Lennar Call Transcripts

8/9/2019 Lennar Call Transcripts

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Lennar Corp. Q1 2010 Earnings Call

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Lennar Corp. (NYSE:LEN) Earnings Call Transcript

Wednesday, March 24, 2010 11:00 AM ET

Call ParticipantsExecutives Analysts

Scott Shipley Dennis McGillDirector of Investor Relations Zelman & Associates

Stuart Miller Ray HuangChief Executive Officer, President, Director and Member of

Executive CommitteeJP Morgan

B. Gross Adam Rudiger Chief Financial Officer and Vice President Wachovia Capital Markets

Richard Beckwitt Joshua PollardExecutive Vice President Goldman Sachs Group Inc.

Jeffrey Krasnoff David GoldbergFounder, Chief Executive Officer and Managing Partner UBS Investment Bank

Jonathan EllisBofA Merrill Lynch

Nishu SoodDeutsche Bank AG

Daniel OppenheimCrdit Suisse AG

Josh LevinCitigroup Inc

Stephen EastTiconderoga Securities LLC


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Presentation

Operator Thank you for standing by and, welcome to Lennar's First Quarter Earnings Conference Call. [Operator Instructions] Iwill now turn the call over to Mr. Scott Shipley, Director of Investor Relations for the reading of the forward-lookingstatements.

Scott Shipley Director of Investor Relations

Good morning. Today's conference call may include forward-looking statements that are subject to risks anduncertainties relating to Lennar's future business and financial performance. These forward-looking statements mayinclude statements regarding Lennar's business, financial condition, result of operation, cash flows, strategies andprospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are notintended to give any assurance to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherentlysubject to risks and uncertainties. Many factors could cause Lennar's actual activities or results to differ materially fromthe activities and results anticipated in forward-looking statements. These factors include those described under thecaption Risk Factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC. Please notethat Lennar assumes no obligation to update any forward-looking statement.

Operator I would like to introduce your speaker for today's call, Mr. Stuart Miller, President and CEO. Mr. Miller, you may begin.

Stuart Miller

Thank you, and good morning, everyone. I'd like to thank you first for joining us for our First Quarter 2010 Update. Thismorning, I'm joined as always by Bruce Gross, our Chief Financial Officer; Diane Bessette, our Vice President andTreasurer; and David Collins, our Controller. Additionally, I'm joined by Rick Beckwitt, our Executive Vice President; andJeff Krasnoff, the Chief Executive Officer of our Rialto segment.

I'm going to begin this morning with some brief opening remarks about the current housing market in general and theprogress we've made on managing our balance sheet and joint ventures. Since we've just finished our quarterlyoperations review with our Regional President here in Miami, Rick Beckwitt, who stayed over to participate in this call,will overview our homebuilding operation, while Jon Jaffe, our Chief Operating Officer, is back in California. And thenJeff Krasnoff will comment on our Rialto segment positioning for 2010 and beyond. Finally, Bruce will provide additionaldetail on our numbers, and then we'll open the phones to your questions. And as always, I'd like to request that in our Q&A period, everyone, please limit to just one question and one follow up so that we can be as fair as possible to all of our participants.

So let me make a few overview comments about the market in our first quarter. While the new home market andhousing in general still face serious headwinds from current economic and legislative condition, the market and overalleconomy appear to be continuing to stabilize and are generally in recovery. As we've expected, at least as it relates tohousing, the recovery is not presenting itself as a V-shaped return to better time, but instead is proving to be a rocky,stabilizing bottom, with visibility obscured by more questions than clear answers. The overhang of foreclosures and theprospect of additional delinquencies ahead continue to moderate recovery, as shadow inventory continues to beabsorbed and then even replenished.

Unemployment and a generally sluggish economic bounce back combined to full demand at traditionally low levels. Andthe prospect of a pullback driven by elimination of legislative and fiscal incentive limit visibility and create pending


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uncertainties about the immediate future of the strength of the market. And finally, the debate over whether inflation or deflation lies ahead and the impact of sovereign credit risks add uncertainty to the view ahead of interest rate.

Nevertheless, as we reviewed our operations from the field, geography by geography, there's some common themes

that appear to be validating the current trend. First, prices are not free falling and in fact, in many markets, arecontinuing to stabilize and even recover. In most of our divisions, there continues to be a meaningful reduction in theincentives used in the sales process, and that factor is reflecting itself in higher gross margins.

For the company overall, incentives were 12.5%, down from 13.2% last quarter and 17.1% last year. And the marginsimproved on a pre-impairment basis to 20.3% from 17.8% last quarter and 14.3% last year. While these trends arevulnerable to the upcoming elimination of the $8,000 tax credit and the elimination of fiscal stimulus to the lendingmarkets in the short term, it seems that the momentum provided by consumer confidence and home affordability willlikely equalize their impact over a short period of time. These government programs worked very well as a kick-start to afree-falling housing market, but it now seems that the free market is positioned to take over in orderly fashion.

Second, inventories of new homes remain significantly reduced. While there's been a great deal of talk about potentialspec building of new home to beat the end of the tax credit, we are finding that that is limited. In most markets, newhomes are still being built to order. And for the segment of the market that wants a new home, there are limitedimmediate opportunities to choose from and that is helping to reduce incentive.

Next, while foreclosures continue to be a significant driver of absorption and pricing, the effect is continuing to decline asthe bulk of foreclosure activities is situated in areas that do not compete with new home construction, such as the inner city or the extreme outskirts of markets in which we operate. The better-situated foreclosure homes are being absorbedin an orderly fashion, and the market is clearing the inventory overhang in many location. The $8,000 tax credit hasfacilitated that clearing process and has helped enable a return to normalcy.

In our operating meetings, we found that a number of our markets were no longer affected at all by foreclosure homes,as they had already been absorbed. I have noted many times that housing is a localized business and inventories inmicromarkets, not broad geographic markets, are most important in considering demand trends.

Finally, we've heard that unemployment rates in many of our markets is at least stabilizing and in some instancesbeginning to recover. Accordingly, a general sense of confidence has returned to the consumer. And there is a tangiblesense that with prices and interest rates low, now is the right time to purchase a home for future security. This isperhaps the most important element in driving the future of the housing market, as the threat of losing one's job hasdeterred many from the housing market for some time now.

With the ground now firming beneath us and with solid foundation of our balance sheet, we are able to find newacquisitions of homesites to build new communities, where homes can be delivered at responsible profit levels at today'sprice level and given zero market appreciation. And Rick will give further color on our operations and will talk about our acquisitions.

As you can see from our press release this morning, at Lennar, we've continued to position our company to return tofundamental profitability in 2010. We've made meaningful progress in preparing our company for stabilized andultimately recovering housing market. That preparation is primarily reflected in our balance sheet that is now well

positioned for the future.Through the end of last year, we aggressively impaired or disposed of assets that would not add to our profitability in thefuture. This process enabled us to both clean up our balance sheet while maximizing the tax benefits derived from thenet operating loss carry-back extension that Congress enacted last year. This, in turn, has enabled us to move forwardwith additional liquidity to make strategic purchases and to begin to add back jobs that were lost as the marketdeteriorated.

In the first quarter, we made meaningful investments that we believe are positioning our company for success. After arather long 4.5 years of mending process, we are pleased to finally be using our cash again to invest for futureprofitability rather than support impaired properties.


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

The number of joint ventures has fallen to 58 currently and that's down from 62 last quarter. Many of the remainingventures are good ventures that have already been reworked and has solid assets that are positioned for the future. Weexpect to continue to reduce this number as we go forward into 2010. Additionally, we've continued to reduce amaximum recourse debt to the company to $279 million.

Finally, on the opportunity side, we've made our first strategic investments in the Rialto segment of our business. As Inoted in prior quarters, we've been preparing to be a significant participant in the distressed opportunities that naturallypresent themselves in down cycles.

We've been incubating an operating team of experienced professionals for the past two years. The team is now formed,and we've begun the process of actively investing in unique distressed investments. Mid-quarter, we announced theacquisition of over $3 billion of face value of loans, in partnership with the FDIC. And we described our progress on our PPIP program with AllianceBernstein.

While I will let Jeff Krasnoff update you on those programs, I will note that we've made meaningful investments that webelieve will add significant shareholder value. This is a tough business, but we do it exceptionally well.

Yesterday evening, we had our weekly asset managers meeting. And as I reviewed assets with our managers fromaround the country, I was enthusiastic to see just how comfortably we operate and manage this very unique segment.We are clearly beginning to see more opportunities present themselves in this area. And with our unique expertise, weexpect to be an active participant in this part of the market recovery, as we feel these investments can add outsizedreturns to our recovering Homebuilding operations.

At the end of the day, we are very pleased with the progress that we've made to date and the very exciting position thatour company is currently in. Our balance sheet is strong and positioned with adequate liquidity to support investment for our future. Our core Homebuilding operations are positioned for success and beginning to grow again, addingcommunities and leveraging our right-sized overhead. And our Rialto Investment segment is now fully operational andinvesting capital to create strong return as we build profitability.

While we recognize that the current economic environment is fragile at best, we feel today that we are extremely well-positioned to navigate the rocky bottom and ultimate recovery that lies ahead. With that, let me turn over to RickBeckwitt to give you color on our Homebuilding operations.

Richard Beckwitt Thanks, Stuart. During our regional Presidents' meeting yesterday, we reviewed the operating performance and marketposition of our 24 Homebuilding divisions.

While there's always room for improvement, I'm pleased to say that the Homebuilding group as a whole and 75% of our

divisions are exceeding business plans for the first quarter. Our actual performance exceeded internal plans in severalcategories, be it gross margin, SG&A, operating income or new sales orders.

Across the board, our divisions are positioned in 2010 for substantial improvement over last year. We have homedesigns and floor plans that are positioned for success in this extremely price-sensitive and value-oriented market. Moreimportantly, our unrelenting focus on value engineering, construction costs and cycle time has enabled us to reduce our corporate build cost to levels we haven't seen in over a decade.

With that in mind, I'd like to drill down and give you some additional color on our individual markets. So keep in mind, asI discuss the current market trends, that even some of the weakest markets, we are in some of the most troubled


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markets, we are positioned to make money, given our reduced SG&A, low-cost brands and the new land deals we havesigned in these distressed areas.

Let's start in Florida. The strongest markets in Florida are Miami-Dade, parts of Broward, Sarasota, Naples, Orlando and

Tampa. These markets have firmed due to increased affordability. Foreclosures and resale listings on the MLS are downsignificantly in each of these markets. We've seen increased traffic and had been able to increase prices or reduce salesincentives.

In addition, new sales per community are on the rise. There are different things driving the improvement in each of thesemarkets, be it the lack of entry-level product in Miami-Dade, the return of value-oriented, out-of-state, second-timebuyers in Sarasota County, active adult buyers sensing a low point in pricing in Naples or increased financing availablefor foreign buyers in Orlando. We are extremely well-positioned in each of these markets.

Despite the huge overhang of high-rise condo product in Miami, the single-family side of this market is just doingextremely well. The weakest markets in Florida continue to be Palm Beach, Port St. Lucie and Fort Myers, althoughwe've seen some recent stabilization in Fort Myers. Unemployment, foreclosures and resales will cause these marketsto take a while to recover. Most of the builders in these markets have gone bust or left the market. This has created aunique opportunity for us to do extremely well in a troubled market.

In the Mid-Atlantic, Maryland and Virginia are some of the best markets in the country, not withstanding the poor recentweather there in those markets. These markets bounced back quickly with government spending in the region. We'vebeen able to increase prices in both markets, with Maryland as the much more price-sensitive market than Virginia. NewJersey is a very stable market. It blind constrained with no foreclosures or resale issues, and we've been able to slowlyincrease pricing and absorptions. We have a strong active adult position in this market that has performed extremelywell.

The Carolinas are a mixed bag. Charlotte is a tough market with 13% unemployment, high foreclosures and a largenumber of homes on the MLS. The market is very volatile with pricing continuing to edge down. We don't see thatmarket returning until the banking sector starts to rehire. Raleigh, on the other hand, is an extremely hot market.Foreclosures have been absorbed by the market, and resales are decreasing. We have seen strong traffic and havebeen able to increase pricing. Our team in Raleigh is at the top of their game. Myrtle Beach is in the early stages of recovery, and Charleston has seen some pricing strength, given the employment growth in the area.

In the Midwest, Minnesota's starting to stabilize, but Chicago continues to be a very weak market. We see no signs of recovery in the Chicago market anytime soon. The labor unions have created a cost of price equation that makes thismarket very problematic. Fortunately, we've got a lean team in Chicago that's focused only on cash flow.

In the Texas markets, Dallas is the weakest part of the market. Foreclosures and resales remain at elevated levels,while the banks have started to slow down foreclosures and then shifted to short sales. The market is not poised toimprove until the end of 2010. That said, we're seeing good profitable sales activity in our well-located communities inDallas. Houston's the most stable part of the Texas market and our largest market. Resales and foreclosures haddeclined. Our master plan communities are doing extremely well, and we've been able to slowly increase pricing. Austinand San Antonio have stabilized, traffic's up, especially at the low price points and in the better-located communities.Military spending and the troops returning to the area will continue to draw this market.

In Colorado, we're starting to see real market recovery in Denver. Traffic's improved significantly with real qualifiedbuyers. We're beginning to see some pricing power.

In the desert areas, let's talk about Arizona. Arizona continues to be soft, but it's improving. Phoenix's in better shapethan Tucson, but both markets' activity is very community-specific. Traffic for the most part is flat, and we've seen amodest improvement in foreclosures and resale listings. As you'd expect, the lower price points are performing better than the higher. And the further you get out of town, the weaker the markets go.

Las Vegas is very similar to Arizona, it's a tough market. With unemployment at 13%, the market will take some time torecover. While foreclosures and resales are trending down, pricing is extremely tough. The high end is dead and the


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entry level is improving. We are fortunate to have almost no legacy assets in this market and had been able to securesome incredible, new distressed deals that will make money even in this down market.

In California, the well-located communities have bounced back very quickly. In the Inland Empire, there is great

affordability. Our communities in Corona, Murrieta, Rancho Cucamonga and San Bernardino are doing extremely well.But the outline areas of Hemet, Beaumont, Palm Springs are lifeless. Fortunately, we have very little presence in theseareas.

The L.A. and Valencia market is improving, but they are a little softer than the Inland Empire. This area had stabilizedwith buyers chasing a new affordable product. Orange County, Irvine, Buena Park are pretty good markets. Traffic's upsignificantly, and we've been able to raise prices. Bakersfield and Fresno markets are still hurting. The combined impactof high unemployment, foreclosures and resales have made this the toughest area of California.

Finally, Northern California. The Bay Area is extremely strong, while Sacramento is still sluggish. While it's off its low,Sacramento won't see a meaningful growth until the state government starts to grow as well. But as in other softmarkets, our downsized product and restructured operations will allow us to be profitable in this market.

I hope that gives you a better read of how things are geographically and how market- and community-specific thisrecovery truly is. Neighboring micromarkets can have completely different prospects. In that context, I'd like now to focuson our land acquisition strategy.

We've been extremely active pursuing new land opportunities since the beginning of 2009. Our primary focus has beenon finished homesites that we can acquire on an auction basis, with little or no upfront deposit. As you can imagine, thefinancial returns from these low risk, properly-priced deals are extremely attractive, due to the short time between thetime we buy the land and when we deliver the home.

Recently, we have used our balance sheet to cash out some distressed opportunities that provide significant margins.These purchases range from buying land directly from banks, cash-strapped developers and builders, foreclosure sales,short sales and even backing into assets by purchasing loans directly or by acquiring CDD obligations.

Yesterday, Stuart and I reviewed each new land deal we have signed since the beginning of 2009. All of these dealswere underwritten with extremely conservative assumptions. They assume no price increases, a slow sale pace andwere priced to yield gross margins and IRRs exceeding 20%. I'm pleased to report that almost all of these deals areexceeding underwriting. Our underwriting and review process is extremely tight. Jon and I are reviewing everytransaction, and no money leaves this company without a thumbs up from me, Jon or Stuart.

In the last quarter, we were very opportunistic and selective with our new transactions. We put under contractapproximately 4,000 homesites located in 73 new communities. While I can't give you too much color on all of thesedeals, I can tell you that they are all high-margin opportunities.

As you can imagine, our focus is to leverage our existing operations and take advantage of the market distress. I'd liketo highlight one of the more interesting deals we put together in the last quarter. We have a great working relationship

with Starwood Capital. They were selected as the stalking horse bidder for TOUSA's Florida assets in the bankruptcyprocess. These landholdings constituted one of the most desirable real estate portfolios to come to market in years. Wework with Starwood to create a truly win-win transaction. We hope Starwood underwrite these assets in exchange for anoption to purchase these assets, if they were the successful bidder in the bankruptcy auction. The great thing about thedeal is we had contract in place before the auction started so that Starwood could go into the auction with precisionabout their financial returns, and we had locked in pricing before the auction started.

We're thrilled with the outcome. We now have an option to purchase 1,400 homesites located in 38 communities inJacksonville, Tampa, Orlando and Southeast Florida over the next 24 months. In addition, we've secured a right of firstoffer on an additional 1,348 homesites after the 24-month period. These options have flexible takedown schedules,


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

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

difficult times. It's their attention to detail that allows us to return to profitability.

Jeffrey Krasnoff Good morning. It's been a while since I've had an opportunity to participate in one of these conference calls. It's great tobe back, and thank you, Stuart and Rick, for the invitation.

On the Rialto side, we've now been at this now for over two years, building the team here inside and alongside Lennar.And our team contains a lot of familiar faces, a number of whom were here a couple of decades ago when we didsomething very similar. We've also had an opportunity to set up our systems, levering off of Lennar's infrastructure andhave had an opportunity to get deep into the markets, thanks to the unique view that only Lennar's operating team couldprovide.

We have also focused on opportunities, patiently evaluating tens of billions of dollars of distressed real estate loans,securities and properties. As expected, for quite some time, owners of troubled assets could not afford to part with thoseassets at the prices appropriate for those who might be better equipped to maximize value.

So similar to what we had seen in prior real estate downturns of this magnitude, we expected the U.S. government to actas a catalyst to help kick-start the clearing of assets and to create price discovery. We have initially pursuedopportunities to partner with the government in programs similar to those that we saw in the early 1990s.

For example, last summer, we became a subadvisor to our old friends at AllianceBernstein in the Treasury's LegacySecurities Public-Private Investment Program, or PPIP, and became one of eight sponsors selected to participate.Together, we raised over $1 billion of private equity commitments that is being matched by Treasury equity andadvantageous match term financing from Treasury. Lennar has made a $75 million commitment to that program, and

just over half of that has been funded to date.

We also have closely watched the activities at the FDIC. And as you are aware, we are now partnered with them in twoentities that acquired about $3 billion of real estate loans. We worked for over four months on the underlying duediligence. And because of the high content of loans made to developers, having Lennar's unique view, we believe, gaveus the distinctive advantage in our evaluation of those assets.

We closed the transactions with the FDIC just six weeks ago and have just about completed the task of bringing all of the loans in from the 22 different receiverships. In addition, during the short time, we've already had contact with amajority of the larger borrowers, borrower meetings are going on as we speak. A few of the loans have already beenresolved and are being documented and cash is being collected.

We see the potential opportunity as being extremely large. Looking at the FDIC alone, there have been almost 200banks seized during this cycle and another 700 are on the watch list. The 22 institutions included in these first fewstructured transactions made up over $4 billion of unpaid principal balance alone, just to kind of give you a perspective

for the size of this opportunity.Many of the remaining troubled institutions have loans similar to the ones in the two transactions we just closed. And weare up and running, and continue to have that unique Lennar advantage. We also anticipate that our involvement insourcing and evaluating these assets will continue to yield one-off opportunities for the Lennar Homebuilding operation.The Rialto team is very excited about how we are positioned and look forward to reporting to you on our progress infuture quarters. Let's turn it over to Bruce.

B. Gross Thank you, Jeff, and good morning. As we indicated in our fourth quarter conference call, we expected a first quarter


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

Revenues from home sales decreased 2% to $513 million. That was due to a 7% decrease in home deliveries,

excluding JVs, partially offset by a 6% increase in the average sales price to $258,000.The overall average sales price increase was partially due to a larger percent of deliveries from California. The averagesales price changed regionally year-over-year as follows: The East region was $229,000, up 2%; the Central region was$208,000, up 7%; the West region was $375,000, up 8%; Houston was $213,000, up 10%; and the other category was$255,000, down 12%.

Our pre-impairment gross margin improvement to 20.3% compared with 14.3% in the prior year was driven by a coupleof items. Primarily, it was due to a significant reduction in sales incentives of $14,000 per home, as it declined from$51,000 in the prior year's quarter to $37,000 per home in this quarter. So that was a reduction from 17.1% of homesales to 12.5% in the current quarter.

The lower sales incentives for home is a result of the improved selling environment, our repositioned product strategy,as well as fewer completed unsold homes. Additionally, our gross margins were favorably impacted from the progress inreducing construction costs per square foot that Rick talked about.

Turning to impairments, we had a very significant reduction in impairments this quarter. It was $10.1 million comparedwith $88.5 million in the prior year. And approximately half of that number in the current year was related toHomebuilding-related impairments.

We are now realizing the benefits from our aggressive cost cutting measures as we reduced SG&A costs by $20 millionor 20% year-over-year. SG&A, as a percentage of revenue from home sales, was 15.8%, which decreased 360 basispoints from the prior year and 40 basis points sequentially from our fourth quarter.

Our Financial Services segment had a small loss of $900,000 versus $492,000 of profit last year as a result of lower volumes in both our mortgage and title operations. Mortgage, pre-tax, was a profit of $2.9 million versus $6.2 million inthe prior year. And our Title Company reduced its loss to $3.4 million versus $5 million in the prior year's quarter.

Turning to the Rialto segment, with the investments we made this quarter in Rialto, we wanted to provide investors fulltransparency, and we established a new [Audio Gap].

There was a $1 million operating loss during the quarter compared with $600,000 in the prior year. Revenues during thequarter included $300,000 for PPIP advisory fees. There were no revenues recorded during the quarter relating to thepartnership with the FDIC, as most of the loans acquired had not been transferred from the FDIC's existing servicersprior to the end of the first quarter. Our investment in the FDIC partnership will begin contributing to revenue in thesecond quarter.

We did recognize $1.4 million of expenses in this segment in the first quarter. And these were costs for due diligencecosts in connection with the acquisition of the real estate loan portfolios and the partnership with the FDIC, as well asRialto general and administrative expenses.

We also recognized $143,000 of equity in earnings, which is primarily our investment in PPIP. As Jeff mentioned, weactually invested $41 million of our $75 million PPIP investment commitment throughout the first quarter.

We recognized a tax benefit during the quarter of approximately $12 million, and it's related to a reversal of the state taxitem that we provided in adopting FIN 48 back on December 1 of 2007. This item was recorded in 2007 because it didnot meet the more likely than not standard required by FIN 48. And in the first quarter, we reached an agreement withthe state resulting in this reversal.

In the first quarter, we continued with a strong balance sheet. And while we strategically invested approximately $500million between new land acquisitions and Rialto investments, we still focused on maintaining a strong balance sheet.


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Stuart mentioned the combination of our Homebuilding cash, restricted cash and tax receivable totaled $1.15 billion atquarter end. And the tax receivable we talked about in our fourth quarter came in, in two pieces. $92 million came induring the quarter, and the remainder $230 million was actually received on March 2. We terminated the company's

credit facility in February. And we entered into cash-collateralized letter of credit facilities, which will result in $8 million of annual savings.

Our leverage remained low, as our Homebuilding and Rialto debt-to-total capital net of cash was 45.9%. And we alsoretired $90 million of Homebuilding debt during the quarter, with the majority of this debt having a maturity that came duein 2010.

We continued to carefully manage our inventory as we reduced wholly-owned completed unsold homes year-over-year from 1,321 to 572. We closed on approximately 3,300 homesites during the quarter, totaling $154 million of new landacquisitions. Inventory declined from $3.9 billion in the prior year to $3.6 billion in the current quarter, and that excludesconsolidated inventory not owned.

We had just over 3,000 starts during the quarter, which was up 46% year-over-year. And there were 83,000 homesitesowned and 21,000 controlled at quarter end, totaling 104,000 owned and controlled.

Of the remaining 58 joint ventures that Stuart mentioned, only 21 have recourse debt, 15 have non-recourse debt and22 have no debt. Additionally, we reduced our maximum recourse indebtedness to $279 million at the end of thequarter, and our recourse net of reimbursement agreements fell to $186 million. We continued to be successful inextending joint venture loans upon maturity as we extended an additional fix [ph] during the quarter.

In our first quarter, there was a new accounting standard 810 that requires companies to include minority interests inequity. And as a result, we included 544 million of non-controlling interest in the equity section of our balance sheet.

In conclusion, the company is financially strong and our strategies have positioned us well. Our operating margins are atthe highest level in four years, with a strong improvement in our gross margins. Our sales incentives are at the lowestpercent of home sales since 2006. Impairments were reduced by about 90% during the quarter. Our SG&A is nowrightsized and has declined as a percentage of home sales even though home sales declined. Our backlog is up 34%.That's the largest year-over-year in percent increase since 2002. Additionally, our cancellation rate of 13% is the lowestwe've seen in many years.

We will see positive contributions from the new land acquisitions that Rick talked about, as new communities open. Andas Jeff's group continues to work through the FDIC investment that we made in the first quarter, Rialto will begincontributing revenue from the FDIC partnership in the second quarter. We are clearly on our way back to profitability.

With that, let me turn it over for questions.


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Question and Answer

Operator [Operator Instructions] Our first question is coming from David Goldberg, UBS.

David Goldberg The first question I wanted to talk a little bit about was if we could talk about buyer quality. I'm merely trying to get anidea, if you've seen any fall off in buyer quality in terms of who's coming into the community? As the tax credit kind of wears on, I mean have you seen FICO scores come down at all? You've seen LTVs increase? And how do you kind of think about with the tax credit, maybe we just pulled forward too much demand and what's left out there in your market?

Richard Beckwitt This is Rick, I'll take this one. With regard to the quality of the buyers coming through the community, I'd say it'sremained relatively high. Folks out there are not just shopping or looking for furnitures, they're looking to buy a homebecause prices are in the affordable range. Credit scores really vary dramatically by market, so it would be tough toreally give you an overall view as to whether they're on the rise or on the fall because they really vary by market. Withregard to the tax credit, accelerating demand, we think that some demand has been accelerated. There's no question of that because there's a falloff between when they get that opportunity back from the government. But it's really difficult toassess what the impact of the elimination of that is going to be.

David Goldberg Are you guys seeing more opportunities for M&A with private builders as a way to access the land, and maybe pricingbecoming more reasonable in those opportunities?

Stuart Miller It might be out there, David. But it's not our focus right now. We're really looking for kind of off-the-beaten pathopportunities. We don't want to go into the head-to-head environment. There's still a lot of developed homesiteopportunities out there that are either on the market or have not yet hit the market. And right now, we're finding organicways to expand our footprint within our operating division, leveraging overhead, one real carefully underwritten deal at atime.

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

Dennis McGill Zelman & Associates

First question, just with some of the macro numbers that are floating around on the new home sale side, it's not a datapoint we put a lot of credence into. But can you just talk about the orders in the quarter and how it trended relative toyour expectation? And any color you can provide on March as well would be helpful.

Stuart Miller Throughout the quarter, first of all, Dennis, we generally don't give the mid-quarter update. But throughout the quarter, Ithink you'll note that it followed its typical seasonal trend. December tends to be a little slower because you have theholidays, and it starts to pick up as you get closer to the Super Bowl and I would say that it followed the typical seasonaltrend.


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

Stuart Miller Yes, it was absolutely in line.


And then secondly, just as we talked about some of the lot opportunities that you've capitalized on. Can you scale whatyou've put either under contract or officially closed on over the last, let's say, five quarters or so relative to the whole104,000 lots that you control?

Richard Beckwitt Well clearly, the margins in the more recent transactions deals that we've signed or actually have closed on are muchstronger than the totality of the balance. And we've been taking advantage of the distressed that's out there, and you'llstart to see the benefit of the margins associated with those deals as we increase the building activity. But with that inmind, we have been very regimented in how we deal with our existing inventory. And as you know, we were early to thegame with regard to taking the appropriate impairments and you've seen that move through the system.


I guess what I'm trying to get a size of is the percentage of those lots that would fall in that first category of lots?

Stuart Miller I don't think we have it broken out but I guess the newer homesites are increasing. It's probably closer to 10% of thetotal now. But we're clearly depleting some of the older communities and replacing with newer, well positioned higher gross margin communities and that's a trend.

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

Joshua Pollard My first question is on the FDIC. I'm ultimately trying to understand how revenues will ramp up in Rialto? In addition,trying to ultimately understand how the cost will ramp up there as well? It's pretty clear, you guys have had the senior management team sort of compensation there. But as the revenue starts to ramp through, as you guys get some morecash from those loans, what should we be thinking about as far as modeling that out?

Richard Beckwitt Well, let me start with the cost side. First of all, looking at the growth of that business as having -- as we buy or participate in new acquisitions and investment opportunities embedded in these deals as an offset of the cost side. Sothere's a fee structure in just about any investment that we're making. And each investment should be paying for itself


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on a current basis as we go. So for example, the FDIC deal has a fee structure that will be funded from current cashflows that we're very comfortable, are already there and will continue to be there and that will be a direct offset to theoverhead that is incurred. There might be a minor adjustment one way or the other but by and large, the deals will payfor themselves. In terms of the ramp up of revenues and profitability, so we've been that, that business is not model-

able. The income and the resolution of assets in that business happens and I hate to say it this way, kind of as theyhappen. But what we do envision is well, overhead will be basically a zero or covered. We think that profitability willramp up as we move forward. We generally fund it as we touch and get involved in more and more of a loan portfolio,the resolutions happen in orderly course. And so there will be a trajectory but I don't think that we can put our hands ona metric that gives us visibility as to how quarter by quarter, those profits will come in.

Joshua Pollard The other side of that question is, I was out in California talking with some of your competitors for the FDIC stuff. In thedeals that they've won, they sort of comment that the moment you get the hello, goodbye weather, as soon as youcontact someone. There's a group of folks who ride up front up in the site, hey, I like to pay my loan off. I haven't beenable to find anyone to work through this loan with. That there is a good chunk of dealing that happen in the first couple of weeks and months. Are you guys experiencing that up front? And then my last sort of follow-up is for Bruce and maybeStuart, the cash balance has come down pretty drastically, not that it's a bad thing because you guys want to investhere. But I would like to know sort of what you guys want to keep on the balance sheet at this point in the cycle?

Stuart Miller As to the first question, the first part, let's say and we'll call it all one question. But as for the first part, we're definitelyseeing activity as we start to speak to borrowers. And the activity is that people say, I haven't had someone to speak towe like to pay off. But you have to temper the enthusiasm around that with some borrowers who will say, we haven't hadsomeone to speak to and we've wanted to pay off and then dot, dot, dot at a discount. Now there's a process involvedhere and everybody would like a big discount and then maybe a little less of a discount and the question is getting to theright numbers. So it takes a little bit of time, even where people have been anxious to speak to someone. So it's aprocess. We have a lot of experience with this. And we know that as time goes forward, we're going to see more andmore resolutions at proper numbers. As it relates to the depletion of cash, as I said in my comments, it's gratifying to beagain investing capital in profitable opportunities for the future. And we think that's the mandate of the company. And soas we look at our cash balance be invested as opposed to depleted, we're positively inclined towards that. I don't thinkthat it is in ours or our investor's best interest to have a great deal of cash on our books earning 1% or less. And sowe're looking for strategic investment opportunities to deploy capital. You're seeing some of that happen in the firstquarter. We're looking at, as we look ahead, at opportunities to deploy more of that capital while we maintain adequatereserves to fund our ongoing operations, recognizing that we have eliminated our revolver in this past quarter.

Joshua Pollard There used to be sort of 40% to 45% net debt-to-cap ratios that you guys sort of guided to or at least the industry guidedto. You guys are sitting there now, is that something that you guys are focused on or not right here?

Stuart Miller

We've always tried to stay in kind of a range around that level, recognizing that the Rialto investment is a largeconsolidated venture that has moved the needle there and under normal circumstances would not have. So we thinkthat we're comfortably in that range, especially as we in our own mind has kind of take out that large non-recourse debtcomponent that's associated with that.

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


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Operator Our next question is coming from Adam Rudiger, Wells Fargo.

Adam Rudiger Wachovia Capital Markets

I had a couple of questions on margins, both on the gross side and on the cost side. On the gross margin was -- howmuch of the $10 million impairment was in Homebuilding cost of goods sold? I'm just trying to get to a pre-impairmentHomebuilding gross margin this quarter? And on the cost side, I was wondering both on the SG&A and in the corporate,there's a significant downtick both sequentially and year-over-year. So I was wondering how sustainable that was? If that's kind of a new run rate do you think, is there anything one-time in there?

Stuart Miller Let me respond to the first question. We actually gave the pre-impairment margins, that was the 20.3%. So just over half of the $10 million is related to Homebuilding. And relative to the second question, as far as the SG&A run rate, we'vereally taken quite a few hits over the past number of quarters, relating to lease terminations. We've had legal expenses,so a lot of those were non-recurring costs and as volume picks up as we expected to, we do expect to get leverage onour SG&A as a percentage of home sales as we go forward.

Adam Rudiger Wachovia Capital Markets

And then one housekeeping question. Did you give, if you did, I missed it, the community count?

Stuart Miller I did mention the community count was flat-ish with last quarter. Now that doesn't include some of the recentacquisitions that we made because we don't add to community count, until we open it for sales.

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

Ray Huang JP Morgan

This is actually Ray Huang on for Mike. First question on the -- I'm just trying to drill down on the comments about 2010profitability. Obviously, the gross margins are taking a pretty nice trajectory here up to 20.3% x charges. I'm justwondering if you had any type of guidance for 2010 on a quarterly basis? And if you expect that to continue to be uppretty solid here year-over-year, and maybe on a sequential basis versus the first quarter? How you see that trendingthroughout the year?

Stuart Miller We haven't provided the quarterly guidance but we're still comfortable that we'll be profitable, we expect to be profitablefor all of 2010. And I think if you listened to some of the comments that were made, a lot of the newer communities areopening, maybe spring and into the middle part of this year, with more deliveries in the back end of the year. And I thinkthe contribution from Rialto will be greater as the year continues. So I would expect that the second half of the year willhave a greater percentage adding to that profitability we expect for this year.


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Ray Huang JP Morgan

Given that the tax credit is expiring in April, what are you guys doing in terms of spec management? And is that higher level of specs in the second quarter potentially going to kind of offset that gross margin improvement at all?

Richard Beckwitt Well as you can imagine with the initiation of the tax credit and the expiration of it, we really geared our inventoryposition on our start schedule to fall within the hash marks of those due dates. Right now, we are not carrying what Iwould say is a large level of speculative inventory. We're really focused on trying to do build-to-sell type of opportunities,pre-sells. We are actually accomplishing some, what I call in the pin [ph] business dirt sales right now and we feelrelatively comfortable with our inventory.

Stuart Miller Let me just add to that in terms of -- we know that there's a lot of enthusiasm about the end of the $8,000 tax credit. Wehave not allowed ourselves to get caught up in a spec building in anticipation of its end. We think that with the slightlylonger-term view that the end of that program is going to come in orderly fashion and not be quite as dramatic as somemight think it will be.

Ray Huang JP Morgan

I know you guys talked about the trends in the first quarter. But just wondering, I'm not sure if you guys answered,whether if you're getting a different color for what's happened before in the second quarter?

Stuart Miller Traditionally and today as well, we don't speak to any inter-quarter results. And we'll just have to wait and see when we

have our call at the end of the second quarter.

Operator Our next question is coming from Josh Levin of Citi.

Josh Levin I wanted to revisit the question of what happens to demand when the a tax credit goes away. So have you seen anyspecific trends in the past few weeks that give you any insights into this question, for example, are you seeing a shiftaway from pre-order homes that my not close in time to qualify, to spec homes that would actually close and qualify?

Richard Beckwitt With regard to people coming in, I think a lot of that depends on what their urgency factor is for a home over there is. Tothe extent that there are real low buyer and moving to the market, they want something to move into today. To the extentthat they've got more flexibility and want to have the specific homesite in the community. They're more focused on thelocation and product than they are necessarily the tax credit. I think you need to keep in mind that affordably is at such alevel in today's market that an after-the-fact rebate from the government is not necessarily driving the purchase decision.And we're confident that over the long term, the elimination of the tax credit is not going to have to cause significantissues for us. And depending on the type and the part of the market, people aren't really even focused on the tax credit.It's a nice thing to get but it's not driving the decision.


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Josh Levin Do you have a sense of how the healthcare reform legislation is going to affect Lennar? Some businesses are out theretalking about incremental costs, have you guys have done any internal work on this or it's just too early to know?

Stuart Miller I just think it's too early to know right now, Josh. I think there's too much up in the air, so I just have to say not sure yet.

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

Stephen East Bruce, if I could ask you on the accounting rule change. All of that minority interest that came onto your balance sheet,will the benefits accrue to Lennar? Or if not, is there some type of counter account that's sitting out there? I guess whatI'm trying to understand is, is this a real bump to book value or not?

B. Gross The way I would look at the accounting change, Stephen just to really simplify it, is the line that was between liabilitiesand equity is now just in the equity section. That's the only change that occurred.

Stephen East So just a reclassification. That's it.

B. Gross Exactly. It just moved down essentially one line. So it's under equity where it used to be in no man's land betweenliabilities and equity.

Stephen East And then the second thing for you all, on the financial services, are you seeing any increase in reserves and warrantiesfor loans coming back, etc.?

B. Gross No, we have not in the first quarter. As you look at our first quarter results for financial services, it's always a low-volumequarter for us. And we did see a reduction in refinances and just low volume. But there were no reserves in the firstquarter that we had to take.

Stephen East You talked about on the SG&A some of the legal expense etc. Any update on Chinese drywall? Where you stand withthat? Is that an issue that's pretty much behind you or from a cost perspective and now it's just a case of potentiallygetting recovery coming back to you all? What's the situation?

B. Gross If you remember at year end, we accrued for expected additional homes that we might find that are affected withChinese drywall. And we had an accrual that was approximately $80 million. So that accrual, not only did we believe atthis time that, that was sufficient for what might still come to our attention as affected homes. But in addition, the


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receivable that we set up, we have been collecting from the insurance company under that receivable and we feelcomfortable that it's behind us now.

Operator Our next question is coming from Jonathan Ellis, Bank of America Merill Lynch.

Jonathan Ellis My first question is about -- you mentioned California or the West having an impact on average pricing this quarter. Andcould you talk a little bit about what actually caused the upside in deliveries in that region and why that's not necessarilygoing to continue for the balance of the year?

Stuart Miller Well, we sold more homes. Market's recovering. There's been increased demand in the market. The housing has gotteninto a point where prices are very affordable and you're seeing the net impact of that flow through the system. The sellprice or delivered price was up because that was an increase part of our overall mix. We're very, very well positioned inCalifornia today, and it's going to be interesting to see how the balance of the year goes. Stay tuned.

Jonathan Ellis My other question is if you could talk a little bit -- you mentioned the land purchases this quarter. Can you provide uswith a target for the full year in terms of land spend, and then also sort of a related question, is in terms of communitycount, any expectations that you'd like to provide in terms of community count as of the end of this coming year?

Stuart Miller I think our best instinct is really to report more on what we've accomplished and leave open the questions of where wego from here. I think we're taking very opportunistic view of all of our investment opportunities and really trying to stayvery close to the market conditions, as they evolve. As I've noted, it's a pretty rocky bottom here. So we're going to seewhat happens on a month-by-month and quarter-by-quarter basis and not try to project the hit [ph] .

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

B. Gross Well, clearly the new communities that we brought on board are going to work their way into our community count as theyear progresses. We'll have some communities that those are replacing, but I think it's safe to say that the communitycount at the end of 2010 will be larger than it was at the beginning of '09 or the beginning of the year.

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

Nishu Sood I wanted to ask about the kind of strategic thoughts behind the FDIC portfolio purchase. Now you folks laid it out prettywell in terms of the circumstances out there with regards to all the regional banks. Obviously, there are -- have beenmany more banks failures and many more that are on the watch list. And the portfolios that you folks purchased wereamong the first to be released in large scale. So in terms of that kind of strategic thinking there, does that tell us that youthink that the first move on these distressed portfolios was the best one that maybe a little lot more competition for the


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Nishu Sood And a question for Bruce in terms of -- just following up on something Joshua asked earlier. You said something that

surprised me a little bit, that the deferred tax asset could come back on to the balance sheet within, I believe you said 12months. I just want to get understanding of how we can kind of analyze that from the outside. Is it going to be a one-timeevent, in other words that you trigger some type of threshold and the entire $600 million plus balance come back on? Isit going to come back unscaled, and what metric should we be thinking about from the outside as the timing and the flowof that?

Richard Beckwitt These are the exact questions that the homebuilders are discussing with their auditors and it's not perfectly clear. Soyou have to keep in mind, we don't have a perfect guidance from the accounting firms. But essentially, once you have ayear give or take of profitability and it's clear that profitability will continue. It's likely that you can have the discussionabout taking in your tax asset reserve and because of the way the reserve is embedded in the assets, it's likely to comeall at one time as opposed to in various components.

Stuart Miller And we'll take one more question please.

Operator And the next question is coming from Dan Oppenheim, Credit Suisse.

Daniel Oppenheim Stuart, you commented about the specs and saying, they haven't been carried away with the first-time homebuyer taxcredit here. Can you just give some quantification in terms of spec levels you have right now in a per community basis?

Richard Beckwitt Our spec level on a per community basis. If I can jump in and answer that, Dan. It's running approximately one to twoper community as far as completed, unsold homes go.

Daniel Oppenheim In Rialto, you talked a lot about the complexity of it and the expertise in critical mass and having a lot of capacity there.What are your thought in terms of when you would like to really step up into that? If you see opportunities, would we seea lot more activity coming in the next several quarters here or will that be more measured?

Jeffrey Krasnoff

I don't think we can think in terms of the next couple of quarters. It's a very opportunistic consideration than -- the bidscome up, the bids are put out there and some of them are won, some of them are just taken off the agenda. Wecontinue to be very involved in the bidding process here. And we have a fair amount of indifference as to whether we'reinvesting over the next month, quarter or year. We're going to be an active participant and be investing in this businessfor the next years to come. So I can't really give you any color as to what we think is going to be a ramp up and what thetiming will be but we are actively involved right now.

Stuart Miller I want to thank everybody for joining us. We're pretty enthusiastic about where we are right now. We recognize that thecurrent economic environment is turbulent. And with that recognition and humble respect for the market condition, we


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think that we are well positioned to be able to move forward. So we look forward to reporting again at the end of our second quarter. Thank you.

Operator This will conclude today's conference. All parties may disconnect at this time.


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Lennar Corp. (NYSE:LEN) Earnings Call Transcript

Thursday, January 07, 2010 11:00 AM ET

Call ParticipantsExecutives Analysts

Scott Shipley Ivy ZelmanDirector of Investor Relations Zelman and Associates

Stuart Miller Megan Talbott McGrathChief Executive Officer, President, Director and Member of

Executive CommitteeLehman Brothers

B. Gross James McCanlessChief Financial Officer and Vice President

Jonathan Jaffe James WilsonChief Operating Officer and Vice President JMP Securities LLC

Richard Beckwitt Michael RehautExecutive Vice President JP Morgan Chase & Co

Joshua PollardGoldman Sachs Group Inc.

David GoldbergUBS Investment Bank

Nishu SoodDeutsche Bank AG

Daniel OppenheimCrdit Suisse AG

Kenneth Zener Macquarie Research

Carl ReichardtWells Fargo Securities, LLC


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Presentation

Operator Thank you for standing by and welcome to Lennar's Fourth Quarter Earnings Conference Call. [Operator Instructions] Iwould now turn the call over to Mr. Scott Shipley, Director of Investor Relations, for the reading of the forward-lookingstatement.

Scott Shipley Director of Investor Relations

Good morning. Today's conference call may include forward-looking statements that are subject to risks anduncertainties relating to Lennar's future business and financial performance. These forward-looking statements mayinclude statements regarding Lennar's business, financial condition, results of operations, cash flow, strategies andprospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are notintended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherentlysubject to risks and uncertainties. Many factors could cause Lennar's actual activities or results to differ materially fromthe activities and results anticipated in forward-looking statements. These factors include those described under thecaption Risk Factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC. Please notethat Lennar assumes no obligation to update any forward-looking statements. Thanks.

Operator I would like to introduce your speaker for today's call, Mr. Stuart Miller, President and CEO. Mr. Miller, you may begin.

Stuart Miller

Thank you, and good morning, everyone. Thank you for joining us for our fourth quarter and year end '09 update. I'm joined here as always this morning by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President andTreasurer; and David Collins, our Controller. Additionally, since we've just finished our two-day operations review of allof our divisions here in Miami, John Jaffe and Rick Beckwitt are here as well.

And since John and Rick run our day-to-day operations in the field, I'm going to begin with some brief opening remarksabout the current housing market in general and the progress we've made on managing our balance sheet and jointventures. Then, Rick and John will comment on our homebuilding operations and positioning for 2010 and beyond. Andfinally, Bruce will provide some additional detail on our numbers. And then, of course, we'll open the phones to your questions. And as always, I'd like to request that in our Q&A period, that everybody, please limit to just one question andone follow-up so that we can be as fair as possible to all of our participants.

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

overall economy appeared to be in recovery, as we have expected, at least as it relates to housing. This recovery is notpresenting itself as a V-shaped return to better time, but instead is proving to be a rocky, stabilizing bottom with visibilityobscured by more questions than clear answers. Nevertheless, as we reviewed our operations in the field, geography bygeography, there is some common themes that appear to be forming a trend.

Prices are no longer free-falling downward and in fact, in many instances, are actually starting to stabilize and evenrecover. In most of our divisions, there has been a meaningful reduction in the incentives used in the sales process andthat's reflected itself in higher margins. For the company overall, incentives were $36,300, down from $42,200 lastquarter and $51,400 last year. And margins improved to 17.8% from 15.6% last quarter and 17% last year. I feelcomfortable today saying that this is a trend and not an anomaly.


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Inventories of new homes are significantly reduced. In most markets, new homes are being built to order. And for thesegment of the market that wants a new home, there are limited immediate opportunities to choose from and that'shelping reduce incentives.

We also heard from the field that while foreclosures continue to be a significant driver of absorption and pricing, theeffect is actually declining as the bulk of foreclosure activity is either in inner city locations or the extreme outskirts of markets in which we operate. The better situated foreclosure homes are being absorbed in an orderly fashion and themarket is clearing the inventory overhang in many locations. The $8,000 tax credit that was thankfully extended byCongress is facilitating that clearing process and will help enable a return to normalcy when the credit expires in thespring.

We heard that a general sense of confidence has returned to the customer. And that there is a tangible sense that withprices and interest rates low, now is the right time to purchase a home for future security. This sentiment is driving manynew purchasers to the market and traffic is slowly improving. This reflected itself in our first year-over-year increase innew orders since our first quarter of 2006.

We also heard from our division President that the unemployment rate in most of their markets has stopped falling and isat least stabilizing and in some instances, beginning to recover. This is perhaps the most important element in drivingfuture confidence as the threat of losing one's job has deterred many from the housing market for some time now.

Finally, we heard that we are able to find new acquisitions of homesites to build new communities where homes can bedelivered at a responsible profit level at today's prices and given zero market depreciation. John will give further color onour operations, while Rick will talk through some of those acquisitions.

As you can see from our press release this morning, at Lennar, we've closed out 2009 by preparing our company toreturn to fundamental profitability. We've continued to make meaningful progress in preparing our company for stabilizedand ultimately recovering housing market. That preparation is primarily reflected in our balance sheet that is now wellpositioned for the future.

We aggressively impaired or disposed of assets that would not add to our profitability in the future. This process enabledus to both clean up our balance sheet, while maximizing the tax benefit derived from the net operating loss carrybackextension that Congress enacted last year. This in turn enables us to move forward with additional liquidity to makestrategic purchases and to begin to add back jobs that were lost as the market deteriorated.

As we enter 2010, our balance sheet is fortified with a debt-to-total capital ratio, net of homebuilding cash, of 36.9% andhomebuilding cash of $1.3 billion with no outstanding borrowings under our credit facility. Additionally, we expect torecover an additional $320 million in cash refund in early 2010 from the net operating loss carryback provision. Thispositions our company very well to make the strategic investments that are desirable as we begin to grow again.

On the joint venture front, we have again meaningfully reduced the number and exposure to joint ventures to add clarityand simplicity to our program. We have reduced the number of joint ventures from the peak in 2006 of 270 to 62currently, and that's down from 72 last quarter. Many of these remaining ventures are good ventures that have alreadybeen reworked and have solid assets that are positioned for the future. We expect to reduce this number again byapproximately half as we go through 2010. Additionally, we've continued to reduce the maximum recourse debt to the

company to $288 million, down from $380 million last quarter.On the opportunity side, we've been preparing for some time to do what we have done in past real estate cycles over and over again, and that is make the cycle our ally, not our adversary. We're clearly beginning to see opportunities takeshape. And as noted earlier, divisions that are profitable are already beginning to purchase new land opportunities on avery conservative basis. And Rick will discuss this in greater detail in just a couple of minutes.

Additionally, in the fourth quarter, we've continued to mature our distressed asset go-forward strategy under the banner of Rialto. As I noted in prior quarters, we've been preparing to be a significant participant in the distressed opportunitiesthat naturally present themselves in downcycles. The team is formed and we've begun the process of actively looking for unique distressed investments.


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At the end of the day, there will be a lot mixed reviews of our fourth quarter numbers as many of you go through theelements of how we closed out 2009. Internally, however, there are no mixed reviews. We've positioned our companyfor fundamental profitability and we're prepared to move forward. Let me now turn over to John and Rick to give some

additional color.

Jonathan Jaffe Thank you, Stuart, and good morning. As Stuart noted, we had our division President meeting this week, where eachdivision presented the current state of their operation and their plan for 2010. I'm very pleased to report that thehardwork and intense focus on improving operating margins that has taken place in the field over the past year isbeginning to produce positive results. Division by division, we're taking our land position, building cost-effective homes,delivering them to today's home buyer as the home is completed and producing a positive operating margin.

Our divisions have effectively managed the sales of homes as they move along their construction assembly line,resulting in our ending the quarter to less than one completed inventory home for wholly-owned community. All of our divisions are achieving this success with new product offerings, reduced construction costs and right-sized SG&A. Aperfect example of this is our successful rollout of our regional product strategy.

In each of our regions, we now have in place a series of value-engineered plans designed for use in multiple marketswithin that region. This has allowed us to further reduce construction costs. For example, in Phoenix, Tucson and LasVegas, we now have only 15 plans. These four plans have replaced 40 plans and have resulted in reduced constructioncosts, which are down 12% on an apples-to-apples basis. These plans have simplified architecture. It offered designs,lifestyle and energy-saving features as attracting new home buyers. This strategy has not only produced well-receivedand cost-efficient plans, but the consistent use of these plans allowed us to reduce overhead in our manufacturingprocess.

Stuart has described our regional operating centers on prior calls, where we have consolidated our purchasing and other administrative processes. In the West, where we support operations in Phoenix, Tucson and Las Vegas, we havereduced the cost of this operating center from over $6 million last year to $3.5 million this year.

This focused management of our homebuilding machine is allowing us to start new homes in our existing communities.With positive operating margins, we will be able to increase the pace of these starts as each market continues tostabilize. With low inventory and the delivery of positive operating margins, we're well positioned to grow our business aswe move through 2010. I'll now turn it over to Rick Beckwitt, who will describe our activity and land acquisitions that willfuel that growth.

Richard Beckwitt Thanks, John. Our primary focus on the land side has been to work through our existing asset base to generate cash. Inmany cases, this has required us to redesign product or work with the towns and municipalities to change what we canbuild in our communities. The towns have been very amenable to lowering specs, reducing square footage sizes, andeven increasing density on a property because they desperately need the income associated with new construction.

In conjunction with this balance sheet-first approach, we have been extremely active on the new acquisitions side. Thedistress in the market has presented numerous opportunities for us to acquire new properties that can add to profitabilityin 2010 and 2011. We have been doing this under the radar screen for some time now. Since August, we've put under contract approximately 5,000 homesites in about 50 communities.

The vast majority of these new deals are finished homesites, where we can buy the land and start building a homeimmediately. Most of these deals have been structured as roll-in options, where we have a small or even no deposit andwhere we can buy the land when we need it.


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In many of these deals, a piece of the purchase price for the land is actually paid when we closed the home with our buyer. As you can imagine, the financial returns from these low-risk, properly priced deals are extremely attractive dueto the short period of time between when we buy the land and when we deliver the home.

Let me give you some examples of a few recent deals. Our Dallas division optioned 15 homesites in McKinney, Texas.We put down a $100 deposit and we can buy these homesites anytime we want prior to December, 2012. Our purchaseprice for these homesites was a fraction of where they were selling at the peak of the market. With truly conservativeunderwriting, this deal would generate an IRR north of 50% and gross margins are in the mid-20% range.

Our Charlotte division optioned 32 homesites recently in a truly A location in Mecklenburg County. We put up a $5,000deposit. The deal has a modest take of about five homesites every 90 days. We had a product ready to go and are ableto deliver homes within three months of the initial close. The IRR in this deal exceeds 100% and the gross margins onthis deal are in the high 20% range.

Now not all of our deals would generate these type of returns. But all of the underwriting we're doing today pencils outthe gross margins in the 20% range and pre-tax margins of approximately 10%. In addition to option contracts, we havebeen selectively using our cash to buy distressed opportunities. These purchases range from purchases from landbanks, cash-strapped developers and builders, foreclosure sales, short sales and even backing in to assets bypurchasing CDD obligations. While the IRRs generated from these purchases may not be as high as from our optioncontracts, the pre-tax profit and margins are significant.

Here are a few examples of some recent purchases. Our northern California division recently purchased 33 homesitesthrough a foreclosure from three banks. These homesites were located in the A+ community in the Bay Area. In anormalized market, the ratio of the finished homesite priced to the sales price is about a 40% to 45% ratio. We acquirethem in bulk at about a 20% ratio. We close this deal in December and we will deliver homes in June. The gross marginon this deal is in the 30% range, with pre-tax margins in the high teens.

Our Fresno division recently purchased two deals from a builder exiting the market. The first deal was 21 homesites in amove-up location in the Fresno market. The second deal was 52 homesites in an entry-level location in Fresno. Whileone was moved up, one was entry, they were both A locations in their price segment. In each deal, we have productready to go and we will be delivering homesites within three months of closing the transaction. Both of these dealsgenerate gross margins approaching 30% and pre-tax margins in the 100%.

A more funky deal is one we recently completed in South Florida. In this deal, we purchased approximately 500homesites from an investor group that desperately needed cash. In the transaction, we also assumed some B bond debtand simultaneously purchased some CDD debt at a big discount. Our finished homesite price resulting from this three-part transaction is extremely competitive. In addition, our gross margins and pre-tax margins are excellent.

I hope this gives you a peak at some of the things we've been up to. We've tried to stay away from the bank-to-broker-to-bid deals because the pricing in those banks are a little stretchy. Most of our opportunities have been generated bygood solid work from our seasoned land associates. They have excellent relationships and are truly tied in to their localmarkets. I'd like to turn it over to Bruce now, who will review our financial results.

B. Gross Thanks, Rick, and good morning. Starting with the operating results for the quarter, you will note that this is our firstquarterly earnings that we've reported since the first quarter of 2007. We reported earnings of $0.19 per share, as youcould see in the press release, which includes $1.34 of earnings per share from the reduction of the deferred assetvaluation allowance, primarily due to the net operating loss carryback. And that's offset by a $0.58 per share chargerelated to valuation adjustments and other writeoffs and a $0.31 per share charge related to valuation adjustments toland that the company has either sold or intends to sell to third parties.

Now there are a lot of numbers in that opening paragraph and I'd like to summarize the quarter results as follows: Wedid note sequential operating improvement in our pre-impairment operating margin, which improved from a negative 30basis points in our third quarter to a positive 160 basis points in the fourth quarter. There was clear improvement as


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you've heard so far on the gross margin line, while we did have some nonrecurring charges in our selling, general andadministrative costs, which will reduce our overhead prospectively and help us return to profitability.

As noted in our impairment number, we disposed of several longer-term assets which will result in a tax refund in early

2010, and additionally in the fourth quarter, we purchased new well-positioned communities that Rick went through thatwill lead to current activity in 2010 with superior gross margins. So let me break that down a little further.

In the press release, we described our revenues going down 30% which was driven by a 22% decrease in homedeliveries excluding joint ventures and a 9% decrease in the average sales price to $238,000. The average sales priceby region changed as follows: The East was $225,000, which was down 8%; the Central was $205,000, up 2%; theWest was $313,000, down 12%; Houston was $199,000, that was up 1%; and the other category was $257,000, whichwas down 8%.

Our pre-impairment gross margin which improved to 17.8% from 15.6% in the third quarter was driven by a couple of factors. The first one as Stuart mentioned, was the reduction in sales incentives of over $15,000 per home, the lower sales incentive which was a result of the improved selling environment, our repositioned product strategy, as well asfewer completed unsold homes which in prior quarters commanded larger incentives since we were focused onconverting that inventory to cash. Second, as John mentioned, was the continued operating focus on reducing our construction cost per square foot which were down 25% approximately from the peak.

There's one other item that I'd like to discuss that impacted gross margin and that related to Chinese drywall. With our proactive approach to dealing with Chinese drywall, we found an approximately 100 additional homes requiringremediation during the quarter. The rate at which we're discovering additional homes with Chinese drywall has beenslowing and we expect to be completed with our homes identified with Chinese drywall by the end of the second quarter.

We are actively pursuing the recovery from manufacturers, installers and various insurance companies and we'veaccrued an additional charge during the quarter of $22 million for additional homes identified, homes yet to be identifiedand the possibility that we may not receive full recovery for these costs. Although this charge had a negative impact onour gross margin, we did have some offsetting positive impacts to gross margin, primarily related to constructionobligations no longer required on property disposed off during the year.

Turning to impairments, in the fourth quarter we recorded $255 million of valuation adjustments and write-offs. Thecategories for the fourth quarter were as follows: Homebuilding was $56 million; land sold or under contract was $89million, of which $72 million closed during the quarter; write offs of option deposits and pre-acquisition costs were $64million; and joint ventures were $38 million.

Of the $255 million of impairments during the quarter, $133 million qualified to be carried back under the extended NOLcarryback provisions enacted in our fourth quarter since we liquidated our position in those assets. As such, they arecomponent of the $320 million refund we expect to receive in early 2010. As a result of this $320 million refund, we alsorecorded a corresponding reversal of our deferred tax asset reserve totaling $320 million.

We have continued to focus aggressively on reducing SG&A costs which decline $32 million year-over-year. Nowalthough the percentage as a percent of revenue from home sales was 16.2%, an increase year-over-year. If youexclude them, the nonrecurring lease termination costs and legal costs during the quarter which totaled approximately

$15 million, our SG&A improved sequentially by about 150 basis points.New orders improved 3% year-over-year. Our backlog dollar value improved 5% year-over-year and these are the firstyear-over-year increases that we've seen for some time. The cancellation rate declined to 20% for the quarter versus32% in the fourth quarter of 2008. Our backlog conversion ratio was 141% during the quarter.

Our Financial Services segment earned a $7.8 million profit during the quarter despite lower revenues. This comparedwith a loss of $5.4 million in the prior year and both our mortgage and title operations have improved their processesthrough the downturn and are operating more efficiently and profitable. Mortgage generated a $7.9 million pretax profitversus $6.3 million in the prior year, and our title company turned profitable to $2.3 million versus the prior year loss of $7.7 million.


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Additionally, we have strategically been selling our remaining cable systems over the last several years and this quarter,we recorded a charge of $2 million on the sale of the cable system. As we look forward towards 2010, our first quarter isexpected to be a low volume quarter similar to the trend that we noted in 2009 and therefore, it's expected to generate a

loss. However, we are still positioned to return to profitability in 2010.Turning to the balance sheet, as Stuart highlighted our strong position, we continue to focus on cash flow while alsotargeting an attractive investments for this recovering market. We continue to carefully manage our inventory as wereduced totally owned completed unsold homes from 1,140 to 480. We sold approximately 2,000 homesites in positionsthat were previously mothballed while closing on approximately a new 3,500 homesites totaling approximately $148million in the well-located, ready-to-build communities that Rick talked about.

Inventory declined from $3.8 billion in the prior year to $3.5 billion in the current quarter and this excludes consolidatedinventory not owned. There were approximately 104,000 homesites owned and controlled at quarter end. We talkedabout the reduction in our joint ventures of the 62 that are remaining. We have only 22 that have recourse debt, 17 withnon-recourse debt and 23 with no debt. We reduced our maximum recourse indebtedness, as Stuart mentioned to $288million. This joint ventures with recourse indebtedness remaining are supported by approximately $1.3 billion of assets.

Additionally, we reduced our non-recours

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