Lennar Corp (LEN) 2010 Q3 法說會逐字稿

Welcome to Lennar's third 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.

The if you have any objections, please disconnect at this time.

I will now turn the call over to Mr.

David Collins, Controller, for the reading of the forward-looking statement.

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 in Lennar's annual report on Form 10-K most recently filed with the SEC.

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

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

Stuart Miller, President and CEO.

Mr.

Miller, you may begin.

Great.

Thank you.

Nice reading, David.

Thank you.

Good morning everyone, and thanks for joining us for our third quarter 2010 update.

I'm joined this morning as always by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President and Treasurer, and of course David Collins who you just heard from.

Additionally, Rick Beckwitt, our Executive Vice President is on an open line from Dallas and will be participating in our question and answer period.

John Jaffe, our Chief Operating Officer, and Jeff Krasnoff, Chief Executive Officer of Rialto, will not be joining us on this call quarter.

I'm going to begin with some opening remarks about the current housing market in general, and the progress that we've made on managing our business.

And Bruce will provide additional details on our numbers, and then of course we'll open the phone lines to your questions.

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

So let me begin by making a few overview comments about the market in general, and our third quarter results specifically.

Our third quarter marks the end of what has been by all accounts a long and difficult summer quarter in the housing market, and against this rather difficult backdrop, we are very pleased that our third quarter results represent a continuation of Lennar's return to profitability, and represent very solid operating performance in all areas of our Company.

Overall, net earnings were $30 million or $0.16 per share, compared with a $171.6 million loss or $0.97 per share loss last year.

All three segments, home building, financial services and Rialto, contributed to this quarter's profitability, and we continue to look to overall profitability for full year 2010.

While we believe that we've properly positioned the Company for the market conditions as they continue to evolve, we remain cautious about the immediate future as there continue to be more questions than answers as to where we will go from here.

It's been widely reported and confirmed in the existing and new home sales numbers, which are both at historic lows, that the end of the home buyer tax credit at the end of April, has been far more impactful than originally anticipated.

New and existing homes have fallen precipitously, while fundamentals driving the overall economy have shown little if any signs of improvement.

Unemployment remains high, while the inventory of foreclosed homes and homes in default and potentially facing foreclosure has continued to rise.

Consumer confidence has remained weak as reported today, while the midterm elections drive rhetoric of blame for the current predicament and the press continues to question whether the end of the home ownership era is upon us.

For the time being, the entire home ownership edifice has been vilified.

On the other hand, the elections will be behind us soon, and affordability is excellent, with low mortgage rates and bargain home prices in almost every market and every price range.

For those who can afford a down payment and have credit, now is an excellent time to purchase a home for long-term stability and we're beginning to see increased traffic in many of our communities.

Additionally, national inventory levels of combined new and existing homes have improved slightly, although they remain above where they need to be, given the current absorption pace.

New home inventories remain very low in most markets, as new homes are being built to order by most builders.

Existing home inventories continue to clear, albeit slowly.

Perhaps most importantly, while the national numbers of existing home stock continue to be replenished by foreclosures, relevant inventory, that is, inventory in the most desirable areas of the most desirable markets, is being absorbed more quickly, and creating micro markets where there are discernible improvements.

In those markets, we're starting to see more favorable comps being used by appraisers, indicating a real stabilization in pricing and of course these are the markets where we are focusing our strategic investment capital.

It's become clear that the recovery in the housing market will continue to be a rocky and sloppy stabilization process that will ultimately give way to improvement in the market.

But the timing and the degree of improvement remain uncertain.

In the context of these complicated times, Lennar's home building operations have been recast for profitability as the market continues to adjust.

Our sales for the third quarter were down 15%, backlog dropped 12%, and there was downward pressure and there is downward pressure on margin as we move into the fourth quarter.

With fewer sales, there's been pressure on sales price and accordingly we've seen an upward trend relative to incentives.

While our incentives were 11.3% in the third quarter, as compared to 15% last year, and 11.5% last quarter, given the sluggishness in the market, we expect incentives will go up in the fourth quarter some $2,000 to $5,000.

Our cancellation rate was 18% and with that said, pricing has stabilized in some communities and our newer communities are continuing to perform well.

Even with the current pullback in demand, we feel that our strategy of focusing on high margin and controlled volume, controlled cost and controlled G&A will continue to benefit us, and enable us to remain profitable as we constantly adjust to market movements.

As we've noted in past quarters, our home building operations have been restructured with competitive product, fewer model offerings, lower build costs, and right sized overhead.

Inventory levels in our communities remain well-balanced with completed specs remaining about two per community, while we're keeping our construction process closely tied to our sales results.

Cycle time continues to come down due to our new more efficient product.

We've simply never run more efficiently in the field, on both the building and the purchasing side of our business.

And given the very limited volume of construction nationally, our supply chain continues to work with us to lower our per foot build cost.

With the summer now behind us, traffic now seems to be starting to pick up.

The summer showed its typical seasonal sluggishness, worsened by the elimination of the tax credit.

But there are real buyers out there.

They're just taking additional time to make their buying decisions.

A modest improvement in the job market and consumer confidence will dramatically improve demand.

Finally, we've continued to make carefully underwritten strategic acquisitions in well-positioned markets that will support our home building business going forward.

Of particular note are some 1,500 home sites of the total 3,300 home sites that we acquired this quarter, where we've been able to purchase outside the traditional broker-sponsored competitive environment as part of the overall cooperative efforts of the Lennar home building and Rialto associates.

Now I'd like to spend a minute on the accomplishments in our Rialto segment.

Some of you are still trying to understand exactly what it is we do in the Rialto segment.

Simply put, we purchase large and small portfolios of loans and OREO at distressed prices and then we work through those assets one at a time to resolve them at retail payoff.

It's all about making money by managing the process of purchasing wholesale and selling retail, purchasing in bulk and selling one at a time.

Admittedly the assets are a little bit more complex, but this is where we excel.

The main contributors to Rialto's $7.7 million of operating earnings this quarter is our 40% share in the profits from the FDIC loan portfolio transaction, our public, private investment fund activities or PPIP as it's better known, with Alliance-Bernstein and the US Department of Treasury, and the management fees from both of these programs.

If you remember, last quarter we reported that we had just completed the transaction and boarding of the 5,500 loans purchased from the FDIC, and had started our workout and monetization process.

We are now deep in these portfolios, having had contact with borrowers representing almost 90% of the combined outstanding loan balances.

Although it's still very early, we have fully resolved over 200 assets and brought in over $120 million in cash.

Over half of these resolved assets have been at levels at or higher than the full outstanding principal amount due on the loan because we've been able to collect past due accrued interest and late fees.

Since taking over the management and servicing of the pools just five months ago, our average resolution price has been almost $0.90 on the dollar.

We currently have over $120 million of cash on the partnership balance sheet.

Over $60 million of this is earmarked to defuse the original $628 million of acquisition financing and the rest is available as working capital to help us maximize the resolution of these assets.

It's also worth noting that these cash positions are, after already paying and expensing substantial portfolio start-up costs including asset protection advances that are potentially recoverable from borrowers.

We expect these expenses to run at lower run rates in the coming quarters.

This quarter also saw our PPIP program begin to kick in meaningfully.

As you may remember, although through a $1.15 billion private equity raise we, together with Alliance-Bernstein, completed last quarter, along with a dollar for dollar equity match and a $2.3 billion advantageous 10 year matched financing from the US Treasury.

Our fund has approximately $4.6 billion of purchasing power.

85% of the partner's equity capital has been called including our portion of the $75 million that we committed.

Our fund has now invested approximately $4 billion to buy $6 billion in face of residential and commercial mortgage backed securities that were originally issued with AAA ratings or the equivalent.

From the beginning, our focus has been on acquiring securities with resilient cash flows with the goal of collecting a mid to high teens return by holding these assets until maturity.

While it is still early in the program, through July 31st, based on a mark-to-market of the underlying collateral and principal and interest collected to date, our fund has operated at a gross 27% annualized internal rate of return.

Most importantly, though, we continue to build an outstanding team of professionals at Rialto with many of us having worked together doing this in the past.

We have now approximately 90 associates focused on our portfolio operations including loan workout, property asset management, servicing finance and back office operations in our three main offices in Miami, Atlanta, and New York, as well as a few satellite offices.

Some of you may be familiar with our disciplined loan workout and resolution process, which we initially designed almost two decades ago to maximize proceeds and returns from distressed assets.

As part of that process, in our weekly asset manager meetings, both Jeff Krasnoff and myself have a unique opportunity to participate with our team as we methodically and professionally approach and deal with the underlying borrowers and tee up many of the resolutions that have to date exceeded our initial underwriting.

We believe that our team and the infrastructure we have in place today is already way ahead of the pack and is setting the standard for best practices in the industry.

This has positioned us extremely well for the large pipeline of opportunity that's been building, not just through the FDIC, but through private banks and other holders of distressed assets that are now beginning to clear even since we last reported to you.

Our Rialto due diligence team, working hand in hand with our network of Lennar Homebuilding professionals, has been evaluating billions of dollars of potential opportunities.

But our team distinguishes itself today because it is made up of already in-place managers who are today working out loans and dealing with similar underlying collateral in the same markets, and a number of cases the same borrowers.

If we are able to purchase assets at our pricing, we are positioned to quickly and efficiently bring those assets right into our already in-place workout machine.

And because of the high percentage of loans made to developers being able to efficiently incorporate Lennar's home building unique view and expertise, gives us another distinct advantage in our evaluation and maximization of value for these assets.

We're very excited about the Rialto position today, and we look forward to reporting to you in the future on our progress as we continue to build this very exciting part of our business.

Overall, in the context of a very difficult market, we are very pleased with the progress that we've made as reflected in our third quarter results, and more importantly, with the general trajectory of our Company's operating strategy.

Home building and financial services remain positioned to be profitable in today's uncertain times, and to drive materially improved profits as the market stabilizes and ultimately begins to recover.

At the same time, our Rialto strategy is building momentum in this distressed environment, as it grows both new and exciting opportunities to invest Company capital and as well, real bottom line profitability.

Our people continue to be a bright spot in the Company.

The dedication and focus in all parts of our Company are a true source of pride.

In difficult times, there's simply no substitute for work ethic and talent in identifying goals and making them happen.

From the excuse of business plans in the field, to the cooperative spirit that exists between the Lennar Homebuilding and the Rialto segments of our Company, in sourcing new business opportunities, our people really make the difference.

They complement each other perfectly, as we find and execute on cross-business opportunities, which are numerous.

We continue to find new opportunities to invest in our home building business, outside of the typical broker oriented deals, because of our exposure through Rialto.

And we continue to have the best and most functional due diligence program in the distressed business area, because of the cooperative participation of the Lennar Homebuilding network of professionals.

Because of this unique platform, we continue to find new and profitable opportunities to invest Company capital and to ensure the future profitability of our Company.

With that, let me turn over to Bruce.

Thank you, Stuart and good morning.

This quarter's profitability included positive operating earning contributions from all three of our business segments.

Starting with our home building business segment, we noted an improvement here that was significant as noted by the operating earnings of $38.1 million reported this quarter and this compared to a loss of $154.7 million in last year's third quarter.

Revenue from home sales increased 10% to $697 million.

This was due to a 9% increase in home deliveries, excluding joint ventures, and a 1% increase in average sales price to $240,000.

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

The east region was down 1% to $213,000.

The central region was up 8% to $219,000.

The west was down 6% to $310,000.

Houston was up 9% to $222,000.

And the other area was up 4% to $275,000.

Our gross margin improved to 21.1%.

That's compared to 7.8% in the prior year.

The improvement in the margin is primarily due to a significant reduction in sales incentives as Stuart mentioned, as well as a reduction in valuation adjustments.

The sales incentive declined from $42,000 per home last year to $31,000 per home this year.

This is a reduction from 15% to 11.3% of home sales.

And the largest reduction in sales incentives year-over-year was noted in our east region.

Home building impairments decreased to $11.3 million.

This compared to $49.4 million in last year's quarter.

And the impairments during the quarter were primarily a result of a strategy to reduce prices and increase absorption in a few of our communities.

Also impacting gross margin this quarter were additional third party recoveries relating to Chinese drywall.

There was a net benefit of approximately 80 basis points from the combined net impact of third party Chinese drywall recoveries and the $11.3 million of home building impairments for the quarter.

We are continuing to realize the benefits from our cost reduction initiatives implemented throughout the downturn and lower nonrecurring expenses in the areas of legal and occupancy costs.

We expect to be able to lever our existing overhead on higher volumes, as noted this quarter.

We reduced our SG&A cost by 4%, while home sale revenues increased 10% year-over-year.

SG&A as a percentage of revenue from home sales was 13.9%.

And that was a 200 basis point improvement from the prior year.

The fundamental success of our improved gross margins and reduced SG&A led to another quarter of improved operating margins, increasing to 7.2% this quarter.

Our Financial Services business segment also reported positive operating earnings of $6.8 million this quarter.

That was versus $11.2 million of profit in the prior year.

The reduction was primarily a result of lower profits per loan in our mortgage operation.

Mortgage pretax earnings were a profit of $7 million versus $9.8 million in the prior year.

And our title Company results were about breakeven, versus $1.5 million of profit in the prior year.

Our third business segment, Rialto, which Stuart talked about in depth, also generated positive operating earnings, $7.7 million, and this is net of $10.8 million of net earnings attributable to noncontrolling interest.

As we reported last quarter, we consolidated the FDIC portfolios and, therefore, our results reflect all the activity from the FDIC entities fully transparent on the Lennar financial statements and there is an offset attributable to noncontrolling interest.

This summary of Rialto's $7.7 million of operating earnings is broken as follows.

$8.9 million is relating to our 40% share of FDIC portfolios, plus $7.1 million of the earnings is from PPIP, and then that's offset by $8.3 million of G&A and other expenses.

Revenue recognition from the FDIC portfolios is recorded based on the expected cash flows from the portfolios to calculate accretable interest income.

These cash flows include both expected loan payoffs and interest income, and the revenues from these portfolios during the quarter were $37 million.

As Stuart mentioned, there is over $120 million of cash in the Rialto segment.

And half of that is set up for defeasance cash against the $628 million loan to the FDIC.

By the end of the third quarter, 85% of Lennar's $75 million capital commitments to PPIP was contributed.

The investment in PPIP is accounted for as an investment in an unconsolidated joint venture and therefore shows on the.

In that Rialto segment.

Corporate G&A expenses for all of Lennar were reduced by $3.6 million or 13% during the quarter, versus the prior year, which is a result of our continued cost reduction initiatives.

Turning to taxes, as you know, we ended the quarter with a large deferred tax asset that's fully reserved.

That balance was $640 million at the end of the quarter.

However, since we are profitable, we are able to utilize the portion of that deferred tax asset that's benefiting current income and during the quarter, approximately $12 million was added back to equity.

In the third quarter, turning to the balance sheet now, we continue to maintain balance sheet strength while investing in new strategic opportunities.

Our liquidity is strong, with home building cash and restricted cash totaling $1 billion at quarter end.

Our leverage remained low as our home building debt to total capital, net of cash, was 44.1% in the third quarter, and shareholders' equity increased to $2.5 billion this quarter.

Our leverage ratio will improve further upon the full reversal of the $640 million deferred tax asset which is expected next year.

This quarter we retired approximately $50 million of Lennar debt during the quarter.

Another five joint ventures were resolved this quarter to a total of 48 remaining in JVs.

Of those remaining 48 joint ventures, 21 have no debt, 12 have nonrecourse debt, and only 15 have recourse debt.

These remaining joint ventures are strategic JVs, conservatively financed, and will be dissolved in their normal course.

Additionally, we sequentially reduced our maximum recourse indebtedness by $54 million to $180 million at the end of the quarter, and that's now down 90% from the peak.

The remaining unconsolidated JVs, which are conservatively financed have a net debt to total capital of only 34%.

We increased our investment in new communities this quarter as Stuart mentioned, the 3,300 home sites we purchased, required a cash spend of $176 million.

These are well-positioned communities with strong projected gross margins, and additionally, we put another 900 home sites under contract.

Inventory increased approximately $100 million during the quarter to $3.8 billion, excluding consolidated inventory not owned.

And there were 84,000 home sites owned and 22,000 controlled at quarter end, totaling 106,000 home sites.

The Company's strategies have positioned us well.

We continue to generate profitability in all three of our business segments.

And our balance sheet is financially strong to continue to capitalize on new investment opportunities.

So with that, let me turn it back to the operator to open it up for questions.

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

(Operator Instructions).

The first question is coming from Joshua Pollard of Goldman Sachs.

Your line is open.

Hey, good morning, how are you all?

Good morning.

My first question is just around your prospects for profitability going forward and there's a couple of questions in there.

The first is is it safe to say that you guys are more focused on cost this year versus last year with a big focus last year being on JVs and that's what's drawing out some of the operating leverage?

Within that, I'd love to hear if you guys are done on the cost reduction side.

You said your business from a construction cost standpoint is running as good as it's ever run and then what you guys are thinking on further reductions in SG&A in the current sales environment.

And I have a follow-up.

No, I think that we've been focused on the cost side of the equation even while we were focused on the joint venture side.

I think that many of the improvements that we have been putting in place over the past couple of years, including product improvements, creating more efficient product, fewer number of plans, these are things that take some time to reveal themselves through the system and we're starting to see those cost reductions really come to light.

We think that this is definitely an ongoing process.

We continue to rework our product and product strategies for the specific markets that we're in.

As I said, our cycle time continues to come down.

Efficiency and effective building practices are going to be a driving force as we go forward, but at the same time, as some of the strategic investments that we have made and are continuing to make in some of the better markets, the stabilizing markets, are complimenting our cost reduction efforts and helping to improve margins.

I guess the follow-up to that is can you talk about September, you said that throughout the summer you saw sort of normal seasonality.

I'd love the to hear whether or not the typical uptick that you see in September from a sales perspective so far has been prolific and that would -- that's it.

Thank you.

Okay.

We generally don't comment into the ongoing quarter but these are sensitive times and I'll say it's still sluggish out there.

Clearly, as we saw things, the slowest month of the third quarter was June.

And July and August were a little less horrible, to put it bluntly.

This has been a tough summer.

As we've gone into September, we're seeing a little bit of pickup in our traffic but that shouldn't be cause to have a sigh of relief at this point.

I think we're going of to have to wait and see and it's a little bit early to say how even September is shaping up.

The next question is coming from Jonathan Ellis of Merrill Lynch.

Your line is open.

Thank you.

My first question is related to a comment you made in your opening remarks related to additional incentives in the fourth quarter and I'm wondering if you could help us understand, are those incentives a function of perhaps a higher mix of speculative sales in the fourth quarter, or is that more driven by incentives on preorders?

Yes, Jonathan, this is Bruce.

The incentives that we talked about, it's really specific community by community where there's a little bit more inventory in the marketplace and we're expecting that there will be a little bit of discounting where there's a little bit more inventory.

But certainly not the kind of incentive increase that we've noted when cancellation rates were a lot higher.

Okay.

My second question is just with respect to Rialto and the accretable yields calculation, can you help us understand to the extent that your recovery rates are higher than what's baked into the estimates for the earnings flow through right now, how many consecutive quarters or what time frame do you have to exceed the existing assumptions in order to adjust the income that flows through the financial statements?

We look at the cash flows for the various loans, Jonathan, every quarter.

So this is monitored on a regular basis and every quarter we're updating the cash flows, the expected cash flows, taking into account what's actually happening during the quarter as well as changes to those expectations and we will adjust accretable yield accordingly every quarter.

Okay.

Thank you.

The next question is coming from Carl Reichardt, Wells Fargo Securities.

Your line is open.

Hey, guys.

Just one quick item.

Bruce, do you have community count at the end of the period?

Community count at the end of the period was 448.

448.

Thanks.

Then what's remaining now on the Chinese drywall reserve?

Sure.

We had an accrual of I think it was $80 million, and third party recoveries were just below $60 million at this point.

All right.

Great.

Thanks a bunch.

The next question is coming from David Goldberg, UBS.

Your line is open.

Good morning, it's actually Susan for David.

Just going back to Rialto, it seems like there is more competition that's out there in terms of getting these kinds loans.

We've seen the Oak Tree, Toll deals, those kind of things.

Are you seeing any increased competition for them?

No.

Actually, in the more recent deals we've actually started to see a falloff in the competition.

This business is not a business that just because you have capital, you jump into.

It requires an extensive due diligence team, a national network and aptitude for various types of properties.

The portfolios are not homogenous either by geography or product type.

The diligence process is extensive and expensive and for people who kind of have jumped in and lobbed in bids, they've generally found that there might be other ways to invest capital.

This is an area where we have long-term understanding of how the bid process works and know how to invest our time properly.

So we won't be dropping out, but there are a number of the competitors that have kind of dropped out as they've gone along.

Okay.

And then just following up on that, as things in the market, in the housing market generally sort of improve and you have various uses of cash, how are you thinking about funding future deals that come across your way?

Well, we have a variety of options right now.

Right now, we're viewing funding as being primarily investment capital off of our balance sheet.

To the extent that opportunity presents itself well in excess of the capital resource that we have available, we have been -- we've been working on other avenues of capital investment that we think we can access very quickly.

Some of them we're really not at liberty to talk about, but there's a lot of capital that's looking for a way to invest.

We are, we believe, one of the premier investment vehicles in this space and the capital is pretty widely available to us.

Okay.

Thank you.

The next question is coming from Michael Rehaut, JPMorgan.

Your line is open.

Thanks.

Good morning everyone.

First question, I was hoping just to return to the statement earlier regarding incentives and I think an outlook that there should be some downward pressure going forward or at least in the fourth quarter in terms of gross margins.

The incentives, if you kind of take the midpoint of that range and use a 750 on revenue or even 700, it implies just straightforwardly, like a 50 BP type of impact.

Year-to-date, you've kind of been bouncing between the 20 and 21, plus or minus, type of gross margin range, ex-charges.

I guess the question is, first off, does that math make sense?

And secondly, do you expect over the next couple of quarters a continuation of sort of a slight tick down and perhaps below that 20% and how are you seeing things shape up to the extent that maybe this is going to be a broader industry trend over the next three, six, nine months with regards to chasing fewer home sales with the same competitive environment?

Let me comment, Mike, on the math.

So this quarter we had a 21.1% gross margin.

So if you strip out the Chinese drywall recoveries and the impairments, it was 20.3%.

The math you went through, if you took that midpoint between 2,000 and 5,000, which is only an estimate and the quarter's not over yet so we're just trying to give a little peek, if you will, into the quarter, because it has been a weaker environment over the last number of months, that midpoint would be 3,500, which if you divide that by our average price home, $240,000, it's about 150 basis points as opposed to the 50 that you mentioned.

So that's roughly what we're seeing today.

And again, because the quarter's not over, that could shift a bit.

And where things go beyond, I think we're going to have to give it some time to see how things unfold overall with the macro economy and housing as well, to see where gross margins go beyond that.

On the positive, we are excited about new community openings and we do think that we have the opportunity to have higher gross margins, as those open over time.

So that's the positive as we go into the end of this year and into next year, to offset some of what we're seeing in the overall economy.

Hey, Bruce, the other thing I'd add, this is Rick, is we have seen a continuing ability to work the construction cost side.

I know Stuart addressed that question earlier.

Actually, this week we've got a major summit, if you will, with all of our large vendors across the United States to talk about pricing on materials.

We're benefiting from the fact that oil's down.

The shipping costs are low.

We aren't seeing any big commodity price increases.

Actually, they're going the other way.

So the big wild card is our ability to offset some of the pricing pressure with continued cost reductions.

Labor's definitely going the right direction.

And we've been successful at keeping the purchase price of most of our major materials down, flat to down.

I appreciate those answers.

Maybe just to follow on as my follow-up on this topic, because I think it's one of the key areas of debate over the next 12 months for the group, you took -- you acquired obviously a few more thousand lots, 1,500 of which through Rialto.

I was wondering if you could give us a sense of percent of closings from newer, more let's say recently acquired lots over the last 12 months, 12 or 15 months, and where you expect that number to be for 2011 relative to where it is now, just to try and get a sense of perhaps where that, again in addition to I guess the construction costs, you know, I assume those newer lots are going to carry all things equal still a higher gross margin.

So just trying to get an offset to the extent that that would, like you said, be a positive impact for next year.

Yes, I think that that number's going to move around a lot and we're not actually calculating what percentage are coming from newer communities or communities online and because it's moving around so much, it just doesn't -- it's not a number that we're putting out or that we're even calculating ourselves.

What I will say about that is on an increased basis, we are finding and sourcing new and unique opportunities to find some awfully good investment opportunities in our home building business.

And about half of the opportunities came kind of through the back door as a part of our Rialto investigation.

They weren't on the market.

They weren't available to the public.

And they really present a unique opportunity for us to invest.

And this will be an increasing component of our margins and performance going forward.

So we feel pretty good about that.

But in terms of the actual percentages, I know it would help in doing some of the modeling, because it's going to move around quite a bit we're just not putting that number out there.

The other one positive thing that I'd point out is we've seen a noticeable and I'd say somewhat dramatic shift in the mindset in some of the municipalities and cities across the US.

They're in hunt of tax dollars and we've seen an increased willingness on their part to work with us to increase densities, to reduce costs in extractions, delay, the unnecessary off-site improvements until they're needed.

So a lot of the other older deals have the ability to pencil out now given their willingness to change things that they hadn't been willing to do in the past.

All right.

I appreciate that additional commentary.

Stuart, just getting back to that one data point, I mean, is it safe to say at least that while you don't want to give a percentage, that still we would see a greater proportion in 2011 versus 2010, I mean, at least directionally is it -- do you think that's a fair statement?

Yes, we do think that that is -- that's the right statement is, as an increasing number of our deliveries are going to be coming from some of those newer communities.

And from a margin standpoint, we think it's very helpful.

Great.

Thank you.

The next question is coming from Josh Levin of Citigroup.

Your line is open.

Thank you and good morning.

In your prepared remarks, you alluded to foreclosure inventory.

We're all hearing more and more about foreclosure inventory finally working its way through the system and coming to a market.

But are you seeing that in your operations?

Do you find that Lennar is competing against more foreclosures than it was, say, six or 12 months ago?

Josh, I try to really make what I think is a very, very important distinction.

If you look at the national numbers on foreclosures, it's big.

And foreclosures continue to replenish the overhang inventory of existing homes.

And if you think in a national sense you would say yes, we're competing against a large number of foreclosures that are out there.

But you have to draw it down to what I can -- I constantly refer to as relevant inventory.

The national number is too broad.

It's at micro levels.

The most desirable areas of the most desirable markets.

The areas where we want to make our next cash investments.

Those markets are seeing a much more rapid absorption of inventory and, therefore, the foreclosed homes in the markets where we're making our strategic investments is much less significant and we're competing against it much less than one would think from looking at the broader numbers.

And I constantly say, you want to think in terms of the A location suburban market might have very -- in any market, might have fewer inventory than, perhaps, an inner city location or a tertiary suburban market where there's just very low desirability for people to purchase.

That inventory is not moving nearly as quickly.

So in terms of relevant inventory, I think that the competition for new home construction against the foreclosed homes is much lower.

So one follow-up on that topic.

You're talking about how conditions are favorable in the micro markets, so the markets where they're in desirable locations.

Hypothetically, if housing conditions stayed weak for some time, do you think there are enough lots in the micro markets to supply all the large home builder operations.

First of all, I want to temper the word favorable, because everything is relative in today's market.

And there are few markets that are strong.

It's just it's a question of what's less weak than other markets.

To your question, are there enough home sites in those better markets to satisfy the appetite of the large home builders, I think there's no question that it is a diminishing number of home sites that are available, but there are still home sites available.

I think that what we have to keep in mind is that relative to any market in the country, the competition, the number of home builders out there competing for home sites is far, far fewer than it has ever been.

The number of home builders has diminished materially, particularly relative to the smaller, local private home builders.

The competition from those smaller participants is just not there.

The capital isn't there to support the business.

And so for the time being, I think that there are home sites available in the better markets for the larger builders.

One thing, Josh, that I'd point out is that we're also able in a weak economy to look at some of maybe the commercial space.

This quarter, we acquired a call it a big box retailer in a very supply-constrained area of Southern California that's very well-positioned where there are no new home sites.

So you also have some of the reuse or rezoning opportunities out there as we've seen in some other downturns in the past.

Thank you very much.

You're welcome.

The next question is coming from Jade Rahmani, KBW.

Your line is open.

Yes, hi.

A somewhat related question.

I was wondering if you could give some examples of the micro markets in which you're seeing positive appraisal comps that you mentioned?

Rick, why don't you take that one?

Sure.

Well, clearly in the Mid-Atlantic area, anywhere in Maryland, North Virginia, those markets are performing better than most of the markets across the US.

We've had an ability to increase prices in selected communities.

We've actually had experienced a higher level of presales, dirt sales that we would expect in this kind of market, even in the Williamsburg area.

Raleigh and that strong medical, biotech sector with the research triangle, that's a pretty decent market right now.

Charleston area, Boeing's got a new plant that's going in, it's driving growth.

So those would be some examples of some good markets.

In Texas, San Antonio's pretty decent, because you've got a lot of military coming into the market with the BRAC realignment.

Actually seen some better demand in the Miami-Dade area.

So there are some good markets out there, micro markets.

Okay.

Thanks.

That's helpful.

And then secondly, can you just tell us what the operating cash flow generated in the quarter was, and if you expect that you'll be funding incremental land development and acquisition spending, primarily from home building operating cash flows?

Sure.

We'll have the detailed cash flow statement as always on the 10-Q, but the biggest variance on operating cash flow is what we determine to invest strategically in new opportunities in home building.

So you will note this quarter there will be a negative operating cash flow as a result of $176 million of new investment opportunities that we decided to go forward with on the home building side.

So we'll provide more details when you see the 10-Q and would be happy to go over the details at that point.

With that said, I think that the strategy as a Company is to invest capital at this time and invest it strategically.

We're seeing opportunities.

We're seeing unique opportunities and we're continuing to invest.

Thanks a lot.

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

Your line is open.

Thanks very much.

Was wondering if you can talk a bit more in terms of the -- what your operations right now in that you're fairly early in terms of using the incentives in the market and think an appropriate move during the slowdown, commenting it's a slingshot there.

What you quantified in terms of the incentives was fairly modest.

We're now seeing other builders introducing incentives that are similar if not more significant.

What's your strategy at this point?

Are you going to continue out there with incentives?

Are you going to meet what others are doing and potentially increase those?

What's your thought in terms of the market share and incentives right now?

I'm sure that everybody has a different strategy.

Our strategy has been and continues to be to focus on margin primarily.

We have introduced incentives to meet what market conditions are, but we are not stretching to drive volume levels high and compromise the good purchases that we've made.

We think that there's a balance there and we're managing that balance carefully.

So when we think in terms of meeting the competition, we're not going to be using incentives aggressively to manage our business against somebody who has a different volume strategy.

But we are going to meet market conditions very methodically to try to maximize margin.

Thanks very much.

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

Your line is open.

Thanks.

Wanted to ask about some interesting kind of color in your commentary.

You mentioned that you think your communities may have been less impacted by some of the negative market factors out there than the rest of the market.

I wanted to get a specific sense of your kind of basis for making that statement.

Is that just your read against macro data?

Is that kind of anecdotal?

Is that based on some specific market data?

What drove that kind of commentary?

You want me to take that one, Stuart?

Yes, go ahead.

I think it has to do with the quality of the communities that you have within a market.

We have some what we would call flagship communities that are the number one place where people want to live in a market, that in good times there's waiting lists to get into those communities, in bad times they're the outperforming communities in those markets and in good times we can push prices significantly.

In bad times or slower times, the pricing doesn't go down as dramatically as the rest of the market.

So if you look at our communities across the US, we've got some great locations.

And I think it's in that context that we can feel pretty proud by the fact that we're not as affected by some of the trends in the overall market.

Let me just add to that and say that, look, a lot of our investment, the dollars that we're investing, we are carefully avoiding markets that are more difficult or are more flooded with foreclosure inventory.

And we are targeting our investment away from those markets and towards micro markets that we identify as being less impacted by the foreclosure numbers overall.

So as we've gone forward, I think that we are ending up with fewer communities that are impacted by what we see as this national wave of foreclosures and it's because we're selecting that as we go forward.

That's augmenting some of what Rick said.

Got it.

Okay.

That's helpful.

And second question, following up on one of Mike's questions earlier, one of the fears that investors have about new communities is that the land prices were generally reported to be rising between May of 2009 and let's say April of this year, and so certainly the lots that you were delivering that you bought earlier in that period would have better margins than the lots you were delivering from what you purchased later in that period.

I was just wondering, Stuart, if you could help just kind of frame that fear and maybe address it?

Yes, I think that it's why we keep highlighting the Rialto exposure that we have to some of the home sites that are not a part of the competitive process.

The market did get a little bit heated as we came to March, April, May earlier this year.

There was a lot of competition for home sites.

I think we side-stepped a lot of that competitive environment because we had a window into some opportunities that were not being actively shopped and marketed.

I think some very strategic and nimble moves by some people on our team enabled us to find home sites that don't fall into the category of having been bid up.

I think they're reflecting in some of our numbers and will reflect in some numbers as we go forward.

So the fears that some might have about some of the home sites that were purchased, we've tried to highlight that we haven't -- we've been outside of that set of fears.

Okay.

Thanks a lot.

You bet.

The next question is coming from Stephen East, of Ticonderoga Securities.

We'll make this the last question.

Stephen, happy to have you get in under the wire.

Thanks, Stuart.

I appreciate it.

Just a couple quick questions.

You mentioned that you're avoiding the markets that are troublesome.

As you look out over the next year or so, where are you pushing?

Where would you prefer to go?

Well, why don't I let Rick handle that.

Rick and John really spearhead that.

I really hate to say on a call like this with maybe other builders talking or listening out there, but I think you can pretty much take your map out and see where the major MSAs are, where there's an anticipation that job growth's going to be there and where we have a pretty decent footprint.

We've got strong operators in what I would call these major areas.

Clearly, anything in the Mid-Atlantic right now seems to be good, but we're a core builder in the Texas area.

We're one of the largest builders in Florida.

That footprint and knowledge and access to deal flow is dramatic.

Similarly, in California, we've been able to pick up some great locations in attractively priced high return communities in parts of California and we're going to continue to grow those areas.

Right now our focus is really two fold.

One, is where can we invest capital and get a high return on our investments, and where can we leverage our infrastructure in order to drive additional volume and get outsized returns given the fact that we're the player that already acts in that market That's where we're going to be.

That's really helpful.

Stuart, you talked about some of your investment opportunities.

You got about $1 billion in cash.

If you look out through 2013, you've got about $500 million in maturities.

You probably have between now and then more opportunities in Rialto than you might be able to handle.

How do you deal with all of the demands of the cash flows and what's the balance that you're comfortable keeping?

Well, look, this is a question that of course we question -- that we address every day here and have been working at for the past two years.

It's no secret that we've been out raising and looking at funds of capital.

We have worked with other institutional investors.

The one thing that is prevalent in the market is that there's a lot of capital to invest but it's not easy to find investment opportunities.

The thing that distinguishes us and gives us an opportunity to invest where others can't, is we have methodically put together a machine over the past two and-a-half, three years now, in the Rialto program that enables us to invest where others just are not equipped to do it.

The process of investing in these distressed asset portfolios, whether in private deals with private banks or public deals, bids, through the FDIC, it is a process that is labor and experience intensive.

It costs money.

The barriers to entry are big, and yet the returns are also big.

This affords us the opportunity to be a machine for capital.

We will raise capital in the public market.

We will raise capital through private avenues as well.

Capital wants to invest where there are outsized returns.

There are outsized returns in the distressed investment vehicle and we're comfortable that with the capital we have on our balance sheet, and our access to capital right now outside of the Company, we're going to be able to make a lot of investment opportunities come to fruition.

Okay.

And when you look at Rialto and FDIC, how long do you think, just purely your view of the world, how long do you think it takes them to unwind these portfolios, in other words, give you the opportunity to buy into them?

Is this a two year type time horizon?

Three?

Four?

Five?

Just how do you view it right now.

I'm sorry, to unwind-?

Like the FDIC deal that you've got, as they continue to pick up more banks and try to unwind these distressed portfolios, is this a three to five year type unwind that you think they go through or how do you look at it?

I feel like you're asking how long do I think that the distressed opportunities remain in the market?

Exactly.

That window will be -- that window will be probably a year and-a-half, two, maybe two and-a-half years.

It will be shorter than people anticipate.

There will be a moment where there's a purge.

And I feel like we're getting closer to that moment.

And the market will ultimately -- I believe that the market will ultimately clear the distressed opportunities.

But in our Rialto program, we are not just focused on distressed opportunities.

Distressed opportunities are the stepping stone to the next activity.

There will be a recomposition of the MDS market in general.

We will be participatory there.

There will be a variety of things that stem from this distress opportunity that we will use this as a steppingstone to get into and expand this part of our business.

And it will always be in perfect complement to the home building business and the two opportunities will play off of each other.

We saw that all the way through the early 1990s and into the late 1990s as we spun off LNR.

We'll see it again with Rialto.

Okay.

Very helpful.

Thank you.

Okay.

Listen, thank you everyone for joining us.

Just in conclusion, we feel strongly that our opportunity set right now is full.

The play between Rialto and the Lennar opportunities, the home building opportunities are great.

And we look forward to continuing to report on our progress as we go forward.

Thank you for your participation today.

This concludes today's conference.

All parties may disconnect at this time.