Lennar Corp (LEN) 2014 Q3 法說會逐字稿

Welcome to Lennar's third-quarter earnings conference call.

(Operator Instructions)

Today's conference is being recorded.

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

I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning everyone.

Today's conference call may include forward-looking statements, including 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 affect future results and may 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 in this morning's press results and our SEC filings, including those 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.

Thank you.

I would now like to introduce your host, Mr. Stuart Miller, CEO.

Sir, you may begin.

Great.

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

This morning I'm joined by Bruce Gross, our Chief Financial Officer; Dave Collins, who you just heard from; and Diane Bassette, our Vice President and Treasurer.

Additionally, our President, Rick Beckwitt, is here; and Jeff Krasnoff, Chief Executive Officer of Rialto; and Jon Jaffe, our Chief Operating Officer, is on the phone from California, and they'll join in on the Q&A.

As is customary on our conference calls, I want to begin this morning with some brief overview remarks on the housing market and our operations in particular.

Then Bruce is going to give greater detail.

We will then open up for question and answer.

(Caller Instructions)

So let me go ahead and begin.

Let me begin by saying that we're very pleased to report another very solid quarter performance for our Company with profitability in each of our major segment.

Our third quarter results demonstrate that our Company is positioned to be able to continue to perform extremely well in current market conditions due to a carefully crafted and balanced operating strategy.

Generally speaking, the market has continued a slow and steady recovery that is markedly different from past down-cycle recoveries.

History would suggest a more vertical recovery, especially given the severity of the economic decline.

This recovery has been a decidedly different experience, as the slope of recovery has been shallow and the expected acceleration has not materialized.

While this is generally the case for the overall economy, it is very much the case for housing in particular.

The housing recovery has been moving gently upward in a fairly narrow channel with movement up and down along the way.

That channel has been downside supported by the significant production deficit that has resulted from the extremely low volumes of dwellings, both single-family and multi-family, that have been built over the past seven years.

Before this downturn, anything below 1 million housing starts in a year was considered almost a housing depression.

This recovery is just now getting us back to that level of starts.

We're still adding to a deficit in production, given the housing needs of the country and that, in our opinion, limits the downside for the recovery going forward.

At the same time, the recovery has been, and likely will continue to be, upside constrained by a limited supply of available homes, new and existing on the market, limited supply of land available to add to the supply of homes, and constrained demand from purchasers who would like to buy but are unable to access the mortgage market.

While many investors have been disappointed that 2014 sales to date did not develop the steep vertical acceleration that they had anticipated, the market did continue to move slowly and steadily forward, driving volume upward and still driving price upward, though at a somewhat slower pace.

I would suggest that this is a very healthy and comfortable environment for the well-capitalized national builders, and for Lennar in particular.

The shallow slope of recovery is likely to provide a steady backdrop for market share expansion in a fragmented industry and an extended recovery duration for those who are able to participate by leveraging a strong capital base.

We continue to believe that the fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture, unlocking pent-up demand while supplies remain constrained to meet that demand.

We continue to believe that there remains a production deficit and that this shortfall will continue to define the housing market for the foreseeable future and will drive the housing recovery forward.

A slow and steady housing recovery will also continue to benefit the rental market, as first-time home purchasers find limited access to the for-sale market barred by higher down payments, very strict underwriting standards, invasive approval processes, and increasing fee structures from the government and banks.

This will likely continue to put upward pressure on rental rates and drive valuation for rental properties upward as well.

Lennar has navigated the first three quarters of 2014 with very solid results as each of our businesses showed strong performance and are well positioned for continued future performance.

A combination of solid management execution of our articulated strategies and strategic investments in core assets combine to produce strong result, and will enable continued industry-leading performance throughout the year.

Homebuilding of course remains the primary driver of our quarterly performance.

Lennar's strategy was to carefully balance pricing power, sales incentives, brokerage commissions, and advertising spend to maximize our results.

The execution of this strategy produced 23% sales growth, 25.2% gross margins, and a 14.8% operating margin.

Homebuilding revenues grew to $1.8 billion, up 25% over last year, while deliveries were 5,457 homes up 9% over the prior year.

Our sales pace in the third quarter was 3.3 sales per community per month, and this was basically flat with 2013 second quarter pace of 3.2.

Our average sales price increased by 14% year over year to $332,000.

During the quarter we opened 73 new communities and closed out 49 communities to end at 603 active communities, a 17% year-over-year increase.

Q3's SG&A was 10.4%, a 20 basis point year-over-year increase.

We did not benefit from much operating leverage this quarter, as the cost of opening new communities, costs associated with developing our new internet site and digital platform for marketing, and some additional advertising and brokerage fees associated with the competitive landscape added to SG&A.

Nevertheless, we continue to expect to benefit significantly from SG&A leverage as we grow volume in the future.

With many of our competitors offering large incentives to drive sales, we controlled our incentives at a 5.8% rate for the quarter, which was down year over year and sequentially from 6% and 5.9% respectively.

In place of increasing incentives across the board, we strategically used them on specific communities where we thought the sales pace was a little slow, and we selectively marketed more aggressively to both the brokerage community and to consumers on communities as needed.

The net result was an absorption pace that was flat with last year, combined costs of SG&A and incentives that were also flat with last year, and a 30 basis point improvement in our gross margin.

Year over year, labor and material costs are up 8.5% to around $49 per square foot.

This represents a mild slowing of the pace of cost increases, as last quarter costs were up more than 9% over the year.

These increases are both labor and material increases, and the breakdown between labor and material is about 40% labor and 60% material, which has not changed materially in the past few years.

Our sales continue to benefit from the execution of our Next Gen product strategy.

Year over year, sales of our multi-generational brand grew by 24%, totaling 275 sales in the third quarter.

We now offer Next Gen plans in 208 communities across the country, and in the third quarter the average sales price for Next Gen was about 34% above the Company's average.

We've continued to focus our Homebuilding strategy on the move-up segment of the market, as the first-time home purchaser has not yet been able to access the mortgage market.

With that said, we currently sell approximately 30% of our homes to first-time purchasers, and we remain strategically positioned with both land and product to capture the first-time home buyer demand when it is enabled by the mortgage market and it emerges with the inevitable strong and pent-up demand that we expect.

Complementing our homebuilding operations, of course our Financial Services segment continued to build its primary business alongside the Homebuilder.

Bruce will talk a little bit more about our Financial Services progress, which had a very respectable quarter with operating earnings of $27.1 million compared to $23.5 million last year.

While our Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, our three additional operating divisions are all continuing to mature as excellent longer-term value creation platforms along side.

Let me start here by saying a hardy welcome and congratulations to our Multifamily group.

This quarter marks the first sales of Multifamily communities to third parties and the first profit contribution to the Company from this segment.

We couldn't be more pleased with these results and the excellent management team that drives this business.

During the third quarter we sold two apartment communities totaling 580 apartments and generated a $14.7 million profit from those communities, which translated into an $8.5 million profit for this segment after overhead.

Each of these sales exceeded our targeted 25% return on invested capital and 2 times cash multiple.

These sales demonstrate the earnings potential of a maturing business as we develop our geographically diversified $5 billion pipeline.

During the third quarter we started development and construction on four new communities.

We now have 19 communities in production, of which 1 is completed and operating, 2 are partially completed and starting a lease-up program, and the remaining 16 are under construction.

These 19 communities have approximately 4,800 apartments with an estimated development cost of approximately $1.15 billion.

As we've discussed in the past, we're building these apartments with third-party institutional capital, and each deal has been conservatively financed with non-recourse debt.

Given the construction schedule of these units and the rest of our pipeline, our Multifamily segment will become a more predictable source of quarterly earnings starting in late 2015 and into 2016.

In the third quarter Rialto produced operating results of $12.4 million, reflecting continued progress and transitioning from an asset-heavy balance sheet investor to a capital-light investment manager and commercial loan originator and securitizer.

Rialto has now returned $385 million of invested capital to the parent Company since late last year, and we expect to generate at least another $250 million of cash in Rialto from initial investments for us to recycle by the end of 2016.

Our investment management servicing platform is growing assets under management, and has a strong asset base from which to harvest value for investors and for our Company.

We're continuing to build upon the base established with our first two real estate funds.

Fund one was fully invested in early 2013, and only 18 months later has returned some 80% of invested capital from income and monetizations.

Fund two has already invested or committed to invest approximately $1 billion of equity in almost 70 transactions, and also continues to make distributions of income to investors.

We still have over $600 million of equity to invest, and expect to begin raising our third real estate fund later this year.

Additionally, Rialto Mortgage Finance, our high return equity lending platform, is originating and securitizing long-term fixed rate loans on stabilized cash flowing commercial real estate properties.

During the quarter we completed our ninth securitization transaction, selling almost $300 million of RMF-originated loans, maintaining our strong margins, and bringing to total -- and bringing the total to almost $1.7 billion in only our first four quarters of operation.

Our FivePoint communities program continues to make significant progress in developing our premium California master plan communities.

At El Toro the first phase of 726 homes is over 80% sold out, and the second phase of 1,000 homes will be sold to builders in the beginning of next year with a grand opening expected in the late spring.

And in San Francisco we've opened the Shipyard, where we're pre-selling homes this quarter and are just now grand opening models.

Currently about 250 homes are under construction with another 100 scheduled to start, and the venture will begin delivering these homes in 2015.

So overall and in summary, our Company is extremely well positioned to thrive in the current market condition.

The shallow slope of recovery, with what we believe will be an extended duration, provides an excellent backdrop for our management team to drive our business forward, pick up market share, and produce excellent results.

We have an excellent management team that is focused on a carefully crafted strategy that has positioned us with advantaged assets that will continue to drive profitability in our core Homebuilding and Financial Service business lines.

Additionally, we have a well-diversified platform that will continue to enhance shareholder value as our ancillary businesses continue to mature.

Today we're very proud to share with you our results for the first three quarters of this year, and we look forward to sharing our further progress at year end.

With that, let me turn over to Bruce.

Thanks Stuart, and good morning.

Our net earnings for the third quarter were $0.78 per diluted share versus $0.54 per share in the prior year.

I'm going to review some of the financial highlights, starting with Homebuilding.

Revenues from home sales increased 25% in the third quarter, and that was driven by a 10% increase in deliveries, that includes unconsolidated entities (sic - see press release "excluding unconsolidated entities"), and a 14% year-over-year increase in average sales price to $332,000.

Our gross margin on home sales was 25.2%, which was up 30 basis points.

Our excellent land position continues to be an important driver of our strong gross margins.

And as Stuart mentioned, sales incentives improved by 20 basis points year over year.

The gross margin percentage for the quarter remained highest in the East, Southeast Florida and West regions, while all other regions also improved their gross margin percentage year over year.

In addition to improving our gross margins, we continued to carefully manage our inventory as we reduced our completed unsold inventory sequentially from the second quarter from 905 homes to 862 homes.

In addition to the operating margin leverage that we received in the quarter, and Stuart went through the SG&A discussion, we have also recognized operating leverage on our corporate G&A line.

That improved 20 basis points to 2.1% as a percent of total revenues.

Other interest expense continues to decline.

It came down from $22.2 million in the third quarter of last year to $8.4 million in the current quarter as we continued to open communities and increase the qualifying assets that are eligible for capitalization.

This quarter we opened 73 communities and ended the quarter with 603 active communities.

We purchased approximately 5,400 home sites during quarter totaling 273 million, and now our home sites owned and controlled total 166,000 of which 136,000 are owned and 30,000 are controlled.

Our Financial Services business segment increased operating earnings to $27.1 million from $23.5 million in the prior year.

The increased earnings occurred despite a continued challenging mortgage market with decreasing refinance transactions.

Our mortgage pretaxincome increased to $20.6 million from $18.8 million in the prior year.

Although refinance originations continue to decline and now represent only 9% of total originations, we were successful in replacing this lost volume with increased purchase originations.

As a result, our mortgage originations increased to $1.7 billion from $1.4 billion in the prior year.

Our in-house mortgage capture rate of Lennar home buyers was 77% this quarter.

And our title company's profit increased to $7.1 million in the quarter from $5.2 million of profit in the prior year.

This was primarily due to higher profit per transaction and our title team's focus on maximizing the title capture rate with our ancillary business transactions.

Our Rialto business segment generated operating earnings totaling $12.4 million compared to $1.5 million in the prior year.

Both are net of non-controlling interest.

And the composition of that $12.4 million in the three types of investments before G&A are as follows.

First, the investment management business contributed $35.3 million of earnings, which includes $20 million of equity and earnings from the real estate funds and $15.3 million of management fees and other.

These numbers don't include the carried interest, which under a hypothetical liquidation increased by approximately $19 million for the first quarter -- for the quarter, and is now at $123 million for real estate fund one.

Again, that profit is not booked until we receive cash flow and there's certainty with those numbers.

Second, our new Rialto mortgage finance operations contributed $292 million of commercial loans into one securitization resulting in earnings of $13.1 million for the quarter before their G&A expenses.

Third, our liquidating direct investments, which are the remaining assets in the FDIC and bank portfolios, had a net loss of $3 million, which was primarily due to our share of impairments in FDIC portfolios as we continue to focus on accelerating the monetization of certain assets in these portfolios, and those numbers are partially offset by gains on sales of real estate and interest income.

Rialto G&A and other expenses were $25.6 million for the quarter and interest expense was $7.5 million.

The interest again primarily relates to the $350 million of Senior Notes and the Rialto subsidiary.

Rialto had a strong liquidity position with over $200 million of cash at quarter end.

Stuart went through the numbers on Multifamily.

Again, we had $8.5 million net profit in that segment, which was $14.7 million for the first two apartment community sales, and then the G&A net of management fees was approximately $6.5 million.

Our investment in the Multifamily segment is approximately $160 million, as we continue to grow this business primarily using third-party capital.

The tax rate for the quarter came down, it was 33.3%.

This quarter we were successful, as we were favorably impacted by the settlement of a state tax exam and additional energy tax credits.

We expect the tax rate for the fourth quarter to be around 36% as we start to receive the full benefit of the Domestic Activities Production deduction, which is Section 199, now that we have fully utilized our federal net operating loss carry-forwards.

Turning to the balance sheet.

Our balance sheet liquidity is strong as we ended the third quarter with $542 million of Homebuilding cash, and $70 million was outstanding under our $1.5 billion unsecured revolving credit facility.

Homebuilding net debt to total cap was 47.5%.

Stockholders equity grew to $4.6 billion this quarter, that's a 23% increase over the prior year, and our book value per share increased to $22.32 per share.

We received a credit rating upgrade during the quarter, as S&P upgraded Lennar's corporate rating to BB.

And subsequent to quarter end, we retired $250 million of our 2014 Senior Notes, which matured on September 1.

Finally, let me summarize the updated goals for 2014.

Starting with deliveries, we are confirming our previously stated goals to deliver between 21,000 and 22,000 homes for 2014 with a backlog conversion ratio for Q4 of 95% to 100%.

This puts deliveries around the middle of the range, which ties in with the way we see the market today.

Gross margin, consistent with what we have previously said and given the competitive pressures in the market, we expect our gross margins to be around 25% for the fourth quarter.

Rialto, we still expect a range of profits between $30 million and $40 million pretax for the year.

And looking at SG&A and corporate G&A, we continue to focus on leveraging our G&A lines, and still expect at least a combined 25 basis points of improvement for all of 2014.

We still expect Financial Services profits to be in the $65 million to $75 million range for the year.

And with Multifamily, since we closed on the two potential apartment communities available to sell in 2014 in our third quarter, as we look forward to the fourth quarter we're not expecting any additional apartment community sales.

Therefore the Multifamily segment will have start-up overhead expenses similar to what you saw in the second quarter of this year.

We're not expecting any significant sales activities in the joint venture and land line for the fourth quarter.

That should be close to breakeven, and as I mentioned our fourth quarter effective tax rate should be around 36%.

We're still expected to end 2014 with a range of approximately 600 to 625 communities.

And with that, let's turn it back to the operator and open it up for your questions.

Thank you.

(Operator Instructions)

Our first question today is from Michael Rehaut from JPMorgan.

Hi, thanks, and congrats on the quarter.

Thanks.

The first question I had was on trends during the quarter.

Stuart, you referred to, in your commentary, that some competitors are offering large incentives.

And Bruce most recently said that, again, some of the competitive pressures -- you expect gross margins to remain around 25% for 4Q.

But in that last comment, Bruce, you would think that if competitive pressures are really materially increasing, gross margins could come under a little bit of pressure in 4Q versus 3Q, but that doesn't appear to be the case.

And so, I was hoping, Stuart, and if Rick or Jon wanted to join in, but just to elaborate on that view of incentives during the quarter -- if incentives really have increased to a material degree, and if that's the case, to reconcile that with kind of still stable gross margins going into 4Q?

Thanks, Mike.

Let me defer to Rick and Jon.

They are very close to the action in the field.

Hey, Michael.

It's Rick.

Bruce did highlight that we think we'll be around 25% for the quarter.

I think we're always very straight up as to what guidance we give you with regard to margins.

We have seen various competitors do different things out there with regard to incentives.

As we've said all year long, we're balancing pace and price to maximize the value of the assets that we've got.

Based on the visibility that we've got today, we're not anticipating anything going outside of that range.

Our incentives this last quarter did go down, and we're balancing that in every community we've got across the nation.

Michael, it's Jon.

I'd add to that, that it really is a community-by-community focus.

And one of the things that I think gives us comfort that we have the visibility in the fourth quarter is our Everything's Included program, which gives us a different value proposition for the consumer, so that we can compete against incentive programs that other builders may have, and continue our pace and pricing strategy.

Okay, I appreciate that.

And I guess just second question on the order trends themselves, up 23%, and using the average community count approach, sales pace up roughly 4% year over year for the quarter.

I was hoping -- and that came in a little bit above our expectations, and I think the street as well.

I was hoping, if possible, if you could give us a sense month to month -- I know month to month can sometimes be volatile, but if any trends, if you'd go into more granularly, did that -- the order growth, that 23%, was that similar throughout the quarter, as well as the sales pace -- anything to note from the intra-quarter perspective?

Not a lot of significant differences monthly, sequentially -- followed the normal seasonal pattern for the summer.

July was probably the strongest month, but June and August were very healthy, both on pace and price.

I'd just say: Michael, I think that what we've been seeing is that the market is tending to move a little bit around -- a little bit up, a little bit down.

You get that sense on a weekly basis and on a monthly basis, but the trend line is decidedly upward.

And it's as I've said; I probably said it three times in my remarks.

It's a gentle, upward slope, and you've got upward and downward movement around that kind of direction.

And I think that's what we're seeing basically in our sales as we go through the months and through the weeks.

Great, great.

Thanks so much.

Appreciate it.

Sure.

Our next question is from Eli Hackel from Goldman Sachs.

Thanks, good morning.

Just starting off, just wanted to touch on the pivot you're doing in terms of your land strategy.

And the overall question is: As you go into the cycle, and as you bought a lot of land early and your ancillary businesses should be cash flow -- increasingly cash flow positive -- how are you thinking about use of cash with respect to maybe either the balance sheet or back to dividends or share buybacks as we go forward?

Thank you.

Well, Eli, that's a top-of-mind question, but it's still a question that's a little bit off in the future.

We're still, we think, deep in the midst of the investment cycle in the Business.

As I noted, the shallow, upward recovery is a very solid backdrop for us to continue investing.

I think it lends itself to a longer-duration, upwardly trending market.

And we do continue to invest in significant land assets.

What our pivot has really reflected more recently is that we're kind of pulling down the duration of land that we're purchasing.

And it is a slow process, and one that is going to present itself over the next couple of years.

But think in terms of, over the next period of time, we'll continue investing our capital in growing our Business forward, and just making sure that we are not getting out over our skis in duration exposure.

Now, with that said, as we do become more cash flow positive, and we will, as our ancillary businesses do start returning capital, as we've already seen with Rialto and as we'll start to see with some of the others as well, and as we lighten up on the percentage of our revenues that we're reinvesting in land, cash will start to turn decidedly positive.

And I think that we will take somewhat of an opportunistic view of the market, thinking strategically about how to best deploy that capital, whether it's in the form of dividend, stock buyback, or some other form of investment.

We're going to keep an open mind, and the management team will be considering it.

I guess I'd add one other thing is, if you look at our land spend this year in FY14, you saw we were heavier in the first quarter and it's been ticking down.

First quarter we were about $500 million; this last quarter we were about $272 million.

[Contra] to that, we've had increased spend on the development side.

And it really goes back to the opportunistic purchases that we had in the previous years, and now we're developing that property.

We're fortunate to not have to go out and buy land today.

And consistent with what we've said in the past, what we're doing is we're working with sellers out there in helping them entitle their land -- tying it up without having to put actual dollars out.

So, that's another example of the soft pivot that we're doing.

Great, thanks.

One quick follow-up: Can you just remind us -- or at least in the last quarter -- what percentage of your deliveries were from the new, higher-margin communities, and what the delta is between those communities and your legacy?

Thank you.

That percentage is somewhere around 80% now, Eli.

Great.

Thanks very much.

You bet.

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

Thank you.

Good morning, and congratulations on a great quarter, guys.

I think big-picture question first, for Stuart and anyone else who wants to opine on this, but then second, along the development activity.

So, first question, recognizing it's been a choppy market, Stuart, and, as you very eloquently discussed the trajectory pointing upwards, can you give us a sense why Lennar seems to be able to hit the ball down the fairway and consistently deliver good results, and some of the differences that -- you don't have to mention names, but there's clearly a dichotomy of performance.

And I think it's an opportunity to talk about what you guys do differently.

And prior to that, the second question, just quickly on development activity.

There's been a lot of noted shortfalls in community new openings.

It seems as if you're also managing to still deliver on community count growth.

Can you comment on delays and some of the impediments to getting that supply to market?

And if so, if those delays are being worked through or mitigated, and what we should anticipate going forward on community count for the industry?

Starting with your first question, Ivy, I think you know well that I hold the competitive landscape in very high regard, and I think that everybody's -- that the large, well-capitalized builders, the strategies of the competitive field are all strong and viable and somewhat differentiated.

Our strategy, which we're quite pleased with, is very focused on a combination of good, strategic land purchases and really hands-on community-by-community management.

So, as you know, we got out ahead of the market in terms of land acquisition.

We bought great, strategic communities in really well-located positions, and we've been able to really leverage the harvesting of those communities -- continue to leverage the community positions that we have.

But I think that maybe the equally important component of this is our management structure and management team is very focused on a community-by-community basis of managing every day the balance between volume, margin, SG&A spend, all of the components that drive and add to the decision making about pricing and incentives and everything else.

The decisions are made on a daily basis in the field; they're made cooperatively between division President, regional President, and Rick and Jon, respectively.

It's just a very active management program that is vibrant and very connected to the market in general.

So, that's our structure and our program.

And we've been very pleased to be able to be balanced in the way that we approach the Business to date.

I think that you can expect a lot more of the same.

As it relates to community, community count, it does get a little bit more difficult to develop communities going forward.

I think that we're pretty well advantaged by having loaded up on our community count early, and gotten into the development and whatever entitlement necessities there were earlier.

With that said, it's still difficult to bring community count online.

As I've told you and others before, community count is one of the most illusive parts of our business, and it's part of the balance.

It takes a lot of executive management to keep focused on it.

I think we do an excellent job, but it's the component of the Business that continues to be a difficult part of management.

Rick, maybe you'd want to add to that?

Yes, probably the toughest thing out there to control, Ivy, is the volume going through the municipalities.

The towns and cities still haven't staffed up to date to handle the volume of the activity.

And with regard to that, even on the housing side, there's buffers that we have to go through in order to get the approvals; not just the approvals on paper, but the site approvals, the inspections.

And fortunately we're blessed because we have really great people.

They try to stay ahead of it.

The land development business is all about timing and knowing what to do, when to do it, and what to expect.

And I think we just have good people.

Great.

Well, enjoy your day.

Congratulations.

Thank you.

Our next question is from Stephen Kim from Barclays.

Hey, guys.

Congratulations.

You had a strong quarter.

Thank you.

I had a couple of questions.

Not to take anything away from what you've done, but wanted to just ask about the SG&A.

Over the last three quarters, the SG&A rate, if you include corporate, hasn't really changed much.

I know you talked about the fact -- you gave some of the reasons for that in your opening remarks.

And you talked about, to some degree, the ramp in community count that you've been experiencing as being a reason why that -- your improvement in SG&A hasn't manifested itself yet.

My question essentially is that if we assume that community count were to grow, let's say -- continue to grow roughly at the rate that it's been growing this year, would the likely impact of that be that SG&A improvement would probably be delayed for another year or so, until that growth meaningfully decelerates?

Or are there other factors that you think will allow your SG&A to start showing that 7% incremental that you talked about, even if your community count growth remains at, let's say, that mid-teens kind of level?

Steve, this is Bruce.

I'll take that one.

As you look at the community count growth, and if you look at the SG&A numbers that we talked about today, the increased communities was the smaller portion of the explanation.

So, as we go forward, we are expecting to get the leverage.

And again, we've kind of laid out how we get that operating leverage because most of the growth is coming from existing divisions or existing communities.

So, we do expect to get that leverage, and we don't expect it to be deferred into some future year.

We expect next quarter to get some leverage, and going into 2015 to get additional leverage.

And, Bruce, if I could just get you to talk a little bit more broadly about -- I mean, one of the things that we get pushback on, and I'm sure you probably do, too, is the fact that for most builders that we talk to, the 125 to 225 basis points of leverage, which some of your graphics would suggest you could achieve, seems much higher, much more lofty goal than I think other builders would feel comfortable talking about.

Some of that has to do with the fact that when you look historically, you guys carried perhaps a greater overhead structure than you intend to going forward.

And I think you talked about US Home in the past playing a role in that.

Could you just elaborate a little bit more on why Lennar may have an outsized opportunity in SG&A versus peers?

I think it starts with, we already have a national platform.

So, as you're comparing across the field, our focus for growth isn't needing to go into new markets, and that's the more expensive component of SG&A.

So, in the past, we did a lot of aggressive growing in the last decade, and we've consolidated.

We're in the markets we want to be in, and we're now about 30 divisions.

Our growth going forward is primarily coming from those 30 divisions where the incremental SG&A is around 7%.

And I think that's probably the biggest differentiator as we think about our program; that's where most of the leverage will come from.

But more specifically to the question that you were asking, Steve, historically we were configured with multiple divisions in the same market.

We've walked through that with many, and we were about 120 different operating divisions -- 124, I think, different operating divisions across the country; sometimes two or three divisions in one geography.

We used the downturn as an opportunity to really rethink the configuration of our operating platform.

And I think that Rick and Jon have done an extraordinary job of putting leadership in place, in geographical places where we're not going to have to expand into multiple divisions in order to grow this time.

Instead, we think that we're going to be able to comfortably grow.

We'll add a few divisions as we get larger and as geographies get a little bit stretched, but right now we're at 30 divisions.

We were at 124, and we might end up with 35, 40 divisions as we grow our volumes back, remembering that the largest opportunity to grow volume and to leverage overhead still remains in recapturing a traditional four-homes-per-community-per-month absorption rate, and we still haven't seen that growth.

So, the ability to leverage overhead directly derives from the way that we're structured today, and we think that we have a hardy focus structure that can bear a lot more growth.

Great, thanks very much.

That was a great answer.

Last question relates to the apartment business.

Did you retain an interest in those two apartment complexes that you sold off?

And can you talk a little bit about what you intend to do in terms of capturing value that you create beyond just the construction of and the lease-up of the units as you go forward?

Thanks.

In the short term, as we've said in the past, Steve, we're in a build-to-sell mode.

We have been dealing with third parties, buying the land, starting a venture, constructing, developing, and then selling the asset once it's stabilized.

And we've had two of those to date.

I think as we move forward into 2015, given that we've got ventures set up with the 19 things that are under construction or completed at this point in time, you'll see a similar type of trajectory on those assets.

We have not retained an ownership interest.

We are working on some things where we hopefully will be able to maybe get the profit, as well as continue to have an ownership interest, but we haven't set that up yet.

Yes, I think, just to add to that, what we've tried to articulate quarter by quarter is that we are going to define this Business as a merchant build business, in order to prove the power of this backlog that we've been creating.

You're seeing the first evidence of that.

This is a proving ground for what we have in our pipeline to demonstrate that, number one, we have a strong pipeline; number two, we can design, build, lease up, stabilize properties.

And as we prove this property after property to a broader market, I think that the next thing that we will focus on is the opportunity that's embedded in this pipeline of product that's very desirable to the investment market.

And we'll take that opportunity, and wrap some kind of a fence -- whether it's a REIT or whether it's a private equity program -- around it and have further monetization.

But we've said very clearly that step number one is to prove the platform, and I think that you're starting to see the proof.

Yes, Steve, there's no question we could go one way or the other.

The true magic is: Can we get both?

And that's what we're focused on, to create a platform where we can generate the income, so it's great for our stockholders on a current basis and predictable, but still have an ownership piece in these assets to have NOI as we go forward.

Great.

Thanks very much, guys, and good luck.

Our next question is from Stephen East from ISI Group.

Thank you.

Congratulations, guys.

Just to follow on that a little bit, you say it was about $15 million -- a little bit less than $15 million you profited.

If I backed into it, you sold it for around $60 million.

One, is that accurate?

And two, what type of cap rate does that imply, because I know, Stuart, you all have talked that you thought you would be able to capture that construction delta on the cap rate.

Well, Steve, it's Rick.

We have continued to get, in those two deals, north of a 200-basis-point spread on cap versus yield on cost.

You're somewhat in the ballpark with regard to proceeds.

There were two different sales, and the returns were really off the charts.

Okay, so, much better than the 25% that I'm sort of backing into there?

Yes, you're right.

Okay, and as you all move forward, you said it was late 2015 that you thought you would be able to start rolling these out quarter by quarter.

And judging by what you've seen so far, as you get later into 2015 and 2016 for these sales, does that hurdle rate -- the 25%-plus -- does it start to ratchet back down?

Starting with the hurdle rate, I don't think it does.

Everything has been underwritten to that kind of IRR for us, given that -- remember that these structures allow us to promote as we work through the waterfall.

With regard to potential sales for 2015, it's probably going to be in the neighborhood of five to six apartment communities.

We may see one in the first half of the year, and the balance in the later half of the year.

The heaviest quarter would be the fourth quarter.

Okay.

And then, Stuart, in our field research, we've seen not only you all, but other builders starting to ramp up broker incentives more versus other type of incentives.

And I guess I'm interested in what's the rationale there?

Why that, which could be true dollars out the door versus some other things?

And what do you think happens as you go through, call it, the next 6 to 12 months, as far as broker incentives versus other types of incentives?

Well, it's an interesting question, Steve.

I think that the first thing that we have to recognize is that we live in a competitive world and a competitive field.

And so, we -- in part, we can be self-determined, and in part, we still have to recognize what the competitive field is doing.

So, to the extent that the field moves in the direction, ie, ramping up brokerage fees -- in order to keep within the acceptable ranges of the brokers, we might have to move in that direction, too.

Do recognize that our Business is defined at a very local level.

So, in some markets, you're seeing some of the competitive group move very much in favor of ramping up brokerage fees.

I think that our view, and the way that we've run our Business is we're probably behind others in how they've ramped up, but we still want to stay in the good graces of the brokerage community, so we really can't fall too far behind in those select communities.

So, it really comes down to the mechanisms by which some of the competitors might, at moments in time, in specific locations, decide that they need to ramp up volume.

So, you're seeing some of that move around as people define their business and define their strategies.

And it's not our preferred direction in terms of managing the pace, but at the same time, we want to make sure that we stay in the good graces of the brokerage community; they are a vital part of our Business.

Yes, fair enough.

I get it on that.

Do you think the incentives are above normal levels at the broker level right now?

Well, again, I just want to highlight that the way the question is framed, it's almost like a national question, and it is a very local kind of activity that we all average up to the national level.

But what I really want to keep in your mind, and people's mind, is that the market itself is kind of moving gently upward, but up and down along the way.

And it has caused some, and in some markets, to really try to focus on driving volume at moments in time.

So, I think I would answer your question by saying that, at times, it does get a little bit overheated, both in incentives and in the fee for brokers.

And at other times, it curtails backwards.

So, it's a moving evaluation rather than one that's static and consistent.

So, I think a lot of it depends on -- a lot of the answer to your question depends on how the market kind of gyrates up and down, and people's need to drive sales, or competitors' need to drive sales.

It gets a little frothy at times; it pulls back.

We try to remain pretty consistent, and not move just directly in response.

But remember: As it relates to brokers, we're trying to stay in the game and make sure that we remain in the good graces of that part of our Business.

Okay.

Thanks a lot.

I appreciate it.

Our next question is from Bob Wetenhall from RBC Capital Markets.

Good morning, nice quarter.

I was just outside of Houston and Katy at Cinco Ranch, and we saw a lot of demand for EI product at the lower end of the price range.

And seems like there's a lot of demand from first-time home buyers.

And I wanted to see if you, A, are seeing a return of the first-time home buyer?

And, B, how you're thinking, heading into 2015, if the first-time buyer is coming back, the tradeoff between incremental operating leverage and mix?

Hey, Bob, it's Rick.

As we've said in the past, we have been very focused on that first-time buyer.

And maybe I'll give you a little bit of color as to what we've been doing over the last year, and how it will play out in our operations, let's say in the next 12 months.

We really view that first-time buyer as a sub-$175,000, sub-$200,000 price point.

And let's just take Texas as an example.

As we move into 2015, under $200,000, we'll have about 26% of our community.

In Dallas, it'll be about 20%; Austin, the same.

And the same with San Antonio.

We've been putting these positions together over the last year to really target that buyer.

It's a little bit tougher to get under $175,000; much, much tougher, because of the land cost, to get under $150,000.

But we do view that as a very viable piece of the Business.

We still will have the higher-priced stuff, but you'll start to see that move through in our closings.

I just want to go back to something I said in our opening remarks.

We haven't at all neglected the first-time buyer market.

About 30% of our Business overall is geared towards that first-time buyer.

We have that cork squarely in the water.

Rick and Jon have been very focused on positioning the Company to participate as that market returns.

But let's not underestimate -- it's still very difficult for that market to get reignited, until we start to see a little bit more movement in terms of access to the mortgage market, remembering that there are really three barriers to that -- to the first-time buyer coming back.

First, it's the down payment.

Then, it's the underwriting; there's very stiff underwriting and the bank overlays relative to accessing mortgage credit.

And then, finally, the process itself has become fairly invasive, at least as far as people see the process and feel the process.

And every time I say this to a group, there's at least three or four people in the group that raise their hand and say: Yep, I know what you mean by invasive.

So, the process is almost designed to scare people away.

The barriers are a little bit steep right now.

It's going to moderate.

And as I noted, we've got our cork squarely in the water, and we are ready to participate as the market really comes back in earnest.

I hope it does.

(multiple speakers) Was going to ask, Jon, you made some comments about FivePoints making some progress.

Looks like the first phase at El Toro is set up.

If you could give us a little bit more color what you're seeing in terms of demand patterns, both at El Toro and the Shipyard, just to give us a view on Southern and Northern California, that would be great.

Thanks very much.

Bob, El Toro's remained very strong since we opened in October.

We're 80% sold out of 726 homes from the various builders in a very short period of time that covered the slowest part of the season as well.

We've seen just continued strength in that market.

Irvine is a very desirable location, and we see strong demand from builders' interest in our next phase there.

In San Francisco, we haven't opened models yet.

That will happen later this quarter, but we've seen strong success with our pre-sales, which was just a very quiet program, but steady demand, steady traffic, steady sales activity, and a building interest [lift].

So, we're very encouraged by the early signals that we see there as well.

Are you still seeing good ASP growth?

Yes, we are.

Great.

Thanks very much.

Okay.

I think maybe we've got time for one more?

Okay.

Our final question today is from David Goldberg from UBS.

Thank you.

And thanks for taking my call, and good quarter.

Thank you.

Wanted to follow up, Stuart, on your commentary in response to Bob's question there about the entry-level buyer and the constraints that are coming in the mortgage market.

And what I'm trying to get an idea of is: How do you monitor those constraints and how that's trending?

So, presumably you guys want to be a little bit proactive, or more proactive than the other builders, to get out first or at least get out early to be on top of that.

So, what are you looking at to try to get an idea about what's happening in terms of credit availability?

And do you think you can get an advantage over the other builders in terms of maybe getting a little bit earlier by looking at some of the signals?

Well, I think, David, that, number one, the credit landscape is as I've basically described, and that is deposit, credit underwriting, and then the nature of the process all being kind of defined and where they are.

There has been some loosening of the credit underwriting at the margin, but it hasn't been as significant as some has been reported.

We stay very close to the customer in the field.

We see who's coming in.

We see what their commentary is.

Remember that the rental market has accelerated in terms of its monthly payment requirement, its cost of living, and that's really driving people to say: I want to buy a home; I'd like to fix my [cough]; I'd like to find access to the mortgage market.

So, we're watching what happens as they come in, and staying very close to the purchaser in the field.

Now, with that said, the barriers are high; and over time, the market adjusts to those barriers.

People start saving more down payment, they find a way, they get help from family.

They start focusing on credit statistics as rental rates go up, and they become more volatile because each year there's a repricing.

People become ignited to get their credit credentials buffed and polished and ready for underwriting.

They take a deep breath and they prepare themselves to go through the mortgage process.

So, you have two things going in opposite directions.

People are becoming more prepared, and the mortgage market is opening up at the margins.

And the only thing that we can really do is stay very close to the purchaser in the field, see what they are seeing, feeling and finding as they try to access the new home market, and use that as the guidepost for really diving in and participating.

Now, we've highlighted that we've gone out, we've tied up properties and positions that enable us to access the first-time market as it really starts to come back, and we're already very involved in the market.

But the indicators to us that it's time to really start focusing on that market will come from the field at a very granular level.

That's very helpful.

And then, just as a follow-up question, it feels like you guys, and maybe a couple of the other builders, are gaining share from maybe broadly the bigger public -- the other public builders or maybe some of the private builders.

Do you think it's true that you're gaining share right now, and the pie is relatively flat?

And if so, do you think it's sustainable as you go forward?

Well, I think there's a reality right now, and that is that the credit landscape is tight.

It's not just tight for the purchaser looking to gain access to the mortgage market, but it's also been very tight for smaller builders and for traditional land developers to get back in the market and to do the things that they do.

So, I think the larger, well-capitalized builders with access to the land market in a more comprehensive way have been able to pick up market share, and that is something that seems like it's continuing going forward.

Of course, the small builders are resourceful and find their way to participate.

But I still think that the larger builders have a distinct advantage in the current market condition, and I do believe that the pick-up of market share is sustainable and will continue.

I know you said that the pie is fairly static; it feels like, over time, the pie is going to be gently expanding as well.

But with a gently expanding pie, I think that you're going to see a pick-up in market share as well.

Thank you very much.

Okay, you're welcome.

And thank you, everyone, for joining us.

We're sorry for those who weren't able to get on.

Of course, Bruce is available today to answer calls, and we look forward to reporting again at the end of our fourth quarter.

Thank you.

Thank you, and this does conclude today's conference.

You may disconnect at this time.