Lennar Corp (LEN) 2009 Q4 法說會逐字稿

Thank you for standing by.

Welcome to Lennar's fourth quarter earnings conference call.

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

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

(Operator Instructions) I will now turn the call over to Mr.

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

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 operations, cash flows, strategies, and prospects.

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

Because forward-looking statements relate to 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 on 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.

Thank you.

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.

Thank you for joining us for our fourth quarter and year end 2009 update.

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

Additionally, since we've just finished our two-day operations review of all of our divisions here in Miami, Jon Jaffe and Rick Beckwitt are here as well.

Since Jon and Rick run our day-to-day operations in the field, I'm going to begin with some brief opening remarks about the current housing market in general and the progress we've made on managing our balance sheet and joint ventures.

Then Rick and Jon will comment on our home-building operations and positioning for 2010 and beyond, and finally, Bruce will provide some additional detail on our numbers and then of course we'll ope the phones to your questions.

And as always, I would like to request that in our Q&A period, that everybody please limit to just one question and one follow-up, so that we can be as fair as possible to all of our participants.

So let me make a few overview comments about the market and our fourth quarter.

Overall, the market and the overall economy appear to be in recovery.

As we have expected, at least as it relates to housing, this recovery is not presenting itself as a V-shaped return to better times, but instead is proving to be a rocky stabilizing bottom with visibility obscured by more questions than clear answers.

Nevertheless, as we reviewed our operations in the field, geography by geography, there are some common themes that appear to be forming a trend.

Prices are no longer free-falling downward and in fact in many instances, are actually starting to stabilize and even recover.

In most of our divisions, there has been a meaningful reduction in the incentives used in the sales process and that's reflected itself in higher margins.

For the Company overall, incentives were $36,300, down from $42,200 last quarter, and $51,400 last year.

And margins improved to 17.8% from 15.6% last quarter and 17% last year.

I feel comfortable today saying that this is a trend and not an anomaly.

Inventories of new homes are significantly reduced.

In most markets, new homes are being built to order and for the segment of the market that wants a new home, there are limited immediate opportunities to choose from and that's helping reduce incentives.

We also heard from the field that while foreclosures continue to be a significant driver of absorption and pricing, the effect is actually declining as the bulk of foreclosure activity is either in inner city locations or the extreme outskirts of markets in which we operate.

The better situated foreclosure homes are being absorbed in an orderly fashion, and the market is clearing the inventory overhang in many locations.

The $8000 tax credit that was thankfully extended by Congress is facilitating that clearing process and will help enable a return to normalcy when the credit expires in the spring.

We heard that a general sense of confidence has returned to the customer and that there is a tangible sense that with prices and interest rates low, now is the right time to purchase a home for future security.

This sentiment is driving many new purchasers to the market and traffic is slowly improving.

This reflected itself in our first year-over-year increase in new orders since our first quarter of 2006.

We also heard from our division presidents that the unemployment rate in most of their markets has stopped falling and is at least stabilizing and in some instances beginning to recover.

This is perhaps the most important element in driving future confidence, as the threat of losing one's job has deterred many from the housing market for some time now.

Finally, we heard that we are able to find new acquisitions of home sites to build new communities where homes can be delivered at a responsible profit level at today's prices and given zero market appreciation.

Jon will give further color on our operations, while Rick will talk through some of those acquisitions.

As you can see from our press release this morning, at Lennar, we have closed out 2009 by preparing our Company to return to fundamental profitability.

We've continued to make meaningful progress in preparing our company for stabilized and ultimately recovering housing market.

That preparation is primarily reflected in our balance sheet, that is now well positioned for the future.

We aggressively impaired or disposed of assets that would not add to our profitability in the future.

This process enables us to both clean up our balance sheet, while maximizing the tax benefit derived from the net operating loss carry-back extension that Congress enacted last year.

This in turn enables us to move forward with additional liquidity to make strategic purchases, and to begin to add back jobs that were lost as the market deteriorated.

As we entered 2010, our balance sheet is fortified with a debt to total capital ratio net of home building cash of 36.9%, and home building cash of $1.3 billion, with no outstanding borrowings under our credit facility.

Additionally, we expect to recover an additional $320 million in cash refund in early 2010 from a net operating loss carry-back provision.

This positions our company very well to make the strategic investments that are desirable as we begin to grow again.

On the joint venture front, we have again meaningfully reduced the number and exposure to joint ventures to add clarity and simplicity to our program.

We have reduced the number of joint ventures -- we have reduced the number of joint ventures from the peak in 2006 of 270 to 62 currently, and that's down from 72 last quarter.

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

We expect to reduce this number again by approximately half, as we go through 2010.

Additionally, we've continued to reduce the maximum recourse debt to the company to $288 million, down from $380 million last quarter.

On the opportunity side, we've been preparing for some time to do what we have done in past real estate cycles over and over again, and that is make the cycle our ally, not our adversary.

We are clearly beginning to see opportunities take shape and as noted earlier, divisions that are profitable are already beginning to purchase new land opportunities on a very conservative basis and Rick will discuss this in greater detail in just a couple of minutes.

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

As I 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 is formed and we have begun the process of actively looking for unique distressed investments.

At the end of the day, there will be a lot of mixed reviews of our fourth quarter numbers, as many of you go through the elements of how we closed out 2009.

Internally, however, there are no mixed reviews.

We've positioned our company for fundamental profitability and we are prepared to move forward.

Let me now turn over to Jon and Rick to give some additional color.

Thank you, Stuart, and good morning.

As Stuart noted, we had our Division President meeting this week, where each division presented the current state of their operation and their plan for 2010.

I'm very pleased to report that the hard work and intense focus on improving operating margins that has taken place in the field over the past year is beginning to produce positive results.

Division by division, we are taking our land position, building cost effective homes, delivering them to today's home buyer as the home is completed, and producing a positive operating margin.

Our divisions have effectively managed the sales of homes as they move along the construction assembly line, resulting in our ending the quarter less than one completed inventory home per wholly owned community.

All of our divisions are achieving this success with new product offerings, reduced construction costs and right-sized SG&A.

A perfect example of this is our successful rollout of our regional product strategy.

In each of our regions, we now have in place a series of value engineer plans designed for use in multiple markets within that region.

This has allowed us to further reduce construction costs.

For example, in Phoenix, Tucson, and Las Vegas, we now have only 15 plans.

These floor plans have replaced 40 plans and have resulted in reduced construction costs, which are down by 12% on an apples to apples basis.

These plans have simplified architecture, they offer design, life-style and energy saving features that's attracting new home buyers.

This strategy has not only produced well-received and cost efficient plans, but the consistent use of these plans allowed us to reduce overhead in our manufacturing process.

Stuart has described our regional operating centers on prior calls, where we have consolidated our purchasing and other administrative processes.

In the west, where we support operations in Phoenix, Tucson and Las Vegas, we have reduced the cost of this operating center from over $6 million last year to $3.5 million this year.

This focused management of our home building machine is allowing us to start new homes in our existing communities.

With positive operating margins, we will be able to increase the pace of these starts as each market continues to stabilize.

With low inventory and the delivery of positive operating margins, we're well positioned to grow our business as we go through 2010.

I'll now turn it over to Rick Beckwitt, who will describe our land acquisition activity that will fuel that growth.

Thanks, Jon.

Our primary focus on the land side has been to work through our existing asset base to generate cash.

In many cases, this has required us to redesign product or work with the towns and municipalities to change what we can build in our communities.

The towns have been very amenable to lowering specs, reducing square footage sizes, and even increasing density on the property because they desperately need the income associated with new construction.

In conjunction with this balance sheet first approach, we have been extremely active on the new acquisition side.

The distress in the market has presented numerous opportunities for us to acquire new properties that we can add -- that can add to profitability in 2010 and 2011.

We have been doing this under the radar screen for some time now.

Since August, we have put under contract approximately 5000 home sites and about 50 communities.

The vast majority of these new deals are finished home sites where we can buy the land and start building a home immediately.

Most of these deals have been structured as rolling auctions where we have a small or even no deposit and where we can buy the land when we need it.

In many of these deals, a piece of the purchase price for the land is actually paid when we close the home with our buyer.

As you can imagine, the financial returns from these low risk, properly priced deals are extremely attractive, due to the short period of time between when we buy the land and when we deliver the home.

Let me give you some examples of a few recent deals.

Our Dallas division optioned 50 home sites in McKinney, Texas.

We put down $100 deposit and we can buy these home sites any time we want prior to December 2012.

Our purchase price for these homes is a fraction of where they were selling at the peak of the market.

With truly conservative underwriting, this deal will generate an IRR north of 50% and gross margins are in the mid 20% range.

Our Charlotte division optioned 32 home sites recently in a truly A location in Mecklenburg County.

We put up a $5,000 deposit, the deal has a modest take of about 5 home sites every 90 days, we had product ready to go, and are able to deliver homes within 3 months of the initial close.

The IRR on this deal exceeds 100%, and the gross margins on this deal are in the high 20% range.

Now, not all of our deals will generate these type of returns, but all of the underwriting we're doing today pencils out the gross margins in the 20% range and pretax margins of approximately 10%.

In addition to option contracts, we've been selectively using our cash to buy distressed opportunities.

These purchases range from purchases from land banks, cash-strapped developers and builders, foreclosure sales, short sales and even backing into assets by purchasing CDD obligations.

While the IRRs generated from these purchases may not be as high as from our option contracts, the pretax profit and margins are significant.

Here are a few examples of some recent purchases.

Our Northern California division recently purchased 33 home sites through a foreclosure from three banks.

These home sites were located in an A-plus community in the Bay Area.

In a normalized market, the ratio of the finished home site price to the sales price is about a 40 to 45% ratio.

We acquired them in bulk at about a 20% ratio.

We closed this deal in December and we will deliver homes in June.

The gross margin on those deals are in the 30% range with pretax margins in the high teens.

Our Fresno division recently purchased two deals from a builder exiting the market.

The first deal was 21 home sites in a move-up location in the Fresno market.

The second deal was 52 home sites in an entry level location in Fresno.

While one was move-up, one was entry, they were both A locations in their price segment.

In each deal, we had product ready to go and we will be delivering home sites within three months of closing our first, closing the transaction.

Both of these deals generate gross margins approaching 30% and pretax margins in the high teens.

A more funky deal is one we recently completed in South Florida.

In this deal, we purchased approximately 500 home sites from an investor group that desperately needed cash.

In the transaction, we also assumed some B bond debt and simultaneously purchased some CDD debt at a big discount.

Our finished home site price resulting from this three-part transaction is extremely competitive.

In addition, our gross margins and pretax margins are excellent.

I hope this gives you a peek at some of the things we've been up to.

We've tried to stay away from the bank to broker to bid deals because of pricing on those things are a little stretchy.

Most of our opportunities have been generated by good, solid work from our seasoned land associates.

They have excellent real relationships and are truly tied into their local markets.

I would like to turn it over to Bruce now, who will review our financial results.

Thanks, Rick, and good morning.

Starting with the operating results for the quarter, you will note that this is our first quarter quarterly earnings that we've reported since the first quarter of 2007.

We reported earnings of $0.19 per share, as you can see in the press release, which includes $1.34 of earnings per share from the reduction of the deferred assets at valuation allowance, primarily due to the net operating loss carry-back.

And that's offset by a $0.58 per share charge related to valuation adjustments and other write-offs, and a $0.31 per share charge related to valuation adjustments to land that the company has either sold or intends to sell to third parties.

Now, there are a lot of numbers in that opening paragraph, and I would like to summarize the quarter results as follows.

We did note sequential operating improvement in our preimpairment operating margin, which improved from a negative 30 basis points in our third quarter to a positive 160 basis points in the fourth quarter.

There was clear improvement, as you've heard so far on the gross margin line.

While we did have some nonrecurring charges in our selling, general and administrative costs, which will reduce our overhead prospectively and help us return to profitability.

As noted in our impairment number, we disposed of several longer-term assets which will result in a tax refund in early 2010, and additionally in the fourth quarter, we purchased new well positioned communities that Rick went through that will lead to current activity in 2010 with superior gross margins.

So let me break that down a little further.

In the press release, we described our revenues going down 30%, which was driven by a 22% decrease in home deliveries, excluding joint ventures and a 9% decrease in the average sales price to $238,000.

The average sales price by region changed as follows.

The east was $225,000, which was down 8%.

The central was $205,000, up 2%.

The west was $313,000, down 12%.

Houston was $199,000.

That was up 1%.

And the other category was $257,000, which was down 8%.

Our preimpairment gross margin, which improved to 17.8% from 15.6% in the third quarter was driven by a couple of factors.

The first one, as Stuart mentioned, was the reduction in sales incentives of $15,000 per home, the lower sales incentive, which was 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, since we were focused on converting that inventory to cash.

Second, as Jon mentioned, was the continued operating focus on reducing our construction costs per square foot, which are down 25% approximately from the peak.

There's one other item that I would like to discuss that impacted gross margin, and that related to Chinese drywall.

With our proactive approach to dealing with Chinese drywall, we found an approximately 100 additional homes requiring remediation during the quarter.

The rate at which we're discovering additional homes with Chinese drywall has been slowing, and we expect to be completed with our homes identified with Chinese drywall by the end of the second quarter.

We are actively pursuing recovery from manufacturers, installers, and various insurance companies, and we've accrued additional charge during the quarter of $22 million for additional homes identified, homes yet to be identified, and the possibility that we may not receive full recovery for these costs.

Although this charge had a negative impact on our gross margin, we did have some offsetting positive impacts to gross margin primarily related to construction obligations no longer required on property disposed of during the year.

Turning to impairments in the fourth quarter, we recorded $255 million of valuation adjustments and write-offs.

The categories for the fourth quarter were as follows.

Home building was $56 million.

Land sold or under contract was $89 million, of which $72 million closed during the quarter.

Write-offs of option deposits and preacquisition costs were $64 million, and joint ventures were $38 million.

Of the $255 million of impairments during the quarter, $133 million qualified to be carried back under the extended NOL carry-back provision enacted in our fourth quarter, since we liquidated our position in those assets.

As such, they are component of the $320 million refund we expect to receive in early 2010.

As a result of this $320 million refund, we also reported a corresponding reversal of our deferred tax asset reserve totaling $320 million.

We have continued to focus aggressively on reducing SG&A costs, which decline $32 million year-over-year.

Now, although the percentage as a percent of revenue from home sales was 16.2%, and increased year-over-year, if you exclude the nonrecurring lease termination costs and legal costs during the quarter, which totaled approximately $15 million, our SG&A improved sequentially by about 150 basis points.

New orders improved 3% year-over-year.

Our backlog dollar value improved 5% year-over-year, and these are the first year-over-year increases that we've seen for some time.

The cancellation rate declined to 20% for the quarter versus 32% in the fourth quarter of 2008.

Our backlog conversion ratio was 141% during the quarter.

Our financial services segment earned a $7.8 million profit during the compart, despite lower revenues.

This compared with a loss of $5.4 million in the prior year and both our mortgage and title operations have improved their processes through the downturn and are operating more efficiently and profitable.

Mortgage generated a $7.9 million pretax profit versus $6.3 million in the prior year, and our title company turned profitable to $2.3 million versus the prior year loss of $7.7 million.

Additionally, we have strategically been selling our remaining cable systems over the last several years and this quarter we reported a charge of $2 million on the sale of the cable system.

As we look forward towards 2010, our first quarter is expected to be a low volume quarter, similar to the trend that we noted in 2009, and therefore, it's expected to generate a loss.

However, we are still positioned to return to profitability in 2010.

Turning to the balance sheet, as Stuart highlighted our strong position, we continue to focus on cash flow, while also targeting attractive investments for this recovering market.

We continue to carefully manage our inventory, as we reduce totally owned completed unsold homes from 1140 to 480.

We sold approximately 2000 home sites in positions that were previously moth balled, while closing on approximately a new 3500 home sites, totaling approximately 148 million in the well located ready to build communities that Rick talked about.

Inventory defined from $3.8 billion in the prior year to $3.5 billion in the current quarter, and this excludes consolidated inventory not owned.

There were approximately 104,000 home sites owned and controlled at quarter end.

We talked about the reduction in our joint ventures of the 62 that are remaining.

We have only 22 that have recourse debt, 17 with non-recourse debt, and 23 with no debt.

We reduced our maximum recourse indebtedness, as Stuart mentioned, to $288 million.

These joint ventures with recourse indebtedness remaining are supported by approximately $1.3 billion of assets.

Additionally, we reduced our non-recourse joint venture debt during the quarter by $548 million.

We started this year with $3.5 billion of non-recourse debt with our unconsolidated joint ventures, and we ended the year with $1.3 billion of non-recourse debt.

We continued to be successful at extending joint venture loans upon maturity.

For the year now, we have successfully modified and extended 38 of those joint venture loans.

We ended the quarter with substantial equity of $2.4 billion, approximately 184.9 million shares outstanding.

Our book value per share was $13.13 per share.

If you reversed or excluded the deferred tax asset reserve, which we expect to be reversed in the future, the book value per share would be $16.72.

So with that, we feel good with our financial position and our position to rebuild to profitability in 2010.

So with that, I would like to turn it back to the operator to open for questions.

(Operator Instructions) Our first question is coming from Carl Reichardt of Wells Fargo Securities.

Your line is open.

Good morning.

Two questions.

First, for Rick, you used the term stretchy in describing the valuations from bank to broker to bid deals.

And I would like you to expand on that a little bit.

Tell me if you're seeing an increase in the volume of transactions that you're looking at in that regard, what is happening to those transactions, are they sitting out there, other people buying them?

And what does stretchy mean in numeric terms?

I think by stretchy, I mean that those transactions have seemed to be penciling out at more pricey terms.

They are not coming out all at the same time.

They are coming out onesie, twosie.

So you got a lot of people looking at them and the people really driving the pricing up are really in the investors.

Because the builders have a sense as to where things are penciled out.

Not a lot of them are trading.

They sit there for a while.

Most of those things are finished home site opportunities, and what we've focused on, as opposed to bidding on the deals as they come out from the banks is really trying to get into the banks and working the relationships that we've established over the years.

And the thing that they are most focused on is the reliability of the close and whether the deal's going to trade.

And so that's what's made us successful during this process.

Okay, makes sense.

Thanks.

I guess the second question I guess for Bruce, on backlog conversion rate -- as you're thinking about mixing more of -- I know you're going to have an additional number of transactions, as Rick described them coming in where you'll be able to do quick turn on unfinished lots, I'm still having a hard time sort of figuring out what backlog conversion kind of can be.

Can you give me a sense in 2010 if you're expecting a similar traditional season pattern and similar numbers to 2009, and how should we think about that?

Well, I would look at the first quarter the same way as we looked at 2009 actuals as far as backlog conversion ratio, which was in the 130% range.

And then as you continue through the year, I think you need to keep in mind that 2009 had a significant number of completed unsold homes the first part of the year, and that led to a very high backlog conversion ratio, up to the tune of 190%, so that was more of an anomaly, and the backlog conversion ratio for the rest of this year will depend on the market conditions and how many communities we bring on, but it should be averaging more in the mid-100% range as opposed to the extremes that we noted last year.

All right.

I appreciate it, thanks, Bruce.

You're welcome.

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

Please go ahead.

Hi, good morning, everyone.

Congratulations on the quarter and happy new year.

I guess my question is you mentioned you bought 5000 home sites and realizing they are very quick turn, what is your expectation in 2010 in terms of the closings that those will contribute with these higher margins relative to the 2009 results?

Well, Ivy, just to be clear, we didn't acquire all 5000.

Lot of those are rolling option deals and we'll take them as we need them over the next year or two.

Given the lead time associated with the construction process, most of our build cycle is on the shorter side.

We can get something built in about 45 days today, because we've got a really efficient team.

And some of our products are taking three to four months.

So if you can assume that we're on the option deals, we've structured them to really take them down as we sell them, and a lot of that's going to be driven by the market.

So closing should sequentially -- these deals should sequentially absorb more on the tail end of 2010 and be a pretty good contributor into 2011.

Great.

Very good.

Thanks.

And my follow-up question really relates to, concerns we've had about FHA tightening, recognizing that public policy today, who knows if it will happen or not, it's anybody's call, at least they are saying they are going to tighten.

So what is your exposure to FHA as you look at 2009 books?

Our exposure is probably in the 60% range.

And there's no question that there's still a lot of moving parts out there.

FHA requiring additional down, tightening up lending standards.

These are all questions that are out there.

I think the single most important factor, though, right now is the absorption of the foreclosure inventory out there that is I think setting the stage for somewhat of a return to more normal times and kind of as I highlighted, I think that there's going to be some tightening of some of the lending standards, but I think that that's going to be -- I'm hoping that that's going to be in the face of a somewhat depleting relevant inventory.

Just to highlight again, there's a lot of foreclosures out there, but the ones that are in the relevant locations are absorbing in an orderly course.

And I think that will help form the field for tightened lending standards that's not overly impacting what can be absorbed in the marketplace.

Great.

Thanks, guys.

Our next question is coming from David Goldberg, UBS.

Your line is open.

Thanks, good afternoon, guys.

Happy new year.

Hi, David.

The first question, Bruce, I wanted to follow up on something you said in the comments about the margin improvement and the percentage back and how the decline in the percentage back contributes to margin improvement.

I'm wondering if you can give us an idea I guess first of all, what -- estimate of how much you think was possible because of specs and also expect specs a percentage of overall deliveries, do you think that's going to kind of even out at current levels as to where we are today?

Your first question with respect to how much of the margin improvement related to the reduction in completed unsold homes, I can't give you an exact number, David, because you are dealing with a lot of communities, a lot of moving targets across the country but two things to think about there.

One, at the beginning of last year, we not only had a very large number of completed unsold, but our main focus as a company, being balance sheet first, with questionable capital markets and the overall economy, what was going to happen, we were very focused on converting inventory to cash.

We now have a very stable balance sheet, and as Jon mentioned, we're down to about one completed home, so we're back to a little bit more normal times and we expect that those incentives per home continue to decline for 2010, but I can't give you the exact percentage of the improvement in margin that that related to.

And then your second question, again, David?

It was kind of -- I think the question was about in terms of the spec, how you -- excuse me, in terms of the incentives, how you balance the incentives on sales.

Looking at the sales base, the potential leverage drivers you can drive versus, do you cut incentives to get some more leverage out of the SG&A line, or do you kind of leave incentives where they are and kind of try to drive more sales?

I think that makes more sense.

David, this is Jon.

It's very market-specific, but clearly where we've been able to sell as we move through the construction process and not have specs, we've been able to reduce our incentives.

In many of the markets that have seen more stabilization, we've seen more forward sales, presales, and that has allowed us to effectively allowed us to reduce incentives, and as we move through the markets, and as they bounce up and down, I think it will affect our ability to continue to reduce those incentives, but as an overall trend based on what we're seeing our expected to control our inventory as our divisions move through the process and be able to continue to reduce incentives.

Let me just add to that, David and say, look, we've got some valuable assets that we're putting on the books right now.

Whether it's some of the assets that have been written down or whether it's new assets that we're purchasing at a good price, it's an art, not a science.

We're going to maximize profitability and maximize the value that we can receive.

So there's a balance in how much of incentives we leave out there in order to, in order to achieve volume.

But we want to absorb -- we want to sell homes so that we're maximizing the profitability that we generate from every asset that we've got right now.

Stuart, I guess I would add to that by saying all of our divisions know exactly what their break-even performance is, how many homes they need to close every month to be profitable and we're holding them accountable for that profitability.

In conjunction with that, each of the divisions is really focused on increasing sales prices and moving the appraisers up in value, and we get more in the long-term by increasing the sales price than by having an incremental closing in the quarter to push the volume.

That's going to help us in the long-term.

Got it, thank you.

Our next question is coming from Michael Rehaut, JPMorgan Chase.

Please go ahead.

Good morning, everyone.

Good morning.

First question, just on the gross margins and SG&A, you had the nice bump-up and we've kind of reviewed and hashed out some of the drivers there.

So now you're getting close to 18%.

Is that, without giving guidance, for the upcoming year, there is a pretty decent difference between 4Q and what you were posting in the first three quarters of the year.

So how are we to think about 2010?

You've talked about the overall goal of profitability, but is that going to be driven off of a higher gross margin and the average of 2009 and/or a lower SG&A level?

Well, like I said, it's really a balance.

my opening remarks, I hope I made clear that we're really looking at a rocky bottom stabilization and I think that anything along the lines of visibility has got to be suspect and I want to make sure that I'm clear on that.

as I look ahead and as we looked ahead division by division over the past couple of days, margin can move around a little bit and I don't want to give you some guidance that I can't live up to and in today's market looking ahead too much is complicated.

But I think we're going to, we're certainly seeing margins at a higher level than we've seen in 2008, 2009, and exactly where they are going to fall is going to be in large part defined by what the market -- how the market guy rates and moves around a little bit.

But as I said in my opening remarks, what we're starting to see in terms of margin stabilization feels a lot more right now like a trend and what the actual number is we're going to have to wait and see what the market gives us.

Okay.

Just a follow-up question.

separate topic on regional strength.

given the higher level of activity in terms of land acquisition, I'm just wondering if you can share thoughts in terms of your natural portfolio of markets, where you are doing more deals where you're a little more optimistic on the margin, one market relative to another, and also if you can overlay onto that, if there's some markets that have higher levels of FHA exposure relative to others.

In terms of geographies, most of -- the way I would say it is most geographies have something positive to give and the most impaired geographies, the land prices and the home prices have fallen the farthest in the least impaired geographies, they have fallen less.

But with stabilization, all of those geographies have land opportunities, assets, values that can generate a profitable home sale.

And so as we've seen stabilization almost across the board, there's still a few communities or areas that are falling, but those are fewer.

In almost all of our geographies, we're finding opportunity to stabilize our business and to start growing profitability.

in terms of FHA base production, most of the geographies, the sweet spot is clearly in the affordable range.

That's where financing is available and most available.

As you get to the higher price points, financing becomes much more complicated.

So pretty much across the board, we've adjusted our product carefully to move into that broader range of affordable housing and so we clearly have a lot more FHA exposure pretty much across the board.

One housekeeping question, if I could.

Okay.

But we, we -- that's the third question.

It's a technical one, so maybe it will benefit everyone.

The $22 million of charges related to drywall, is that in SG&A?

And I know you said there was offsetting positives as well.

Does that fully offset the 22 and are they in different components of the income statement?

They are both in gross margin and the offsetting credits to the $22 million offset a significant portion of that $22 million, not all of it.

Okay, thanks.

Thank you.

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

Your line is open.

Good morning, thanks.

Wanted to follow up a little bit on the SG&A side.

Stuart in your opening comments, you talked about potentially being positioned to start adding back some jobs from earlier losses in the cycle.

So wanted to get an idea of your thoughts there.

I know expectations will change throughout the year, but how are you thinking about head count going into 2010?

And given your current expectations, should we expect that SG&A might actually grow next year on a dollar basis, or should we still expect it to see a little pressure?

Well, maybe this won't sound right, but I'm kind of hoping that SG&A grows on a dollar basis next year.

What we've talked a lot about is the fact that, the business is kind of stabilizing and therefore we're starting to look at adding communities to the divisions that are ready to begin moving forward.

And with the addition of new communities comes the addition of new construction people and sales associates that, that we need to build and sell in those communities for our fundamental operation.

So we think that there are going to be some opportunities to add jobs.

And frankly it's a lot of what we are seeing and hearing from our division president that's happening in the broader economy, as we see stabilization, jobs are starting to come back and that's breeding some optimism overall.

I think we're part of the broader economy.

Additionally, and maybe less visible is as our program in Rialto starts to reveal itself, we start to see that in the distressed workout world, there's some job creation in that arena as well and we think that through our Rialto affiliation program, we're going to see some job creation there as well.

Let's be clear.

We have the fixed infrastructure in place to probably deliver another 4000 or 5000 homes today.

And if you look at it from a field standpoint, that's all we need to hire.

The only other variable costs in there will be the commissions associated with the sales of the homes and incremental signage within the communities.

So from a leverage standpoint, we are really positioned to push profits down as we bring on these new associates, and bring the new communities on.

And I'll just add to that, I think we're going to push the costs down, as Rick was saying, but there is a land on some of the SG&A costs.

The other thing to keep in mind, we've incurred a lot of costs this year as we worked ourselves out of a number of leases, and those costs will not be recurring as we go into next year.

So we've taken three or four years to right size the company, but it's been a lag to the reduction and the size of the company.

So there will be a reduction in costs relating to infrastructure.

Okay, great.

That's really helpful.

And I just wanted to follow up on your comments around profitability and make sure that we all have the bar in the same place.

Bruce, when you talk about being positioned for profitability in 2010, I want to make sure I understand exactly what you mean there.

Is that hitting it in a particular quarter?

Is that for the full year?

Is that excluding or including impairment?

By this time next year, what would you have considered meeting that goal?

We're looking for 2010 in total to be profitable.

I did indicate that we expect a loss in the first quarter.

So those are the two components that I've commented on for 2010, and relative to impairments, we certainly -- we're close to $5 billion of impairments over the last almost four years and we think we're really just about done with what we're done with the impairments, unless the market was to turn south from here.

So that would be a positive EPS number at 2010?

Correct.

Okay, thank you.

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

Your line is open.

Thank you.

My question is around the incentives in your backlog.

Can you talk about where those are relative to the 36,000 that you guys printed this quarter, in addition to that?

You said that each division knows where the breakeven is.

Can you talk about these --

Let's start with our sales incentives in our backlog.

We do believe that as we go into 2010, there will be some continued reduction in the sales incentives per home.

So let's just make that statement.

The backlog is an indicator.

So there is some additional improvements coming.

As far as the breakeven, looking at it on a division by division basis, because at the corporate level we have some additional items, financial services, and interest expense that's not in the division.

So it's really a more appropriate number on a division by division basis.

On your last call you talked about each of your 29 divisions being profitable.

How close are you to that goal?

And what else is needed to get there?

Seems like gross margin is clearly moving in the right direction.

How much more do you need to take out of SG&A to get there?

I think in most instance, we're pretty much there.

I think that we've had some extraordinary costs.

This quarter we've taken some additional impairments.

We've, we've done a -- our divisions for the most part are reporting positive operating programs, and I think we're pretty much there.

Yes, and I think your focus is really on the wrong component.

It's -- our divisions are running about as clean as you can run a company right now.

And where the upside is going to come over the next year or two is by having incremental price appreciation, incremental closings, just volume.

It's really cost side growth.

We have pulled about as much costs out of the G&A structure as you can pull out of a company.

If I could sneak one last housekeeping one in there, could I get your spec count at the end of November, as well as your community count?

So the completed unsold, I think I gave that number, was 480 at the end of the fourth quarter.

And the community count was just under 400 for the fourth quarter.

Thank you.

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

Please go ahead.

Thanks.

I wanted to return to the land purchases, the 5000 lots that Rick mentioned you purchased since August.

Now, it sounds like opportunism is the best way to characterize those purchases and it makes a lot of sense and you've obviously been very conservative in terms of buying finished lots and doing a lot of option takedowns as well.

Now, looking ahead, though, that strategy, you know, the opportunity of opportunism, combined with a conservative kind of underwriting outlook is going to be difficult as you get back to growth because it will be difficult to, you know, to return to the volume levels you were in prior years, just focusing on those sorts of opportunities.

Obviously there's going to be a lot more competition as well.

Unless you're planning on shrinking the size of Lennar relative to where it was historically, at some stage you would need to wait into a riskier propositions, in other words, larger, or less developed.

Stuart, I wanted to get a sense from you as to when and if that transition would happen and where we would see that show up.

Would that be primarily in Rialto, or would it also be for Lennar as well?

Well, this is Rick.

Let me take a stab at it and then I'll throw it over to Stuart.

I think that you're wrong with regard to whether some of the deal flow's going to not continue.

There's a tremendous amount of properties that is still held by the banks that they just haven't decided yet to liquefy.

Several of them are making determinations of whether they are going to survive or not.

That, combined with other investors that own property that are working their way through the foreclosure process, the deal flow's going to continue into 2010, 2011, 2012.

I guess in conjunction with that, as the market normalizes and improves, if I follow your assumption there, sales prices are going to go up, which is also going to make some of the transactions pencil out at higher prices.

So in an improving market, it's going to raise the ship all the way across the board.

And we're going to continue to generate deal flow, option contracts, purchase properties, and do things opportunistically.

Okay.

I'm sorry, Stuart.

I didn't know if you were going to add anything to that.

Yes, I think from our view right now we're starting at a base of where we are today in terms of, in terms of the number of deliveries, size of the company.

Looking historically at what we delivered some years ago is not the basis on which we're running the company today.

Right now we have operating divisions that are sized and positioned to be able to operate where they are and they will grow in an orderly, methodical way, generating -- primarily focused on generating profitability.

And, and I do think that, number one, there are an awful lot of opportunities out there that are going to be harvested over the next years.

Number two, I think that there are far fewer players in the marketplace to compete for those opportunities.

Doesn't mean that some of them won't come back, and number three, the Rialto program that we have in place is a significant opportunity for us.

It is an opportunity to participate and, and invest in bulk opportunities, not the types of things that our divisions are particularly positioned to go out and look at, but larger opportunities with mixed assets.

It's something that we've done productively in the past and I think that we'll see a lot of opportunities through Rialto that will A, be absorbed into Rialto, and B, will lead to opportunities for each of our divisions.

So I think that there will be a lot of -- I think there's a lot of -- if there's visibility to anything, there's visibility to a lot of opportunity on the ground and out there that has to be absorbed over the next years.

Got it.

That's great.

And second question is on a different subject.

I've always appreciated your folks' fairly straightforward assessment of conditions out there, so obviously listen keenly when you describe stabilization, improving conditions.

Now, it's always going to be tough in terms of what your reference points are.

Your data reference points when we're in a choppy bottom, I think as you very well characterized it.

I think when you're taking a slightly more optimistic stance, obviously the national data and anecdotally as well, there was definitely some weakening after the tax credit expired.

So I was just wondering what, what kind of -- what's your reference points then for this more optimistic stance?

Are you looking to now, into January?

Are you kind of looking ahead to the spring selling season, or was the apparent weakness not really affecting Lennar as much?

No, that apparent weakness was very real, and I think felt by everybody.

And, first of all, let me say as a reference point, it's very much -- people in the field, in different geographies, giving feedback and giving an assessment of their marketplace, and, and especially at this time of year, the holiday season is a particularly slow time for housing and very hard to get a read.

The information that I am giving to you all today has more to do with the sense and the feeling, the tangible sense that our people in the field are getting from talking to customers, seeing who is coming in the door as traffic, not necessarily pulling the trigger quite yet, but what the general sentiment is out there and the appetite is for building homes, not for buying homes, excuse me.

The $8000 tax credit seemed like it was going to go away and then as I said, thankfully Congress extended it.

The significance of that tax credit is its import in helping to absorb the inventory of foreclosures that are out there, while also providing some impetus for buyers to buy new homes as well.

But the big, the big inventory factor that we have in front of us today still remains the foreclosure issue.

It's not new homes on the ground.

It's existing homes that are going through a foreclosure process, an REO process, and finding their way onto the marketplace.

And what we're finding is that extension of the $8000 credit is really a boon to absorbing that inventory and getting us back to a normal playing field where then without the training wheels of, of government stimulus, we can start to rebuild the back bone of housing as it was in years past.

So my perspective right now is that with unemployment no longer rising at the rate that it was, with a little bit more confidence in the step of the buyer, with the absorption of some of the foreclosure in relevant areas, kind of accelerating, I think that as we go through this, as we go through the beginning of this year and into the selling season, we're likely to see some stability, and I think that even as we, as we see the dissipation of the $8000 credit at the end of March, that, hopefully we're going to see the foundation form of a more stabilized environment for housing going forward.

We'll have to wait and see.

There's nothing certain about what I'm saying, but these are the data points, incentives that I'm getting from people on the ground, our people on the ground in diverse geographies.

Okay.

That's very helpful.

Thanks a lot.

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

Your line is open.

Thanks very much.

I was wondering if you could talk about the supply side, when you talk about land transactions -- the opportunities there, how much do you see for 2010 do you think this could potentially increase your community counts for 2010 versus 2009.

Dan, you broke up a little bit.

If you could speak up a little.

Sorry.

Do you think the land transactions that you see are numerous enough -- confidence in the market that you could end up with an increase in community count year-over-year 2010?

Yes, I think that we will have a rise in community count in 2010.

Just from an overall standpoint, we've got about 25 divisions right now, and it would not be unrealistic for each division to put on another two communities in the market.

Okay, and then secondly, you talked about some of the benefits of pushing on prices as opposed to volume has a greater long-term effect.

As we look at other builders and competitors where they talked about increasing their spec home construction with the tax credit extension here, do you worry about that at all?

Do you think that you basically have to follow suit and go for a little bit more volume?

No, I think that everybody's got a slightly different strategy and, and as we've seen many times before, there isn't one strategy that's the right answer.

We have our answer.

I think that we're going to stay very focused on profitability on a division-by-division basis and making sure that we're maximizing profit out of the valuable acquisitions that we put in place.

I think this we will have, you know, we will have the benefit of perhaps some -- an increase in community count.

I think the biggest factor, though, Dan, is the foreclosure landscape.

And I think that the single most important thing that we can look for and hope for is that concurrent with the absorption of some of the inventory that's out there, perhaps the government lands on some strategies to keep people in their home.

I know that they are working hard at that and to the extent that we find that there's some strategy that keep people -- that help with either payment abatement or maybe some principal reduction or something, that will be the most meaningful effect on the supply landscape and whether one builder or another adds a little bit of standing inventory or not is not the -- that's not the biggest part of the market right now.

Okay, thanks very much.

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

Your line is open.

Thanks.

Good morning, guys.

I was wondering, Rick, could you just describe on the, or if whoever wants to take it, on the new deals and what you're looking at, kind of how you look at how returns or margins compare to what you, I guess what you just reported?

Like I say with the backlog, really what you just reported, any color you could give there?

Well, on the new transactions, as I've said, we're really looking to have gross margins in excess of 20%.

We would like fully loaded G&A, so pretax margins in the 10% range.

We didn't report a 10% pretax profit for the last quarter, but that's what we're looking for on new underwriting.

And to the extent we put more cash out there, the returns need to be greater.

Jon?

I think as you look at it -- based on our gross margins, which we expect will have some slight improvement as we move forward, these new deals as we layer them on top of our existing deals should help that gross margin grow.

As we mentioned already, we've got a very right sized adjusted company now division by division.

So those high gross margins will drive an improved bottom line margin.

Okay.

All right, thanks.

Then I guess maybe for Bruce, looking at the JV reduction and how much -- was there a chunk of that or significant chunk that moved on balance sheet, and I guess maybe tied into that is land you have sold or for sale that you reserved for against, did much of that come from the JV category or was that already on balance sheet?

Well, the first question there, there was one joint venture in particular that moved on the balance sheet and was consolidated this quarter.

But as far as the land sales, if you are referring to the land sales that we talked through, those land sales were all to third parties that I mentioned, which was included in the impairment numbers.

Let me say, with that said, the joint venture discussion is really becoming pretty small relative to the company these days.

And we're really enthusiastic about that, because it's created an awful lot of noise.

And the lion's share of the ventures that we have out there right now are going to move through to completion in the normal course.

Many of them are good solid well-run, good working joint ventures that are going to generate cash flow, pay off their debt and return capital or actually provide profit to the company.

So I think that we've made some meaningful progress, sometimes taking some assets on book, sometimes, you know, taking some impairment.

But I think we've put a lot of that, or all of that kind us at this point and the joint venture stress is for the most part out of the system.

All right, good.

Thanks.

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

Your line is open.

Hi, good afternoon.

First of all, on the tax strategy that you all employed for fiscal 2009, what does this imply for potential impairments and is there the potential for any more tax refunds in the future?

Well, Jay, good morning.

We did maximize what was available to us with what was enacted in the fourth quarter with the NOL carry-back.

So the $320 million that we talked about, that was the maximum available to us.

So we are not expecting additional refunds beyond that.

Okay, and any implications for impairments we should read from it?

Any implications for impairments?

No, I think as I indicated in the impairments this variety -- last several quarters embedded in that, we took approximately 133 million of additional impairments that qualified for that NOL carry-back.

So I think the additional impairments related to that have already occurred during the quarter.

Well, I think, I think you can read something into that, and that is that, you know, basically by enacting the NOL carry-back and by us getting involved in being able to maximize it would probably move forward impairments that we might have taken, or might have seen in the future, and probably have drawn to a close or a minimum anything that we'll see as we go forward.

I think we're, I think we're back to a normalized business model today, and I think that's part of what has us enthusiastic about closing out 2009.

I think that the NOL carry-back facilitated moving beyond the impaired environment that we've been in.

We can start adding communities and frankly, adding jobs, which I think was the import of exactly that legislation.

Okay, and then my other question, I believe last quarter that you talked about buying land in Texas, California, Florida, and just wanted to know, are those the same geographies where you're finding deals now, or are there other geographies that are opening up for you?

We've been really focused nationally.

I think that we had participation in every market.

Okay, great.

Thank you.

Thank you.

Why don't we take one more question.

Our last question is coming from Ken Zener, Macquarie.

Please go ahead.

Good afternoon.

Good afternoon.

I just want to look into the fixed G&A structure that you guys have, because it seems when you talk about normalized margins, if it's 20-plus on the gross margin -- the real issue considering selling the variable is it's moving your G&A, fixed G&A percentage down and that percentage I think will actually be quite a bit more than your gross margin move-up.

If you have enough staffing for 4000 to 5000 more closings on the basis of 11,000, when do you expect to get in a G&A, the fixed G&A structure more in line?

Are you looking for that much growth in 2010?

I doubt it, right?

So how do you get that fixed G&A structure down relative to the revenue?

Is it some pricing assumption?

With flat communities, it seems hard to get that much volume to absorb the fixed G&A.

When we talked about the 4000 or 5000 incremental closings that we could do through the machine, that was not a suggestion that that's what we're going to do this year.

I think the built-in infrastructure on a divisional basis, to handle incremental communities, where you only have to hire a builder, and someone that's going to manage the sales process at the local level.

Because the division is scaled to handle more.

If you just aggregate that up across the country, we've got that kind of built-in capacity for the infrastructure.

As that volume starts to appear and we generate that, whether it's this year, next year, or 2013, the overall SG&A margin will go down and that fixed G&A will be covered by those incremental top side revenues.

Does that answer your question?

It does.

The magnitude of the volume, though, so if you guys -- depending on how you -- how we would back into your fixed G&A, seems like that could actually drop.

If your SG&A was 16% this quarter, the selling is variable at 5%.

You have a high fixed G&A structure, which we could back into on a dollar basis, which seems like you would need a lot of revenue growth to get profitability because the gross margins moved up quite a bit.

I guess what is the units under construction, is the other question?

Homes under construction, as we ended the year, were approximately 3400.

And the (inaudible)?

Right.

So of the 104,000, let's just look at that.

78,000.

Thank you very much.

Happy new year.

Same to you.

Thank you.

And, listen, thank you, everybody, for joining us for our call.

We look forward to moving into 2010 and reporting as we go forward.

Thank you.

This will conclude today's conference.

All parties may disconnect at this time.