Lennar Corp (LEN) 2015 Q4 法說會逐字稿

Welcome to Lennar's fourth quarter earnings conference call.

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

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

Today's conference is being recorded.

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

I'll 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 and 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 release and our SEC filings, including those under the caption, Risk Factors, contained in Lennar's annual report on Form 10K, most recently filed with the SEC.

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

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

Sir, you may begin.

Great, thanks, David, and good morning everybody.

Just to let you know I'm joined by Bruce Gross, Chief Financial Officer; David Collins, who you just heard from; Dianne Bessette, our Vice President and Treasurer; Rick Beckwitt, our President; and Jeff Krasnoff, CEO of Rialto, are here with me with a few other members of our management team.

Jon Jaffe, our Chief Operating Officer, is joining by phone from California.

Some of them will join in the conversation for Q&A.

Eric Fader is here as well.

He might jump in.

I'm going to give some brief remarks about the business in general.

And then Bruce is going to jump in and break down our financial details, as he has in the past, and then of course, we will open up to Q&A, as we always do and request that during Q&A, each person limit yourself to one question and one follow-up so that we can get as many participants in as possible.

So let me start by saying that our fourth-quarter and full-year 2015 results just marked another year of outstanding operating results for our Company.

Every part of the Company has performed as expected and positioned itself for continued performance in 2016 and beyond.

Management teams across our platform have risen beyond the challenges of sometimes complicated market conditions and have adjusted strategies to meet those challenges.

We remain very well-positioned to execute our strategically crafted operating plan in what continues to be a very solid macro environment which is particularly well-suited for large, well-capitalized companies like Lennar.

In light of the Fed's move in interest rates this week, let me speak briefly about our outlook for the housing market in general.

Many have been concerned about the relationship between housing and interest rates.

We are quite certain though that modest moves in interest rates in the context of a positive economic environment will be a net positive for housing in general.

This has been the case in approximately half of all prior positive interest rate environments.

As we've noted before, the overall housing market has been generally defined by a rather large production deficit over the past years and this has resulted in a growing pent-up demand.

Stronger general economic conditions, including lower unemployment, sustained wage growth and growing consumer confidence will drive consumers to form new households, and to rent and purchase dwellings.

We expect that demand will continue to build and to come to the market over the next years as the deficit and housing stock needs to be replenished.

While land and labor shortages will somewhat restrict the ability to quickly respond to growing demand, this environment will result in a very steady positive homebuilding market and enable us to grow and expand our platform.

Against this backdrop, let me briefly describe and discuss each of our operating segments.

Our for sale Homebuilding operations have performed extremely well in 2015.

Our results reflect the slow but steady growth in the overall Homebuilding market.

While labor shortages and cost increases have tested our ability to match sales and delivery pace, our management team has kept careful control of pace while managing sales prices and margins and reducing SG&A to offset and maintain strong net operating margins.

The continuation of the difficult mortgage approval landscape and the introduction of the new TRID rules also provided some obstacles that our management team navigated seamlessly.

We've also noted before that given the now mature and restricted land environment, we've been managing and continue to carefully manage our growth in order to maximize our bottom line and to drive strong cash flow.

This has been and will continue to be the strategy driving our Homebuilding platform as we manage land acquisitions to purchase only the best deals and we continue to maximize pricing power and continue to deploy innovative strategies to drive our SG&A down.

With demand growing steadily, land limited, labor tight, and constrained mortgage availability, we feel that we're in an excellent environment to run our business at a steady and consistent growth rate with strong bottom line profitability and strong cash flow.

Our Financial Services Group has had an outstanding 2015 as well.

Of course, as we've continued to grow our core Homebuilding business, we also continue to grow and mature our Financial Services Group.

While the Financial Services operations have grown alongside our core Homebuilding business, we've also benefited from a strong refi market and from an expansion of retail opportunities in both our mortgage and titled platforms.

These side car opportunities will continue to expand into 2016 as the refi business dissipates in its ordinary course.

Our strategy for the future of Lennar Financial Services is to construct and maintain a fully self-sufficient financial services platform that benefits from Lennar's Homebuilding business but also drives profitability from retail operations as well.

Bruce Gross, our Chief Financial Officer, oversees this operation, and will discuss it further in his comments.

2015 has been an outstanding year for Lennar multifamily communities as well.

LMC, as we call it, complements our core Homebuilding operation and allows us to provide a much needed housing alternative for an urban-focused Millennial population and a credit-challenged first time home buyer in a tight mortgage financed underwriting environment.

Driven by a multi-year shortfall of multifamily development, the fundamentals of the rental market are extremely compelling with historically low vacancy rates and low turnover and rising rents.

Under the leadership of Todd Farrell and Ed Easley, we became the nation's fifth largest developer of Class A apartments and have built a nationwide development, construction and management platform that will produce both significant short-term profits for the Company and long-term value for our shareholders.

We have discussed on prior calls we started -- as we've discussed on prior calls, we started this business in 2011 as a merchant builder where we planned to sell our apartment communities when we were leased and stabilized.

In 2015, we augmented this strategy with the first close of Lennar Multifamily Venture, a build to core equity fund designed to allow us to hold our Class A income producing assets for continued cash flow and recurring earnings.

Today, including both our merchant build and build to core equity fund, we have a pipeline of over 21,000 apartments with a total development cost exceeding $6 billion.

In 2015, our Rialto segment had an outstanding year as well under the leadership of Jeff Krasnoff and Jay Mantz and continues to grow as a best-in-class asset manager.

Our stated results were driven by increased management fees and returns from our Asset Management business and securitization gains in Rialto mortgage finance.

These results do not include the substantial increase in undistributed, hypothetical carried interest from our funds.

Rialto has transitioned from being an asset heavy, balance sheet investor to a capital-light high return on investment vehicle.

Our Investment Management and Servicing platforms have been growing assets under management.

In a little over six years, we've raised almost $6 billion in equity and have invested close to $5.5 billion.

We're continuing to build on this -- upon this base in our -- from our first two Real Estate funds which have both been top quartile performers.

Fund I has had spectacular performance.

We have already distributed approximately 130% of invested capital with a long way to go.

Fund II is also on its way.

The final capital call occurred just this fourth quarter, as we've invested over $1.6 billion of equity.

We have already returned $300 million, or about 23% of the original commitments and we've had our first closing of almost $510 million for Rialto Real Estate Fund Number III.

And to complement our Real Estate funds, we also have almost $700 million of investor equity dedicated to mezzanine lending which we'll also be looking to grow as we move into 2016.

Complementing our Asset Management business, Rialto Mortgage Finance run by Brett Ersoff, our high return on equity lending platform, is focused on originating and securitizing long-term fixed rate loans on stabilized cash flow and commercial real estate properties.

RMF is now the second largest non-bank CMBS originator by dollar volume and the largest by loan count.

During the quarter, we completed our 24th securitization transaction, selling over $854 million of RMF originated loans, maintaining our strong margins and bringing our total to over $4.6 billion of securitized loans since RMF inception.

Rialto simply couldn't be better positioned for 2016, as the dysfunction in the financial markets and the new risk retention rules works to the benefit of Rialto's core competence in both CMBS and broader financial products.

Finally, our strategic investment in Five Point Properties and its management team positions us to continue to benefit from some of the best located land in California as the market continues to improve.

As noted in our last conference call, Five Point has filed a confidential registration statement for the initial public offering.

We can't speak too much about Five Point and we'll keep you posted, as further information becomes available.

In conclusion, we are very pleased to present our fourth quarter and full year 2015 results this morning.

As we look ahead to 2016, we couldn't be more enthusiastic about the prospects for Lennar, as all segments of our Company are extremely well-positioned.

As we've said many times in the past, we are uniquely positioned as we have the right people, the right programs, and the right timing to continue to perform, as we have this year, well into the future.

And with that, let me turn it over to Bruce.

Thanks, Stuart, and good morning.

Our net earnings for the fourth quarter were $282 million, which is a 15% increase over the prior year.

Revenues from home sales increased 16% in the fourth quarter, driven by a 9% increase in wholly-owned deliveries, and a 6% year-over-year increase in average selling price to $347,000.

Our gross margin on home sales in Q4 was 24.6% which achieved our goal of 24% gross margin for the full year.

The prior year's gross margin percentage was 25.6% and the gross margin declined year-over-year was due primarily to increased land costs as well as Chinese drywall settlements benefiting the prior year's quarter by 30 basis points.

Sales incentives continued to decline this quarter at 5.9% versus 6.6% in the prior year.

Gross margin percents were once again highest in the East, Southeast Florida, and West regions.

Direct construction cost increases have moderated, as we continued through the year.

These costs were up 5% year over year to approximately $52 per square foot and that was driven almost entirely by changes in labor.

We have a continued focus on reducing material costs, due to commodity declines primarily in lumber, copper, oil and steel.

We were successful in improving SG&A operating leverage by growing volume organically in our existing Homebuilding divisions.

Additionally, we continued to see the benefits of our focus on digital marketing.

This is the lowest quarterly SG&A percentage in 15 years.

Equity in earnings from unconsolidated subs was $14.7 million in the fourth quarter compared to a loss of $3.7 million in the prior year.

This quarter's profit was primarily due to our share of the gain on sale of home sites by our El Toro joint venture.

This quarter we opened 61 new communities, and ended the quarter with 665 net active communities.

New home orders were up 10% year over year and new order dollar value increased by 20%.

Excluding the Houston market, these numbers were up 14% and 23%, respectively.

Our sales base remained flat with the prior year at three sales per community per month and the cancellation rate decreased to 17% in the fourth quarter from 20% in the prior year.

In the fourth quarter, we purchased 3,900 home sites, totaling $250 million versus $254 million in the prior year's quarter.

The lower land spend represents the results of our soft pivot strategy.

Additionally, we were successful in bringing $240 million of previously mothballed assets into active production in 2015 so we can monetize those assets.

Our home site counts owned and controlled is now at 166,000 home sites of which 126,000 are owned and 40,000 are controlled.

Our completed unsold inventory ended the quarter with approximately 1,100 homes, which is in our normal range of one to two per community.

Our Financial Services business segment had strong results, as Stuart mentioned, with operating earnings increasing to $33.8 million from $30.2 million in the prior year.

Mortgage pre-tax income increased to $25.9 million from $23.8 million in the prior year.

The increased mortgage earnings were due to higher volume, as mortgage originations increased 23% during the quarter to $2.4 billion from $2 billion in the prior year.

Purchase origination volume increased 24% as a result of increased Lennar home deliveries, and our expanded retail presence.

The capture rate of Lennar home buyers improved to 83% this quarter from 80% in the prior year.

During the quarter, the new TRID regulations became effective and our mortgage title and homebuilding associates, working hand in hand, were successful in closing over a 1,000 transactions in our fourth quarter that fall under these new regulations.

Our title company's profit increased to $8 million in the quarter from $6.9 million in the prior year and that was primarily due to higher volume over the past year.

Our Rialto segment produced operating earnings of $7.6 million compared to $38.2 million in the prior year.

Both are net of non-controlling interest.

Prior year's operating earnings included $34.7 million related to carried interest.

The Investment Management business contributed $26.6 million of earnings, which includes $4.7 million of equity and earnings from Real Estate funds and $21.9 million of management fees and other.

At quarter end, the undistributed hypothetical carried interest for Rialto Real Estate Funds I and II now total $146 million combined.

We don't recognize those profits until we receive the cash.

Rialto Mortgage Finance operations contributed $854 million of commercial loans into four securitizations resulting in earnings of $16.8 million for the quarter.

Our liquidating direct investments had earnings of $3.2 million and Rialto G&A and other expenses were $31.9 million for the quarter and interest expense, excluding warehouse lines, was $7 million of interest expense.

Rialto ended the quarter with a strong liquidity position with $150 million of cash.

Turning to multifamily.

We highlighted this year that our fourth quarter should be the start of regular profitability being generated from this segment.

We did in fact, deliver a $10.2 million operating profit in the quarter and that was primarily driven by the segment's $16.6 million share of a gain from the sale of an operating property as well as management fee income, which is partially offset by their G&A expenses.

We ended the quarter with five completed and operating properties, 27 under construction, more of which are in lease-up, totaling over 7,800 apartments with a total development cost of approximately $1.9 billion.

Our tax rate for the quarter was lower; it came down to 33.2% versus 32.7% for the year.

Our tax rate reflects our focus on building energy-efficient homes as well as homes with solar systems which provide valuable tax credits.

Turning to the balance sheet, we have a high-quality balance sheet that has been further strengthened this year with improved liquidity, reduced leverage and bolstered equity.

Liquidity improved as we ended the year with approximately $900 million of Homebuilding cash and no borrowings under our $1.6 billion revolving credit facility.

Our leverage improved by 170 basis points year over year as our net debt to total capital was reduced to 42.2%.

We grew stockholders' equity by 17%, or $822 million year over year to $5.6 billion and our book value per share increased to $26.75.

Our debt maturity ladder was enhanced as we opportunistically accessed the debt market in October, issuing $400 million of eight-year senior notes at 4.875%.

Now I'd like to provide some goals for 2016.

First, deliveries.

We are currently geared up to deliver between 26,500 and 27,000 homes for 2016.

We expect the backlog conversion ratio of approximately 70% for the first quarter, 85% for the second quarter, 75% to 80% for the third quarter, and over 90% for the fourth quarter.

We expect operating margins to be flat to down 50 basis points in 2016 and that compares to the actual in 2015 of 14.1%.

The full-year gross margin is expected to be in a range of 23% to 24%.

Any reduction in gross margin percentage should be mostly offset with operating leverage on the SG&A line.

There will be seasonality between the quarters, with first quarter being the lowest operating margin and then improvement as volumes increase during the year.

Financial Services are expected to be in a range of $115 million to $120 million for the year.

The quarterly amounts are expected to be spread similar to 2015, with the first quarter anticipated to be the lowest quarter of profitability.

With rising interest rates, we expect 2015 strong refinance market to slow down in 2016.

Turning to Rialto, we expect a range of profits between $35 million and $40 million for the year.

The second half of the year is expected to have higher profitability than the first half.

Multifamily expects to sell 8 to 10 multifamily communities in 2016 with a range of profits in total between $50 million to $55 million for the full year.

The first and fourth quarters are likely to be the largest quarters and the second and third quarters the lightest; however, we should be profitable every quarter in this segment going forward.

Looking at the combined category of joint venture profit, land sales and other income, we expect a range of $55 million to $60 million of profit, primarily coming from the JV profits and land sales, with just over half of this estimate currently expected in our third quarter.

Corporate G&A is expected to be a flat percentage of total Company revenues year over year, as we continue to focus on technology initiatives.

Our tax rate in 2016 should be approximately 34%.

Our net community count is expected to decrease approximately 8% to 10% from our ending count of 665 with the increased spread throughout the year.

Our balance sheet in 2016, with our soft pivot strategy, our strong earnings contribution and a $400 million deep in the money convert callable late in 2016, our leverage will be trending down year over year, further strengthening our balance sheet.

With these goals in mind, we are well-positioned to deliver another strong profitable year in 2016.

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

We're ready to begin Q&A.

Thank you, sir.

Our first question comes from Robert Wetenhall with of RBC Capital Markets.

Good morning and congratulations on a great year and great execution.

I just wanted to ask Bruce mentioned the soft pivot strategy and I was hoping, maybe Stuart or Rick or Jon, if you had any view on where are we in the recovery?

Is this like the fourth or fifth inning and how should we think about land spend and investment going forward?

Well, I think the way that we are thinking about it is this, Bob.

This has been a very shallow, very slow and steady recovery, unlike the kind that you would have expected in the context of such a deep and steep decline.

It has been framed by mortgage availability and a variety of economic factors but because it has been slow and steady, we think that we're probably earlier in the recovery cycle than one would expect for the duration that we've been at it.

Now what that means is from the standpoint of land, land has accelerated in pricing, maybe even ahead of itself, so in terms of the maturity of land pricing, we're seeing that land pricing has recovered at a faster pace than the overall market.

Land is still in short supply, so it is difficult to come by a location, best-located properties, and the pricing is more of a retail nature than a deeply discounted nature.

So the way we're thinking about it is we have a lot of runway ahead of us in terms of further recovery for this market, as I've noted, defined by the production deficit; but at the same time, with land being a lot more pricey than it has been in the past, we're really carefully managing our land acquisition and we're also constraining growth.

We could step on the accelerator and grow volume at an accelerated pace but that would mean reaching out for broader land deals, bigger land deals.

We've noted in the past that we've been managing both the front end and the tail of our land acquisitions in order to carefully balance, maximizing pricing power, maximizing margin, and generating free cash flow at the same time.

With taking from your land inflation comments, it's been a really strong year for average selling prices.

You guys are up 8% in the fourth quarter.

Just trying to think against a 10% comp in 2015, what kind of expectations do you have for ASP performance in 2016?

And just as kind of a housekeeping question, any color on your comments about the Houston market and the Miami market from the press release would be appreciated.

Thanks and good luck.

Sure, thank you.

I'm going to let Rick and Jon weigh in on that.

I would tell you on an overall pricing standpoint, we're probably anticipating somewhere in the mid-single digits range, about 5% -- 4%, 5%, 6% and that will definitely move by market.

Certainly, we haven't underwritten any deals with any inflation so to the extent that we get some upwardly moving price, we'll benefit from that on a performance standpoint.

With regard to Houston, I'll start off by saying that it's the largest market in the country, delivering about 28,000 homes and that, in spite of the oil pressures there, it's still a pretty solid market.

It's got good fundamentals.

On the new home side, there's about a two-month supply of homes which is good compared to the rest of the country.

On the resale side, it's about the same amount of supply, about two months' homes are staying on the market and compared to what Houston has been historically and the rest of the nation, it's a strong market and while job growth has de-accelerated primarily in the energy-related sector, it's still net positive for the year with technology hiring, with the shipping sector being strong and with the medical sectors bringing in employment.

New home sales were definitely down year to date for us and for the rest of the market.

The market is being more sluggish on the higher price points but anything below $300,000, $250,000, it's been extremely strong market.

We are positioned in the market below the $310,000 price point and again, in better located communities in the higher price points.

If you look at our performance in the market, it's interesting.

Sales were down because as Stuart said we regulated price of pace but our sales price for the quarter was up because we focused on margins and the price point below -- above $350,000, that 249 corridor, the 290 corridor is strong.

Sugar Land is strong and Clear Lake is strong and as I said below $300,000, it's strong throughout the market.

So we feel good about the position we have in the market.

We are very focused on the land market there and I think we feel good but it's a softer market, there's no question.

There's headline noise risk and that's impacted the market.

With regard to Southeast Florida, we are very pleased with our performance there.

Sales were up about 19% in Q4, closings were down about 3% but ASP was decent and our margins were strong.

We're well positioned for 2016 with great new communities coming on board and we feel very positive about that core market.

Jon?

Bob, it's Jon.

I would just add as you look at the markets across the country that inventory story is a very healthy one.

We don't see a build up of speculative inventory in any of our markets and see a very healthy balance of supply and demand despite the demand headwinds.

As Stuart described are still strong enough demand that is keeping inventory levels very tight, which should lead to continued pricing power, although moderated by the -- another overall environment.

Our next question comes from Ryan Gilbert of Morgan Stanley.

Hi, guys.

Thanks for taking my question.

In the West, it looks like orders have slid down a little bit sequentially.

I'm just wondering if that's off a tough comp or are you seeing some demand slowdown there?

Jon?

Well in the West, markets have remained very healthy, as you look at California as the overall market, our sales pace was flat to up just a little bit compared to last year for the fourth quarter; in the Pacific Northwest, our sales pace is up year over year.

Phoenix is flat to up a little bit and same with Nevada, so as you look at sales pace year over year, very consistent.

We really don't see any slowdowns in any of our markets out here.

Great, and then in Rialto, do you have a -- is there a target SG&A level you're looking at or where do you think SG&A can go in terms of either as a percentage of revenue or assets under management?

Yes, hi.

This is Jeff.

In terms of overhead for Rialto, I think we're getting to the point where we've got some good operating leverage, just year-over-year personnel costs have remained relatively flat but the number of Assets Under Management are going up.

So we don't have any specific guidance on that in terms of numbers and in term of percentages because it's really more geared towards what products we are actually working at the moment, but we do see that we're well-positioned from an operating market -- from an operating leverage perspective.

I think Rialto is growing its bottom line, maintaining its overhead level.

Operating leverage is going to drive from growing Assets Under Management, RMF continuing to perform at a very strong level and the continued depletion of some of our legacy assets, which do take some additional management time and stress, so you're going to see Rialto continue to improve its bottom line.

Great.

Thanks.

Appreciate it.

Our next question comes from Michael Dahl of Credit Suisse.

Hi, thanks for taking my questions.

Just wanted to go back to the margin guidance, gross margin specifically, and wondering if you can give us a sense of, you've got a range of basically flat to down 100 basis points and how should we think about what some of the puts-and-takes are.

Is it as pricing stands now, you'd hit the midpoint if you're able to push prices more aggressively, it's the high end?

If waiver cost accelerates, it's the low end.

Is there anything you can give or like some of the big buckets and what your expectations are within that guide?

Well, look.

We've highlighted that you've got land costs that have been going up.

You've got labor costs that have been going up.

You've got pricing that is sitting in some market conditions and we'll see how that evolves.

We're expecting kind of a mid-single digit increase in terms of ASP over the next year, as Rick properly pointed out, and offsetting some of that or some of the overhead considerations.

Some of the SG&A, we have some very strong, some very innovative programs to drive SG&A down even while normalized leveraging of SG&A will help margin over time.

We think that, as we go through the year, we're going to see some of the programs that we've put in place really balance out some of the headwinds that we see in the marketplace and enable us to drive a really strong bottom line.

The only thing I'd add to that is the other bucket of activity that will temper some of the margin that we've had in the past is we're bringing out some of our mothballed communities in order to generate some cash out of our inventory and those have margins that are lower than the Company average.

Got it and I guess, just a follow-up on regions specific, tying in Houston to this.

I guess it's been a market where the margins have been quite high relative to what builders would typically see in this market over time and you made the comment around regulating pace and pushing price.

I think some others have started to talk about maybe some slippage on price so just wanted to get your sense of market dynamics around price there.

How should we think about margins and even if margins are holding up, you are mixing away from Houston and so from a mix perspective, it seems like that might be a headwind to overall margins.

Any color there?

Well, margins in Houston are down year over year given the decline in the market.

There's still good margins for us as a Company but they're not as strong as they were a year ago.

Got it, Okay, thank you.

This is Jon.

I'd add our healthiest margins are on the coast in Florida and California and those markets remain very healthy for us so yes, that balance between what's going on in Houston and then our strong coastal markets.

Okay, thanks.

Our next question comes from Dennis McGill of Zelman & Associates.

Hi, good morning.

Thank you guys.

Just to close the loop on that last question there.

Bruce, is it fair to say if you back out Houston, just given its size, that gross margin would actually be up across the Company next year at this point?

I'm not sure that I would go there.

I'm not sure how much the margins in Houston are actually going to come down but it's likely that they would be more at least flattish I would say.

I think, look, I think when you get down to it, that's a math question and we would have to go back and run some numbers to give a real answer to that but, look, I think there's a lot of averaging in looking at our margins.

There are a lot of moving pieces.

Rick highlights bringing in some of our mothballed assets.

Houston is part of the factor.

Some of the markets are very strong.

Some of them are a little bit more questionable, like Houston, so there's some averaging in all of that and we're trying to give guidance for a full year when, in fact, looking out over a year, a lot of things are likely to change, not the least of which is the land landscape, coupled with the labor constraints that are out there.

Costs are clearly pressured to some extent and then there's the opportunity to leverage SG&A and again, I can't highlight enough, we think we have some really innovative components of our Company that are focusing attention on leveraging SG&A even more than just normal averages.

Okay, that's fair and Stuart, you mentioned this a couple times and just now, on the labor issue, just curious for your opinion on how you would think about this almost on a go-forward basis as well.

It's being talked about in a lot of different ways and I think everyone agrees it's a challenge for the industry but I think there's varying degrees of what builders are experiencing, varying degrees across markets and also from a relative standpoint, it's not clear.

I think based on how some of the companies have talked about it, whether this is a problem that's getting worse, it's been a problem for awhile or whether you're seeing any type of shift in the rate of labor inflation, if you will.

So I guess a lot in there but just curious on your thoughts how you guys think about it internally as you look forward?

Yes, look, labor is a complicated factor.

One of the big questions that people ask is where has all of the labor gone and why isn't it showing back up and how does it mesh with unemployment and wage gains and everything.

To me, it's a double-edged sword.

On the one hand, labor costs are going up.

On the other hand, wages are going up and that means more people are going to be able to afford homes.

And I think it's generally a net positive for the industry.

I know that there have been different accounts of the labor conditions.

I think labor conditions are different in different markets so different builders' mix will play into that.

Is it getting better?

Is it getting worse?

I think it's kind of hanging around the same.

If we had a big spike up in volume for the industry I think it would be very hard for the labor market to respond.

It would be more constrained but all of this speaks to the benefit of the largest, best-positioned, best-managed companies and I would have to put us in a top tier in that regard.

We have an excellent management team.

We're very focused on having labor in place that we've worked with for many years.

People that are used to being paid on time, used to being treated properly.

We think our Everything Is Included program works to our benefit.

It is a simplified production program so it has enabled us to navigate these waters a little bit more confidently and consistently than perhaps some of the others, so given the simple platform, given our size and scope, given our management team, I think we are -- we feel that we're best-in-class in terms of being able to manage a tight labor market that we think is going to persist.

Labor is not coming back to this industry in the kind of quantity that we need to sustain growth going forward so being well-positioned in that regard is a net positive for the Company.

Very good and then just one last number.

Bruce, I'm sorry if I missed this but have you detailed how much labor on average, if you blend it across the country, is up year over year, the labor cost?

We said that it's approximately 5%.

Okay, perfect.

Thanks guys, good luck.

Thank you.

Our next question comes from Stephen Kim of Barclays.

Good morning.

Good morning.

Sorry about that.

I was muted.

A couple questions.

I guess my first question relates to land and I would say, first off, is if you could help us put the rate at which you're taking down your mothballed lot supply.

I'm wondering at the rate you kind of envision taking that down into FY16, like how many years on average do you think?

Or how many years generally do you expect at that kind of pace it would take you to work through your supply of mothballed lots?

And then a part -- a second part of the land question is, can you refresh us exactly how much you spent on land and land development this year and what your plans are for next year?

So on the mothballed communities, I'd say it's probably about a four year trajectory, Steve.

Some markets will be faster.

We brought a fair number of these communities in already and there's some of these assets that require some land development so that we brought into production, but we may not get all of the deliveries on them until the later years.

But these are well-positioned assets that we made a strategic decision during the downturn to not sell these communities and quite frankly, that was, looking back, it was the right decision.

With regard to land acquisition, I'll give that to Bruce with regard to what we spent.

So for the year, Steve, we spent less on land acquisitions.

Last year was $1.41 billion and this year is $1.384 billion.

Land development costs are slightly up; last year, it was just under $1.1 billion and this year it's $1.15 billion.

I guess the last thing I'd say on Land Act is I think people need to be very focused on the difference between the purchase, the actual closing of the land deal and when the land was put under contract.

And as we said several years -- several quarters back going back into 2010, we had put under contract several assets that are -- that we're still closing on today.

And I think you'll see that as we move into 2016, that, that several of these deals, a lot of these deals, most of these deals were pre-2016, 2015 vintage.

Got it, okay.

That's an important distinction I appreciate that.

Another somewhat related question to land is the potential role of M&A.

So I know as you guys look to deploy the assets, often you look at the -- entering a market or expanding a presence in a market through acquisitions, somewhat similarly to buying dirt.

I was wondering if you could comment a little bit on what you see out there in terms of the -- your M&A pipeline or the deal flow (technical difficulties) makes sense for your interest level increase more or less in the context of your land commentary earlier?

Thanks.

Okay, Steve, some of your question didn't exactly come through, so if I miss something, you'll let me know.

But look, we have always looked at M&A as an opportunity but it's an opportunity that competes with what we think is an extraordinary and dynamic organic growth program.

We simply have an excellent group that is focused on land acquisition, growth organically and I think that we've been able to excel at that.

So every acquisition candidate competes with that organic growth opportunity so it's going to have to be something that really works quite well for the Company.

With that said, in an environment where labor is in short supply, land is ever more complicated and we have, what we think, are fairly unique strategies.

There might be, can be, will be unique opportunities for groups that can benefit from some of our positioning to find their home here with us and we think that, that attraction will ultimately find its way into M&A for the Company.

Now if you look at the things we've looked at, we've looked at just about everything in the marketplace.

If you look at some of the things we've done, we've recently closed on some assets that could be considered, in part, M&A.

We've got our cork in water.

We're looking very carefully but our standards are very, very high and we think, ultimately, the market will create attractions that bring M&A our way.

Rick, would you add to that?

Yes, I think that Stuart is spot on.

We look at the acquisitions from a margin standpoint, operating leverage standpoint, and given the platform that we've got, it's a pretty high bar.

This last quarter we closed on, we acquired some communities from another builder.

It's about eight or nine communities, a smaller deal but these were ones we could bring into production relatively quickly.

That's cash on cash and pretty much during the same year, within 16 to 19 months.

So we look at everything.

We've got a high bar but I wouldn't be surprised that you see us do some more of that as we move forward in the next year or so.

Okay, great.

Thanks very much guys.

Our next question -- thank you.

Our next question comes from Michael Rehaut of JPMorgan.

Thanks.

Good morning everyone.

Good morning.

First question I had was just going back to the gross margin and operating margin guidance and congrats on executing this past year along the lines of your guidance, really strong performance there.

Looking at your outlook for 2016, it occurred to me that if you kind of -- you gave a decent range on gross margins.

Obviously, there's some variability that can occur throughout the year, either with rates or labor or whatnot that could impact closings, let's say, and perhaps that's part of it but to the extent that you're able to hit the higher end of that gross margin guidance range?

And at the same time, I would expect you guys to be able to extract some amount of additional SG&A leverage, is there the potential for operating -- a little bit of further operating margin expansion in 2016 or is that just pushing the envelope a little bit?

But it would seem to me that perhaps there could be a little bit of touch of conservatism here.

Just wondering your thoughts around that or are there certain factors that you're a little bit more cautious around?

No, listen, Mike.

I think that if you look at the market in general, the market has many elements that are moving around.

We're not injecting conservatism.

I think that the market has headwinds that are very real and that have to be navigated.

You're hearing it from all of the home builders.

I think that you're going to get excellent performance out of our Company but we're still going to be performing within the limitations of the marketplace in general.

You hear about land constraint, the difficulties that you see across the board; companies acquiring land.

It's difficult out there.

That's a headwind.

Labor is a headwind that even though we feel we're advantaged in some of those ways, it's a limitation so I wouldn't be thinking in terms of us conservatizing our numbers.

I think we're trying to give you a real picture of where we think things are.

We've given us -- we've given ourselves a fairly sizable margin in terms of our guidance because we think the market is volatile and difficult enough where it's uncertain as to where we are actually going to land but I wouldn't think of it in terms of conservatizing our numbers for our performance.

Yes, I guess I was just talking about it if you were able to hit the higher end of the gross margin range to the extent you were to get a little SG&A leverage that at minimum, you could hit on the flat operating margin, if not, perhaps slightly better, but obviously, a long way to go to get there throughout the year.

A lot of work ahead of us so we're going to have our head down and be focused on this but you know, I think that we're trying to give as good a guidance as we can.

We don't have a crystal ball and we'll have to see how the year resolves itself.

Right.

Second question, just following up on the M&A question, and certainly, you guys, over the last 10, 15 years, 20 years have been opportunistic in a lot of different ways.

Stuart, I was just kind of interested your broader thought on the market, where we are right now.

There's quite a bifurcation evaluation across the publicly traded builder universe where you have many builders at or below book value.

And I know that book value is -- can often -- it only gets you so far in terms of the valuation metric in terms of the underlying asset's real value.

But as you look at across the publicly traded universe, what would be your expectation set, let's say, over the next two or three years for there to be some additional public to public M&A, like we've seen at points in the past?

Well, look, Mike.

I'm sure that you've already crafted in your mind that here at Lennar, we know the metrics associated with each and every one of the other -- the potential M&A candidates.

We think about, we look at, we dissect the opportunity set that could and might be out there.

We don't talk much about M&A but let me broaden the discussion and say that we've developed a highly diversified platform.

Let's not forget Rialto.

Let's not forget our Multifamily operations and even our Financial Services Groups.

We think about M&A in combination in terms of each and every one of those groups and the multiple kind of parts that can be brought together and kind of used as offsets.

There are, in our opinion, limping antelopes out there for us to consider as targets across our platform and those opportunities for us are enhanced as we focus on the organic side of our business, breeding excellence in each and every one of our components.

So in the Homebuilding world, we've had a more vibrant kind of landscape where many are performing quite well.

In other areas, there are more difficult trajectories for some of the potential targets and we think there are opportunities there as well.

As the landscape evolves, we are looking at all of the opportunities in M&A to enhance our business and to build shareholder value.

But in all instances, an acquisition target is measured against an excellent organic growth program as the baseline.

And in order for us to engage M&A which is a lot of work and a lot of engagement, it's going to be something that works really well for our Company.

Thank you for that.

Just quickly, technically, sorry, if I missed this.

I was broken out before the call got -- dropped me.

Bruce, can you give out guidance around for FY16, the tax rate and your outlook for community count growth?

We did.

We said the tax rate for 2016 would be about 34% and the community count would grow in a range of approximately 8% to 10%.

Perfect.

Thanks so much.

Our next question comes from Jade Rahmani of KBW.

Thanks.

Actually my question, related to Stuart's last point.

It's clear Lennar has evolved into much more than a homebuilder so I wanted to ask how you envision the story evolving from here.

Do you think with the ancillary businesses, the strategy will be to monetize individual vehicles through asset sales, IPOs, spin-offs, M&A or would you, at some point, consider creating an umbrella asset manager company to oversee the various businesses and even development of future businesses?

Just want to know what you think of the Asset Management business.

We've been very tuned into the Asset Management business.

We've, of course, modeled the number of scenarios relative to that.

This is a process of construction.

We are looking and have been looking at a variety of scenarios as to how we take these maturing businesses and enhance shareholder value.

While we're not opening the curtain just yet and giving a peek inside, I think that we have daylighted the fact that we look at these as unique opportunity sets to build shareholder value.

I think we've got some real treasures in these ancillary businesses and whether they are looked at as, in their entirety, each individually or whether we kind of bifurcate our thinking around the core asset and the management asset, it's something that's very much on the table and that we think about pretty regularly.

So the answer is we'll all have to wait and see.

It's a dynamic environment and even the public markets are a dynamic environment in that regard.

I think that as a proxy, remember that we have already highlighted that we are working on the program, the programming for Five Point.

And as more information becomes available and with our confidential filings, we're going to keep the market apprised but that's a -- that's one step in answering the question that you're asking.

Thanks for that.

On Rialto, I wanted to ask if you think Rialto can continue to buy big pieces primarily through third party funds as its industry-leading market shares demonstrated or with the onset of risk retention, whether Rialto will need to put at least half of these investments on its own balance sheet in order to satisfy the risk retention rules.

Well, look, the risk retention rules are in a dynamic phase right now.

There's a lot of legal questions around risk retention.

We believe that Rialto is uniquely positioned to be able to benefit by the operation of the risk retention rules as they take shape and firm up so I can't give you a definitive answer to that right now.

But it is our belief that Rialto will be able to continue to invest a lot of money in that very dynamic investment class.

And structurally, while we might have to adjust in order to meet the risk retention rules in some way, as they continue to evolve, we think that the momentum of the market is moving towards the Rialto-like investor away from some of the hedge funds and other competitors that have been out there.

And Rialto is probably positioned to be able to do a lot more business in this arena and risk retention will really benefit our platform.

Thanks for that.

Appreciate it.

Okay.

Let's take one more question.

Thank you.

Our last question is from Mr. Mark Weintraub of Buckingham Research.

Great.

Thanks very much.

I'm just -- first, expanding on a lot of the answers you've given vis-a-vis capital allocation, M&A in the mix as a possibility, et cetera.

Can you just also update us on your thoughts where you want the balance sheet to be and return of capital to shareholders?

How that gets prioritized in your thinking at this stage?

That's -- this is a question that occupies a lot of our management time.

We have been focused over the past couple of years of turning our ancillary businesses into primarily asset-light, high-return, high turnover businesses.

And as I highlighted with Rialto, that process is maturing.

We continue to deplete legacy assets and enhance our asset-light programs.

On the apartment LMC side of the business, you've seen us make a strategic move this year towards a fund manager which enables us to become much more asset-light in that regard.

As we go through 2016, Five Point, of course, has been self-sufficient, using its own capital for quite some time.

The answer to the question is we've been moving away from capital heavy and towards capital light in all of our ancillary businesses and of course, on the Homebuilding side, we've talked about tapering back on land acquisition and land development.

The land component of the business going less long, not going short just yet but less long over time.

As Bruce highlighted the numbers in terms of land acquisition, we're down a little bit year over year in terms of land acquisition.

Really, the more interesting thing is as we're growing our business, our land spend is fairly static right now which means as a percentage, it's going down.

We're really focused on a cash flow model which, of course, as we go forward, we think is going to necessitate a question about how we start to think about returning capital.

We'll start by reducing our debt and that will start as we go into the future and then we'll start thinking about capital return to shareholders.

And on the debt side, is there a specific target or range that we should be thinking of as where you'd want to take it to before contemplating other potential uses, share repurchase, what have you?

I think that for right now, I wouldn't give a specific metric on that.

We'll wait and see but remember, that our leverage because of our substantial earnings, has been drifting down and will continue to drift down even if the debt level remains static.

Nevertheless, we think that during the maturing of the Homebuilding market, we're going to bring that debt level down before we start returning capital but we will start returning capital as well.

And two real quick follow-ons.

On Rialto, I just want to confirm I assume you do not have recognition of carried interest in the guidance you gave and what would cause there to be a booking of carried interest in 2016 possibly?

We did not include any of the carried interest in the guidance unless there's cash that's received.

That's what determines the book and the profitability.

Yes, I would say this is Jeff.

Yes, in essence, what's been recognized to date has been the advances under the documents we get advances against taxable income and that's basically what's been recognized to date.

There are in the guidance those ongoing cash receipts are projected but nothing in addition to that, unless it's cash that's going to be received.

Okay.

And if there's a real quick easy answer to this.

On the mothballed communities, can you give us a sense as to, roughly speaking, what percentage of deliveries, or revenues in 2016 are expected to come from mothballed communities?

About the same as we said in 2015, close to 10%.

Okay.

Super, thanks so much.

Okay very good.

Thanks, everybody for joining us for a report this quarter and for year-end.

And we'll look forward to a vibrant 2016.

Thanks for joining us.

That concludes today's conference.

Thank you all for participating.

You may now disconnect.