Lennar Corp (LEN) 2008 Q4 法說會逐字稿

Hello and welcome to Lennar's fourth quarter and year-end conference call.

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

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

Today's conference call is being recorded.

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

I will now turn the call over to Mr.

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

These factors include those described under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC.

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

I would like to introduce your host, Mr.

Stuart Miller, President and CEO.

Sir, you may begin.

Yes.

Good morning, everyone.

And thank you for joining us for our fourth quarter 2008 and year-end 2008 earnings update.

I am 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, and as is traditional David will give you an update on our asset review and impairments, a report that we have done for just about three years now.

And Diane, of course, will be available to participate in our question-and-answer period.

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

Of course we welcome you to rejoin the queue and as time permits we will answer as many questions as we can.

Let me start by saying that against the backdrop of what I would say is clearly the most difficult housing market that I, and I dare say any of those of us in the housing industry, have ever encountered, 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 continued to carefully manage our asset base, and we have worked diligently to rework and reposition our joint ventures.

We are making credible progress toward stability and ultimately profitability in the most difficult times.

Now with that said, I would like to start my comments this morning by giving what I think is a clear view of the troubled market conditions in which we are operating and recognize that at the end of the day I feel rather optimistic that this condition is going to correct itself as the government continues to intervene.

But I do think that it is important for all of you to understand the market conditions as we see them today.

So, as we look out, home prices and volumes are clearly right now free falling as general economic pressures are driving a downward spiral that simply doesn't have a natural end.

Foreclosures continue to add inventory to an already saturated market while each movement downward in home values sparks a new wave of homeowners unwilling to support an asset that is even more under water relative to their mortgage.

Growing unemployment and fear of job loss exacerbates the predisposition to default on mortgage payments, while hope that the government will bail out defaulted home loans makes the default less of a decision.

Sellers in this market are primarily liquidators, ever more prone to accept any offer in order to move today's inventory to make way for the mounting backlog of defaulted loans that are moving ever more slowly through the foreclosure process.

Now on the other hand, natural primary purchasers are on the sidelines.

The purchase of foreclosed homes is more of a professional business than a selection of a dream home.

Many of the foreclosed homes are in disrepair and the negotiation process is cumbersome.

Participating in this part of the market requires a unique familiarity with diligence and patience that is not easily understood.

Purchasers, natural purchasers, fear that if they don't get a uniquely priced problem home then they're simply paying too much.

Traditional sellers, that is homeowners and home builders, are not able to sell homes unless they offer ever greater discounts and keep up with liquidation values.

The movement to keep people in their homes and to rework defaulted loans is, frankly, frustrated by the inability of banks and servicers to actually communicate with their borrowers, and reworked loans are defaulting at an alarming reported 50% to 60% rate in the first three to six months.

The slowing rate of foreclosures is more in the nature of convenient rhetoric than actual accomplishment, and making a dent in the mounting foreclosure pressure will be slow and complicated.

Month after month, market conditions have been slowing the number of transactions.

Purchasers are losing conviction, and while the reported number of transactions, new and existing home sales and closings, continues to hover around the $5 million home mark, an increasing number of potential purchasers are canceling purchases made and opting to stay on the sidelines.

Traditional laws of supply and demand are just not working.

Unnatural sellers and unnatural buyers are driving prices downward at an unstoppable rate.

The more values drop the more homeowners default on their mortgages either out of necessity or out of frustration, and the subprime foreclosure problem is spreading to Alt-A and prime mortgages, as well.

And as purchasers become increasingly concerned with the value of their largest asset, their home, they have stopped spending on other products as well.

They simply feel poorer.

Overall consumption in the economy has continued to drop and unemployment has continued to rise.

Many are losing their job or feel in jeopardy of losing their job.

With overall consumer sentiment falling and failing, fewer potential home purchasers are willing to enter the market.

Frankly, we are in the midst of a downward spiral and momentum has been building.

The problems of falling home values are broadly affecting the the overall economy.

As values fall, consumers are driven from the market because of their impaired balance sheet, and banks and investors are similarly driven from the market because of the impairment of their balance sheets derived from falling asset values or asset backed security values that are dependent on those assets.

Home builders have been at the front of this trend, and have seen this trend evolving.

And it has been our belief that if we do not take positive action to bring this downward cycle, the housing market and the overall economy will not find equilibrium on its own.

In the context of these now well documented conditions, I remain generally optimistic about where we are going from here.

I feel that the problems that define our industry, and for that matter our economy, are now revealed and recognized.

I have said for many quarters that the bright light at the end of housing's dark tunnel will be governmental action taken to stop the downward spiral.

And I have said that once someone connects the dots, they will fashion a solution that will include a meaningful fix for housing and the slide will subside, a floor will be formed, and we can begin a recovery.

I am optimistic because we are at the threshold of a new governmental regime that is not saddled with the responsibility of having created the problem and can therefore take dramatic action to change the environment without being defensive.

The new administration is truly enabled by the fact that the problem is revealed, they did not create it, and everyone wants it fixed.

I am optimistic because the new administration appears to be dynamic, thoughtful and intelligent.

We are already seeing a government that is being formed to be ready from day one, to be prepared and active.

The named participants are smart, capable actors that are not newcomers to their arena.

Deliberate thought is being given to new programs, and politics as usual seems to be set aside in favor of decisive action.

I am optimistic because I am confident that the new administration will make housing an important part of their blueprint for economic recovery.

So what is the fix?

At the end of the day, the drive to fix housing will have two components.

First, we will continue to seek to stem the flow of foreclosures and will seek to keep homeowners in their homes.

Banks, our MBS servicers and the FDIC will continue to modify loans and work with borrowers in order to avoid foreclosures.

The government, together with credible actors in the private sector, will continue work already underway to balance the virtues of helping families keep their homes while minimizing the moral hazard of rewarding defaulted borrowers.

As these actions are implemented and perfected, the supply of available homes on the market will stop accelerating.

The most significant action that can be taken to keep families in their homes, however, will be the second component.

Demand stimulus will be needed and implemented in order to stop the fall in home values.

We are already seeing the beginnings of this second component as the Federal Reserve has adopted meaningful measures to begin to drive mortgage rates downward.

But a great deal more will have to be done to get buyers off the fence and back into the market in order to stop the slide in home values, and absorb existing inventories.

At the end of the day, we will need a program that will jump start primary buyers back into the market in numbers that will enable 6 million to 7 million transactions a year.

As a floor in values is found, fewer families will slide into the abyss of underwater mortgages, and there will be fewer defaults.

Materially lower interest rates will enable existing homeowners to refinance at affordable fixed rates, and stabilized values will enable appraisers to support refinances.

At the end of the day, housing's fix will contribute to three important components of economic healing.

When families buy homes, good things happen.

After a home is purchased, families purchase things for their home.

They buy drapes and furniture, they buy appliances and televisions.

They begin consuming and that helps the overall economy.

As housing assets stabilize, banks' balance sheets stop depleting and banks start lending again.

Bank that is are lending become profitable, and can start to repair themselves.

Finally, when people purchase homes, existing homes are improved, and new homes are built, and that means employment.

As I look ahead, I am optimistic.

I fundamentally believe the things always look darkest just before the fix, and things are looking adequately dark right now.

Against that backdrop, let me say that in the fourth quarter as I said, the housing market continued to deteriorate at an accelerated rate.

And against that backdrop, we have made meaningful progress with our fourth quarter and year-end results.

With market conditions as they are, we continue to accept the fact that some things are just out of our control, and we are simply not going to be able to alter those elements.

But the items that we can control, we continue to be all over them in each of our divisions.

As is customary, at the end of each quarter our senior management team recently visited with each of our divisions as we did our quarterly operations reviews.

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

We continue to rebuild our gross margin which shows the continued improvement of some 490 basis points year-over-year before valuation adjustments to 17%.

Our operating margin before valuation adjustments has improved some 580 basis points to almost 3%, producing a slight operating loss for the quarter of approximately $7 million.

While a portion of this improvement, no doubt, derives from impairments previously taken, as David will cover in just a few minutes, 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 what is still a somewhat disappointing 14.1% of lower than expected revenues.

Nevertheless, our SG&A is down some $132 million year-over-year for the quarter, or 100 basis points year-over-year.

We have continued a quarterly progression of positive trends in this distressed market environment which positions the company well for rebound in the future.

And while this progression will likely stall in the first quarter, as our backlog has been depleted by high cancellations, the foundation on which it is built will hold us in good stead throughout the next year.

A few basic highlights show that while gross margin has fallen slightly from 18% in the third quarter to 17% this quarter, operating margin has nevertheless improved from 2.3% in the third to 2.9% this quarter.

And pretax loss before impairment, and a one-time gain has remained stable at approximately a $7 million loss.

Unfortunately, impairments continue to increase due to a dramatic fall in market conditions in the fourth quarter from approximately $150 million in the third quarter to approximately $221 million in the fourth.

With market conditions still extremely soft though, our operating progress overall 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 carefully manage our inventory of completed homes in the face of increased cancellations, and reduced the number and composition of joint ventures.

In fact, we have reduced the number of joint ventures from 270 at peak to 116 currently, and that is down from 146 last quarter.

We have reworked or close to rework on most of our joint ventures and the trend on our JVs is positive.

Our overall land asset is down similarly and great progress has been made on the asset side of the business so management can focus on sales, construction, and SG&A.

Today we are a leaner operating machine, and are well prepared for when market conditions stabilize.

On the corporate side we have complemented the progress in the field.

Our balance sheet remains strong with a substantial cash position of $1.1 billion.

That position is further fortified by the approximately $230 million that we received subsequent to year end as a tax refund.

This cash position enables us to continue to seize opportunity where distressed creates unique value rather than walk away from that opportunity, and we anticipate that we will continue to use cash available to harvest value and opportunity from our joint ventures as they arise.

Additionally, there is nothing borrowed on our revolver and we have a responsible debt to total cap position of 49%, and net of cash that is 37.5%.

In the wake of the meaningful restatements of assets that we have undergone, the repositioning of many of our joint ventures, and the taking of a $730 million tax asset reserve, this is meaningful progress.

Although we have continued to lose money in our fourth quarter, with the loss per share of $5.12, aggregate levels of impairments and losses are in the nature of adjustment to moving market conditions, and these adjustments are to a much smaller asset base.

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

And we are confident that even with a continued degradation of market conditions, our stated asset base will not suffer nearly the levels of impairments that we have seen in the past.

Additionally, in the fourth quarter, we have begun to mature our go forward strategy relative to our overall company structure.

As has been customary throughout Lennar's history, we have weathered numerous housing cycles.

As we have weathered numerous housing cycles we have been preparing to be a significant participant in distressed opportunities that naturally present themselves in down cycles.

Approximately a year and a half ago, Jeff Krasnoff came back to the company and began to incubate the management team that would be focused on distressed opportunity as it was presented.

The team is now formed and we have launched a program to raise independent capital to combine with this team to deal with the significant asset dislocation that has occurred.

While it is still premature to be making asset purchases right now, our strategy going forward will be to segregate our home building manufacturing program, from our more capital intensive asset opportunity program, much as we did in the early 1990s, as we built what became LNR Property Corporation.

We are can confident that as the market corrects, and ultimately it will, that we will be able to create meaningful value for the company through this vehicle.

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

We have prepared our company for market conditions as they currently exist, and we are not projecting 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 about the housing market in general.

We have made significant progress in repositioning our business as a scaled down and lean operation.

We have adequate resources to weather the difficult market conditions that are in front of us.

And we continue to focus on the operational elements that will drive us to profitability and continued cash flow in the future.

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

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

And as the market finds a bottom and begins a recovery, we at Lennar will be well positioned to participate.

Bruce?

Thank you, Stuart, and good morning.

As Stuart discussed, this was a quarter that we made significant progress in the company, and I will provide some of the financial details supporting that progress.

Our focus again this quarter was further strengthening our balance sheet liquidity and that was the number one priority.

Stuart mentioned there was $1.1 billion of home building cash on the balance sheet.

That improved from $857 million at the end of the third quarter.

So we generated positive cash flow this quarter, and that was a result of our operational focus on significantly reducing land purchases, executing a high backlog conversion ratio, and aggressively controlling costs, which I will discuss further in a minute.

So now, Lennar has generated positive operating cash flow each year for more than a decade, and this was in years of both significant growth, as well as in years of significant decline in housing as we have seen more recently.

We mentioned after year end, we immediately filed the tax return and received in our cash account $230 million of cash relating to a tax loss carry back.

Additionally, we ended the quarter with no outstanding borrowings on our revolving credit facility, and during the quarter we were successful in amending that credit facility to provide greater flexibility under our covenants and that facility commitment is now $1.1 billion and matures in July of 2011.

Our home building debt to total capital net of cash, the number is 35.7%, at the end of the year.

That compared with 30.2% in the prior year's fourth quarter.

When you look at our debt maturities going forward, they're spread pretty nicely over the next eight years through 2016, and there's no major refinance risk in any year.

Since the downturn began, there has been a lot of concern that Lennar's joint ventures would erode Lennar's liquidity as a result of recourse debt guarantees or supporting nonrecourse JV obligations of debt.

As we have continued to add transparency to our SEC quarterly filings, we knew the best transparency would be looking at the company's financial position as these JVs are significantly reduced.

And during the quarter, the company has continued its aggressive focus on reducing the number of joint ventures.

From the peak of 270 in 2006, we dissolved about 100 joint ventures this year, and that's leaving 116 joint ventures left at the end of the fourth quarter.

Of these remaining joint ventures, only 41 have recourse debt, 27 have nonrecourse debt, and 48 have are no debt at all.

We continue to make significant progress with reducing maximum recourse indebtedness with our own consolidated JVs which has been reduced now by 71% to $520 million at the end of the year, since the peak of $1.8 billion at the end of 2006.

This year's progress was significant as we are well ahead of schedule with respect to our bank covenant on maximum JV recourse debt which was $735 million of maximum recourse debt at the end of the fourth quarter.

The total cash payments made during the quarter for remargining relating to maintenance guarantees with our JVs was $26 million, and for the total year, it was $74 million.

As a result of the consolidation of four joint ventures, there was an increase in Lennar's debt balance on its books of approximately $200 million during the quarter.

Although these JVs were consolidated for accounting purposes, the risk profile of the joint ventures has not changed, and the debt is primarily nonrecourse debt.

The company has not supported nonrecourse debt throughout this downturn, and nonrecourse debt will continue to remain nonrecourse to the company.

We have said that our JVs have been strategic, and in the significant housing recession our joint ventures have enabled us to share the decline in land and housing values with our partners.

And this has worked as intended, and has positioned Lennar with a lower land balance on its balance sheet and therefore, has less exposure to future land impairments.

As we all know, wholly owned land takes 100% of the loss from declining land prices so we have less exposure with that lower land balance today.

Our current financial position of ample liquidity, low leverage, reduced risk with our joint ventures, a balance sheet with less land exposure, and no significant debt refinance risk highlights the growing strength of the company's balance sheet as the market has continued to weaken.

We have continued to carefully manage our inventory levels as they're down approximately $250 million sequentially from our third quarter to $3.8 billion excluding consolidated inventory not owned.

The progress was primarily due to aggressively reducing land purchases to only $64 million during the quarter, which is approximately 75% below the quarterly land purchase run rate through the first nine months of 2008.

Additionally, our land development spend was reduced significantly, and looking forward should continue to be minimal due to our focus on purchasing finished homesites only when needed under our land light strategy.

The finished homes and construction in progress inventory was reduced sequentially from $2.2 billion to $2.1 billion, and land under development including option deposits was also reduced sequentially from $1.8 billion to $1.7 billion.

Homes under construction declined sequentially by about one-third from 6,300 in the third quarter of '08 to 4,200 in the fourth quarter.

Our unsold completed homes increased during the quarter to 1,140, but that was primarily driven by an increase in the cancellation rate from 27% in the third quarter to 32% sequentially in the fourth quarter.

We have been very successful with our focus on reducing the number of completed unsold homes throughout this downturn, and we fully expect, again, that we will bring this number down significantly in the first quarter of 2009.

Our homesites owned and controlled were reduced by 67% since the peak in 2006 from 345,000 homesites to 114,000 homesites, and included in this number are 74,000 homesites owned, 13,000 controlled with third parties, and approximately 26,000 option from joint ventures.

We had substantial equity at the end of the quarter, $2.6 billion, and that equates to a book value per share of about $16.34.

Turning to the operating results for the quarter, as Stuart mentioned, we had approximately a $7 million operating loss when you look at it on a pretax basis before impairments, and before the recognition of a gain on the recapitalization relating to land source where we had deferred profit going back to 2007.

In the fourth quarter, we increased our EBIT before evaluation adjustments to approximately $159 million, and that compares to a $57 million EBIT loss in the prior year's fourth quarter.

The 40% decline in revenues from home sales was driven by a 34% decrease in home deliveries, and a 10% reduction in average sales price to $262,000.

The average sales price is net of sales incentives which averaged about $51,400 per home.

That compares to $58,800 in the prior year's fourth quarter.

During the year, our Houston operations comprised more than 10% of total revenues, and as a result, we are required to move Houston from the central region to its own reporting segment beginning this quarter.

The average sales price changed by segment as follows.

The east was 244,000, down 14%, the central was 201,000, down 8%, and the west was 356,000, down 15%, Houston was 198,000, up 4%, and other region was 280,000, up 5%.

Stuart mentioned our success with our gross margin, SG&A and operating margin statistics.

The 2.9% operating margin is the fourth quarter in a row of operating margin improvement going back to the fourth quarter of last year.

That is up 490 basis points over the prior year.

Again, that improvement in gross margin year-over-year is due both to a lower land basis as well as lower construction costs.

We continue to make progress on our construction costs per square foot which has been reduced by more than 15% since the peak.

SG&A expenses that were reduced 44% compared to last year and are at 14.1% of revenue.

That 100 basis point improvement is a result of continued focus on consolidating divisions and we have now reduced our head count by about two-thirds since our peak and we are down from approximately 14,100 associates to this week approximately 4,700 associates.

There was approximately $8 million of nonrecurring severance and lease termination costs during the quarter.

Due to the company's termination of its right to purchase certain land source assets, the company this quarter recognized deferred profit of $101 million, and that is net of $32 million of deposits we had on our books that we have written off.

This is shown up on two line items in our financial statement.

There's $133 million, that's a gain on the recap, and $32 million of losses relating to those deposits that are in management fee and other.

New orders were down 46% during the quarter compared to the prior year.

The number of homes in backlog declined 60% year-over-year.

And, as mentioned, the cancellation rate was 32% during the quarter.

That compares to 33% in the prior year's quarter and 27% in the third quarter.

Our financial services segment had a loss of $5 million during the quarter.

That compares with a loss of $19 million in the prior year.

There were nonrecurring lease and severance costs of about $3 million during the quarter.

Our mortgage, pretax, increased to a profit of approximately $6 million during the quarter from a loss of $8 million in the prior year.

And our capture rate improved from 78% in the third quarter of this year to 86% in the current quarter.

Our title operations had an $8 million loss.

This compared with the prior year loss of $12 million.

Although Lennar has significant liquidity to meet its future obligations, we will continue to have our top priority on the balance sheet, we'll continue to focus on generating positive cash flow by concentrating on the areas we can control, which are significantly reducing land purchases, carefully managing our inventory levels, maintaining a high backlog conversion ratio, and generating construction efficiencies, and continuing to right size our overhead levels.

With that, I will turn it over to David to talk about our impairment update.

Thank you, Bruce.

Good morning, everyone.

I am going to discuss our impairment process, as well as the valuation allowance we recorded against our deferred tax assets in the fourth quarter.

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 fourth quarter valuation adjustments and writeoffs of $221 million which includes $31.8 million of land source writeoffs.

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

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

We believe that most of the heavy lifting regarding impairments is behind us and that we are at the tail end of the impairment cycle.

Impairments in 2008 were $598 million which was an 81% decrease from our impairments of $3.2 billion in 2007.

Let me quickly summarize our fourth quarter impairments.

First, the home building side of our business, we applied the standards of FAS 144 to land that we intend to build homes on and recorded a valuation adjustment of $63 million.

The segment detail for all impairments I will be discussing is in this morning's release.

Secondly, 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 the fourth quarter.

We applied the standards of FAS 144 to that land and recorded a valuation adjustment of $17 million.

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

We continued to evaluate, re-evaluate, 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 lean 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 $63 million of option deposits and preacquisition costs, which represented approximately 2,700 homesites.

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 related to those ventures.

In the fourth quarter we recorded a valuation adjustment of $59 million.

In addition, we also recorded $19 million of write offs of notes receivable.

In addition to the impairments I just discussed, in the fourth quarter of 2008, we recorded a noncash valuation allowance against our deferred tax assets of $730.8 million.

Due to our operational results for the fourth quarter, we have now incurred cumulative losses over the evaluation period we established in accordance with FAS 109, the accounting for income taxes.

Accordingly, after evaluating all of the available evidence, including our cumulative losses in our evaluation period, we determined that a valuation allowance was required.

In future quarters, a portion of the valuation allowance we just established could be reversed if we generate profits going forward.

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

And now we will begin our formal question and answer session.

(Operator Instructions).

Our first question is coming from Michael Rehaut, JPMorgan.

Hi.

Thanks, good morning, everyone.

The first question is on your pricing strategy as you, to your own company, haven't taken as much impairment charges.

And we just came off Hovnanian yesterday with a pretty substantial charge, and other companies I think continue to take much larger charges.

One of the things that appears could be contributing is still trying to hold price.

Your order ASP was up a little bit sequentially.

And I was wondering if you could walk through your pricing strategy, and if that is in fact the case given that in prior remarks, you have said that pricing continues to deteriorate and the fact that your backlog is down over 60%, is that pricing approach going to change at all in the coming months?

I think our quarterly ASP is down, Mike.

What numbers are you looking at?

We are backing into the average order price, not the closing ASP.

Okay.

Given the small level of backlog at the end of the quarter, Mike, that might be a little deceiving.

We have seen reductions in average sales price in pretty much all of our markets across the country.

And I would not expect that you are going to see average sales prices increasing.

Yes.

I think that our pricing policy continues to be the same, Mike.

We continue to price to market conditions, and I think that we are certainly balancing, holding sales prices as much as possible to be commercially feasible and to be in the market.

But, we are clearly bringing down our prices as market deteriorates.

And one thing I would add, Mike, as David alluded to in his comments, is we were pricing to market at the start of the downturn, and as a result, we were ahead of the curve relating to impairments and valuation adjustments.

And last year, if you look at our impairments, they were ahead of most of the peers.

We had a combined number of almost $3.2 billion of impairments and valuation adjustments last year.

This year, they're down to $597 million, and I think it shows that we were early in the impairment process by dealing with things, pricing the market early than maybe some of the others have.

Okay.

I appreciate that.

Second question, and then I will move on as you requested.

You had mentioned in your prepared remarks, an independent, raising independent capital to take advantage, and continuing to restructure your company, that you'd have more of a home building focused operation, and the other part more of a land capital intensive operation.

And you specifically mentioned LNR as something that you worked through the company in the early to mid-90s.

At the same time during that period in the early to mid-90s, a lot of investors were challenged by that more heavy land intensive part of the business.

And I believe, if my memory serves, there was somewhat of a valuation discount in your stock, and eventually that was one of the reasons you decided to spin it out separately.

What are you thinking currently in terms of this second revisiting of this strategy?

Are you going to keep it inhouse and build it up and eventually spin it out, or how do you see this coming about this time around?

Well, I think that as we have gone through different time frames we have learned, and I think that as we have built up a program inside the company in the late 80s, early 90s, we found that it was capital intensive.

We think it is more efficient to raise capital outside the company and to build more of a segregated program that has most of its capital coming from outside sources.

So it won't be the same program that we embarked on, as we built LNR, but it will have a lot of the same opportunities afforded for the company as we grow forward.

And would you think it would be in some type of JV structure then?

It will be more of a fund structure.

And I think that we, relative to that piece of the business, I wanted to highlight structurally where we are going that we are segregating as a company a home building focus and the asset management focus on a go forward basis.

But we really can't give a lot more detail than that right now.

Thank you.

Our next question is coming from David Goldberg, UBS.

Thanks.

Good afternoon, guys.

How are you doing?

First question is, given where the backlog is today, at depressed levels, as you think about free cash flow and generating flee cash flow, with the overhead and with the infrastructure you have in place now, is it going to be possible to generate free cash flow at these levels as you look forward in fiscal '09, ex the tax refunds?

Yes, David.

Absolutely, it is possible and our focus is very much intensely focused on items we control.

And if you look at our land purchases, in this quarter, they were $64 million which is down very significantly.

And that's the biggest cash outlay that we have as a company.

And we continue to bring down overhead costs as well as construction costs as well.

So it is absolutely our focus and it is absolutely possible again.

The follow up question is for Stuart and it goes to this idea of raising or having a land fund that is going to, where the, if not the assets the people are going be spun out of the company.

And the question is really about what are you seeing as you go out to investors in terms of trying to raise money to do distressed investing, to do land investing, to spin this out?

Have you found a change in the appetite or maybe different investors, over the last three months given what has gone on in the market?

And also what kind of return would those investors be looking for given what the risk profile of distressed land investing looks like now?

David, I'm a little bit limited on what I'm allowed to talk about in that regard.

But, there's no question that the landscape is shifting on a daily basis relative to the investment world.

Realistically, pools of capital are still trying to figure out if they still have capital, and what allocations that they will be able to make.

The appetite for investment is clearly not what it used to be.

That is an understatement.

But as we have gone out to the market, I think there's a general recognition that there's a very significant dislocation in the marketplace.

People recognize that dislocation breeds opportunity.

And really opportunity is best realized by people who have the managerial machine to be able to match up with capital.

It is not really financial capital that just does financial underwriting that thrives in the midst of dislocated assets.

It is that operating machine that is most critical and I think that's what we have put together.

So while capital is much more selective today, I think there has been general receptivity and we will just have to see where it ends up.

The primary focus of my comments today were to highlight that, while it is in our DNA to be operational relative to distress and recovery, it is not our intention to focus the company's capital resources in the direction of capital outflows to working through distress.

Instead, our primary focus within the company, and with the company assets, is going to be purely on the manufacturing machine with very limited commitments to land assets because we simply won't have to.

Over the next years, developed homesites will be available for pure production.

And our natural propensity and the incubated management team that we have been working with is going to be focused on independent segregated capital in more of a fund structure to be looking at distress very separately.

Great.

Thank you for the thorough answer.

Appreciate it.

You bet.

Your next question is coming from Ivy Zelman, Zelman & Associates.

Good morning, everybody.

The JV success that you've had in reducing the recourse debt and down to 116, if you can answer the first question would relate to understanding a JV partner's composition.

Is it going to be hopefully that the rate of change on unwinding future JVs will be at the same pace, or is it going to be more challenging now because some of these are stickier, and just the idea, if they're builder partners, financial partners, any idea of that composition and your expectations and goals as you unwind and we look forward to continued improvement.

And the second question would be related to your op balance sheet debt.

Bruce, you gave us the numbers.

There are 27 joint ventures with nonrecourse debt.

And wondering what is the total nonrecourse debt today and how much of the total debt that's off balance sheet is nonrecourse with completion guarantees associated with it and letters of credit?

So, an update of the off balance sheet debt on top of the $2.544 billion you have on balance sheet, please.

Ivy, that was like six questions and you are probably going to want to follow up too.

No, I'm done.

What was the debt number, guys?

We are just looking up the nonrecourse debt number.

I forgot.

What was the first question?

First question was the partners.

Okay.

So first of all, clearly we are going to get to a point where the number of ventures we actually dismantle starts to go down.

We think that for the time being we are still going be unwinding a number of ventures over the next few quarters.

And a lot of that activity is in the works.

But one thing I want to highlight is that some of the ventures that we have in place are very constructive, very positive ventures that will continue to operate productively.

I think there's a core number of ventures that we will continue to have as we go forward, just because they're working well, they're working as expected, and there's no reason to dismantle it.

So we will get down to that core.

But until we do, you can expect to see as we go forward, a continued reduction in the number of ventures and that will take place over the next few quarters.

Can you talk about the composition of those JVs, again if they're builder partners or financial partners?

I think there's a variety.

It is a different composition.

guess it's primarily more oriented towards financial partners.

A number of the builder partnerships have already been unwound.

Yes, a lot of those have been unwound where we have split homesites.

There are still some remaining and we are still focused on bringing that number down each of the next several quarters.

So I think you are still going to see progress, as we have been seeing, in reducing the number of JVs.

The nonrecourse number that you were asking about, Ivy, it is about $3.2 billion.

We don't have the chart completed yet that you will see in the 10-K that we expect to file hopefully by the middle of January.

And with completion guarantees that number is now down to approximately $800 million.

That will be $800 million of the $3.2 billion?

That's correct.

And again, we have not had to make any payments under completion guarantees as people have been concerned about since the start of the downturn.

Lastly, Bruce, on letters of credit, are there incremental letters of credit on top of the $3.2 billion?

The total financial letters of credit in the company were further reduced to $278 million during the quarter.

And some of those relate to letters of credit that are deposits with some of the joint ventures, but that number continues to come down.

Is that incorporated in the $3.2 billion or separate on top of it?

No, that's separate.

But the $278 million are the total number of financial letters of credit in the company.

It includes letters of credit, just to operate a business our size for things like insurance and other things.

So that letter of credit amount relating to any of the joint ventures has come down very considerably.

Okay.

I will get back in the queue.

Thanks.

Thank you.

Our next question is coming from Carl Reichardt of Wachovia.

Hey, guys, how are you?

Bruce, I have a question on what I call cash margin.

So if we just forget GAAP margin for a second, gross margin, and just look at the cash invested in land before impairments and direct construction costs, are you getting more cash out of the individual deliveries you had this quarter than you actually put in?

So in other words, have we flipped from partial return of cash to return on cash?

That's correct.

So if you look at our average land basis in a home, let's say it is somewhere between $50 million and $60 million a homesite, we're generating positive gross margin, so we're getting back the cash invested in the land on top of any margin on that home, as well.

Again, not looking at the basis, on an impaired basis, but on a real cash basis, so look at what you actually paid in cash in the first place, ignore the impairment, are you getting that total cash pool back?

Well, we haven't actually, we haven't done that calculation so I can't answer that question.

What's your guess?

I had rather not guess.

Go through that again.

To the extent that we have taken further impairments, if we were to add all of the impairments in that that we've taken in the past are we still positive from a cash margin standpoint.

It's okay, we can go through it later.

I am just trying to figure out when we go -- it is actually cash register accounting, we have a positive margin as opposed to GAAP accounting.

But that's okay.

I have one other question.

What you are really asking, Carl, is conceptually if we were to buy a new homesite.

And we were to buy that homesite and build a home, are we bringing in more cash than we laid out for that home?

And you would include an allocation of SG&A for that; right?

I am not in this particular example, but if you wanted to, sure.

Yes.

I was asking about just cost.

Clearly, excess G&A, the answer is clearly yes, but SG&A is the wild card which would fluctuate relative to volume.

But if you include SG&A right now, the answer would be yes.

And I think also, as you look at that, the impairments taken previously, the land basis we have today is sustainable.

So we believe that will continue on any land that we buy that will generate cash margin going forward even under current existing option agreements or any additional take downs we would have from joint ventures.

The homesite that we are taking today is a homesite that is being put into production and delivered, and we are only taking it down or putting it into production if it is producing positive cash.

Okay.

I got you.

The second last question, Stuart, is more theoretical but given that as the company splits, investors in the equity of the company are not going to be buying the same land machine that they bought previously.

They are going to be buying a company that is basically a manufacturer.

What assurances can you give them now that you're going to be a low cost manufacturer or a great manufacturer?

What is going to make you a better than a traditional builder who's literally buying finished lots and producing rapidly or quickly so their margin basis is all in the box?

What's going to make you better?

I don't know how to answer that question right now.

I think that the market is in enough turmoil that the way we all evolve as we come out of this market is open to some question.

But I think that from the standpoint of the way we have been organized in the past, to us, the focus is and has been on having a very limited number of floor plans, and a focus program on making sure that those floor plans are efficient and tuned into local market expectations and desires.

I think that's what we have done in the past.

By keeping the number of floor plans or models available small, we continue to be able to benefit from volume purchasing.

It doesn't happen to be the case right now.

Right now construction costs are just being driven down by the sheer magnitude of the drop in volumes overall, but I think that as we re-emerge we will continue to keep and maintain a very simplistic approach to the way we operate our business which will enable us to keep low the number of SKUs we employ and that in turn will keep our production costs very low.

So, I think that as we go forward, you can expect to see that we are going to be very focused manufacturing machine with a very simplistic footprint market by market, and that is going to drive our construction costs to be a low cost provider construction costs.

Okay.

I appreciate that so much.

Thanks so much, guys.

Okay.

Our next question is coming from Nishu Sood of Deutsche Bank.

Thanks.

Stuart, first question I wanted to ask was, in your remarks at the beginning you were talking about the need for demand stimulus, rate reductions, perhaps even some kind of a tax incentive or tax credit.

I was just wondering, rate have come down quite a bit, just on their own more recently from the fed actions you mentioned.

So have you seen a response to that from buyers either in traffic or conversion of that traffic to orders?

No, and I think that was the underlying point.

Yes, we have started to see the beginning.

But unfortunately, the momentum is still stalled in the negative direction, it is going to take a lot more.

And I think that people are seeing and becoming aware of this.

I mean just recently, you have seen mortgage rates start to decline to the sub 5% range.

I guess we will all have to wait and see if that has more of an impact.

But we have tested in the field, 4.5, 4.75 rate levels.

It is really not enough to get people off the fence right now.

And I think that, I don't know if it is going be in a first pass or it's going to come a little bit later but I think that, I think that everyone is going to recognize that in order in stabilize housing prices, which is critical to the financial institutions, and to consumption, as well, we are going to have to really drag buyers back into the marketplace with some real meaningful incentives.

That's my sense right now.

Got it.

That's very helpful.

I understand it's pretty early in the process.

My second question, I wanted to ask about the lots that are coming on to your balance sheet.

Your lot count is up a few thousand over the last couple of quarters.

I wanted to get a sense of these lots that are coming on to your balance sheet from two perspectives.

The first being from a mark perspective or impairment perspective.

You folks were certainly ahead of the curve in terms of recognizing conditions and marking your assets appropriately.

So these assets coming on to your balance sheet might not be as ahead of the curve in terms of their marks.

And second, from the perspective of their state of development, what stage of development are these lots that are coming on to your balance sheet?

Let me just comment that actually our homesites that are owned are down slightly from the third quarter.

The third quarter they were 76,000 and now we are down a little over 1,000 homesites this quarter.

So it has come down a bit and as we look to where we were at the end of last year, that's probably what you are referring to, they're up a little bit.

And the reason why they're up a little bit over last year is we have taken advantage of strategic purchases over the last year, from joint ventures we are unwounding where we liked the land and we were getting the homesites at a very attractive price, or the ability to buy homesites under an option program where there was some downside protection if the ultimate home price was to go down in value.

So the addition was for homesites that we believe will generate strong returns even given the current market conditions.

I think that, by and large, any homesites that are coming on our books now are what I would call pre-impaired.

We are buying them at reduced pricing.

They would be what you would think of as similarly situated to the land that is on our books currently.

The hit is is generally taken before any of these properties are actually brought on the books by us, and relative to a joint venture position, a joint venture partner might have walked away from their equity, might have had to pay down part of the debt, any number of things might have happened.

In terms of the development condition of most of these homesites, while there are different homesites that are in different stages of development, by and large I would say most of them are finished and developed.

I guess I should have made my assumptions clearer.

I am assuming a lot of the lot increases is because of the joint ventures, either take down agreements or consolidation.

Is that generally the right assumption?

We also have option contracts we continue to perform under that are not relative to joint ventures where we might be bringing on homesites, but in those instances, as with our joint ventures, the homesites that we're bringing on have all been renegotiated prices.

Where the price of the homesite simply doesn't work in the current environment, we have walked away from those deposits.

And you know we did an awful lot of that last year and in the beginning of this year.

So, we have either renegotiated the price at which we are purchasing or we have walked away from the option contract, or the joint venture has had to resolve itself.

Just to clarify an issue, there are no obligations to take down any homesites from joint venture, zero specific performance with any of our joint ventures.

Got it.

I will get back in the queue.

Thank you.

Our next question is coming from Susan Berliner, JPMorgan.

Hey.

This is Chris Bailey in for Sue.

Just a quick question.

Wanted to verify that the valuation allowance charge, the 730, that that is added back to your tangible net worth?

If you look at our recent credit facility amendment, what we did is we lowered our minimum tangible net worth where there is a minimum tangible net worth now of $1.3 billion.

So if you are looking at the tangible net worth covenant, after you factor in the deferred tax asset valuation reserve, there's ample room with respect to that covenant which I think is where your question was directed.

Yes.

I guess what I am getting at is I belief tangible net worth is a component of the leverage ratio covenant.

That's what I was looking at, or if I can just get the leverage ratio at the quarter end I can back into it.

Yes, the leverage ratio covenant has a maximum, actually 55% is the new leverage ratio as part of our covenant, and there is ample room with respect to that covenant, as well, even with deferred tax asset reserves taken.

Okay.

But, so then I guess I am understanding that the denominator part of the leverage ratio includes tangible net worth.

I am just trying to understand if the tangible net worth - that is the original question -- if, understand the minimum tangible net worth you have to have the greater of the calculation or $1.33 billion.

What I am asking is, the discharge actually reduces tangible net worth or for the leverage ratio covenant?

That's correct.

So the adjusted consolidated tangible net worth is the equity number that is used in the calculation for the leverage ratio.

Okay.

Thank you.

You're welcome.

Our next question is coming from Josh Levin of Citi.

Hey, good afternoon, everybody.

Stuart, you mentioned your enthusiasm for the new administration and we have all been reading in the newspapers the details about what will likely be a large stimulus package.

Based on your discussions with folks in Washington and Chicago, when do you think we might get some clarity on the new administration's policy towards the housing market?

Oh boy, everybody is trying to figure that out.

Yes but you're connected; right?

Well, I don't know that I am connected.

I don't know which of the homebuilders are connected.

We are all trying.

I think that is, and appropriately so, a black box right now.

I think that the administration has clearly drawn a wall around itself, and isn't giving those answers because I think that the administration is balancing a lot of thoughts and requests.

And I think doing so in a very closed environment.

And I think that in time they will come out with their program.

So I don't think there's an answer to that question right now and I suspect that even within those walls, the decisions are not yet mapped out as competing interests are being put down on paper and given a priority.

I think we are going to have to wait and see.

Okay.

Fair enough.

Last question, we know that down payment assistance programs went away in October.

How much did you use them during the last quarter, and to what extent has Lennar made use of other, perhaps not as well known buyer assistance programs like the USDA guaranteed loan program?

We are looking for those numbers.

Hold on a second.

The down payment assistance program came down this quarter.

It came down to 25% of our deliveries used the down payment assistance program, and that was through -- that's a quarterly number but after the end of October there was no down payment assistance program.

So with our November deliveries, there were no more down payment assistance opportunities with respect to the mortgages.

There are some more local ones that some of our divisions are using, but we don't have a compilation of that number.

Okay.

Thank you.

Our next question is from Stephen East, Pali Capital.

Good day, everybody.

Hello, Steve.

You all have done a good job of generating some cash and reducing your exposure on joint ventures, and I understand what your maturities are coming for the next few years on balance sheet.

If we look at '09 and '10 for the JVs, what type of maturity levels do you have coming due on those?

I am assuming, Steve, your question is relating to JVs where we have recourse guarantees.

Exactly.

So if you look at the$520 million, I think the first comment is that, if there is a maturity with those loans it doesn't mean there's any obligation on the part of the company.

I just want to highlight there is approximately, I think it is $1.3 billion of equity with respect to those joint ventures where there's $520 million of recourse guarantees.

Now as you talk about maturities, first of all, there are some of the joint ventures that have backlog in place, and those loans will be paid off based on the closing of backlog.

But if you looked at the pure maturity, it spreads out, for the most part, over the next two to three years, all of those JVs will have maturities.

But we expect any cash coming from the company would certainly not be very significant relative to our balance sheet.

Okay.

So, if I looked at that $520 million, is it safe to say probably not even half of that would need cash coming from you all versus the backlog generation?

I would certainly believe it would be below half.

Okay.

And then, if we could turn, Stuart, back to the talking about the company structure, and I appreciate all of the detail you have given us.

Would this fund only be looking at land moving forward, or do you envision it taking it off of your current balance sheet, away from your operations now, and you would look much more like just a manufacturer of homes, or would you burn through that?

No.

That's a good question, Stephen.

I think we are going to burn through the legacy land that we own.

I think it makes it very complicated to try to sell to a new fund.

So, the way we are structuring is that the assets that we own within the company will be self liquidating.

Okay.

Which leads me just to the next part of it.

From a human resources perspective, would that just be -- I am assuming over time you would probably move those people over into this fund, but that's not, if I am looking at '09 and your SG&A costs, and some of that, that may not be a big savings that you would find in '09?

No, that's correct.

I don't think that it will be a big savings in '09.

There will be some that move over, but I don't think it will have a meaningful impact.

Okay.

Just one last question, just as you looked at your sequential trends, your demand trends, in the quarter, how would you characterize those from a monthly basis?

Our sequential trends, you mean month by month?

Correct.

The quarter clearly trended towards deterioration.

If you remember, when we talked in the third quarter, let's see, June and July were really bad months, August saw a tick up from the DPA assistance, the DPA programs going away.

September continued a little bit of that trend, but as we moved into October, November, the market got materially worse.

And I think that the trend seems to be moving in that direction.

Thanks a lot.

Nice quarter.

Thank you.

Our next question is coming from Timothy Jones, Wasserman & Associates.

Good morning.

Good morning.

Two questions.

One, on the $520 million nonrecourse obligations, does that include all the debt and any completion guarantees?

And if it is can you break it out how it goes?

The $500 million which are the recourse obligations relating to unconsolidated JVs, that's just the debt guarantee portion.

How much more is the completion guarantees?

It is very minimal.

Minimal?

Yes, it is very small number.

Okay.

The second one, I spent two decades explaining LNR to people to my chagrin.

I mean it is just unbelievable.

I don't even want to go through it.

You know how happy I was when you got rid of it.

But what you are talking about is going back into having joint ventures on your future land buys, and you are not the only one, with financial partners, and yet you say it is not going to be a JV.

And you're going to have management fees and so forth.

This sounds awfully much like a son of LNR.

Well, I hope that I highlighted it as such.

It is just that we're going to do it in a different way.

I didn't quite get the different way.

Okay, well bear with me.

You are right.

It did cause some confusion, but one of the things we might want to remember is LNR generated a lot of profit for the company and a lot of value creation for the shareholders.

So it's that component of it that I would like to do all over again.

And on the residential side, by the way.

But the difference in structure is that we are not going to do a series of ventures in the company here.

And really, if you look backwards, Tim, that' what we've got is a series of ventures.

This is a fund where all of those activities will happen within that fund structure and it will be isolated with a discrete investment from the company, and that is the company's involvement, investment in its entirety.

The management will be self-contained, and it will grow and produce more of a passive profitability for the company.

And that's about as far as I can go right now.

Just to add on to that, will you have any commercial -- obviously you are talking about a lot less commercial activity than you had in LNR, but with the land you buy you obviously generate some commercial properties off of these purchases.

Yes, but we do that anyway, even inside Lennar.

The bottom line is, right now, if we look ahead to the next quarter, two quarters, three quarters, I think that the commercial opportunity anyway is not going to be ripening for some time to come.

It is the residential focus, the residential dislocation is going to mature first.

And so you can expect that this program will have virtually no commercial component whatsoever.

But it will own all of the JVs then?

Well, it will own its own JVs.

We do not anticipate moving anything from the existing corporate books into this fund.

Thank you very much.

Okay.

You bet.

Our next question is coming from Jim Wilson, JMP Securities.

Good morning, guy.

I was wondering, rather than digging into the debt side and obligations of the JVs, can you give a little update on how your thoughts on future development are proceeding for some of your major JVs such as Hunters Candlestick Point or even El Torro?

The second one would be, obviously this was a former JV but what is happening with Land Source?

Are you in a position, I would assume, to try to get back in and pick up some of the assets, or if you can give any update on what's going on there, that would be great also.

Jim, I would love to give better color on some of these things but in all of these things we are really constrained in how much talking we can do.

We have partners, we have confidentialities, and in Land Source we clearly have litigation.

And so we really can't give much an an update and speak about specific partnerships.

But, these programs are a lot like the broader market.

Where there's entitlement activity, we continue to proceed on entitlement activity.

Where there's impairment, we continue to look at impairment for what it is.

And so expect that the land in these JVs is being dealt with in much the same way, that the land within the primary company is being dealt with.

Okay.

All right.

Thanks.

Our next question is from Megan McGrath, Barclays Capital.

Hi, good afternoon.

I wanted to get back to backlog really quickly.

As you stated, your backlog was down fairly significantly, but you were able in the past couple of quarters to convert a pretty high level of that backlog to closing.

So given that your spec count was up, do you expect to be able to maintain that pretty high level of backlog conversion, or what is the best way for us to think about that?

I think you can expect, Megan, that we will have a very high backlog conversion ratio again in the first quarter.

We certainly expect that the number of completed unsold homes will come down significantly in the first quarter.

And that will be very helpful in generating very high backlog conversion.

Okay.

Great.

That's helpful.

Then a quick follow up on the balance sheet and the JVs and what happened with your debt, I am a little confused, if you can help break it down.

Your nonrecourse went down by about $109 million, your corporate debt went up by a little over $200 million.

If you can walk us through the moving parts.

I think you said some of the new corporate debt was nonrecourse.

So does that mean that some of the $3.2 billion could come on to your books later?

If you can maybe walk us through exactly what happened that would be helpful.

Sure.

There were four joint ventures that consolidated this quarter.

The debt was primarily nonrecourse.

That was a result of, as we evaluate the contributions from the partners, there was a greater weighting of contributions or responsibilities from the Lennar side.

As a result, they consolidated for accounting purposes.

It didn't change the nature of the nonrecourse debt, however.

I do not expect this will continue going forward.

There were some specific joint ventures that had been closed in this quarter.

They did move over the line and were required to be consolidated.

So as a result, $200 million was required to be consolidated on our books.

That increased Lennar's debt balance.

And as you look at the recourse indebtedness that came down, relating to JVs, that's only one component of it.

When you look at the nonrecourse debt, nonrecourse debt had come down, as well.

I would be happy to provide some more color.

We haven't completed the typical schedule that will go in the 10-K breaking this out, but I would be happy to walk through that mechanic with you after the call and help you reconcile that.

That would be great.

Thanks very much.

You're welcome.

Our next question is coming from Buck Horne, Raymond James.

Good afternoon.

Appreciate the extra detail on the inventory balances at year end, as well.

I was wondering if you can estimate how much of the $2.1 billion work in progress is land without any vertical construction on it.

Of that number, Buck, we have been running, finished homesites in that category running about $800 million.

Perfect.

And one follow up, do you have any estimates of maybe over just the next six months or so, what you project land acquisition and development costs may be, and what your carrying costs on just the land portfolio now is in terms of soft costs.

The soft costs, in terms of the land that we own, our land balance has come down considerably year-over-year.

So, the property taxes are pretty minimal on the land that we have on our balance sheet.

I don't have an exact number calculated but the number is not very significant.

Any estimate looking at land CapEx spend?

We are not spending a lot of money on land development at all.

And as Stuart mentioned, our focus on having a land-light homebuilding manufacturing model, we're very focused on only buying finished homesites.

So with a good portion of the land that we have as either finished homesites or significant development underway, we are looking at significant reductions in any of the land development spend.

And we already have seen that as this year has progressed.

Thank you very much.

You're welcome.

Hello?

Hello.

Operator, are there any other questions?

Yes.

We do have a question coming from Ken Zener of Macquarie.

And let's go ahead and make this the last question, if that's all right.

Appreciate it, Stuart.

Given your strong margins, I am trying to understand the mix of your owned lots because you guys have obviously been taking some down, how much of the owned lots would you say are finished?

The exact homesite count we don't have, but we can talk about it in terms of dollars.

That would be fine because it seems like a lot of this stuff has come through the joint ventures, because you sell homes and obviously lot count has been stable, so it is a good thing.

Just trying to see how much of the investment spend has been done on those lots.

It you look at our inventory components broken out, maybe it is helpful to say that home under construction, so obviously those are finished, and that includes any vertical sticks and bricks, there is under $1.2 billion in that category.

There is under $1.5 billion of land under development and there is slightly higher than $800 million of finished homesites.

And then the rest of the inventory category is option deposits and other miscellaneous.

So hopefully that breaks out the numbers from a dollar standpoint.

That does.

And I wonder if you can talk, because you guys, obviously with your units under construction being a high multiple of your backlog, and your excellent gross margin this quarter, can you talk about the spreads you are seeing between the units you are delivering out of backlog relative to the spec units?

Because some builders have talked about spreads existing there, but with your high corporate gross margin, it doesn't appear that that's a significant factor for you.

We don't have an exact breakout of those spreads but our focus has been to keep inventory very low.

So we're managing to a low inventory level that's spec, and we're aggressively moving through those each quarter.

And most of what we've been successful with is using some of the low mortgage rates to help move through some of the specs that exist and that has been very successful for us.

Right, but I guess there is a spread that exists to the extent that when you're delivering over 100% of backlog the reason is because of the high units under construction.

But I mean they kind of blend there.

To the extent there's a spread you're actually pulling in about 20, it would seem, on the units out of backlog which people understand to be a more stable margin.

In some of our markets, we brought down our cycle time.

In a market like Texas typically has a pretty short construction cycle, as well.

So there is a a little bit of a mix balance there.

Thank you very much.

You're very welcome.

And that will be it for today.

Any of you that need to circle back and ask questions, we are as always available.

And look forward to giving you further update as we come around to the first quarter.

Hopefully there will be greater clarity as to where we go governmentally when we come back to our first quarter results.

Thank you again for joining us.

.

This will conclude today's conference.

All parties may disconnect at this time.