Lennar Corp (LEN) 2010 Q1 法說會逐字稿

Thank you for standing by and welcome to Lennar's first 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.

Today's conference call is being recorded.

If you have any objections, please disconnect.

I will now the 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 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 statements.

I would 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 would like to thank you, first, for joining us for our first quarter 2010 update.

This morning I am joined, as always, by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President and Treasurer, and David Collins, our Controller.

Additionally, I am joined by Rick Beckwitt, our Executive Vice President, and Jeff Krasnoff, the Chief Executive Officer of our Rialto segment.

I am going to begin this morning with some brief opening remarks about the current housing market in general, and the progress we have made on managing our balance sheet and joint ventures.

Since we have just finished our quarterly operations review with our regional Presidents here in Miami, Rick Beckwitt, who stayed over to participate in this call, will overview our homebuilding operations, while Jon Jaffe, our Chief Operating Officer, is back in California.

And then, Jeff Krasnoff will comment on our Rialto segment positioning for 2010 and beyond.

Finally, Bruce will provide additional detail on our numbers.

And then we will open the phones to your questions.

And as always I would like to request that in our Q&A 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.

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

While the new home market and housing in general still face serious headwinds from current economic and legislative conditions, the market and overall economy appear to be continuing to stabilize and are generally in recovery.

As we have expected, at least as it relates to housing, the 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.

The overhang of foreclosures and the prospect of additional delinquencies ahead continue to moderate recovery, as shadow inventory continues to be absorbed and then even replenished.

Unemployment and a generally sluggish economic bounce back combine to hold demand at traditionally low levels.

And the prospect of a pull back driven by elimination of legislative and fiscal incentives limit visibility and create pending uncertainties about the immediate future of the strength of the market.

And finally, the debate over whether inflation or deflation lies ahead and the impact of sovereign credit risks add uncertainty to the view ahead of interest rates.

Nevertheless, as we reviewed our operations from the field, geography by geography, there's some common themes that appear to be validating the current trend.

First, prices are not free falling, and in fact in many markets are continuing to stabilize and even recover.

In most of our divisions, there continues to be a meaningful reduction in the incentives used in the sales process, and that fact is reflecting itself in higher gross margins.

For the Company overall, incentives were 12.5%, down from 13.2% last quarter, and 17.1% last year.

And margins improved on a pre impairment basis, to 20.3% from 17.8% last quarter and 14.3% last year.

While these trends are vulnerable to the upcoming elimination of the $8,000 tax credit and the elimination of fiscal stimulus to the lending markets in the short term, it seems that the momentum provided by consumer confidence and home affordability will likely equalize their impact over a short period of time.

These government programs worked very well as a kick start to a free falling housing market but it now seems that the free market is positioned to take over in orderly fashion.

Second, inventories of new homes remain significantly reduced.

While there has been a great deal of talk about potential spec building of new homes to beat the end of the tax credit, we are finding that that is limited.

In most markets, new homes are still 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 is helping to reduce incentives.

Next, while foreclosures continue to be a significant driver of absorption and pricing, the effect is continuing to decline as the bulk of foreclosure activities is situated in areas that do not compete with new home construction such as the inner city 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 $8,000 tax credit has facilitated that clearing process and has helped enable a return to normalcy.

In our operating meetings we found that a number of our markets were no longer affected at all by foreclosure homes as they had already been absorbed.

I have noted many times that housing is a localized business, and inventories in micro markets, not broad geographic markets, are most important in considering demand trends.

Finally, we have heard that unemployment rates in many of our markets is at least stabilizing and in some instances beginning to recover.

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

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

With the ground now firming beneath us, and with the solid foundation of our balance sheet, we are able to find new acquisitions of home sites to build new communities where homes can be delivered at responsible profit levels at today's price level and given zero market appreciation.

And Rick will give further color on our operations and we will talk about our acquisitions.

As you can see from our press release this morning, at Lennar, we have continued to position our Company to return to fundamental profitability in 2010.

We have made meaningful progress in preparing our Company for a stabilized and ultimately recovering housing market.

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

Through the end of last year, we aggressively impaired or disposed of assets that would not add to our profitability in the future.

This process enabled us to both clean up our balance sheet while maximizing the tax benefits derived from the net operating loss carryback extension that Congress enacted last year.

This in turn has enabled 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.

In the first quarter, we made meaningful investments that we believe are positioning our Company for success.

After a rather long four and a half years of mending process, we are pleased to finally be using our cash again to invest for future profitability, rather than support impaired property.

Our balance sheet remains fortified with the homebuilding and Rialto debt to total cap ratio net of cash of 45.9%, and homebuilding cash of approximately $1.15 billion, which includes the $230 million cash taken in two days after the end of the quarter.

The number of joint ventures has fallen to 58 currently and that is down from 62 last quarter.

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

We expect to continue to reduce this number as we go forward into 2010.

Additionally we have continued to reduce our maximum recourse debt to the Company to $279 million.

Finally, on the opportunity side, we have made our first strategic investments in the Rialto segment of our business.

As I noted in prior quarters, we have been preparing to be a significant participant in the distress opportunities that naturally present themselves in down cycles.

We have been incubating an operating team of experienced professionals for the past two years.

The team is now formed and we have begun the process of actively investing in unique distressed investments.

Mid quarter we announced the acquisition of over $3 billion of face value of loan, in partnership with the FDIC, and we described our progress on our PPIP program with AllianceBernstein.

While I will let Jeff Krasnoff update you on those programs, I will note that we have made meaningful invements that we believe will add significant shareholder value.

This is a tough business but we do it exceptionally well.

Yesterday evening we had our weekly asset managers meeting and as I reviewed assets with our managers from around the country, I was enthusiastic to see just how comfortably we operate and manage this very unique segment.

We are clearly beginning to see more opportunities present themselves in this area, and with our unique expertise we expect to be an active participant in this part of the market recovery as we feel these investments can add outsized returns to our recovering homebuilding operation.

At the end of the day we are very pleased with the progress that we have made to date and the very exciting position that our Company is currently in.

Our balance sheet is strong, and positioned with adequate liquidity to support investment for our future.

Our core homebuilding operations are positioned for success, and beginning to grow again, adding communities and leveraging our rightsized overhead.

And our Rialto investment segment is now fully operational and investing capital to create strong returns as we build profitability.

While we recognize that the current economic environment is fragile, at best, we feel today that we are extremely well positioned to navigate the rocky bottom and ultimate recovery that lies ahead.

With that, let me turn it over to Rick Beckwitt to give you color on our homebuilding operation.

Thanks, Stuart.

During our regional Presidents meeting yesterday, we reviewed the operating performance and market position of our 24 homebuilding divisions.

While there is always room for improvement, I am pleased to say that the homebuilding group as a whole, in 75% of our divisions, are exceeding business plans for the first quarter.

Our actual performance exceeded internal plans in several categories, be it gross margin, SG&A, operating income, or new sales orders.

Across the board our divisions are positioned in 2010 for substantial improvement over last year.

We have home designs and floor plans that are positioned for success in this extremely price sensitive and value oriented market.

More importantly, our unrelenting focus on value engineering, construction costs, and cycle time has enabled us to reduce our per foot build cost to levels we haven't seen in over a decade.

With that in mind, I would like to drill down and give you some additional color on our individual markets.

But keep in mind as I discuss the current market trends, that even some of the weakest markets -- we are in some of the most recent troubled markets, we are positioned to make money given our reduced SG&A, low cost plans, and the new land deals we have signed in these distressed areas.

Let's start in Florida.

The strongest markets in Florida are Miami Dade, parts of Broward, Sarasota, Naples, Orlando and Tampa.

These markets have firmed due to increased affordability.

Foreclosures and resale listings on the MLS are down significantly in each of these markets.

We have seen increased traffic and have been able to increase prices or reduce sales incentives.

In addition, new sales per community are on the rise.

There are different things driving the improvement in each of these markets, be it the lack of entry level product in Miami Dade, the return of value-oriented out-of-state second-time buyers in Sarasota county, active adult buyers sensing a low point in pricing in Naples, or increased financing available for foreign buyers in Orlando.

We are extremely well positioned in each of these markets.

Despite the huge overhang of high-rise condo product in Miami, the single family side of this market is doing extremely well.

The weakest markets in Florida continue to be Palm Beach, Port St.

Lucie and Ft.

Myers, although we have seen some recent stabilization in Ft.

Myers.

Unemployment, foreclosures and resales will cause these markets to take a while to recover.

Most of the builders in these markets have gone bust or left the market.

This has created a unique opportunity for us to do extremely well in a troubled market.

In the Mid Atlantic, Maryland and Virginia are some of the best markets in the country, notwithstanding the poor recent weather in those markets.

These markets bounced back quickly with government spending in the region.

We have been able to increase prices in both markets, but Maryland is a much more price sensitive market than Virginia.

New Jersey is a very stable market.

It's land constrained with no foreclosures or resale issues, and we have been able to slowly increase pricing and absorptions.

We have a strong active adult position in this market that has performed extremely well.

The Carolinas are a mixed bag.

Charlotte is a tough market with 13% unemployment, high foreclosures and a large number of homes on the MLS.

The market is very volatile with pricing continuing to edge down.

We don't see that market returning until the banking sector starts to rehire.

Raleigh, on the other hand, is an extremely hot market.

Foreclosures have been absorbed by the market and resales are decreasing.

We have seen strong traffic and have been able to increase pricing.

Our team in Raleigh is at the top of their game.

Myrtle Beach is in the early stages of recovery, and Charleston has seen some pricing strength given the employment growth in the area.

In the Midwest, Minnesota is starting to stabilize but Chicago continues to be a very weak market.

We see no signs of recovery in the Chicago market any time soon.

The labor unions have created a cost/price equation that makes this market very problematic.

Fortunately we have got a lean team in Chicago that's focused only on cash flow.

In the Texas markets, Dallas is the weakest part of the market.

Foreclosures and resales remain at elevated levels.

While the banks have started to slow down forecloses and have shifted the short sales, the market is not poised to improve until the end of 2010.

That said, we are seeing good profitable sales activity in our well located communities, in Dallas.

Houston is the most stable part of the Texas market and our largest market.

Resales and foreclosures have declined, our master plan communities are doing extremely well, and we have been able to slowly increase pricing.

Auctions in San Antonio have stabilized, traffic is up, especially at the low price points, and in the better located communities.

Military spending and the troops return into the area will continue to draw this market.

In Colorado, we are starting to see real market recovery in Denver.

Traffic has improved significantly with real qualified buyers.

We are beginning to see some pricing power.

In the desert areas, let's talk about Arizona.

Arizona continues to be soft, but it is improving.

Phoenix is in better shape than Tucson but both markets, activity is very community specific.

Traffic, for the most part, is flat and we have seen a modest improvement in foreclosures and resale listings.

As you would expect, the lower price points are performing better than the higher, and the further you get out of town, the weaker the markets get.

Las Vegas is very similar to Arizona.

It is a tough market.

With unemployment at 13%, the market will take some time to recover.

While foreclosures and resales are trending down, pricing is extremely tough.

The high end is dead and the entry level is improving.

We are fortunate to have almost no legacy assets in this market and have been able to secure some incredible new distressed deals that will make money even in this down market.

In California, the well-located communities have bounced back very quickly.

In the Inland Empire, there is great affordability.

Our communities in Corona, Murrieta, Rancho Cucamonga, and San Bernadino are doing extremely well.

But the outlying areas of Hemet, Beaumont, Palm Springs are lifeless.

Fortunately, we have very little presence in these areas.

The LA and Valencia market is improving, but they are a little softer than the Inland Empire.

This area has stabilized with buyers chasing a new affordable product.

Orange County, Irvine, Buena Park are pretty good markets, traffic is up significantly, and we have been able to raise prices.

Bakersfield and Fresno markets are still hurting as the combined impact of high unemployment, foreclosures and resales have made this the toughest area of California.

Finally, Northern California, the Bay Area is extremely strong, while Sacramento is still sluggish.

While it is off its low, Sacramento won't see meaningful growth until the state government starts to grow, as well.

But as in other soft markets our downsized product and restructured operations will allow us to be profitable in this market.

I hope that gives you a better read of how things are geographically, and how market and community specific this recovery truly is.

Neighboring micro markets can have completely different prospects.

In that context, I would like now to focus on our land acquisition strategy.

We have been extremely active pursuing new land opportunities since the beginning of 2009.

Our primary focus has been on finished homesites that we can acquire on an option basis with little or no upfront deposit.

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

Recently we have used our balance sheet to cash out some distressed opportunities that provide significant margins.

These purchases range from buying land directly from banks, cash strapped developers and builders, foreclosure sales, short sales, and even backing into assets by purchasing loans directly or by acquiring CVD obligations.

Yesterday Stuart and I reviewed each new land deal we have signed since the beginning of 2009.

All of these deals were underwritten with extremely conservative assumptions.

They assumed no price increases, a slow sales pace, and were priced to yield gross margins and IRRs exceeding 20%.

I am pleased to report that almost all of these deals are exceeding underwriting.

Our underwriting and review process is extremely tight.

Jon and I are reviewing every transaction and no money leaves this Company without a thumbs up from me, Jon or Stuart.

In the last quarter we were very opportunistic and selective with our new transactions.

We put under contract approximately 4,000 homesites located in 73 new communities.

While I can't give you too much color on all of these deals I can tell you that they are all high margin opportunities.

As you can imagine, our focus is to leverage our existing operations and take advantage of the market distress.

I would like to highlight one of the more interesting deals we put together in the last quarter.

We have a great working relationship with Starwood Capital.

They were selected as the stalking horse bidder for two Florida assets in the bankruptcy process.

These land holdings constituted one of the most desirable real estate portfolios to come to market in years.

We worked with Starwood to create a truly win-win transaction.

We helped Starwood underwrite these assets in exchange for an option to purchase these assets if they were the successful bidder in the bankruptcy auction.

The great thing about the deal is we had an option contract in place before the auction started so that Starwood could go into the auction with precision about their financial returns and we had locked in pricing before the auction started.

We are thrilled with the outcome.

We now have an option to purchase 1,400 homesites, located in 38 communities, in Jacksonville, Tampa, Orlando and southeast Florida over the next 24 months.

In addition, we have secured a right of first offer on an additional 1,348 homesites after the 24 month period.

These options have flexible takedown schedules, produce gross margins in excess of 20%, have IRRs north of 20%, and allow us to leverage our existing SG&A to produce increased profits.

Before I turn it over to Jeff, I would like to thank our folks in the divisions for the hard work and focus they've had during these difficult times.

It is their attention to detail that allows us to return to profitability.

Good morning.

It has been a while since I've had an opportunity to participate in one of these conference calls.

It's great to be back, and thank you, Stuart and Rick, for the invitation.

On the Rialto side, we have now been at this now for over two years building a team here inside and alongside Lennar.

Our team contains a lot of familiar faces, a number of whom were here a couple of decades ago when we did something very similar.

We have also had an opportunity to set up our systems, levering off of Lennar's infrastructure, and have had an opportunity to get deep into the markets thanks to the unique view that only Lennar's operating team could provide.

We have also focused on opportunities, patiently evaluating tens of billions of dollars of distressed real estate, loans, securities and properties.

As expected, for quite some time, owners of troubled assets could not afford to part with those assets at the prices appropriate for those who might be better equipped to maximize value.

So, similar to what we have seen in prior real estate downturns of this magnitude, we expected the US government to act as a catalyst to help kickstart the clearing of assets and to create price discovery.

We have initially pursued opportunities to partner with the government in programs similar to those that we saw in the early 1990s.

For example, last summer, we became a sub advisor to our old friends at AllianceBernstein in the Treasury's legacy securities Public-Private Investment Program, or PPIP, and became one of eight sponsors selected to participate.

Together, we raised over $1 billion of private equity commitments, that is being matched by Treasury equity, and advantageous match term financing from Treasury.

Lennar has made a $75 million commitment to that program.

And just over half of that has been funded to date.

We also have closely watched the activities of the FDIC, and as you are aware we are now partnered with them in two entities that acquired about $3 billion of real estate loans.

We worked for over four months on the underlying due diligence.

And because of the high content of loans made to developers, having Lennar's unique view, we believe, gave us the distinct advantage in our evaluation of those assets.

We closed the transactions with the FDIC just six weeks ago and have just about completed the task of bringing all of the loans in from the 22 different receiverships.

In addition, during this short time, we have already had contact with a majority of the larger borrowers.

Borrower meetings are going on as we speak.

A few of the loans have already been resolved and are being documented, and cash is being collected.

We see the potential opportunity as being extremely large.

Looking at the FDIC alone, there have been almost 200 banks seized during this cycle, and another 700 are on the watch list.

The 22 institutions included in these first few structured transactions made up over $4 billion of unpaid principal balance alone, just to give you a perspective for the size of this opportunity.

Many of the remaining troubled institutions have loans similar to the ones in the two transactions we just closed.

And we are up and running and continue to have that unique Lennar advantage.

We also anticipate that our involvement in sourcing and evaluating these assets will continue to yield one off opportunities for the Lennar homebuilding operations.

The Rialto team is very excited about how we are positioned and look forward to reporting to you on our progress in future quarters.

I will turn it over to Bruce.

Thank you, Jeff, and good morning.

As we indicated in our fourth quarter conference call, we expected a first quarter loss due to low projected deliveries.

For the quarter, we reported a loss of $0.04 per diluted share, compared with a $0.98 loss per share in the prior year.

Revenues from home sales decreased 2%, to $513 million.

That was due to a 7% decrease in home deliveries excluding JVs, partially offset by a 6% increase in the average sales price to $258,000.

The overall average sales price increase was partially due to a larger percent of deliveries from California.

The average sales price changed regionally year-over-year as follows.

The East region was $229,000, up 2%.

The Central region was $208,000, up 7%.

The West region was $375,000, up 8%.

Houston was $213,000, up 10%.

And the other category was $255,000, down 12%.

Our pre impairment gross margin improvement to 20.3% compared with 14.3% in the prior year was driven by a couple of items.

Primarily it was due to a significant reduction in sales incentives of $14,000 per home as it declined from $51,000 in the prior year's quarter to $37,000 per home in this quarter.

So that was a reduction from 17.1% of home sales to 12.5% in the current quarter.

The lower sales incentives for home is a result of the improved selling environment, our repositioned product strategy, as well as fewer completed unsold homes.

Additionally, our gross margins were favorably impacted from the progress in reducing construction costs per square foot that Rick talked about.

Turning to impairments, we had a very significant reduction in impairments this quarter.

It was $10.1 million compared with $88.5 million in the prior year, and approximately half of that number in the current year was related to homebuilding related impairments.

We are now realizing the benefits from our aggressive cost cutting measures, as we reduced SG&A costs by $20 million or 20% year-over-year.

SG&A as a percentage of revenue from home sales was 15.8%, which decreased 360 basis points from the prior year, and 40 basis points senquentially from our fourth quarter.

Our financial services segment had a small loss of $900,000 versus $492,000 of profit last year, as a result of lower volumes in both our mortgage and title operations.

Mortgage pretax was a profit of $2.9 million versus $6.2 million in the prior year.

And our title company reduced its loss to $3.4 million versus $5 million in the prior year's quarter.

Turning to the Rialto segment, with the investments we made this quarter in Rialto, we wanted to provide investors full transparency and we established a new (inaudible).

There was a $1 million operating loss during the quarter, compared with $600,000 in the prior year.

Revenues during the quarter included $300,000 for PPIP advisory fees.

There were no revenues recorded during the quarter relating to the partnership with FDIC, as most of the loans acquired had not been transferred from FDIC's existing servicers prior to the end of the first quarter.

Our investment in the FDIC partnership will begin contributing to revenue in the second quarter.

We did recognize $1.4 million of expenses in this segment, in the first quarter.

And these were costs for due diligence costs in connection with the acquisition of the real estate loan portfolios in the partnership with the FDIC as well as Rialto general and administrative expenses.

We also recognized $143,000 of equity and earnings which is primarily our investment in PPIP.

As Jeff mentioned, we actually invested $41 million of our $75 million PPIP investment commitment throughout the first quarter.

We recognized a tax benefit during the quarter of approximately $12 million, and this related to a reversal of a state tax item that we provided in adopting FIN 48 back on December 1, of 2007.

This item was recorded in 2007 because it did not meet the more-likely-than-not standard required by FIN 48 and in the first quarter, we reached an agreement with the state resulting in this reversal.

In the first quarter we continued with a strong balance sheet.

And while we strategically invested approximately $0.5 billion between new land acquisitions and Rialto investments, we still focused on maintaining a strong balance sheet.

Stuart mentioned the combination of our homebuilding cash, restricted cash and tax receivable totaled $1.15 billion at quarter end.

And the tax receivable we talked about in our fourth quarter came in in two pieces.

$92 million came in during the quarter, and the remainder $230 million was actually received on March 2.

We terminated the Company's credit facility in February, and we entered into cash collateralized letter of credit facilities which will result in $8 million of annual savings.

Our leverage remained low as our homebuilding and Rialto debt to total capital net of cash was 45.9%.

And we also retired $90 million of homebuilding debt during the quarter with the majority of this debt having a maturity that came due in 2010.

We continued to carefully manage our inventory, as we reduced wholly owned completed unsold homes year over year from 1,321 to 572.

We closed on approximately 3,300 homesites during the quarter, totaling $154 million of new land acquisitions.

Inventory declined from $3.9 billion in the prior year, to $3.6 billion in the current quarter.

And that excludes consolidated inventory not owned.

We had just over 3,000 starts during the quarter which was up 46% year-over-year.

And there were 83,000 homesites owned and 21,000 controlled at quarter end totaling 104,000 owned and controlled.

Of the remaining 58 joint ventures that Stuart mentioned, only 21 have recourse debt, 15 have nonrecourse debt, and 22 have no debt.

Additionally, we reduced our maximum recourse indebtedness to $279 million at the end of the quarter, and our recourse net of reimbursement agreements fell to $186 million.

We continued to be successful in extending joint venture loans upon maturity as we extended an additional six during the quarter.

In our first quarter, there was a new accounting standard, 810, that requires companies to include minority interest in the equity.

And as a result, we included $544 million of noncontrolling interests in the equity section of our balance sheet.

In conclusion, the Company is financially strong, and our strategies have positioned us well.

Our operating margins are at the highest level in four years, with a strong improvement in our gross margins.

Our sales incentives are at the lowest percent of home sales since 2006.

Impairments were reduced by about 90% during the quarter.

Our SG&A is now rightsized and has declined as a percentage of home sales, even though home sales declined.

Our backlog is up 34%, that is the largest year-over-year percent increase since 2002.

Additionally, our cancellation rate of 13% is the lowest we have seen in many years.

We will see positive contributions from the new land acquisitions that Rick talked about as new communities open.

And as Jeff's group continues to work through the FDIC investment that we made in the first quarter, Rialto will begin contributing revenue from the FDIC partnership in the second quarter.

We are clearly on our way back to profitability.

With that let me turn it over for questions.

We will now begin your formal question-and-answer session.

(Operator Instructions).

Our first question is coming from David Goldberg, UBS.

Your line is open.

Good afternoon, everybody.

The first question I wanted to talk a little bit about was if we could talk about buyer quality.

I'm really trying to get an idea if you're seeing any fall-off in buyer quality in terms of who's coming into the community, as the tax credit runs on.

Are you seeing FICO scores come down at all?

Are you seeing LTVs increase?

And how do you think about, with the tax credit maybe we have just pulled forward too much demand and what's left out there in your market?

This is Rick.

I will take this one.

With regard to the quality of the buyers coming through the community, I would says it has remained relatively high.

Folks out there are not just shopping or looking for furniture, they're looking to buy a home because prices are in the affordable range.

Credit scores really vary dramatically by market.

So it would be tough to really give you an overall view as to whether they're on the rise or on the fall because they vary by markets.

With regard to the tax credit accelerating demand, we think that some demand has been accelerated, there's no question of that, because there's a fall off between when they get that opportunity back from the government.

But it is really difficult to assess what the impact of the elimination of that is going to be.

Got it.

Quick follow up question here.

Are you guys seeing more opportunities for M&A with private builders as a way to access land and maybe pricing becoming more reasonable on those opportunities?

It might be out there, David, but it's not our focus right now.

We are really looking for off the beaten path opportunities.

We don't want to go into the head to head environment.

There are still a lot of developed home site opportunities out there that are either on the market or have not yet hit the market.

And right now, we are finding organic ways to expand our footprint within our operating division, leveraging overhead, one real carefully underwritten deal at a time.

All right, thanks so much.

Have a good morning.

Our next question is coming from Dennis McGill, Zelman & Associates.

Your line is open.

Good morning everybody.

The first question, just with some of the macro numbers that are floating around on the new home sales side, it's not a data point we put a lot of credence into, but can you just talk about the orders in the quarter and how it trended relative to your expectations.

And any color you can provide on March as well would be helpful.

Throughout the quarter, first of all, Dennis, we generally don't give the mid quarter update, but throughout the quarter I think you will note that it followed the typical seasonal trend.

December tends to be a little slower because you have the holidays and it starts to pick up as you get closer to the Super Bowl.

And I would say that it followed the typical seasonal trend.

And that trend relative to your expectations was largely in line?

Yes, it was absolutely in line.

Okay.

And then, secondly, just as we talked about some of the lot opportunities that you have capitalized on, can you scale what you have put either under contract or officially closed on over the last, let's say, five quarters or so relative to the whole 104,000 lots you control?

Clearly, the margins in the more recent transaction deals we have signed or actually have closed on, are much stronger than the totality of the balance.

And we have been taking advantage of the distress that's out there.

And you will start to see the benefit of the margins associated with those deals as we increase the building activity.

But with that in mind, we have been very regimented in how we deal with our existing inventory.

And as you know, we were early to the game with regard to taking the appropriate impairments and we have seen that move through the system.

What I am trying to get a size of is the percentage of those lots that would fall in that first category of lots.

I don't think we have it broken out but I guess the newer homesites are increasing, it is probably closer to 10% of the total now.

But we are clearly depleting some of the older communities and replacing with newer well-positioned higher gross margin communities, and that's a trend.

Okay, that's helpful.

Good luck, guys.

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

Your line is open.

Good morning.

My first question is on the FDIC.

I am ultimately trying to understand how revenues will ramp up in Rialto, in addition trying to ultimately understand how the cost will ramp up there as well.

It is pretty clear you guys just had the senior management team compensation there.

But as the revenues start to ramp there as you guys get some more cash from those loans, what should we be thinking about as far as modeling that out?

Let me start with the cost side.

We are, first of all, looking at the growth of that business, as we buy or participate in new acquisitions and investment opportunities embedded in these deals is an offset of the cost side.

So there's a fee structure in just about any investment we are making, and each investment should be paying for itself on a current basis as we go.

So for example, the FDIC deal has a fee structure that will be funded from current cash flows that we are very comfortable are already there and will continue to be there.

That's a direct offset to the overhead that is incurred.

There might be a minor adjustment one way or the other, but by and large the deals will pay for themselves.

In terms of the ramp up of revenues and profitability, it's always been that that business is not modelable.

The income and the resolution of assets in that business have been, I hate to say it this way, as they happen.

But what we do envision is, while overhead will be basically a zero or covered, we think that profitability will ramp up as we move forward.

We generally find that as we touch and get involved in more and more of a loan portfolio, the resolutions happen in orderly course.

And so there will be a trajectory but I don't think that we can put our hands on a metric that gives us visibility as to how quarter by quarter those profits will come in.

The other side of that question is I was out in California talking to some of your competitors for the FDIC stuff.

In the deals that they have won, they comment that the moment you get the "hello, goodbye letter", as soon as you contact someone, there's a good group of folks who right up front up and decide, "Hey, I'd like to to pay my loan off, I haven't been able to find anyone to work through this loan with," that there's a good chunk of dealings that happen in the first couple of weeks, months.

Are you guys experiencing that upfront?

And then my last follow up is for Bruce and maybe Stuart.

The cash balance has come down pretty drastically, not that it is a bad thing because you guys want to invest here, but I would like to know what you guys want to keep on the balance sheet at this point of the cycle.

Okay.

As to the first question -- the first part, let's say, we'll call it all one question, But, as to the first part, we are definitely seeing activity as we start to speak to borrowers, and the activity is that people say, "I haven't had someone to speak to, we'd like to pay off." But you have to temper the enthusiasm around that with some borrowers will say, "We haven't had someone to speak to and we've wanted to pay off" and then dot-dot-dot, "at a discount." There's a process involved here.

Everybody would like a big discount and then maybe a little less of a discount, and the question is getting to the right number.

So it takes a little bit of time even where people have been anxious to speak to someone.

So it is a process.

We have a lot of experience with it and we know that as time goes forward we will see more and more resolutions at proper numbers.

As it relates to the depletion of cash, as I said in my comments, it is gratifying to be again investing capital in profitable opportunities for the future, and we think that's the mandate of the Company.

And so, as we look at our cash balance, be invested as opposed to depleted, we're positively inclined towards that.

I don't think that it is in ours or our investors' best interests to have a great deal of cash on our books earning 1% or less, and so we are looking for strategic investment opportunities to deploy capital.

You are seeing some of that happen in the first quarter.

We are looking, as we look ahead, at opportunities to deploy more of that capital, while we maintain adequate reserves to fund our ongoing operation, recognizing that we have eliminated our revolver in this past quarter.

There used to be 40% to 45% net debt to cap ratios that you guided to or at least the industry guided to.

As you guys are sitting there now, is that something that you are focused on or not right here?

We have always tried to stay in a range around that level, recognizing that the Rialto investment is a large consolidated venture that has moved the needle there and under normal circumstances would not have.

So we think we are comfortably in that range, especially as we in our own mind take out that large debt component, nonrecourse debt component that's associated with that.

Thank you very much.

Josh, let me just add that, remember, as you look at our debt to total capital, we have a $650 million deferred tax asset reserve that we do expect to come back into equity over the next four quarters, give or take a quarter.

Four quarters, that's relatively quick.

Thank you.

Our next question is coming from [Adam Bruegger], Wells-Fargo.

Your line is open.

Good morning.

I had a couple of questions on margins both on the growth side and on the cost side.

On the gross margin, how much of the $10 million impairment was in the homebuilding cost of goods sold?

I'm just trying to get to pre impairment homebuilding gross margin this quarter.

On the cost side, I was wondering both on the SG&A and on the corporate, there was a significant down tick, both sequentially and year over year, so I was wondering how sustainable that was.

If that's a new run rate do you think there's anything one time in there?

Let me respond to the first question.

We actually gave the pre impairment margins, that was the 20.3%.

So just over half of the $10 million related to homebuilding.

And relative to the second question as far as the SG&A run rate, we have really taken quite a few hits over the past number of quarters relating to lease terminations, we've had legal expenses.

So a lot of those were nonrecurring costs, and as volume picks up, as we expect it to, we do expect to get leverage on our SG&A as a percentage of home sales as we go forward.

Great, thank you.

And then one housekeeping question.

Did you give (if you did I missed it) the community count?

I did mention the community count was flattish with last quarter.

That doesn't include some of the recent acquisitions that we made because we don't add to community count until we open for sales.

Okay.

Thank you.

Our next question is coming from Michael Rehaut, JPMorgan.

Your line is open.

This is actually Ray Horn on for Mike.

First question, just trying to drill down on the comments about 2010 profitability.

Obviously gross margins are seeing a pretty nice trajectory here, up the 20.3% ex charges.

I was wondering if you had any type of guidance for 2010 on a quarterly basis, if you expect that to continue to be up pretty solid year-over-year, and maybe on a sequential basis versus the first quarter, how you see that trending throughout the year.

We haven't provided the quarterly guidance but we are still comfortable we will be profitable.

We expect to be profitable for all of 2010.

And I think if you listen to some of the comments that were made, a lot of the newer communities are opening maybe spring and into the middle part of this year with more deliveries in the back end of the yea.

And I think the contribution from Rialto will be greater as the year continues.

So I would expect that the second half of the year will have a greater percentage adding to that profitability we expect for this year.

Then just to follow up on that, given that the tax credit is expiring in April, what are you guys doing in terms of spec management?

And is that higher level of specs in the second quarter potentially going to offset that gross margin improvement at all?

As you can imagine, with the initiation of the tax credit and the expiration of it, we really geared our inventory position and our start schedule to fall within the hash marks of those two dates.

Right now we are not carrying what I would say is a large level of speculative inventory.

We are really focused on trying to do build to sell type of opportunities, presales.

We are actually accomplishing some what I would call business yard sales right now, and we feel relatively comfortable with our inventory.

Let me just add to that and say we know that there's a lot of enthusiasm about the end of the $8,000 tax credit.

We have not allowed ourselves to get caught up in spec building in anticipation of its end.

We think that with a slightly longer term view that the end of that program is going to come in orderly fashion and not be quite as dramatic as some might think it will be.

Okay, I appreciate that.

Just one last question.

I know you talked about the trends in the first quarter but I'm just wondering, I'm not sure if you answered, if you could give some color for what's happened so far in the second quarter.

Traditionally and today as well, we just don't, speak to any inner quarter results and we will just have to wait and see when we have our call at the end of the second quarter.

Great, thank you.

Our next question is coming from Josh Levin of Citi.

Your line is open.

Good morning everybody.

I wanted to revisit the question of what happens to demand when the tax credit goes away.

Have you seen any specific trends in the past few weeks that give you any insights into this question?

For example, are you seeing a shift away from preorder homes that may not close in time to qualify, just spec homes that would have to close and qualify?

With regard to people coming in, I think a lot of that depends on what their urgency factor is for a home over their heads.

To the extent that they're a relo buyer and move into a market, they want something to move into today.

To the extent that they have more flexibility and want to have the specific homesite in the community, they're more focused on the location and product than they are necessarily the tax credit.

I think you need to keep in mind that affordability is at such a level in today's market that an after-the-fact rebate from the government, is not necessarily driving the purchase decision.

And we are confident that over the long term, the elimination of the tax credit is not going to cause significant issues for us.

And depending on the type and the part of the market, people aren't really even focused on the tax credit.

It is a nice thing to get but it is not driving their decision.

Okay.

Different topic.

Do you have a sense of how the healthcare reform legislation is going to affect Lennar?

Some businesses are out there talking about incremental costs.

Have you done any internal work on this, or is it just too early to know?

I just think it is too early to know right now, Josh.

I think there's too much up in the air so I would just have to say not sure yet.

Okay, thank you very much.

Our next question is coming from Stephen East, Ticonderoga Securities.

Your line is open.

Thank you, good morning, guys.

Bruce, if I could ask you on the accounting rule change, all of that minority interest that came on to your balance sheeted, will the benefits accrue to Lennar?

Or if not, is there some type of contra account that's sitting out there?

What I am trying to understand is, is this a real bump to book value or not?

The way I would look at the accounting change, Stephen, just to really simplify it, is the line that was between liabilities and equity is now just in the equity section.

That's the only change that occurred.

So just a reclassification, that's it.

Exactly.

It just moved down essentially one line so it is under equity where it used to be in no man's land between liabilities and equity.

Okay, I get that.

And then the second thing, on the financial services, are you seeing any increase in reserves and warranties for loans coming back, et cetera?

No, we have not in the first quarter.

As you look at our first quarter results for financial services, it is always a low volume quarter for us.

And we did see a reduction in refinances and just low volume.

But there were no reserves in the first quarter, that we had to take.

Okay.

And then just the last question, you talked about on the SG&A some of the legal expense, et cetera.

Any update on Chinese dry wall where you stand with that?

Is that an issue that's pretty much behind you from a cost perspective and now it is just a case of potentially getting recovery coming back to you?

What's the situation?

If you remember, at year end we accrued for expected additional homes that we might find that are affected with Chinese Drywall.

We had an accrual that was approximately 80 million.

That accrual, not only do we believe at this time that that was sufficient for what might still come to our attention as affected homes, but in addition the receivable that we set up, we have been collecting from the insurance company under that receivable, and we feel comfortable that it is behind us now.

All right, thanks a lot.

Your next question is from Jonathan Ellis, Bank of America/Merrill Lynch.

Your line is open.

Thank you.

My first question is about, you mentioned California, or the West having an impact on average pricing this quarter.

Could you talk a little bit about what actually caused the upside in the deliveries in that region and why that's not necessarily going to continue for the balance of the year?

We sold more homes, the market's recovering, there has been increased demand in the market.

The housing has gotten to a point where prices are very affordable.

And you are seeing the net impack of that flow through the system.

The sale price or delivered price was up because that was an increased part of our overall mix.

We are very very well positioned in California today, and it is going be interesting to see how the balance of the year goes.

Stay tuned.

Okay.

And my other question is if you could talk a little bit, you mentioned the land purchases this quarter, can you provide us with a target for the full year in terms of land spend?

And then also a related question is in terms of community count, any expectations you would like to provide in terms of community count as of the end of this coming year.

I think that our best instinct is really to report more on what we have accomplished and leave open the question of where we go from here.

We are taking a very opportunistic view of all of our investment opportunities and really trying to stay very close to the market, conditions as they evolve.

As I have noted, it is a pretty rocky bottom here, so we are going to see what happens on a month by month and quarter by quarter basis and not try to project ahead.

Okay.

Maybe just one clarifying question, though.

In terms of the community count, are you anticipating scaling up over the course of the year, just directionally?

Clearly, the new communities that we brought on board are going to work their way into our community count as the year progresses.

We will have some communities that those are replacing but I think it is safe to say that the community count at the end of 2010 will be larger than it was at the beginning of '09, the beginning of the year.

Okay, thanks, guys.

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

Your line is open.

Thanks.

I wanted to ask about the strategic thoughts behind the FDIC portfolio purchase.

You folks laid it out pretty well in terms of the circumstances out there with regards to all of the regional banks.

Obviously there have been many more bank failures and many more that are on the watch list.

And the portfolios that you folks purchased were among the first to be released in large scale.

So, in terms of the strategic thinking there, does that tell us that you think that the first move on these distressed portfolios was the best one, that maybe there would be a lot more competition for subsequent portfolios?

Or does it tell us something more along the lines of this is just the first of our purchases and there may be others to come?

We have been underwriting portfolios for the past two years.

Jeff has mobilized the team.

Maybe I should let Jeff speak for it but I will take it first.

Jeff has mobilized a team that has been operating in this space for quite some time.

The way you should look at our purchase is not that the first mover is an important position because, in fact, we have underwritten a number of portfolios, and we have either just decided not to bid or we have not been a winning bidder for the past couple of years.

What you should read it as is that pricing is starting to find its way to a point where acquisitions can be made, proper management applied, and profits will naturally come from that.

And that means that you have two things happening.

Pricing is coming down to an appropriate level and you have what we call price enabled sellers.

That means a seller who is actually able to trade at the price where the market is willing to buy.

The government obviously is price enabled and can sell at an appropriate level.

Some of the banks have been reluctant or incapable of selling at those levels.

You are now getting to a point where the market has identified an appropriate price, where buyers will buy and be able to make a profit.

We have a great deal of expertise in this area.

Our underwriting has been thorough in all of the portfolios that we've underwritten.

We have a great deal of confidence that what we are purchasing we will be able to add some real value as a management team and make some good decisions that will yield us a good profit.

This is Jeff.

The only thing I would add to that is the fact that these were really the first of the acquisition development and construction loan type of portfolios, as well.

We believe we have a unique approach to that because it does require a lot of infrastructure in order to be able to, number one, just underwrite it, but also work it out after the fact.

And having a large footprint across the country puts us in a great position to be able to bid on these.

I think you had all of those things beginning to come together at one time.

The pricing, the type of portfolio, the team that we have put together, so on and so forth, all aligned.

Let me just say one more thing, Nishu.

The other thing to note is I don't feel like there's a first mover advantage so much.

I just don't think there are a lot of competitors for this business.

This is a tough business that takes a great deal of expertise.

You can't just decide to get into this business and start buying some assets.

It is a complex business that requires a team that really knows what it is doing.

So rather than being a first mover, we know we have the advantage of being a very unique team and the fact that we are finding prices that make sense is what's most significant.

Is the capacity of the Rialto team consumed pretty much completely by the portfolios you have already bought, or is there room to do more deals in the near term?

I would say there's a lot of room from an infrastructure perspective and from a team perspective.

There's a lot of room to expand and do more.

We have the base and we've had the last couple of years really to put together really a great team here.

And adding additional personnel, as necessary, on top of the existing infrastructure and so on.

Again, it is all hard work but we believe it is something that we are pretty adept at doing and we have done it in the past.

We have done this before and we scaled from zero to $4 billion over time.

We have a history of knowing how the scaling process works, and I think we have a lot of capacity here.

And a question for Bruce just following up on something that Joshua asked earlier.

You said something that surprised me a little bit, that the deferred tax asset could come back onto the balance sheet within, I believe you said, 12 months.

I just wanted to get an understanding of how we can analyze that from the outside.

Is it going to be a one-time event?

In other words, that you trigger some type of threshold and the entire $600 million plus balance comes back on?

Is it going to come back on scaled?

And what metric should we be thinking about from the outside as to the timing and the flow of that?

These are the exact questions that the homebuilders are discussing with their auditors.

And it is not perfectly clear.

You have to keep in mind we don't have perfect guidance from the accounting firms.

But essentially, once you have a year, give or take, of profitability, and it is clear that profitability will continue, it is likely that you could have the discussion about taking in your tax asset reserve.

And because of the way the reserve is embedded in the assets, it is likely to come all at one time, as opposed to in various components.

Okay, thanks a lot.

We will take one more question, please.

The next question is from Dan Oppenheim, Credit Suisse.

Your line is open.

Thanks very much.

Stuart, your comment about the specs and saying you haven't gotten carried away with the first time homebuyer tax credit buyer here, can you give some quantification in terms of spec levels you have right now on a per community basis?

Our spec levels on a per community basis, I can jump in and answer that, Dan.

It is running approximately one to two per community as far as completed unsold homes go.

Okay.

And then a second question, on Rialto, you talked a lot about the complexity of it and the expertise, getting critical mass and having a lot of capacity there.

What is your thought in terms of when you would like to really step up to that?

If you see opportunities, would we see a lot more activity coming in the next several quarters here or will they be more measured?

I don't think we can think in terms of the next couple of quarters.

It is a very opportunistic consideration.

The bids come up, the bids are put out there, some of them are won, some of them are just taken off the agenda.

We continue to be very involved in the bidding process here, and we have a fair amount of indifference as to whether we are investing over the next month, quarter or year.

We are going to be an active participant and be investing in this business for the next years to come.

So, I can't really give you any color as to what we think is going to be a ramp up and what the timing will be.

But we are actively involved right now.

Okay, thank you very much.

I want to thank everybody for joining us.

We are pretty enthusiastic about where we are right now.

We recognize the current economic environment is turbulent.

And with that recognition, and humble respect for the market conditions, we think that we are well positioned to be able to move forward.

So, we look forward to reporting again the end of our second quarter.

Thank you.

This will conclude today's conference.

All parties may disconnect at this time.