Lennar Corp (LEN) 2008 Q3 法說會逐字稿

Welcome to Lennar's third quarter earning conference call.

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

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

Today's conference is being recorded.

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

I will now turn the call over to Scott Shipley, Director of Investor Relations for the reading of the forward-looking statement.

Good morning.

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

These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operation, 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 the 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 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, which is on file with the SEC".

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

I would like to introduce you host, Mr.

Stuart Miller, President and CEO.

Sir, you may begin.

Thank you and good morning everyone.

Thank you for joining us for our third quarter 2008 update.

I'm joined this morning by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President and Treasurer and David Collins, our Controller.

Bruce will provide additional detail on our numbers.

David will give you an update on our asset review and impairments, a report we have given for over two years now and Diane will be available to participate in the question-and-answer period.

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

Of course, we welcome you to rejoin the queue if you have additional questions and we will attempt to answer as many questions as possible.

Now, in the context of what has been perhaps one of the most difficult quarters in home building history, Lennar's management team and associates have put forth an extremely productive quarter.

We have continued to focus on the basics of rebuilding our operating business while we have also continued to carefully manage our asset base and work diligently to rework and reposition our joint ventures.

We feel that we are making credible progress towards profitability in the most difficult of times.

In the third quarter, the housing market continued to deteriorate, though at an accelerated rate.

June and July were truly dismal sales months and in August, we saw what I would call a phantom uptick which derived primarily from the pending elimination of the down payment assistance program on October 1 of this year, which is part of the so-called stimulus package passed in July.

I'm asked regularly as to whether or not we are at the bottom, and I feel overall that we are not there yet.

In this market, we recognize that some things are just out of our control and we are simply not going to be able to alter those elements.

The items that is we can control, however, we have been all over them in each of our divisions.

Just over two weeks ago, our senior management team visited with each of our divisions as we did our operations reviews.

A review of our reported numbers shows the meaningful progress that we found in each of our divisions.

We are rebuilding our gross margin, which showed improvement of some 400 basis points year-over-year before valuation adjustments to 18%.

Our operating margin before valuation adjustments has improved some 230 basis points to 2.3%, producing a diminished loss from operations for the quarter of just under $7 million.

While a portion of this improvement no doubt derives from impairments previously taken, and Bruce will cover that later, an increasing proportion stems from a focused reengineering of our product, materially reduced construction costs and a determined attention to right sizing our SG&A, which stands at a still disappointing 15.7% of lower than expected revenues.

Nevertheless, our SG&A is down some $148 million or 49% year-over-year, and we expect to continue meaningful improvement in SG&A in the fourth quarter in both dollars and percentage.

We are starting to see a quarterly progression of positive trends in this distressed market environment which positions the company well for rebound in the future.

A few basic highlights show that gross margin has improved from 15.9% in the second quarter to 18% this quarter.

Operating margin has improved from 0.5% in the second quarter to 2.3% this quarter, and pretax loss before valuation adjustments has declined from almost $36 million in the second quarter to just under $7 million this quarter.

Impairments are also declining, though modestly, from approximately $137 million in the second quarter to approximately $132 million in the third.

Generally speaking, there are not yet signs of stabilization in the field.

Demand patterns are inconsistent and erratic, and we have found that there's an increasing flow of foreclosures that are maintaining downward pressure on prices and appraisals.

In most markets, it is apparent that the flow of foreclosed homes is expanding rather than subsiding.

There is a silver lining in all of this, though it is currently of limited consequence.

The positive news from the field relative to some markets is that inventory of finished new homes is coming down and the number of competing new home communities is declining and the number of builders is also declining.

With market conditions still extremely soft though, our operating progress is meaningful.

On the asset management front, we have continued to fortify our Company by continuing to manage and restate our land assets while we simultaneously keep our inventory of completed homes very low and reduce the number and composition of our joint ventures.

In fact, we have reduced the number of joint ventures from 270 at the peak to 146 currently, and that's down from 163 last quarter.

Of those 146 joint ventures, 67 of them have no debt, 31 have non-recourse debt and 48 have recourse debt.

Recourse debt to joint ventures is down from a high of $1.8 billion in 2006 now to $630 million which is down some $177 million from last quarter.

We have reworked or are close to a rework on most of our non-performing joint ventures and the trend on joint ventures is positive.

While we will not and cannot comment on specific ventures, we have held true to our conviction that we do not support the debt of non-recourse obligations and we are not excusing partners from sharing partnership losses.

While the renegotiation process can be difficult and time consuming, many of our partnerships have presented us with an opportunity to actually enhance our investment position.

Our overall land asset is down similarly.

Additionally each division brought tremendous focus on inventory homes in the third quarter and reduced completed inventory by almost 50% year-over-year.

Great progress has been made on the asset side of our business so management can focus on sales, construction and SG&A and our divisions are, in fact, focused on the basics of blocking and tackling [in fewer] home building.

On the corporate side, we have completed -- we have complimented the progress in the field.

Our balance sheet remains strong with a substantial cash position of $857 million.

While that is down slightly from the second quarter, we continue to seize opportunity where distress creates unique value rather than walk away from opportunity.

We anticipate that we will continue to use available cash to harvest value and opportunity from our joint ventures as they arise.

Additionally, there's nothing borrowed on our revolver and we have a responsible debt to total capital position at 40.5% and net debt of cash -- and net of cash, that is just over 30%.

In the wake of the meaningful restatements of assets that we have undergone and the repositioning of many of our venture properties, this is meaningful progress.

And while we continue to lose money in the first -- in the third quarter, with a loss per share of $0.56 and a home building operating loss of approximately $92 million, aggregate levels of impairments and losses are more in the nature of clean up rather than reconciliation to unknown market conditions.

As I have said in prior quarters, we have done the heavy lifting on impairments and we are now situated with stated assets that can and will produce improving margins when the rate of decline in market pricing subsides.

We are confident that even with continued degradation of market conditions, our stated asset base will not require significant downward correction.

In conclusion, let me say that we've made a great deal of progress in a very difficult market.

We have prepared our Company for market conditions as they currently exist and we are not projecting a material improvement for some time to come.

But as I have said before, this should not be confused with abject pessimism.

In fact, I remain quite optimistic about our business and the housing market in general.

Although it is difficult to find reason to be optimistic in these unprecedented turbulent market conditions, I believe this market will rebound.

It will have to rebound in order to stimulate the rest of the economy back on to its feet.

Whether over the next month or after the election, steps will be taken out of necessary to facilitate home ownership leadership out of the economic doldrums.

We have finally come to a time when consensus is building that falling home prices are not only detrimental to the economy at large, but in order to repair our failing financial system, we will have to stop the decline.

Sooner or later, Washington will connect the dots that indicate that a floor in home prices will provide the foundation on which we can actually build a future.

The current stop gap measures to aid hard hit financial companies will be repeatedly frustrated by falling home prices and the securities that back them.

Any meaningful solution to the credit crisis will necessitate a simultaneous stabilization of the housing market.

The housing stimulus bill that was passed by Congress in July simply was not enough.

In fact, I would argue that the bill was net-net anti-stimulative.

The $7,500 tax credit, which was actually an interest free loan, created very little incentive to families looking to purchase a home.

The elimination of the down payment assistance program and the increase in the FHA down payment requirement from 3% to 3.5% actually took purchasers out of the market when we could least afford it.

The indicators keep coming in, and it seems that we are quickly approaching the time where decision makers will reconcile to the reality that positive constructive steps need to be taken to properly support weakened markets and enable them to recover.

If we are going to get home ownership back on its feet and stop the fall of home prices, we are going to need to facilitate the absorption of inventory by encouraging buyers to start purchasing again and we are going to have to facilitate a mortgage market to be able to lend at multiple price points to those purchasers.

This fix continues to be the bright light that I see at the end of home building's dark tunnel.

While we might argue or suggest that actions are late, it does seem that there is a floor out there where enough negative news, which is now confirmed, will result in enough action to bring on sustainable stabilization.

The housing market is faced with increased supply from foreclosures and suppressed demand.

Home inventories, primarily existing homes, are expanding and will have to be absorbed before pressure is relieved from sales volume and pace.

At Lennar, we have been heads up throughout the downturn in the housing market and we have prepared our company to succeed in current market conditions and to thrive when the market ultimately corrects.

Thank you, and I will turn it over to Bruce now.

Thank you, Stuart and good morning.

As Stuart discussed, this is a quarter of significant progress, and I will be providing some of the financial details supporting that progress.

Turning to the operating results for the quarter, we have narrowed our preimpairment loss to $0.03 per share for the quarter.

David will walk us through this quarter's impairments, which as you will see, these impairments are largely behind us at this point.

Revenues from home sales decreased 54% to $996 million, driven by a 49% decrease in home deliveries and a 9% decrease in average sales price to $270,000.

The average sales prices net of sales incentives, which averaged $45,900 per home during the quarter, and that was flat with the prior year's number.

The average sales price declined regionally as follows.

The east was down 7% to $263,000, central was down 3% to $200,000, the west was down 15% to $376,000 the other category was flat at about $300,000.

We continued to improve on the positive trend in operating margins.

Our gross margin was 18% before impairments and our selling, general and administrative expenses were 15.7 resulting in the 2.3% operating margin Stuart mentioned.

The preimpairment gross margin improved 400 basis points over the prior year, and this improvement in gross margin was due to first, a lower land base from the exhaustive asset reviews each quarter impairing assets to be reflective of today's market conditions as well as more recent land purchases which are reflective of current market conditions.

And then second, from lower construction costs.

We have aggressively reduced the number of floor plans in our markets, rebid our construction plans and we have centralized purchasing to achieve savings on both a local, regional and national scale.

Our construction costs per square foot have been reduced by close to 15% from the peak.

The operating strategies to achieve these cost savings have taken some time to be implemented and recognized in the numbers and we are now seeing the results in our numbers.

The east region experienced the largest improvement in the gross margin during the quarter.

Similarly, the operating measures taken relative to right sizing SG&A have taken some time to be implemented and recognized in the numbers.

SG&A expenses were reduced by 148 million or 49% versus last year, and as a percentage of revenue, was up 170 basis points to 15.7%.

During the quarter, we expensed approximately $15 million of nonrecurring severance and lease termination costs as a result of additional division consolidations.

We have made significant progress in reducing SG&A costs, however our volume has fallen at a faster pace.

As a result of these additional division consolidations, we have now reduced both our divisions and our head count by approximately two-thirds since our peak in 2006.

These measures taken should enable us to see significant reductions in our SG&A percent going forward.

New orders were down 42% during the quarter compared to the prior year, the number of homes in backlog declined 40%, 44% year-over-year and our cancellation rate declined to 27% for the quarter from 32% in the prior year's quarter.

We have seen significant progress from our financial services, operations as well as profits improved from a loss of $5.2 million to a profit of $12.8 million, and all of these financial service numbers I will be discussing are excluding a $27 million write-off of all the goodwill in our mortgage subsidiary in the current quarter.

Mortgage pretax increased from a loss of $2.3 million to a profit of $14 million.

This quarter, our mortgage capture rate improved from 72% in the prior year's quarter to 87% in the current quarter.

Almost all of our loans in this quarter were fixed rate loans and the percentage of government loans increased to about two-thirds of our mortgage originations in the current quarter from 25% in the prior year's quarter.

Our title company narrowed their loss to $600,000 for the quarter compared with a $1.3 million loss in the prior year, and title has made significant progress in right sizing its operations to today's market conditions and actually showed a profit in August, which was their first monthly profit since June of last year.

We continued to focus on a strong balance sheet as we aggressively reduced our JV recourse indebtedness while maintaining our strong cash position.

We generated EBIT during the quarter before valuation adjustments of $21 million, which is an increase from the second quarter, and then as Stuart mentioned, we had $857 million of home building cash on the balance sheet while we had zero outstandings on our revolving credit facility.

As our liquidity position remains strong and our leverage on a net debt to total capital basis actually improved from the third quarter of the prior year down to 30.2%, we also had substantial equity with $3.4 billion at the end of the third quarter.

We've made significant progress on the reduction in the number of unconsolidated JVs and a reduction of recourse indebtedness as Stuart mentioned, while we maintained strong liquidity and a strong cash position.

I won't repeat all of the numbers that Stuart mentioned, but I will highlight again that the maximum recourse JV indebtedness has come down from approximately $1.8 billion at the end of '06 to $630 million at the end of this quarter, and our net recourse JV exposure has been reduced to $492 million at the end of this quarter.

That is net of reimbursement agreements we have with our partners.

This quarter's progress was significant as we are approximately three-quarters ahead of schedule with respect to our bank covenant on maximum JV recourse reduction, and we have accomplished the reduction again with a minimal change in our cash balance.

The total cash payments relating to remargining guarantees with JVs having recourse debt during the quarter was only $9 million and there was also significant progress made during the quarter in reducing our financial letters of credit which are down about 60% from the peak which was $728 million at the end of '06 to $294 million at the end of this quarter.

We have continued to carefully manage our inventory levels as they have been reduced by 36% from the prior year's quarter to $4.1 billion, and that excludes consolidated inventory not owned.

Finished homes in construction and progress was reduced 29% from $3.2 billion to $2.2 billion year-over-year.

Land under development was also reduced 42% from $3.2 billion to $1.8 billion year-over-year, and from the second quarter of this year, inventory increased sequentially, about $200 million, but that was all due to strategic purchase of assets from joint ventures as a result of renegotiations with our partners.

Inventory purchases declined 60% from last year's third quarter from $348 million to about $139 million, and that was also a sequential decline from our second quarter, which had land purchases of $162 million.

We have reduced our unsold completed homes by about 50% from the prior year to 623 at the end of this quarter, which averages just over one per community.

We have continued to manage starts to today's demand levels and as a result, homes under construction have declined over the prior year by 31% from 9,100 to 6,300 in the third quarter.

And our homesites owned and controlled have been reduced by 62% since the peak in '06 from about 346,000 to 130,000 today and that's comprised of 76,000 owned, 15,000 controlled by options with third party sellers and 39,000 option from joint ventures.

Again, we have made significant progress this quarter and we look forward to discussing additional progress when we talk with you again next quarter.

With that, I am going to turn it over to David to discuss an update on impairments.

Thank you, Bruce.

Good morning, everyone.

As is tradition during our conference calls, we are once again providing an update of our impairment process to provide further clarity.

In this morning's release, we outlined our third quarter valuation adjustments of $132 million.

We continue to remain actively engaged in our rigorous process of division by division asset reviews to insure our that our assets are properly stated.

We started this impairment process almost three years ago and were diligent early on in reviewing our asset base and recording impairments.

As we have previously disclosed, we believe that most of the heavy lifting regarding impairment is behind us and that we are at the tail end of the impairment cycle.

Let me quickly summarize our third quarter impairments.

First, the home building side of our business.

We applied the standards of FASB 144 to land we intend to build homes on and recorded a valuation adjustment of $32 million.

This amount was 56% lower than the home building impairment charge we recorded in the second quarter of 2008.

The segment detail is as follows; east segment was $9 million, central segment was $3 million, west segment was $19 million and other was $2 million.

The second bucket is 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 third quarter or intend to sell subsequent to the third quarter.

We applied the standards of FASB 144 to that land and recorded a valuation adjustment of $13 million.

The segment detail is as follows.

East was $11 million, central was $1 million and west was $1 million.

Third, we have the next category which relates to land and adoption deposits and preacquisition costs.

We continue to evaluate, re-evaluate and renegotiate deposits on land under option as markets remain challenged.

For those option contracts where 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 $11 million of option deposits and preac costs which represented approximately 900 homesites.

This segment detail is as follows.

East $1 million, central $2 million, west $6 million, and other $2 million.

As we do with all of our assets, we continue to evaluate and re-evaluate our investments in joint ventures.

In our review, we focused on the recoverability of our investment 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 APB 18 to our investment balance relating to those ventures.

In the third quarter, we recorded a valuation adjustment of $43 million.

This amount was 22% lower than the JV impairment charge we recorded in the second quarter of 2008.

The segment detail is as follows.

East segment $10 million, west segment $20 million, other $13 million.

In addition, this quarter, we recorded $6 million of write offs of notes receivables due to their uncollectability.

The segment detail is as follows.

West $1 million, other $5 million dollars.

Finally, we review goodwill for impairment annually or whenever indicators of impairment exist in accordance with FAS 142.

As a result of this review, our financial services segment recorded a $27 million write off relating to the goodwill of the segment's mortgage operations.

So after that overview, we'd like to open it up for questions.

(Operator Instructions).

It will be one moment for the first question.

Our first question comes from Dennis McGill of Zelman & Associates.

Hi guys, good morning.

Good morning.

Stuart, I was just -- you touched on this in a few different ways, can you offer your opinion on what's positive and maybe negative about the current talked about bail out plan and then as it relates to a stimulus, what would you think would be most helpful to the market that the government could do that they're not doing?

You know, the bail out plan, I think, is still taking shape and I think that any commentary on that is premature.

I think that everybody is looking at it and still trying to figure out exactly what it is.

It certainly seems that we're going to have something akin to an RTC type program, almost a throw back to the early 90s.

And if you look at the massive assets that are imbedded in the financial structures, there's going to have to be some kind of a movement from public to private and then repackaging.

I'm sorry -- from private to public and then a repackaging of those assets and distribution back into the private sector like we saw with -- in the early 90s.

But exactly how they're going to do this, the financial stress is far more complex this time around than it was in the early 90s.

And then, I think we are going to have to sit back and watch.

As it relates to the housing market, I feel pretty strongly that if they don't get housing prices to stop falling given the way that housing -- the fallen housing prices amplifies through financial structures to the securitizations that are out there, and the way that those securitizations impact others, there's -- we are just going to be chasing the market downward and each financial fix will be frustrated.

I said that in my comments.

In terms of what constructive measures can be taken, the home builders had really tried to express, as the July stimulus bill went through Congress, that the $7,500 interest free loan was not likely to produce a lot of activity in the market.

When that was the result, we were hopeful and we tried to support it, but the reality in the marketplace is that the bill has really been a net negative.

Our focus had been to kick start the housing market and to get people buying again with a real tax credit, more in the $15,000 to $20,000 per home range, and we felt and continue to feel that it is that kind of stimulus for a period of time, maybe it is six months, that will be needed to kick start the market, get people buying, and therein support the fall in housing prices with purchase activity.

The positive of that kind of program is that it doesn't come with the stigma of moral hazard and does a lot to support the housing market.

I'm sure there are other thoughts out there that are equally good.

That's just mine.

Appreciate that.

And then on the idea of moral hazard, do you think the tax credit is beneficial to the idea of maybe buying foreclosures that are out there which are, I assume, are pressuring -- creating a lot of that home price pressure you are talking about?

I don't know how to break it down perfectly even in my own mind, I get a little confused on this.

It just seems to me that we are going to have to get the volume of purchasers up, no matter how you cut it, to absorb foreclosures and to get the market buying again.

And how it is distributed, whether it is foreclosures or new homes or whatnot, I don't know what that right formula is, but it seems to me that anything that we can do to get people buying homes again and recognizing there's some fabulous values out there.

If ever there's a time to way a home now is it.

It is just a matter of getting people over the hurdle of saying I want to buy a home and then getting them positioned with a down payment that they can come up with and a mortgage that is properly positioned and affordable to them.

It seems to me if we get people buying, the mortgages on today's home prices will be secure, profitable to the lenders, and the homes are more likely to go up over time because of the low pricing point that they're at right now.

I appreciate that.

It's going to be interesting to see how this plays out.

Just one clean up number, do you have the payables number from this quarter?

The payables number from this quarter, we can follow up with you, Dennis.

Okay.

Not a problem.

We will get it off line, thanks again, guys.

Our next question comes from Carl Reichardt of Wachovia.

It is actually [Adam Ruger] on for Carl.

Dennis asked one of my questions, but another question I had was, you talked about (inaudible) on demand in August from down payment assistance and pulling that forward.

I was wondering if you could quantify that a little bit or talk about how responsive you think consumers were to those promotions and if that does, this legislation could potentially reverse it.

If that does materialize, what that would do for you.

We have given that a lot of thought, and if you look at August, there was clearly a spike in the down payment assistance, the use of the down payment assistance programs and the promotions brought in a lot of buyers.

As we dissected the flow of people coming in, we came to realize that a number of the people that ultimately used the down payment assistance program didn't need the program, but they used it because it was a good deal.

We kind of view that the impact of its loss, the loss of the down payment assistance program is going to be somewhere between 10% and 15% of the buying market right now.

Do you have any thoughts on the potential for it to get -- the elimination of it to get reversed?

I think in today's market, just about anything we can think of is on the table, and there's no way to handicap it.

And I don't mean for that to sound funny, I think it is just too tough to call.

There's clearly legislative consideration as to whether it should be -- that program should -- the program should be reinstated.

Now, look I think that overall from a policy standpoint, we in the industry understand that as a policy matter, it is probably better not to have down payment than to have it in the long run.

But I think that emphatically, we believe that right now and today is not the time to cut off the blood supply to the patient that's on the operating table.

Great.

Thanks.

Our next question is from Susan Berliner of JPMorgan.

Yes.

Hi, good morning.

I know you guys had noted that you think impairments were going to go down pretty materially going forward.

I guess I was wondering how that kind of jives with your thoughts on price decreases going forward.

Well, we do believe that our impairments will continue to fall.

First of all, our asset base is materially smaller than it was a year ago.

But additionally, we think that we, as David has said clearly we have done a lot of very heavy lifting in terms of impairing our assets.

Some of the impairments that you are seeing are reflective of those continued price decreases that you see in the marketplace and will continue to have what we call this clean up until prices stop declining, but because of the smaller asset base and because we have done so much of the hard work already and brought our asset values down to clear profitability or the ability to make a profit, we -- our projection is even with prices declining, we have a solidly stated asset base.

I would just add to that Susan, that as prices have come down, we have put a lot of attention to redesigning our product and focusing on bringing down construction costs as well as we are delivering a smaller product more focused on how do we maintain a high margin as the market is in the condition it is, and a lot of that is coming from the progress on construction cost reduction.

That's great.

I appreciate.

I just had one other question.

If you guys could provide any details on your bank availability or tangible net worth cushion.

Well, we can say that we are in compliance with all of our covenants and we believe we have enough cushion with tangible net worth and as you have asked the question in the past, Susan, about borrowing base.

It is somewhat of a circular formula.

We have availability under our borrowing base.

We have to use cash over $500 million first.

Any cash that is used to buy inventory gets added back into the borrowing base.

So it is a little bit circular, but we are in compliance of all of our covenants as we have mentioned to you in the past.

Great.

Thanks very much.

Our next question is from David Goldberg of UBS.

Thanks.

Good afternoon, everybody.

Hi, David.

I was wondering, Stuart, I guess this is a question for you.

Incentives were flat this quarter in the release, but you commented pretty in depth and gave us great color on how conditions were getting worse through the quarter and how SG&A as a percent of revenue was higher because there wasn't the operating leverage maybe that you thought there was going to be.

I guess I am trying to understand or get a better idea about how you are thinking about profitability versus sales volumes now and maybe with that, how it bakes into the impairment analysis in terms of the assumptions as you look forward.

It's an interesting question.

As we went into June and July, as I noted, David, the market just really fell off precipitously.

We have tried to carefully manage a balance between volume and sales price and incentives, but we have decidedly favored not chasing volume and operating leverage in favor of reducing profitability.

So, we clearly have moved to a direction of saying that, you know what, let's decrease our volume, let's continue to cut overhead, let's continue to renegotiate construction costs, but we are simply not going to chase volume.

There's no reason to build homes if we can't do it profitably.

Got you.

Then I guess the follow up question is about the sale of some of your equity interest in bringing in Hillwood into your JVs, replacing L&R in some cases and then buying some of your equity interest.

I was wondering if we could get some detail about what kind of cash that generated as selling your equity interest, and also maybe a little bit about how many JVs you are still involved with with L&R and maybe just exposure on it dealing comment about those deals a little bit.

Well, that's -- we recognize that as a compound question, more than one, but --

I have to try, right?

That's my job.

I guess if you get it all in one breath it counts as one question.

That's exactly right.

Okay.

Bruce will comment on the cash, but let me just comment conceptually.

First of all, the addition of Hillwood is a very positive addition.

It was more in the nature of replacing a partner than a cash generator.

I think that the -- it was important in Hunters Point to be able to bring on a partner that is enthusiastic about the future of that opportunity as Hillwood is and brings to the table some individual expertise as Hillwood does, replacing a partner in L&R that has similar expertise, but has less appetite.

So this was a very good strategic move for the company.

In terms of the number of joint ventures that is we have with L&R ,I think we have about seven, and L&R continues to be a solid partner and financially very strong, so that's a positive.

Might there be other transactions with them?

That's something that is open to question.

In markets like this, you just have to figure that everything is on the table, and then Bruce, perhaps you would like to talk about cash?

Sure.

The cash from the transaction, David, brought in approximately $120 million of cash.

The majority of that, about $80 million, was used to buy out existing partners.

Got you.

That's great.

Thanks so much.

You bet.

Our next question is from Timothy Jones of Wasserman & Associates.

Good morning, guys.

Good morning, Tim.

Okay.

A couple of questions.

I think it is -- I think probably the most important thing you said was the 15% reduction in cost per square foot.

First of all, this is a part of one question, what period did that relate to where the peak was?

And secondly on that question is, break it down by either land or reversals of the prior write downs and labor and obviously, the effect of changing your construction methods and overall cost of materials if you can, or just a guess on it.

That's another compound question.

I learn fast.

After 40 years, don't you think?

You are doing good, Tim.

Go ahead, Bruce.

The peak that we are comparing to is 2006.

What quarter?

I don't have an exact quarter for you, but it was the earlier part of 2006.

And how about the break downs of that 15% how they come into various components, what percentage of -- how much is land, how much is reversals or how much is materials, how much is redesigns?

Tim, that 15% is all construction costs.

That is, that's -- I think that would be comparable sticks and bricks.

Concurrent with that, we are saying, as an addition to that, there was the redesign of homes which brought down square footages or redesigns to a more efficient design, and then on top of that, as addition and separate items, you would have impairments that are flowing through that are a component of that, but I think that what we are trying to highlight, though maybe not effectively highlighting it, is that clearly impairments are contributing to margin improvement, but it has been to a lesser proportion -- and we can't exactly delineate this, to a lesser proportion than say two quarters ago or three quarters ago, that the redesign contributed -- that the reduction and construction costs contributed and the reduction in SG&A contributed.

Those components, those latter three components are contributing a greater proportion to our margins.

So you're saying that these other factors you could have another 5 for each percent, and you could actually be down 25%, roughly?

Another 15 (inaudible) take 5 from lower land and 5% from restructure -- redesigns.

I guess if I had to give you my impression, I think that there's less upside to realize from construction costs going forward.

It is a diminishing amount.

I think there's a greater upside to be realized from SG&A which will continue to contribute positively, and product design, we are getting very close to having our product designed across the country, so that implementation is already being reflected as well.

But all three of those together are really powering a better gross margin -- better net margin.

I will comp myself out now, since that two questions, I will get back in queue.

Okay.

Good.

Our next question is from Stephen Kim of Alpine.

Hi, guys, good morning.

Good morning, Steve.

A couple of questions for you.

First a housekeeping item.

On your financial services, I noticed that if you back out or add back the goodwill impairment there, that you would have recorded a profit of about $14 million.

I wanted to know whether or not that was a good number to think about going forward or if that was a figure that had some one time things in it.

As you take a look at that Steve, let me break it into two pieces.

One is title, is on the track back to profitability, so that component is on the right path.

The other component is the mortgage side, which I think that's a pretty good number on a go forward basis.

We had one of the highest capture rates we've seen in some time at 87%.

That has been our focus, and I think that's probably a good number, assuming that the number of government loans that we originate continue to be at these high levels, because we make more on a government loan than we do on other loans.

Sure, okay.

And then the second question relates to SG&A.

I know this is a question that we chatted about last quarter.

I think at that time, you had talked about a 10% SG&A target, and I apologize if you have addressed this already in the call.

I didn't catch everything you have said so far, but was curious as to what your anticipation is -- or what your thoughts are now about the realisticness of obtaining a 10% SG&A target, which admittedly would be a very good result for you?

Do you still think that's in the offing here in the next quarter or two, or do you think that maybe is not a realistic number?

Steve, if we think back to last quarter, I was rather emphatic about that number, and I guess I have to say today that I feel less emphatic and optimistic about it, primarily because of the way that revenues have come down, really more than we had expected.

But we are extraordinarily focused on exactly that number, and we do expect to be down below 10%.

That's going to be easier to have happen as the market starts to return and revenues go up.

Are we going to hit it in the fourth quarter?

I am a lot less optimistic about that right now.

We are going to have to wait and see.

I will tell you that in going through our operating reviews, this is the primary focus within each division and the number of our divisions are actually going to be there.

But I think that, overall, we might fall a little short of that number.

Okay.

Great.

Fair enough.

Thank you very much.

Okay.

Our next question is from Michael Rehaut of JPMorgan.

Hi guys, this is [Ray Wong] in for Mike.

First question on the cash flow generation, it looks like you guys have generated operating cash flow of about almost $800 million through the second quarter, with an additional $100 million this quarter.

Right now, what are your expectations for the fourth quarter, and I guess in looking ahead based on your current expectations for the business in the market and with your backlog down over 40% here, directionally, where do you guys see cash flow generation in 2009 versus '08?

Well, let me comment, Ray, as far as the fourth quarter goes.

We don't have an exact number for you, but we can tell you that we are incredibly focused on continuing to manage our inventory very carefully.

So we continue to focus on managing inventory, both from delivering homes that are available to be delivered as well as reducing our land purchases.

And that's where the majority of cash flow generation is coming from.

Of course, it depends a little bit on the market as far as what holds for the fourth quarter, as well as going into 2009.

However again we are very well positioned from an inventory perspective as we look forward and again, in 2009, we expect to be cash flow positive.

We haven't put out an exact number at this point though.

Right.

So if conditions kind of muddle along here through '09, do you guys -- what would you guys expect land spend to be in '09 versus '08 ,and maybe break that out between new raw land purchases versus development costs?

We are not making any projections in today's market.

We are not looking forward.

Okay.

Just a follow up question, I think last quarter, down payment assistance was about 33% in 2Q.

I was just wondering that number for the third quarter?

The third quarter number, Ray, was about 45%.

And that is 45% of the 87% of loans we originated.

Okay.

Great.

Thank you.

Thank you.

Our next question is from Josh Levin of Citi.

Hey, good morning everybody.

If you look at the economic and housing market landscape, both the challenges and opportunities, how do you think about the possibility of issue equity over the next year?

We -- everything is on the table all the time in a market like this.

We have seen tremendous volatility over the past -- over the past couple of weeks.

Looking ahead, we are just not making any projections right now as to anything that we might or might not do.

Fortunately, as we are situated today, we are in a good cash position.

Our balance sheet is strong, and we don't have immediate need for cash.

But I'm not going to take anything off the table either.

Okay, fair enough.

One follow up.

As far as I know, you haven't been on the road talking to investors in quite some time.

But as I understand it -- excuse me -- you are thinking about going out on the road and talking to investors in the fourth quarter.

What is the logical rational behind your decision to go out now on the road after such a long absence?

I don't know that it would be considered an absence.

What we have done over the past -- really over the past couple of years is, we have said we are more than happy to talk to investors at any time over the phone or here in our offices, and we've had a number of investors come through and sit and go through our program.

We -- it hasn't been an absence, we just haven't been out on the road.

Our primary focus has been to manage our business and manage our operation.

This has been an extremely full time job, seven days a week working long hours.

So the reason for the absence from presentations and the conferences has been so that we can focus our attention on running our business.

Now that fact that we will -- we have always been a participant in conferences, and should we decide to join back in, it is only because we have the time to do that, because so much of the work that we have been working on is now effectively completed.

Okay.

Thank you very much.

You're welcome.

Our next question is from Chris Hussey of Goldman Sachs.

Thanks very much.

Stuart, you mentioned that you thought there would be a 10% to 15% impact on the housing market from down payment assistance going away.

Do you mean that you think that new home sales, that statistic will go down another 10% to 15% just from down payment assistance going away?

There are too many factors to really -- I can't project what the number of new home sales is going to be.

It just seems, and this is an estimate, Chris.

It just seemed to us by looking through the numbers that we are able to see, it is somewhere in the 10% to 15% range of potential buyers that are taken out of the market.

Now, will there be other things that come along that stimulate purchase that offset that?

We're just not sure, but it seems like it is -- it's not an insignificant impact.

That's helpful.

Then, the second question around cash flow, and I think you mentioned that you have made about $200 million of land purchases in JVs, or from your JVs during the quarter.

Just trying to get your strategy there in terms of -- what is your strategy in terms of cash preservation?

Your cash balances have stayed relatively flat, but they don't -- they're not growing as fast as they had been earlier in this cycle.

Do you feel like you have the right amount of cash and now it is time to take advantage of some of these land purchases, or how we should be thinking about that?

We are not taking advantage of land purchases in the market.

There will be that opportunity in due time, and I think that we are really neatly positioned to be out there working through some of the distress as it presents itself and it will.

I've noted before, we have maintained our management team to be able to go out and take advantage of the market conditions as they ripen, but we don't think that now has been that time.

What we have -- where we have used some cash is in preservation of value and opportunity that exist within our portfolio.

And what I have tried to highlight is that within our joint ventures, some of those ventures have been stressed either through venture partners that simply don't want to continue on.

We saw that certainly with the Hunters Point joint venture, or we have seen venture partners that simply don't have the liquidity to move on, and rather than abandon value or opportunity, we have used capital to opportunistically improve our position.

So that is the difference between what we are saying and maybe what you are seeing reflecting in the numbers.

Okay.

And do you have any tax refunds that you can get this year that might trigger another big land sale like you did last year, or is that all the way by the books now?

No, we don't anticipate a land sale of that kind of magnitude.

Okay.

Thanks very much, guys.

You're very welcome.

Our next question comes from Nishu Sood of Deutsche bank.

Thanks, hello everyone.

Good morning.

Wanted to follow up and ask about, call it the next generation RTC type vehicle that's being debated even today.

There is the possibility that it will include the purchases of development and acquisition loans, and may end up therefore unloading land like what happened in the early 90s.

Now, this is on top of the situation where a lot of capital has already lined up to buy these assets, so I imagine it would have a big impact.

I wanted to get your thoughts on the potential behavioral impact.

Does this freeze the market as people kind of assess and wait to see what this vehicle is going to do?

From a builder perspective for example, would you prefer to be buying it from a -- prefer to replenish your land portfolio by buying from this next generation RTC versus the distressed funds that are being set up.

I wanted to get your thoughts on the behavior and how it changes the landscape.

Let me think of how to answer that.

First of all, it is interesting.

I agree with you, there's a lot of capital that is lined up on the sidelines, but it is neatly tucked away on the sidelines, in large part because that capital doesn't quite know how to, in large measure, it doesn't know how to look at a diverse array of portfolios or properties that are out there.

And so, that capital is going to have to find a machine.

The question is, will the capital find machines, meaning management teams that are able to convert what is distressed land assets, undeveloped land assets into developed homesites.

I think at the end of the day, if you look at where kind of we're headed, as a, our primary business will be looking to buy developed homesites from a land machine that is able to develop homesites and offer them at an appropriate price.

We are clearly going to have to wash a lot of land through whatever distress program is out there before we have an appetite to purchase those developed homesites.

I think across the country, we are seeing a -- kind of a mismatch between what it takes to buy a homesite and make a gross margin versus what sellers are willing to, or perhaps are able to, sell for.

And so it is really going to be washes through distress, through these capital reservoirs that purchasing and marrying up with the machine to actually develop homesites at a price that a home builder can make a margin on.

Now I will say additionally that other parts of our company will probably be participatory in that process, and it is one of the things we maintained as that land machine focus to marry up with capital.

This sounds a little more conservative.

Let's say if you take Lennar's historical actions on a strategic sale, you tended to do things directly and on a larger scale.

So, am I hearing you correctly, is this a more kind of conservative stance going forward compared to the historical profile?

No, I think if you go back to the early 90s and you look at the way that we emerged from the distressed market in the early 90s, we did exactly what I have just described.

We came out of that distressed period and we combined our operating machine with capital reservoirs that were available and ready to get involved in the distress.

You might or might not even know, but we actually grew an entire company that became, well, it became L&R out of that early distress.

And we're looking at very much the same way.

Got it.

A just a follow-up question in terms of promotional activities.

We've been hearing from some of the other builders that promotional activities are wearing out in their effectiveness.

National sales drives, for example, since so many people are doing them have been losing their effectiveness.

You had even mentioned, for example, last one or two quarters ago, when we spoke about shifting more to incentives along financial services, the government's $7,500 tax credit obviously stacks up poorly against what the builders are doing.

Wanted to get your thoughts on what marking tactics are working right now, if any, and how are you shifting your behavior in response to that?

Well look, as I noted, June and July were just beyond our expectations in how far they'd fallen off.

August showed an uptick, and it was primarily because of promotion and I'd be surprised if that isn't the case with other builders as well.

It was a promotion that was geared toward the down payment assistance and getting under the wire of its elimination.

And this was across the country and multiple builders and not in concert, I am just saying that we noted that a lot of places, our competitors were doing the same.

So, what promotions are working?

The answer to that question is it is a day by day evaluation, each new data point in the marketplace gives rise to the next promotion.

Hopefully at some point, what will resinate with buyers is a combination of the fact that home prices are really at a very, very low point right now, especially new home prices, and put that together with a mortgage program that works for them and the availability of down payment money, and they will step up and buy homes.

But that's not for right now.

Okay.

Great.

Thanks a lot.

You bet.

Our next question is from Megan McGrath with Barclays Capital.

Hi, thanks.

Hi.

First question on -- the follow up on your JV recourse debt you talked about, how you are three-quarters ahead and have gotten it down to around 492.

I am wondering if you can give us a sense of the mechanism by which you have reduced that.

How much of it was cash that you used to pull that inventory and the debt came away, how much of it was accounting, perhaps moving it from recourse to non-recourse?

Sure.

Let me just highlight that, the number we are comparing to last quarter was $807 million of maximum recourse indebtedness but on consolidated JVs.

This quarter was $630 million.

The number you mentioned, Megan was net of reimbursement agreements, which is not in the covenant calculation.

Okay.

So we are looking at a reduction of about $177 million we paid about $58 million of cash relating to that reduction.

So that is a cash component relating to that, and then additionally, it had different land sales, land splits, et cetera.

That would be the remainder.

Okay.

And what are those numbers available versus, let's say the fourth quarter of '07?

I don't have them on the call here, but I'd be happy to follow up with you.

Great.

Thanks.

Then just a quick one.

You mentioned in your last 10-Q that you may have to take a FAS 109 charge at the end of the year.

Now that we are one more quarter in, do you have any feeling on the likelihood you might have to write that asset down?

No, we do not.

That's something that we will review with our auditors as we get to the end of the year.

Okay.

Thanks very much.

You're welcome.

We will take one last question.

Our final question comes from Jay McCanless of FTN Midwest.

Hey, good morning.

My first question is on the distressed land asset you were discussing before.

I wanted to know if you heard more from bank workout teams, if the activity from the bank side is picking up?

No.

I think that the banks -- are you talking about in terms of selling assets?

Correct.

No.

I think that banks are -- they're pretty much immobilized right now, and maybe this is out of school for me to say, but I think that banks are concerned with maintaining tier 1 capital right now.

And the impairment to the assets on their books could probably, it is a matter of survival right now.

Okay.

Then the follow up question I had, in your prepared remarks you discussed that your competitive forces in certain areas, whether it its builder, competitors or resales or new home communities are declining.

Are there areas of the country more clear for Lennar, I guess a more clear playing field for Lennar than others?

What do you mean by more clear playing field?

In terms of less communities, say private builder bankruptcies opening it up for Lennar to go out and build more homes et cetera?

I think that that -- that would apply to almost every market that we are in.

It is very clear that smaller builders are pulling back if not going out of business.

We are see thing in all, all communities, all geographies right now.

And in terms of the number of communities, as communities are burned off, there are just no replacements out there.

Okay.

Great.

Thank you.

Okay.

Thank you everybody.

We appreciate your attention relative to our third quarter and look forward to another productive quarter in the fourth.

Thank you and good-bye.