Lennar Corp (LEN) 2009 Q3 法說會逐字稿

Welcome to Lennar's third quarter earnings conference call.

(Operator Instructions) After the presentation, we will conduct a question-and-answer session.

Today's conference call is being recorded.

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.

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 operation, 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 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 statement.

I would like to introduce your speaker for today's call, Mr.

Stuart Miller, President and CEO.

Mr.

Miller, you may begin.

Thank you and good morning everyone.

I'd like to thank you for joining us for our third quarter 2009 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.

And of course, you've heard from Scott Shipley.

I'm going to begin with some opening remarks about the current housing market in general and then comment on our home building operations.

Finally, focus on the progress we've made on managing our balance sheet and joint ventures.

And after my remarks, Bruce will provide additional detail on our numbers.

And then, we'll open the phone to questions.

And as usual, I'd like to request that during our question and answer period, everyone please limit to just one question and one follow-up, so that we can be as fair as possible to all of our participants.

Now, as you can see from our press release this morning, we continue to make meaningful progress in preparing our Company for a stabilized and ultimately recovering housing market.

We're gaining confidence that we're getting much closer to the end of this housing-led downturn.

And while there still little visibility as to sales pace and pricing power looking you ahead, the uncertainty as to the size of the declines is diminishing.

In the third quarter, we started to see some real signs that the housing market is in fact starting to stabilize.

There's no question that the rate of descent in both sales and pricing has begun to decline and in some markets, we've actually seen stabilization.

There's been a discernible increase in traffic reported in many of our communities as purchasers have begun to consider the home purchase as attractive again.

A combination of low prices, lower interest rates and government incentives have worked to pique the interest of primary buyers and dispel the taboo about home purchases that has deterred so many from the market.

Additionally, with home affordability at record highs and with low price points offered in the market, there are more buyers interested in making a purchase.

The sense that now is the time to buy is starting to gain momentum as potential qualified purchasers are getting confirmation from news reports and the overall stock market that prices are at or near lows.

In our third quarter, we saw our sales volume decline at the lowest percentage rate since November of 2006.

We've also seen, in most of our divisions, a stabilization or slight decline in the use of incentives, which means in effect that prices are stabilizing in many of our communities.

Our incentives per home fell in the third quarter by some $11,000 per home.

Though that's in part due to lower specs and lower prices.

But perhaps more reflective of market conditions, incentives were reduced by a little over 2% of the sales price of homes.

While there continue to be significant head winds that limit stabilization and recovery, both for the economy in general and for housing as well, there are some significant positive influences that are beginning to shape a more positive future.

And perhaps the most important and least tangible of these factors is the general confidence of the consumer.

Now, by no means, would I suggest that housing is out of the woods and recovered.

To the contrary, many important head winds remain.

Foreclosures continue to build and add to inventory at a significant rate.

Mortgage rates have been fluctuating and while low today, are a significant and sometimes uncertain factor for the future.

Tax credit programs that have stimulated purchasers to make a purchase are potentially ending or at least their futures are uncertain.

And unemployment and gas prices are on the rise.

Today's economic environment and housing market is still tenuous and still suggests that there is downside risk.

But with that said, today's environment is showing some real promise for stabilization and feels materially better than the absolute hopelessness that had existed for so long.

At Lennar, we have focused in three primary areas as we prepare our Company for stabilization and ultimately recovery.

And I'd like to briefly discuss these areas.

The first is Lennar's strategy.

Lennar's strategy has been to streamline and prepare our core homebuilding operations for profitability and to position as a pure play home builder in a stabilizing and then recovering market.

Second, we've remained focused on the asset management side of our business and have fortified our balance sheet to provide a solid foundation for our operations and to be positioned for growth as market conditions stabilize.

And third, we have focused on the the opportunities that invariably present themselves in the wake of distress.

We've continued to make significant progress in all of these areas.

Let me start with our core home building business.

Our home building operating strategy continues to be well-defined and focused at the local divisional level.

We have 29 home building divisions and each division is focused on refining its asset base, identifying its core communities and core product offerings, generating current operating cash flow, and operating at profitable levels.

Each is also focused on reducing the number of completed and unsold homes to enable a greater focus on profitability as we go forward.

Overall, we've reduced the number of completed unsold homes from 625 in the second quarter, to 515 at the end of the third quarter.

And just about every one of our divisions will be operating at cash flow positive and profitable by year end.

And the divisions that are already operating at these profitable levels have begun looking at and purchasing distressed opportunities to grow and expand organically, leveraging their efficient operating platform.

The leverage of our division overhead that will return, as new purchases are added to our existing operating platform, will dramatically enhance profitability in each division.

In every division, we've reworked our product to appeal to today's value-oriented, first-time and move-up purchaser.

We've also reduced the number of plan offerings and have value engineered those plans in order to create maximum efficiency and reduce construction costs.

SG&A has been right-sized in all of our divisions to today's production levels and each can handle additional volume and with very little additional overhead.

On the asset management front, we've continued to fortify our Company by continuing to manage and restate our land asset, while we carefully manage our inventory of completed homes and reduce the number and composition of our joint ventures.

We've continued to review all of our land assets on a quarterly basis and have restated asset values to match market conditions.

Over the past years, we've significantly reduced our land assets, which now requires far less management time.

As market conditions stabilize, we will finally see an end to this impairment cycle and will be left with assets that can and will produce improving margins when the rate of decline in market pricing subsides.

While this is an ongoing process, in a still declining market, we've come quite a long way.

We've also reduced the number of joint ventures that we carry, again.

The number of joint ventures has fallen from 270 at the peak in 2006, to now 72.

And that is down from 85 just last quarter.

Many of these remaining ventures are good ventures that have already been reworked and have solid assets that are positioned for our future.

Additionally, we've continued to reduce the maximum recourse debt to the Company to $380 million, from $422 million last quarter.

Concurrent with this press release, we're also filing an 8-K with a PowerPoint presentation containing material additional disclosure on the joint ventures as we have.

We hope that this disclosure will be helpful.

Our balance sheet, remains strong at the end of the third quarter with a substantial cash position of over $1.3 billion.

Additionally, there is nothing borrowed on our revolver and we have a responsible home building debt to total capital position, net of cash, that is now at 35.6%.

Our balance sheet and cash positions enable us to continue to seize opportunity where distress creates a unique value rather than walk away from opportunity.

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

On the opportunity side, we've been preparing for some time to do what we have done in past real estate cycles.

And that is, make the cycle our ally, not our adversary.

We're clearly beginning to see those opportunities take shape.

As noted earlier, divisions that are profitable are already beginning to purchase new land opportunities on a very conservative basis.

We've seen new purchases along the eastern seaboard, in Florida, in Texas and in California.

In all of these transactions, we have purchased finished home sites that match our product in place and that will contribute immediately to our bottom line.

More importantly, each of these purchases will produce a very high rate of return.

On another opportunity front, the LandSource front, the very significant overhang that has existed on our Company produced by our LandSource joint venture is now officially behind us.

In the third quarter, the LandSource bankruptcy turned into an investment opportunity for the Company, while we eliminated approximately $1.4 billion of joint venture debt.

We have reported -- we invested $140 million to purchase a 15% interest in LandSource, which has some of the best remaining land in California and is now capitalized at a very attractive valuation.

Additionally, we've purchased several assets out of the LandSource bankruptcy and we settled any claims against the Company.

This is an excellent deal for the Company that will hold us in good stead for years to come.

Additionally, the independently managed LandSource structure results in a significant reduction of SG&A for the Company overall.

Additionally, in the third quarter, we've continued to mature our distressed asset go-forward strategy under the banner of Rialto.

As noted in prior quarters, we've been preparing to be a significant participant in the distressed opportunities that naturally present themselves in down cycles.

The team has formed and we've launched a program to raise independent capital in various forms to invest alongside our own capital investments.

While it's still premature to be making these asset purchases, we feel that the timing is getting closer.

Our strategy is to segregate our home building manufacturing program from the more capital-intensive asset opportunity programs, such as we did in the early '90's, as we built what ultimately became LNR Property Corporation.

And we're confident that as the market correct, we will be able to create meaningful value for the Company through this vehicle.

Through our third quarter, the housing market began to show signs that stabilization and recovery might well be on the horizon.

While negative factors continued to define the realities of the quarter, we saw sales and traffic improve each month sequentially during the quarter, coincident with a general uptick in consumer confidence.

It is starting to feel like there are enough positive indicators out there that they are starting to define a real trend.

At Lennar, we've made a great deal of progress in the most difficult of market conditions.

We have prepared our Company for market conditions as they currently exist and we are positioned to be able to leverage our current platform by finding new opportunities in the wake of distress.

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

Interest rates are low, while the tax credits that have stimulated sales to date are coming to a natural end, government officials are squarely focused on housing issues and continue to focus on reducing the number of foreclosures by enabling homeowners to keep their homes.

Our government seems determined to use trial and error and trial again in order to fix the economy.

And the general confidence of the consumer is returning to positive, especially as it relates to purchasing a home.

In the context of these conditions and in typical Lennar tradition, we squarely have one foot on the gas and one foot on the brake.

Should the market take another step down, we are well positioned to pull back.

And should recovery actually begin, we are ready to participate.

Bruce?

Thank you, Stuart and good morning.

In the third quarter, we continued to strengthen our balance sheet.

Our liquidity position remains strong during the quarter, with $1.34 billion of cash.

During the quarter, we continued our focus on cash flow, while also targeting attractive investments for this recovering market.

We issued 8.1 million shares under our equity drawdown program announced last quarter, raising $99 million, at an average price of $12.17 per share.

The cumulative capital raise under this program now totals $225 million.

Our ample liquidity enabled us to reinvest $140 million in LandSource, as Stuart mentioned.

In addition to the communities purchased from LandSource, we spent approximately $77 million on well located, finished home site purchases during the quarter.

Additionally, we retired approximately $40 million of Lennar debt.

While at the same time, we continued our trend of significant progress towards reducing the number of unconsolidated joint ventures and related recourse indebtedness.

Of the remaining 72 joint ventures that Stuart mentioned, only 29 have recourse debt, 18 have nonrecourse debt and 25 have no debt.

Almost 50% of nonrecourse JV indebtedness was reduced this quarter, compared to the second quarter, as $1.4 billion was eliminated as a result of the LandSource restructuring.

This debt was nonrecourse to LandSource and as a result, there was no obligation to Lennar.

The restructured LandSource entity, now called Newhall Land Development, is financially strong, with more than $90 million of cash and no debt.

LandSource does not have any support obligations from Lennar going forward.

Additionally, we reduced our maximum recourse indebtedness, as Stuart mentioned, to $380 million.

These joint ventures with recourse indebtedness are supported by approximately $1.6 billion of assets, which are evaluated for impairments each quarter, and $121 million of reimbursement agreements from partners if Lennar is required to pay under the guaranty.

We have reduced our maximum recourse indebtedness now by approximately 80% since the end of 2006.

We've continued to be successful in extending joint venture loans upon maturity, as we have mentioned over the past several quarters.

And during this quarter, we extended 18 of our remaining joint venture loans.

We are confident that in our fourth quarter, we will continue the significant progress in further reducing both the number of unconsolidated joint ventures and the maximum recourse indebtedness to Lennar.

There were no outstanding borrowings on our revolver and you once again we remain in full compliance with all of our covenants under our revolving credit facility.

Our leverage remained low as our home building debt to total capital, net of cash, was 35.6%.

And our inventory declined from $4.1 billion in the prior year, to $3.6 billion in the current quarter, excluding consolidated inventory not owned.

There were approximately 4,600 homes under construction at August 31, 2009, which is an increase of approximately 14% sequentially.

There were 109,000 home sites owned and controlled at quarter end.

We ended the quarter once again with substantial equity of $2.4 billion and approximately 183 million shares outstanding at quarter end, which is a book value of $13.12.

And that would be approximately $18 per share when adding back almost a $5 per share deferred tax asset reserve, which we do expect to be reversed after several quarters of profitability.

Turning to the operating results for the quarter.

For the quarter, we had a loss per share of $0.97, which includes $0.42 per share of charges related to valuation adjustments and other write-offs.

And a $0.34 per share charge related to a noncash deferred tax asset valuation allowance.

Revenues, as you know from the press release, declined 36%, which was driven by a 28% decline in home deliveries and a 28% decline in average sales price to $239,000.

Regionally, the average sales price breaks out as follows.

The east region was down 18% to $215,000.

The central was up 2% to $204,000.

The west was down 12% to $329,000.

Houston was up 1% to $203,000.

And other was down 12% to $265,000.

The average sales price is net of sales incentives, which as Stuart mentioned, is down $11,000 sequentially.

It was $53,000 in our second quarter and is $42,000 per home in the current quarter.

That compares to $46,000 in the prior year's quarter.

The decline in sales incentives sequentially was noted in every one of our operating regions, so this was a broad improvement in the sales incentive decline.

Our gross margin was 15.6% before impairments.

The pre-impairment gross margin declined from 18% in the prior year.

However, improved sequentially from 14% in our second quarter.

The sequential improvement in gross margin is primarily due to the reduction in sales incentives sequentially that I just mentioned.

The lower sales incentives is a result of the improved selling environment, our repositioned product strategy, as well as fewer completed unsold homes, which in prior quarters commanded larger incentives to convert that inventory to cash.

Our impairments for the quarter were $118 million and that compared to $132 million in the prior year's quarter.

This was broken out as follows.

$49 million for home building.

$1 million for land sold or under contract.

Write-offs of option deposits and preacquisition costs were $9 million.

And joint ventures were $58 million.

The impairment process followed the same rigorous discipline we have followed each quarter throughout the downturn.

We have continued to focus aggressively on reducing our SG&A costs, which declined $56 million year-over-year.

SG&A as a percent of revenue from home sales was 15.9%, which increased 20 basis points from last year, due to lower revenues in the current year.

Throughout this downturn, we have implemented aggressive cost reduction initiatives, resulting in a lean and efficient structure.

And as volumes are expected to increase in the fourth quarter, we expect to see the benefits of leveraging these cost reduction initiatives that we've already implemented.

New orders narrowed their year-over-year decline to 8%.

And backlog improved 20% sequentially from our second quarter.

The cancellation rate was 19% for the quarter versus 27% in the prior year's quarter.

And in the third quarter, we started approximately 3,100 homes to match the improved sales pace of 3,100 you new orders.

This positions us well for stronger deliveries in our fourth quarter.

Our backlog conversion ratio was 130% in the quarter versus 96% in the prior year's quarter.

Last quarter, we indicated that we do expect our third quarter backlog conversion ratio to decline sequentially from the 191% in Q2, as we significantly reduced the number of completed unsold homes.

Our financial services segment earned an $11.2 million profit this quarter, despite lower revenues and this compared with a $12.9 million loss in the prior year.

Our mortgage pretax improved to a profit of $9.8 million, from a loss of $13.2 million in the prior year.

And our title Company earned $1.5 million this quarter, compared with a loss of $600,000 in the prior year.

The Company is financially strong and our strategies have positioned us well towards rebuilding profitability.

And with that, I'd like to turn it back to the operator to open it up for questions.

(Operator Instructions) Our first question is coming from David Goldberg of UBS.

Your line is open.

Thanks.

Good morning everyone.

Nice quarter.

Thank you.

The first question is about the finished lots that you guys are purchasing.

And Bruce, thanks for the detail on the amount that you spent on the finished lots.

I'm trying to get an idea of how long it takes, do you think, on average, to bring those lots through the process, sell the homes and actually deliver them, ie.

where do you think the cash conversion cycle is on lots that you're purchasing today?

In most instances, David, we're looking at home sites that would be started on almost immediately after being taken down.

In many of those cases, we're taking down home sites only as we need them.

In a rare instance, we might be buying a group of home sites, which would generally be in the 20 to 30 range.

But in all instances, the home sites would be ready to start almost immediately.

And when I say that, within a week, two weeks, at most, a month.

And then, the construction cycle would be the natural construction cycle for the product in the particular division and that might range anywhere from three months to six months.

So we're looking at about -- we're looking at a rapid turnover of that inventory.

Great.

The follow-up question was, if we get a little bit more into Newhall and more specifically, how we as investors can kind of evaluate what is longer term investment?

And I know you commented there were no further cash obligations to you guys but in terms of potential cash spend, do you potentially feel that you might have to put or might choose to put more cash in?

And how we could evaluate that as we look forward, the success of the investment and what the eventual return is to you?

Okay.

Well, let's think about that.

First of all, as it relates to the Newhall investment, there will be no additional outlays.

In fact, embedded in the amount of money invested was a reserve for future expenditures that are needed for the development of the Newhall properties.

So it's already prefunded and that's included in the investment that we've already put forth.

So relative to that specific investment, I think that we can expect that there will be no outlays.

There is the opportunity within that structure to look at and purchase other opportunities out there.

And so, from an opportunistic standpoint, should our partners decide along with us that there is a unique opportunity, we could make an investment in another property that is a like kind of distress investment but it is purely at our option and only if we see a you unique opportunity.

And in terms of the evaluation?

I'm sorry, maybe I didn't understand that part of the question.

Just trying to look forward to see how we can evaluate the success of the investment and the return back to you as a Company.

What's the right way to think about the success of your investments, the $140 million?

I think to be straight, it's going to be fairly opaque.

You're probably not going to be able to segregate it out of the numbers that you see.

The underwriting of the investment was to a very aggressive standard by us and all of the participants in that program.

And it's just a very attractive deal that we think is going to yield us attractive returns as we go forward.

But I don't think you're going to be able to segregate it out.

Okay.

Thanks, guys.

Our next question is coming from Carl Reichert of Wells Fargo.

Your line is open.

Hi, guys.

How are you?

Just a follow-up on David's question, who asked mine.

Anyway, you mentioned that you expect some SG&A savings from LandSource's re-creation.

Obviously, I know you've shifted.

There's been some folks that have moved over there.

Can you quantify that?

Is it minimal or is it something significant?

We haven't put a number out there, Carl but I think that it's probably around $5 million.

But that's a guesstimate and don't want you to hang your hat on it.

And it results from the fact that the management team that had been overseeing the LandSource and some other investments has actually moved off to be its own independent company, running that investment and doing some other things as well.

So, that is a significant savings to the Company.

Okay.

Great.

Thanks.

And then, just to follow up, back on this issue of the divisions purchasing lots on a finished lot basis.

And I just want to make sure I understand.

The separation of land and home building in your mind, Stuart, is really a function of development activity or more longer term, lower return, perhaps higher margin opportunities versus quick turn finished lot stuff?

So, we can expect the Company to continue to actively buy finished lots and turn them quick.

Is that how you see the separation or am I missing something?

No, I think that's -- I think you probably said it better than I generally do but that's exactly what we see.

We are inclined to forego the higher margin and lower turn opportunities in favor of the higher turn opportunities.

We want to keep it short-term.

I appreciate it.

Thanks, much.

You bet.

Thanks, Carl.

Our next question is coming from Stephen East, Pali Capital.

Your line is open.

Good morning.

Good morning, Stephen.

The first question revolves around what you talked about, sequentially, your orders were growing throughout the quarter.

Can you talk about how that compares to historical and are you able to quantify any tax credit benefit in that?

Well, just to answer the last part first, I think that the tax credit was pretty stable all the way through, except for California.

And we didn't see much of a dropoff as the California credit fell off.

So, it seems that it acted as an adequate spark to get some things going and that spark has kind of maintained itself.

I think that falling interest rates have probably helped that along a little bit and I think that the -- I think we can't underestimate just the general air of consumer confidence that's kind of come back.

Does it match up with historical trends?

I think not.

Generally the third quarter is -- it kind of moves around a little bit, historically.

I think that it is somewhat of an anomaly that through the summertime, you would see that the sales increased, as we have this summertime.

But I don't have the actual facts on that and so we see it as somewhat of a trend forming, Stephen, but we'll have to wait and see.

Okay.

And then, on the second part of it, did I hear you correctly that in the fourth quarter by year end, all divisions will be both profitable and cash flow positive?

And if so, it seems like your JV's are diverging a little bit from your core business from a profitability perspective.

And just wanted to get some color on why that's happening?

Well, I was careful not to use the word all because I don't want to fall off if there are a couple of divisions that haven't quite gotten there.

Okay.

But as we have mapped out our divisions, division by division right now, it looks like just about every division will be cash flow positive and profitable.

And as it relates -- Bruce, maybe you could speak to as it relates to the ventures?

Sure.

As it relates to the ventures, Stephen, you have to set aside first the impairments.

And then, what's remaining in the ventures, there are some associated costs to carry in some of the ventures.

And we're very focused on the ventures, as we are with the rest of the business, to try to bring those numbers back as close as we can to profitability.

But from a division to division standpoint, you'll see most of the joint ventures more heavily weighted out in the western side of the country.

And as we're looking at divisions getting back to profitability, we're taking into account, as we go into next year, that those will also be included in the analysis.

Well, okay.

So, are you implying, then, that the west is a little bit less profitable from a JV standpoint than the rest of the country?

I would say that right now, it has been materially less profitable when you include joint ventures.

So, let's just be straight with it, and there -- we anticipate, that as we get into 2010, that even inclusive of the weight of the ventures in the west, that we expect that we should be profitable across our core business and that's inclusive of the ventures.

So, that's what we're looking at right now.

Okay.

Thanks a lot.

Nice quarter, guys.

Thank you.

Our next question is coming from Michael of JPMorgan.

Your line is open.

Hi.

Thanks, good morning, everyone.

Good morning, Mike.

First question, if it's possible to get a little bit more color on the improvement that you saw month to month during the quarter in terms of if August -- will you go as far to say that it turned positive year-over-year?

And also, if you could give some regional context to perhaps on a month to month basis where you saw perhaps some more improvement relative to other regions?

I would just say, Michael, that the improvement sequentially was there month to month, both on the sales, as well as in the reduction of sales incentives.

Looking at it month to month, year-over-year, we haven't really run those numbers exactly but there was clearly sequential improvement, both in the pricing, as well as the sales pace and it was pretty consistent across our regions.

I don't think that we can say that year-over-year -- the answer to the question; Was August positive year-over-year?

I don't -- I haven't looked at the numbers but it's too tough a comparison to look on a monthly basis.

Frankly, quarterly is a little difficult too.

But in any given month, we might be running a special or some kind of a special program, which might throw that month out of sync when you look year-over-year.

So, I think that we're all looking for some positive signs out there to kind of confirm a sense that the market is improving.

And all I can say about the sequential improvement is that it was clearly there.

It was clearly felt.

And it feels like we're at the beginning of something that might be real.

Okay.

Appreciate that.

Sure.

Second question, just on -- you mentioned that you've been increasing the number of starts to better match sales pace.

And actually, gave the number of started 3,100 homes to match the orders.

So, is it fair to say, then, that you're not necessarily getting more aggressive from a spec standpoint?

Obviously, you still reduced completed spec during the quarter.

Is this more just getting into a higher state of readiness?

Or on the margin, do you feel more confident maybe to add, let's say, one spec per community, given that you have a higher level of traffic and order pace?

No, we're clearly not increasing the level of specs.

And to the contrary, we're continuing to tighten up in that regard.

We're very focused on looking for that moment where we start to get some pricing power.

And we feel that by keeping the spec level at a minimum, we'll be able to get that pricing power if and when it does return.

I noted that some of our incentives have started to be reduced, which is a reflection of a little bit of pricing power in some of our markets.

We see that a little bit more along the eastern seaboard, maybe a little bit in California.

But by keeping our spec count really tight, we're going to be able to manage that process the best and really generate the best profitability for the Company.

Okay.

Good to hear.

One quick technical question, if I could.

Sure.

Bruce, I think you highlighted in the cash flow that the -- you spent about $77 million on finished lots.

And I assume -- is that safe to assume that's the amount that you've been referring to throughout the call in terms of the specific finished lots investments in the eastern seaboard, Florida and Texas, California?

That's correct.

And can you give us an idea, the number of lots that you're tying up through this?

Well, including the communities we purchased out of LandSource, we did acquire approximately 3,600 finished home sites or primarily finished home sites throughout the quarter.

Okay.

Great.

Thank you.

Thanks, Mike.

Our next question is coming from Josh Levin of Citi.

Your line is open.

Hi, good morning, guys.

Good morning, Josh.

Stuart, I wanted to ask about your comments on the land market.

You said that Lennar, you saw some good land deals and you made some land purchases.

But with regards to Rialto, you said still premature.

So, maybe you could elaborate a little bit on what explains the difference between what Lennar is doing and seeing and what Rialto is doing and seeing?

Josh, that's a good question.

And we haven't provided a lot of detail on Rialto but Rialto is doing a lot of what we have kind of as part of our DNA.

And that is kind of out there, looking for pure distress and opportunities to not only participate but to provide solid management and expertise.

And it's broader than just residential home building.

So for example, many have noted that Rialto is a participant in the PPIP program, along with Alliance Bernstein and a couple of other partners.

We are one of the nine designated managers and they're currently out raising capital.

We will invest in the PPIP program, along with other capital partners, and Rialto will be a co-manager.

We will participate in those kinds of opportunities.

The money is not yet raised and the opportunity set is not yet defined but it might include pieces of RMBS or CMBS tranches that become available.

So, it's a really different business segment that is a piece of what we have done historically and created tremendous value with.

And for those who are familiar with the LNR history, this is a program that is very much along those same lines.

So the opportunity set that is different relative to Rialto, is Rialto is not likely to be a land investor or pure land investor but views this opportunity set as much wider.

And those opportunities have not yet quite presented themselves.

Okay, great.

My next question is on gross margins.

Lennar's gross margins continue to be above average relative to its peers and that's regardless of whether you're selling lots of specs or not selling lots of specs.

Why do you think you're able to keep producing these above average margins relative to your peers?

Well, I think it's hard to compare it to the peers but what we could say with Lennar is we were early to the impairment process.

We started early in the cycle.

We've been very successful in redesigning our product and focusing on the first-time and the value focused buyer.

And we've made great improvements in our construction costs per square foot.

I can't speak for the others but I know that we've been very focused on bringing down our land basis, which we've done successfully through the impairment process.

And bringing down our construction costs as well.

Okay.

Thanks, guys.

Thank you.

You're welcome.

Our next question is coming from Megan McGrath of Barclays Capital.

Your line is open.

Hi, good morning.

Wanted to follow up on Mike's question earlier about ramping up production.

The 3,100 that you started this quarter, can you just give us any color on what that's like versus a normal quarter?

Do you normally start about your number of orders, 50%, 60%?

What does that normally look like?

The way I would think about it, Megan, is we're more focused on presales now.

So, we're trying to match better.

But we think that there's more opportunity to improve margin, as Stuart mentioned, as we're preselling more than we have been in the past.

In some of the last few quarters because there was a higher cancellation rate that existed out there, there was more inventory on the ground, so that there was less opportunity to focus on the presales.

Okay.

Thanks.

And then, just wanted to see if we could get any more color on the incentive picture.

Are the incentives that are going away the ones more likely, at the closing table, asking for a final price cut or is it more sort of in the beginning of the process?

Any specific patterns you're seeing there?

No and I have to be honest, I don't have the detailed knowledge to be able to speak with certainty.

But I will say, I think that the incentives at the closing table are pretty much a part of history.

We're seeing very little of that, except as it relates to closings where there's an appraisal problem.

And that means that, for whatever reason, an appraiser might have come in with a low appraisal and whether you sell the home to this purchaser or anyone else, you're not going to get around it.

But in terms of pure negotiation, the incentives at the closing table are pretty much behind.

Is there additional color on the incentives?

The answer is probably not.

The reduction in incentives, right now, is still pretty small and I think we're going to have to sit and wait for the fourth quarter to really see what this trend looks like.

So, I hope that we'll be able to give a little bit more color at the end of the fourth.

But for right now, it just feels like the environment is getting a little bit better.

Okay.

Great.

Thanks.

You bet.

Our next question is coming from Joshua Pollard, Goldman Sachs.

Your line is open.

Good morning to you all.

In your comments about 2010 profitability, are you looking to be profitable in each quarter of 2010 or are you simply talking about profitability as you exit the year?

In addition to that, could you talk about -- I assume you guys are expecting further improvement on the gross margin line as you deliver homes on newer lots.

Could you talk about the SG&A leverage that you guys expect to come through the numbers next year?

Can you put any figures around how much of the costs you've cut do not need to come back or how much revenue you can add without adding an additional dollar of SG&A?

Yes, to speak to your first question first.

I've tried to be careful to say that I think that there's a positive trend or a sense of a positive trend that is starting to define itself in the marketplace.

But I don't think that we yet have visibility as to too many specifics as we go forward.

We're certainly running along -- if we're seeing stability, we're running along a very rocky bottom and I think that to try to quantify too much, as we look ahead, would probably be a mistake.

Are we going to be profitable every quarter as we go forward?

I'm going to have to say that as it relates to too much detail looking ahead, I'm going to have to leave that an open question right now.

That's what we're solving to.

But I do think that there are going to be ups and downs in the marketplace and I don't want to misrepresent something.

Yes, go ahead.

No, that's understood.

Have you started to run the analysis on whether or not you could be both profitable in 2010 and cash flow positive?

We have run that analysis.

We've done it on a division by division basis and we've done it at the corporate level.

And we think that we can be both cash flow positive and profitable in 2010.

And if I could just sneak one more in, just a technical one.

What was your community count in the quarter and what was your cash flow to joint ventures, if you have those two numbers?

The community count, Josh, is in the low 400 number.

It was about 410 communities.

Again, keep in mind, some of those are at the very tail end, so it's often a misleading number.

As far as the cash flow with the joint ventures, there are a few moving pieces during the quarter because we did spend about $140 million relating to LandSource.

But relative to cash contributions for the quarter, outside of LandSource, we did contribute a portion of the recourse reduction and there was some capital that went into the unconsolidated entities.

We'll provide more detail as we get through the 10-Q with an exact number for you.

But I would look at it that about 50% of the maximum recourse reduction this quarter came from Lennar.

So, approximately 50% of that reduction from $422 million to $380 million.

And then, there were some other capital contributions beyond that.

Thank you, all.

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

Your line is open.

Thanks.

Just wanted to follow up on Joshua's question about the 2010 guidance and the return to profitability.

You already obviously had mentioned a little bit about operating leverage.

I wanted to understand what the trajectories of impairments versus gross profit would look like.

Would you expect one to improve let's say a couple quarters before the other one, either the gross profit or the impairments, or is its going to be coincident?

What do you think that will look like for you folks for next year?

I would think, Nishu, that you're going to see coincident improvement.

Okay.

It makes sense.

We've still been in a declining environment and recognizing that, the impairment cycle doesn't finish until you stop declining.

It seems to me that as you start to see stabilization and ultimately recovery, that would -- and of course, it won't happen in all markets at the same time.

We'll report national numbers but they will be a compilation of a lot of mixes and matches.

It seems to me that as the market stops declining, margins should improve at the same time because prices are at least stabilizing or going up a little bit and/or incentives fading away.

And at the same time, there's no further need to make impairment adjustment.

So while that will happen in different markets at different times, I would think that you would see a coincident improvement.

Got it.

That's helpful.

What's implicit in my question is the timing difference between when you decide -- when you look around at the conditions you decide to impair an asset and then when it ultimately flows through your -- when you ultimately close on it?

And in fact, related to that, there was an interesting disclosure or just a kind of comment in your press release this morning.

And I think you had it last quarter but not before that.

That your impairments usually -- you actually do not ever relate to closings within the same quarter.

So, that there is some type of delay.

Now, that just might have been a change to your language.

I wanted to focus in on that a little bit because I was under the impression that occasionally you might impair something that would actually flow through and you might actually close the same quarter.

Has there been a change in the kind of timing differential?

Might that reflect differences in what kinds of assets you're impairing?

Earlier on in the cycle, maybe, you were impairing more standing inventory, now it's more land that's further out.

So maybe if you could just kind of help me understand what that disclosure meant as it relates to the time between the impairment and the closing.

To the extent there is a land sale during the quarter, we treat any loss as an impairment.

Okay?

So that's one disclosure that we have been careful to clarify.

David, you might want to comment on any other changes.

Yes, you might be referring to the non-GAAP financial measure disclosure that we have in there.

We've always disclosed gross margins excluding impairments and including impairments.

The non-GAAP financial measure just adds some color on how certain adjustments flow through margin.

And we wanted to separate because the impairments we take on the home building side relate to homes that are not closed.

We wanted to show what our true margins are for homes that we deliver during the period, which is excluding impairments.

And then, we also disclose gross margins on home sales including impairments.

So, we just wanted to clear up that we were at least showing both sides of the gross margin, in and out.

Got it.

So there's been no change, it's just a clarification of the way things have been.

No change, just further color.

Okay.

Thank you very much.

Our next question is coming from Dan Oppenheim, Credit Suisse.

Your line is open.

Thanks very much.

Was wondering if you could talk a little bit more in terms of SG&A?

It the past, when conditions were worsening, you talked about getting down to 10%.

Clearly, the revenues should start to improve soon with this.

And so, I'm guessing profitability just by better margins, not just the SG&A.

But do you still have a goal of getting to 10% SG&A, what's their timing do you think about that?

The answer is yes and we're still very focused on it for this year end.

Okay.

Great.

And then secondly, there's a lot of talk in terms of the better environment and looking at the finished land opportunities.

How are you looking at the developing some of the raw land that you have currently?

Are we getting close to the point where you could do that or is it still some time away?

And if so, what would it take to get there?

It's still going to take some time before the development of raw land, in most instances, will make a lot of financial sense.

And we're clearly looking at every dollar spent as a dollar that needs to be held accountable for its own return on investment.

So investment in development dollars in development right now, does not return adequately to merit the investment.

And that's why we're looking primarily at buying home sites at a lower price than you could actually develop in many instances today.

And that's where our production will come from.

Great.

Thanks very much.

You bet.

Our next question is coming from Jay McCanless, FTN Equity.

Your line is open.

Hi, good morning.

A couple questions.

The first one, have the sequentially improving conditions that you saw during the quarter carried over to September?

We really don't comment on the next quarter but since I don't comment, I won't say that -- things seem to be holding consistently as we go forward.

Okay.

Understood.

My second question is on the credit and on what we've been hearing from other builders about the quick move business.

In terms of being very tight on your spec counts or do you believe that you may be giving up some sales at the margin, just to make -- to be more conservative?

Or do you feel like the natural spec creation through cancellations, if that's meeting that opportunity well enough?

Yes, that's kind of the age-old question in home building.

And I think that the argument can always be made and always is made by a sales force that we're giving up sales because we don't have more spec on the ground.

And it's possible that we are.

But our balance right now tells us that we're going to have more purchasing power than we will lose sales.

And so, we're going to stick with the low inventory level.

And we think that the natural inventory, as you pointed out, is sufficient to pick up the lion's share of the sales that we might otherwise lose.

Okay.

Great.

Thank you.

You bet.

And this will be the last question, thanks.

Our next question will be coming from Ken Zener, Macquarie.

Your line is open.

Good morning.

You guys have, what, two times backlog units under construction.

It seems like you guys have plenty of units out there.

Can you talk about the propensity to build spec on these new lots that you're purchasing versus waiting for an order?

We are very reluctant to build any spec.

We're not treating any of the new home sites differently than the already-existing ones and our program is very much the same.

We're not out there, chasing the opportunity to add production.

We want to do it profitably on a home by home basis.

Okay.

Then, just what is your guys owned lot count?

And can you give a little more color around the land bids?

So, you guys spent $77 million.

But was that maybe 20% of your bids went through?

And could you give us a little flavor of competitive bids, pricing and why you think you lost some of the deals that you did?

Let me answer the first question.

Our owned home site count increased to approximately 78,000 this quarter.

Okay.

You want me to answer the second one?

I wouldn't venture a guess as to how many of our bids actually went through.

The reason that we lost on some of the bids that we lost on is because someone else bid higher.

Clearly.

I don't want to -- but no I think that --.

Did you sense it was from more aggressive people that had a less deep land supply or they were perhaps more -- greater liquidity?

Because I assume true investors would -- unlevered investors, you would be able to beat on a pricing dynamic.

So did you get any feedback from your field operations about --?

There's really not a consistent theme.

We're trying to -- you and I are trying to have a discussion about national numbers when it actual, it's such a local phenomenon.

In some instances, we've been outbid by small, local builders that are using leverage.

It's basically a levered bid in one form or another.

In other instances, it's a national builder that might have a specific need in a particular market.

I think that there's clearly been an uptick in the number of participants looking for home sites.

And when finished home sites come to market, multiple bidders are showing up today.

But the underwriting by and large is still pretty carefully done.

We have seen some instances where we've been surprised at the prices that have been paid and we're staying away from that.

We're not chasing pricing but we're measuring our program very carefully.

I would have to say that we're losing more bids than we're winning.

But the ones that we're getting, we're very comfortable with.

Thank you.

You're very welcome.

And listen, I'd like to thank everybody for joining us.

I apologize for those who have questions that we weren't able to get to.

Certainly, Bruce, Scott, myself, we're all available to have an offline discussion.

Like to thank everybody for joining us for our third quarter and look forward to reporting year end.

This will conclude today's conference.

All parties may disconnect.