity of this downturn has not yet proven fatal and I think that most of the builders are likely to be able to sustain themselves through it.

I agree.

They're also well prepared to harvest opportunities on the other side which brings up why I was kind of questioning there hasn't been much insider buying and the market hasn't really been giving any credit for this preparedness as well.

Any ways, I have one more question and that is Bruce, if you could let me know some relative proportion of your 63,000 owned lots that are finished?

The percentage of the owned homesites that are finished -- I don't have that handy, Eric.

Maybe that's something I could follow up on as well.

Ok, great.

Thanks.

Ok.

Well, listen, thank you everybody for your interest and attention.

It has been a tough year and a tough quarter.

We look forward to strikes forward in 2008.

Thank you.

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