Lennar Corp LEN
Q1 2013 Earnings Call Transcript
Transcript Call Date 03/20/2013

Operator: Thank you for standing by and welcome to Lennar's First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

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

David Collins - Controller: Thank you. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial conditions, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results.

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

Operator: I would now like to introduce your host, Mr. Stuart Miller, CEO. Sir, you may begin.

Stuart A. Miller - CEO: Great. Thank you and good morning, everyone. Thanks for joining us for our first quarter 2013 update. We're pleased to share our results this morning. I'm joined this morning by Bruce Gross, our Chief Financial Officer; Dave Collins, who you just heard from, our Controller and Diane Bessette, our Vice President and Treasurer. Additionally, Rick Beckwitt, our President; and Jeff Krasnoff, Chief Executive Officer of Rialto are with us here as well. Jon Jaffe, our Chief Operating Officer is available by phone for the Q&A session.

We also have with us Eric Feder who has been a bridge for deals within the Company and today is his birthday, so we asked him to join us for the conference call today, so happy birth day, Eric.

I'd like to begin this morning with some remarks on the overall state of the housing market recovery and then briefly overview our operation. Bruce is then going to provide some detail on our financial services segment as well as some additional color on our overall numbers, and as always we'll open it up for Q&A, and we request that during the Q&A time period that each person limit themselves to one question and one related follow-up.

So, to begin, let me make four macro points about the housing market recovery. First, housing is recovering and the recovery is consistent, healthy and growing stronger. We saw from yesterday's housing starts and permits numbers that the recovery in housing is continuing to progress in both multifamily and single-family products. This data confirms what we've seen in the field for some time. There's been an underproduction of housing during the downturn as we produced as few as 550,000 homes per year during the downturn of both multi and for sale product. This is very close to the rate at which homes become obsolete.

So for some of those years, we had essentially no net production against a normalized household formation rate of some 1.25 million annually. This shortfall will have to be made up and the market is beginning to move in that direction.

Second point, national numbers continue to (indiscernible). On Monday, the U.S. homebuilder confidence number showed a decline, which suggested that the recovery might be stalling or might not be as robust as expected. Against that backdrop, yesterday's numbers confirmed continued recovery. In our view the conflict in the information rest in the fact that the homebuilder confidence survey is primarily a polling of smaller private builders. Their lowered confidence reflects their limited access to capital and in turn a limited access to land. The larger builders have had access to capital and land, while the market was depressed and since then land prices have moved significantly. Late participants in the land market are having difficulty participating in the market recovery and are not able to solve to acceptable margins in their underwriting. Lack of builder confidence against the backdrop of increased starts and permits supports our thesis that larger builders will increase market share, while also participating in the broader market recovery. Land positions owned in the context of housing recovery is driving homebuilder confidence. I suspect that the builder confidence survey of the larger well-capitalized builders would reveal substantially higher confidence.

Third point, the recovery is based on strong market fundamentals. Low interest rates and relatively low home prices continue to produce low monthly payment rates which compare favorably with local rental rates. Not only is for-sale housing extremely affordable, but it is a preferred and more stable alternative to rentals which reprise every 12 months.

Inventories are low for both new and existing homes as demand increases, there are fewer homes to purchase and prices are being driven higher. Distressed homes are being absorbed by the investor community and repurposed as rental. While these homes are primarily in secondary and outer-fringe location, they would not compete with new product anyway and they're being taken out of the for-sale pool as the market rebuilds. In the short-term, these rental homes are helping to fill the void of the short supply of rentals for growing demand. In the longer term, as these homes are put back on the market, they will likely be purchased by the renters that are in them as they find that they can qualify for homeownership. We do not view this as a looming inventory problem.

Finally, resurge in demand for homes is constrained by the mortgage market currently which has constrained demand with an overly restrictive underwriting criteria. Slowly however the landscape is improving as banks are beginning to reconsider their credit underwriting overlays and open the doors to more approvals. While this process has been and continues to be slow to mature, we have come a long way since last year at this time and we expect to see further definition of the regulatory environment leading to a further extension of credit to the market.

While there have been and still are economic and political uncertainties ahead. We feel that this housing recovery is fundamentally based and driven by a long-term demographic need for housing. We believe we are still in the beginning stages of a recovery that will be sustained for several more years.

Now, turning to Lennar, Lennar has been and continues to be very well positioned for the current recovery in housing. This is reflected in our first quarter 2013 result and in our positioning for the future. In our first quarter, new orders were up 34% over last year and our dollar value of backlog is up over 100% in the highest level it's been in five years.

Gross margins improved year-over-year to an industry-leading 22.1%, a 120 basis point increase over last year and operating margins increased 410 basis points to 10.1% reflecting the operating leverage in our absorption growth. For the full year 2012, we expect our average gross margin to be between 23% and 24%.

Margins continued to benefit from our proactive land acquisition strategy as well as higher home prices, lower incentives and operating leverage from greater absorption community of three per month which is a 20% improvement over last year and then of course, from more sales overall, our average selling price for the fourth quarter was $269,000, a 9% increase over last year, which covered the increases in labor and material cost which increased approximately 4%. Our homebuilding operations had been improving due to a strong operating strategy complemented by excellent management execution.

Additionally, we opened 80 new communities and closed out 55 communities during the quarter to end at 484 active communities, a 14% year-over-year increase. We continue to expect our year-end community account to be approximately 550 communities as our land acquisition strategy drives our growth.

Today, we are fortunate to have the land in hand to meet our projected deliveries through 2014. As a result, we are primarily pursuing land opportunities for 2015 and beyond. This is an enviable position in today's market, a position that it was earned through a very strategic land acquisition program that began in 2009. This program has put us several steps ahead of the competition and allows us to fish in the different pond. We are using our balance sheet to tie up land opportunities that will produce strong margins for years to come. Many of those assets are large-scale multi-year flagship development deal. Rialto has continued to play a very big part in our land program and I want to thank the team for their hard work and dedication.

Complementing our Homebuilding operations, our Financial Services segment had another strong quarter with operating earnings of $16.1 million compared to $8.3 million last year. Our mortgage company captured 79% of Lennar homebuyers within the markets in which it operates. Mortgage operations have also benefited from a robust financing market. Lennar home mortgages should continue to grow alongside our expanding homebuilding business as well as serve non-Lennar purchasers in selected markets.

While our Homebuilding and Financial Services divisions are the primary drivers of near term revenues and earnings, our three additional operating divisions are all maturing to be excellent longer term value creation platforms for the Company. Rialto continues to grow as a blue-chip private capital investment management company. While current earnings have slowed as we have shifted from balance sheet investment to a fund investment model. The prospects for future consistent earnings continue to improve. We've now invested or committed almost $1 billion of equity in Fund I. Performance for the fund is already well ahead of original projections and subsequent to year-end, we started distributing capital back to investors.

In addition, if we continue on this performance path, we expect to well exceed the return hurdles set for our investors which means carried interest with Lennar to Rialto as the manager of the fund. None of that potential value is reflected in our current earnings picture. Finally, in December fund number two had its first closing of commitments of approximately $260 million including $100 million from us, and we've already started investing that capital.

Lennar Multi-Family, our apartment division commenced construction on an additional two communities in the quarter and now has four communities under construction nationwide with a growing pipeline. And FivePoint Communities is quickly moving to bring developed land in premium locations to the market to fill the growing demand for well-located approved and developed home sites.

In conclusion, as I reflect on the current positioning of Lennar and the state of the current housing recovery, I could not be more optimistic about our future. The housing market is healing and recovery is accelerating as we produce shelter that is needed for a growing population and a return to normal level with household formation. As the housing market continues its overall trajectory back to normal, it will provide stimulus to the overall economy through job creation and building long-term consumer wealth which for generations has been a benefit of homeownership.

Our homebuilding machine is extremely well-positioned and continues to gain market share. We have excellent land position in a constrained landmark and we have an excellent management team that will continue to be our primary driver of current earnings.

Homebuilding is supported and enhanced by financial services, which will grow in step with the homebuilder and continue to develop its third-party operations to enhance its bottom line. Rialto continues to expand its franchise and invest in high-yielding alternative assets while supporting the homebuilder with access to off market home sites. Our growing multifamily platform provides an additional long-term and complementary growth opportunity for the Company and finally FivePoint with its large long-term California land assets, simply couldn't be better positioned to reap the benefit of an appreciating land constrained housing market.

Although there will be political and economic headline risk, the drivers of our business are fundamentally sound. I am confident of Lennar's position in today's marketplace and rest assured that our future growth is supported by a strong balance sheet, with an exceptional group of leaders who will be able to navigate through the challenges and towards the opportunities of 2013.

With that, let me turn it over to Bruce.

Bruce E. Gross - VP and CFO: Thank you, Stuart and good morning. I'll provide additional colors to the numbers starting with homebuilding segment, revenues from home sales increased 40% in the first quarter, which was driven by a 28% increase in deliveries and a 9% increase year-over-year in the average sales price to 269,000. The increase in deliveries resulted in a 79% backlog conversion ratio, which exceeded the 75% expectation given on our fourth quarter conference call. The average sales price by region is as follows, the East region was $251,000, up 13%. The Southeast Florida region was $271,000, up 2%. The Central region was $258,000, up 17%. Houston was up 12% to $258,000. The West region was $294,000, this was down 7% but that was due to product mix. And in the other region was $339,000, down 6%.

Our gross margin on home sales was 22.1% and that compared with 20.9% in the prior year, an improvement of 120 basis points. The gross margins from our new communities purchased since 2008 continued to outperform the Company average gross margin during the quarter, and they represented 57% of the Company's deliveries in the first quarter. Sales incentives were 23,300 per home and that was 8% as a percentage of home sales revenue. The sales incentives improved by 420 basis points or $10,900 per home delivered versus the prior year. The gross margin percentage for the quarter was highest in the East and Southeast Florida regions. However, this quarter's results had an increased product mix coming from the central and other regions where the gross margin percentage is lower than the Company average.

As we highlighted on our fourth quarter conference call, there is seasonality in our gross margins and it tends to be lower in the first quarter and then typically increases throughout the year. This is due to lower closings in the first quarter, as well as higher field cost due to preparing to open more communities as well as winter-related costs in our communities. Our SG&A percent improved by 290 basis points to 12% this quarter. This is the incremental operating leverage that we've been discussing for some time, as our volume and particularly our absorption per community increases. Through the downturn, we transformed the entire Company to be on an Everything's Included platform and we eliminated our design studio divisions remaining from the U.S. Home acquisition. This move allowed us to eliminate multiple divisions in the same market, and as a result, the number of homebuilding divisions has been reduced from 124 divisions at the peak in 2006 to 29 today. This is resulting in significant operating leverage on our G&A line.

Additionally, we have focused heavily on using social media to attract our homebuyers which has significantly reduced our advertising costs. With the improvement in both gross margin and SG&A, our operating margins as Stuart mentioned improved by 410 basis points to 10.1%. During the quarter, we purchased approximately 9,400 home sites totaling 472 million, and we invested $120 million in land development. Our home sites owned and controlled now total 135,000 home sites.

Turning to Financial Services, mortgage pre-tax income increased to $16.4 million from $8.9 million in the prior year. The first quarter improvement was again helped by the strong refinance environment leading to higher volumes and a higher profit per transaction. This quarter's mortgage originations increased by 60% to 1.2 billion and originations with non-Lennar homebuyers were 58% of total originations this quarter. Again, that was primarily driven by robust refinance market. Our title company had a $300,000 profit in the quarter compared with $100,000 loss in the prior year.

Turning to our Rialto business segment, they generated operating earnings of $1.7 million during the quarter, compared to $9.4 million in the prior year. Both amounts are net of noncontrolling interest. The composition of Rialto is 1.7 million of operating earnings by type of investment is as follows, the first Rialto real estate fund contributed 6.4 million of earnings, the FDIC and wholly-owned bank portfolios contributed a net of 300,000 of earnings and these amounts were reduced by approximately 5 million of G&A, and other, which is a net of management fees and reimbursements of 6.3 million.

At quarter end, the FDIC debt, net of cash available in the defeasance account and in Rialto's cash account was only 99 million. We expect this debt to be paid off this year and then there will be significant cash flow generation back to the parent.

This quarter, we reversed approximately 25 million of the remaining deferred tax asset reserve, all of which pertains to state taxes. We expect reversing another 30 million to 40 million this year if our earnings trend continues.

Turning to the balance sheet, our liquidity remains strong during the quarter with 1.1 billion of cash on hand and no outstanding borrowings under our $525 million credit facility, we continued our balance sheet strategy of pushing out debt maturities, while driving down cost of capital as we raised 275 million of 4.125% 6-year senior notes and 175 million of 4.750% 10-year senior notes during the first quarter. We received the ratings upgrade from S&P to BB minus during the quarter, and our net debt to total capital improved by 30 basis points year-over-year to 49.3%.

To recap what was said on this call and highlight a few additional items for future quarters in 2013, I am going to list few areas starting with active community count. Stuart mentioned that we are on track to be at (550) for the end of 2013. I wanted to remind people that there's a heavier concentration opening in the second half of the year. We expect our backlog conversion ratio to be between 85% and 90% for the second and third quarters and then should increase to between 90% and 100% in the fourth quarter. We expect to continue to see a positive gross margin trend during the year, increasing from last year's average of 22.7% for the whole year to between 23% and 24% as an average for 2013 with the typical seasonality throughout the year. We expect to see about 100 basis points year-over-year improvement in SG&A percentage in each of the next three quarters remaining in 2013.

Financial Services, we do expect that the number of refinance transactions will slow as we progress through the year and the profit per transaction, which is at very high levels right now, will moderate as we go through the remainder of the year.

As highlighted on the call, Rialto is in a transitional period as the PPIP investment was successfully completed last year and the second real estate fund will be ramping up throughout the year. So, Rialto's profitability is expected to be back loaded in 2013. Excluding the impact from additional deferred tax asset valuation allowance reversals, we expect to have an effective tax rate going forward of approximately 39%. We are very well positioned as we start our second quarter with the strong backlog dollar value that Stuart mentioned and the favorable industry dynamics as well. So with that, let me turn it over to the operator and we'll open it up for questions.

Transcript Call Date 03/20/2013

Operator: Stephen East, ISI Group.

Paul Przybylski - ISI Group: Actually this is Paul Przybylski on for Stephen. I was wondering if you could go over your philosophy on order pace versus price and what you are focusing on now as we move through the year.

Rick Beckwitt - President: It's Rick Beckwitt. It's a delicate balance in the field. We are reviewing pricing weekly in every community across the country. We have been increasing prices probably every couple of weeks in some communities, at least once a month in all communities, and we balance the pace/price split really on a local basis. Our preference is to increase price over pace, particularly in communities where we have long position – a lot of home sites to close out ahead of us, and to the extent that we are at the back end of the community, we may move through that community without too much price increase because of the incremental overhead associated with the fewer deliveries.

Paul Przybylski - ISI Group: You spent $500 million on land. What's your target for this year?

Rick Beckwitt - President: I think that you could probably count on about $500 million a quarter.

Operator: Michael Rehaut, JPMorgan Chase.

Michael Rehaut - JP Morgan Chase: Appreciate your comments at the beginning Stuart where you mentioned some macro comments that you believed the housing recovery is actually growing stronger and that credit also is slowly improving. I was wondering if you could give certainly your own trends are improving quarter-to-quarter, particularly in terms of price and the comments that Rick gave are very helpful. Are there any other areas of specificity or granularity, particularly as it relates to the market growing stronger? It kind of almost points to acceleration, and I think that kind of delight some of the optimism, particularly around pricing that you shared with us when we met with you last month.

Stuart A. Miller - CEO: I think Mike that I think that when we look backwards what we have generally seen is that the trends that start to reveal themselves in the national numbers and come through performance reports are saying that we start to see and feel in the field early. It's tough to be granular about these things. It's more about traffic, quality of traffic and the conversations at the field level that you're having with customers. I've noted that this recovery is starting to feel fundamentally driven and fundamentally sound and it's primarily because the communications in the field are about people thinking about their monthly payments as it compares to rental rate, their monthly payment as it compares to stability and disposable income and this is a real shift from people just kind of saying, hey, I want to own a home. It is about nickel, dollars and dimes and making sure that they are managing their life as well as possible. We are seeing that demand is growing. It is somewhat constrained by the smaller funnel of mortgage approvals and so we are seeing not as much demand come through the numbers as demand is out there and the constraint of the mortgage approval process is really keeping the recovery worse today than it feels like it wants to be, and again this is somewhat of a feeling from the field. Now, looking at the mortgage approval process, it feels like it's fairly static, when we think about it in kind of real-time sense. But if we go back a year or we go back two years, the mortgage approval process has really liberalized itself quite a bit. It was just a couple of years ago that it was virtually impossible to make your way through the maze of the paperwork and verifications that were required to get a mortgage, and though those might not be hard credit statistic, those impediments were just as severe as a 780 FICO score. People didn't want to go through the morass of trying to get a mortgage. Today, it is a more streamlined process. The buyer is educated as to what their down payment, their FICO scores, their credit stats have to be in order to get approved and they are coming in more prepared. Mortgage money is becoming marginally more available, and I think that trend will continue as we start to get legislative and regulatory certainty injected in the banking system. The overlays will start to dissipate a little bit.

Michael Rehaut - JP Morgan Chase: I guess the second question on the Rialto business. I believe you said that in the release that there was a $7 million impairment, just wanted to get a sense of what that share was for Lennar is it consolidated, including your pro rata share how that affected profitability? And the real estate fund $6.4 million contribution as well. Is that something that we can assume will continue in that rate or is it going to be kind of lumpy or maybe grow modestly. How should we think about that?

Bruce E. Gross - VP and CFO: Okay. Let me start, Mike, with your first question. The impairment of $7 million that was noted in the release 40% of that is ours that's our share in the FDIC transaction, and that's really based on as we look at our cash flows, it's more of a timing issue. As we pushed out the timing of some of the resolution of the assets that resulted in a little bit of an impairment, so in our numbers it's 40% of that $7 million. On the real estate fund question, each quarter, we go through a fair value analysis, the real estate fund, number one, is doing exceedingly well, and as Stewart talked about, there being a significant carried interest that will (indiscernible) back to Rialto. That's a significant amount of profitability that will come in at the tail-end of the fund as opposed to on a regular basis. So there are significant value creation there, but that tends to be back-loaded. The quarterly amounts for the real estate fund will be based on the fair value of the assets each quarter.

Michael Rehaut - JP Morgan Chase: So, quarter-to-quarter, it could differ, it's not much of a stream?

Bruce E. Gross - VP and CFO: Sorry, one more time Mike?

Michael Rehaut - JP Morgan Chase: I said, so you say you've kind of a fair value analysis, so quarter-to-quarter it might differ as opposed to kind of like, more of a consistent stream?

Jeffrey P. Krasnoff - CEO of Rialto: It's Jeff Krasnoff. There is a consistent stream from regular operating earnings as well. So, the answer is, it could vary quarter by quarter, but it is an ongoing stream.

Operator: Ivy Zelman, Zelman & Associates.

Ivy Zelman - Zelman & Associates: I wanted to ask you, Stuart, given the success you've had in the quarter, and are believing in the early signs of the recovery many clients ask me the question, what can derail the housing recovery, and the question is always posed, as we see sort of reserves now you’re your fund – that fund raise QE3 likely to end potentially second half or first half of '14. How do we think about those risks and the potential negative impact on the housing fundamentals and your just overall view on QE3 and that sort of trends et cetera?

Stuart A. Miller - CEO: Look, as I noted Ivy, there are political and economic questions that could impact and clearly the government is contending with questions of how to deal with the debt issues and a radical mistake which I don't think we'll come to make as a country, a radical mistake could derail everything. So, I don't want to minimize the possibility that something very severe comes our way in terms of political risk. It just seems unlikely to me. The strength of this recovery as I see it, and as we see in the field, it really is driven by monthly payment and people desiring to find a stable way to identify their monthly cost of living in a static wage environment and maybe even a growing wage environment because of those fundamentals I think that we are pretty secure in terms of moving forward and continuing to recover. Now, in terms of QE3 – the elimination of QE and all of those questions, we were really talking about interest rates and I think that we are – as we look at our business, we think that there is room for interest rates to go up without derailing the current trajectory. If you really do the math and look at the impact of interest rates of an increase of 100 basis points or 200 basis point in today's limited shelter alternatives environment we are likely to see rental rates get pushed up if the band shifts back over to rentals and therefore the comparison even at those higher interest rates is going to be favorable and people have to have a place to live. So, I think there is pent-up demand. I think that there is a shortfall in supply that derives from the downturn. I think that the monthly cost of living is where people are focused right now and will likely to see a continued recovery. That's my best guess.

Ivy Zelman - Zelman & Associates: I guess my second question being more specific to your strategy. Rick, you alluded that you prefer to take price over pace, but you have a balancing act to maximize and what many of our clients are struggling with trying to differentiate builders and the positioning they have whether they were – like you were aggressive in the downturn utilizing your capital structure and positioning yourself. Is it fair to say that even operators are not as well positioned, as long as home prices are going up that we should see generally for the industry and probably Lennar will outperform on margin improvement, because many think we're hitting a wall because of labor constraints or raw material inflation, land inflations getting too ahead of us. So just your general comments. I don't know Rick, if you want to answer that, but overall, thanks a lot guys.

Rick Beckwitt - President: Sure, Ivy. Clearly, if prices continue to increase, the industry will benefit from additional potential margin as long as the builders are careful and controlling the cost and the input cost into the homes. We're working it every day. We're not accepting all price increases that come through, although we are taking some on the chin and we'll continue to work the inputs into the home, and if we have to value engineer to keep costs down, that's what we'll do. I think some companies and probably the publics are better at dealing with these types of issues than the privates are, and we're optimistic that margins will continue to increase. We've given that guidance throughout the year and we'll see where it goes Ivy.

Stuart A. Miller - CEO: Let me just add to that and just say that, look, the increase in cost comes from land, labor, materials. Our land component is really well identified over the next couple of years and the land that we're purchasing is for 2015 and beyond. So we have a pretty lockdown on the land cost relative to the homes that we'll be delivering over the next couple of years and that's a big component of what is, in some instances a cost increase component. From a labor and materials perspective, we think that home price appreciation is likely as we go forward to continue to outpace the increase in those two areas. We've seen that. I think that we noted in our opening comments that sales price had increased some 9%, costs were somewhere around 4%, whether that's the relationship, whether it tightens a little bit, we still see sales price outpacing cost increases as we go forward. One last thing I'll say is, as it relates to land, we are buying and have been buying a lot of land, but a lot of that land is in our pipeline already. Land deals that have been contracted for, that are indiligent or in some form of entitlement process that are waiting to be closed, so these land deals, even as we close them from today going forward, many of them were negotiated at a different point in time and help us walk down that cost component.

Operator: Steven Kim, Barclays Capital.

John - Barclays Capital: It's (John) filling in for Stephen today. Since you touched on cost, could you maybe run through the various cost components and what specific materials you're seeing the biggest increase in price and for those that you are seeing pretty dramatic increases in price, is there any ability to hedge that away, maybe if you could give some color on that?

Stuart A. Miller - CEO: Jon, why don't you take that?

Jonathan M. Jaffe - VP and COO: The material is obviously the biggest increases and order of that is lumber being the largest, then drywall and then concrete. On the labor side associated with that, framing labor have seen the biggest stress and therefore the biggest increase, drywall labor as well and then the plumbing and paint labor. Still seeing a lot of the metrics for upward pressure on those material costs as we look forward and we expect we will continue to see that. The way that we manage, we don't go out and buy hedges, but we through our national purchasing process lock-in extended contracts and those vary in length depending on what the materials are. So, for example, lumber which has been volatile, we are typically locking in three or four months of pricing at a time other products and materials we might be locking in a year at a time. Labor tends to go on a community-specific basis in terms of time period that that's locked in.

John - Barclays Capital: Then just wanted to get an update on the schedule for the big five point community set that you have out west, I believe. The first one to really come on is going to be El Toro. But do you have any update as far as timing for those various communities?

Jonathan M. Jaffe - VP and COO: This is Job again. At El Toro we will see our first transaction where we will be selling home sites to builders, closing some time in this quarter and for builders to – we are having a grand opening of their products sometime later this year. At Newhall, we continue to move through the Valencia assets that are on the east side of the freeway and Newhall Ranch which is on the west side is still in its processing of its maps through that process, so that's still probably about 18 months or so in front of us. In San Francisco Hunters Point we'll see the first vertical product coming out of the ground by sometime in the late second quarter, early third quarter of this year.

Operator: Dan Oppenheim, Credit Suisse.

Dan Oppenheim - Credit Suisse: I was wondering if you could talk about the trend – the est, looking at the – order growth was a little bit lower, so we've seen a lot of communities where they're temporarily sold out in terms of having lots of future, but sort of metering the pace of sales now. Can you talk about how much you're doing that in some of these communities and what you're thinking about in terms of order growth and pricing and such?

Stuart A. Miller - CEO: Jon, go ahead.

Jonathan M. Jaffe - VP and COO: Sure in the west it will be a very community specific review of that sales pace. So, since there hasn't been much in the way of finished lots being produced by the industry over the last several years, there are many communities which we do meet or beat the rate of sales and suppressed it below what the market would demand, so in that case, we are seeing more significant price increases. In some markets, where there are finished home sites in front of us, we're able to achieve a much higher sales pace. So for example, in Northern California, in the Sacramento area where we have a healthy supply of home sites in front of us or the Inland Empire, we are able to be achieving a higher absorption level because we're able to pick up our production levels.

Rick Beckwitt - President: This is Rick. The other thing I'd add is if you look back over the last several quarters, probably going back through the last two or three, four, the west has been a large percentage of our new land acquisition. So, you'll continue to see some growth stemming from those recently acquired deals in the next year or so.

Dan Oppenheim - Credit Suisse: Then next, the follow-up, you talked about the market broadening in terms of the recovery overall. We've heard some talk about how traffic isn't improving (indiscernible) it is very high quality in terms of conversion. Can you comment at all in terms of what you're seeing, broadening or are you seeing traffic increasing as well or how is that?

Rick Beckwitt - President: This is Rick, traffic has been very strong. Quality of traffic is even stronger. Year-to-date, our traffic is up significantly pretty much across the board, and conversion rates are strong, so we're encouraged with what we're seeing out there. It gets back to some of the fundamentals that Stuart mentioned in his opening comments with regard to limited supply, people being – understanding the qualification process. It's a decent market today.

Operator: Adam Rudiger, Wells Fargo.

Adam Rudiger - Wells Fargo: Stuart, I was wondering if you could talk a little bit more about the 2015 – lands you're buying for 2015 and beyond in terms of what the competition is for those kind of lots relative to newer delivery type lots, what the assumptions you used for those are and kind of what the state of that land is that you're buying or looking at?

Stuart A. Miller - CEO: Well, listen, I'll let Rick, take the bulk of that, but I think that a lot of the land parcels that we're looking at for 2015 – that we are purchasing for 2015 are really already identified in our pipeline. As we've been working on those deals either they are in negotiation or under contract the assumptions for many of our deals are without a pricing increase model, though in some instances we do find that we are injecting some inflation into our underwriting. So, Rick, why don't you?

Rick Beckwitt - President: I think it is pretty much across the board. The stuff that we are looking for '15 and '16 for that matter is things that are not yet developed, they are either raw or need some entitlement work so we will work jointly with the landowner today, put some seed money into the deal or maybe cover the entitlement cost with an opportunity and the lock on the purchase of land once things happen. And as a result of that landowners today don't have a lot of capital to invest in the underlying property so it is a win-win deal for us and for them as they move the property along and we contracted at a wholesale price. So when things past go when we get everything in line the approvals, the entitlement, everything the way we want it the density will close on the land two years from now. So, it works well for us.

Stuart A. Miller - CEO: With regard to the competition in that piece of the pie what we found is that most of the other folks right now are looking for current delivery things. There are some that have a land light model and don't want to invest in underlying property and develop so the competition is much more limited.

Adam Rudiger - Wells Fargo: Think that one of the advantage is if I could just add that we're finding. There are two groups of potential competitors that are kind of hamstrung right now. The land, land developers – the banks are just not lending on land. The old acquisition development loan for land deals is not getting back on track right now. So it really is the well-capitalized public company that has the ability to access the capital to invest in land assets and to drive the entitlement and development process forward. The other group that's really sidelined are the smaller builders. The smaller builders have also had that same access to capital issue. We are coming out of the downturn, the banks have just not recast their confidence relative to that group, but it did not perform particularly well in the downturn, and so they're not competitors. So, while the large capitalized – large well-capitalized homebuilders are out there and competing for some of the same properties, our ability to really cast our sole attention to those later land deals enables us to negotiate well and to position ourselves well and focus just on that group of asset.

Adam Rudiger - Wells Fargo: My second question, Bruce, I wanted to ask about gross margins and I know you made a pretty intentional – it sounded like some intentional commentary on some of the puts and takes, but I just wanted to ask the question again anyway. If I look at the gross margin this quarter relative to say the second quarter of last year when you actually had – you did create revenues – homebuilding revenues this quarter which would suggest volume maybe wasn't a negative impact for you. I was just surprised, but I thought the gross margins would have been up more given how strong the reduction in incentives were. So, can you just talk about that a little bit more and maybe what I'm missing?

Bruce E. Gross - VP and CFO: Sure, there's really two items that I'd say are different there. Number one, we did have an increased product mix coming from our central and other regions where the gross margin percentage tends to be lower than the Company's average and then additionally, our field costs tend to be higher in the first quarter and what we did is we looked at our states that have colder weather, Minnesota, New Jersey, Colorado, some of the mid-Atlantic and even Pacific Northwest and there is a number of costs that are involved when you're looking at those winter states that happen in the first quarter and we went back over the last decade or so and it's a typical trend that your first quarter falls off as you go sequentially from Q4 to Q1 and even if you looked at similar revenues you just tend to have more of those winter costs which Rick you might want to highlight a couple of those.

Rick Beckwitt - President: Yeah, you know, it's not in all the markets, but clearly Minnesota, Chicago, Maryland, Virginia, New Jersey, Boston and to a lesser degree the Carolinas depending on the market. They're just incremental direct costs. Excavation is more important, more expensive depending how deep the frost line is and you've got to over-excavate, you can't use the fill, you've got to bring sand in because you can't compact the cold dirt, you've got to mix the concrete hot with CO2 and with chloride and hot water. You've got incremental fuel expenses associated with the trenching for the utility lines, cost of heating the homes is higher. There's just a lot of costs associated with building in the winter. For some markets like Minnesota it could be $10,000 to $12,000 to $13,000 more home during that time period of the year. So, it happens every year depending on the amount of snow and how cold it is, it's worse or better.

Operator: Nishu Sood, Deutsche Bank.

Nishu Sood - Deutsche Bank: I wanted to follow-up on Adam's question about the land purchases. You mentioned you are focusing on land purchases for 2015 and beyond, I wanted to understand in terms of your land buying activity how absolute a statement that is. In other words does that imply that if you see a finish lock deal or your land guys who are obviously going to be super busy right now they see a finish lock deal come up, they don't even bother going through the brain damage of submitting a proposal for it. Just on the presumption that pricing is not going to be attractive. Maybe if there are some numbers you could give us to kind of help us understand like 70% of land or lots that you are buying for 2015 and beyond some of them maybe for near term. Just some color around that please?

Rick Beckwitt - President: This is Rick. Clearly, if we find a finish term site deal that's available that it had good margins with the developer that we are working with today because relationships we are going to gobble that thing down. What Stuart and I had been saying is that given the fact that we have in place today a pipeline of land to meet deliveries through 2014 it gives us the flexibility to focus more on the long-dated type of things that will come online in the later years. We are very focused on leveraging our overhead structure, investing cash, maximizing returns and driving profitability for our shareholders. So to that extent, if we see something that can be added for this year or next year, we are going to focus on that. It just gives us the flexibility to look a little bit longer in the land curve.

Stuart A. Miller - CEO: Yeah, just adding to that, we have always been driven by opportunity, and I think that is what is unique about our company is our ability to hunt I think is better than it's ever been. It's (Erik's) birthday, he's sitting here in the room, but (Erik), I have mentioned before has been a bridge between Rialto and Lennar, enabling us to find opportunities, when we're looking for one thing that really services another part of our company. Keeping that open mind to opportunities where and when they might exist that might be off the beaten path. To the extent that we see opportunities to get off-market deals that are not subject to the same competition, the same pricing pressures where we can make a company normalized margin, we are all over that, and those kinds of opportunities are still out there for us and we are still looking for them. It's just not our primary everyday focus. Our primary everyday focus is recognizing that as we go forward, we are going to have – we're already stable for 2013 and '14 in terms of what we expect to deliver and '15 and beyond is where our primary focus is right now.

Nishu Sood - Deutsche Bank: Second question I wanted to ask about was spec homes under construction. I was just wondering if you could give us an update on those numbers. And in particular, what I wanted to understand was, we are heading into the – we're in the spring selling season obviously with a greater degree of confidence than we've had in years and years and so, how has that affected your rate of spec build and just generally what you're seeing out there from your other competitors as well?

Stuart A. Miller - CEO: Okay, in terms of the state building. The number of homes under construction that are unsold are 3,667 this quarter, and that's 52% of what's under construction during the quarter, and if you look at total starts for the quarter we had 4,898 and that compares the 2,954 in the first quarter of last year.

Bruce E. Gross - VP and CFO: I guess the other stat we look at is number of completed homes that we have across the universe of our communities that are unsold and it's less than two. So, we think that we have a very fresh inventory today. We're starting on a very fast cliff. We want to get our inventory moving, and if you look at it today versus at the end of the year, we had about 1,500 or 1,700 more homes than where we ended up at the end of the year.

Operator: Will Randow, Citigroup.

Will Randow - Citigroup: Stuart, Rick, I want to revisit the color you provided on land spend a few times. I was hoping to get a feel for the breakdown in three ways, specifically, what is the breakdown between developed spend or development spend rather, spend in undeveloped and spend on developed lots.

Stuart A. Miller - CEO: Will, I don't have the breakdown right now, but we can get it to you later on what was finished versus developed. We'll have to get back to you on that one.

Will Randow - Citigroup: I guess, could you provide color directionally on how you go through that thought process when you are acquiring today. Is it more on development dollars?

Bruce E. Gross - VP and CFO: There are some markets where there is a pretty active development business. Those would be in some of the Texas markets where there is developers that are churnings lands today. So, in those type of markets where buy and finished home sites are on a take down. I would tell you that across the board we have been acquiring properties that require some development activity, we've got development skill set in house and we are leveraging that expertise. My guess is if I had to just pick a number out it is probably 60%, 70% development-oriented deals and the balance is either finished or semi-finished take them down on (indiscernible) and just doing onsite versus the offsite.

Will Randow - Citigroup: Then, Bruce, as a follow up I may have missed it. But did you mention where demand is tracking second quarter to-date and could you provide any color on where gross margin is for that demand?

Bruce E. Gross - VP and CFO: In order to answer your question we did not give any additional color going into the second quarter on demand and we didn't talk specifically about the gross margin trend going into the second quarter but we did reiterate that we are still comfortable that our gross margins for the year will be 23% to 24% for the full year and the sequential trend will continue where it is lower at the beginning of the year and it tends to grow each quarter through the year.

Operator: David Goldberg, UBS.

Sue - UBS: It's actually (Sue) for David. Bruce, in your comments, you mentioned that you guys have closed out of your design studios in Houston and as this recovery is coming together, are you finding that your Everything's Included is sort of ramping up with that? In that, you're having to make fewer sort off one-off or specific changes to what's in the packages? And as part of that, given that this recovery's more concentrated among the move-up buyers, have you made any fundamental changes to it in order to be more attractive to the buyer that you're seeing out there today.

Rick Beckwitt - President: This is Rick. In Houston, we do operate under the brand Village Builders which has a component of a design center but we still are a very much EI oriented builder. What we have done on the EI the platform is incorporate just to simplify the good, better, best type of specification level for our homes. You can choose the individual items out of the package. It comes with the package. So it's Everything's Included in that package. That's allowed us to move-up through different stages of what someone wants spend on the homes.

Jonathan M. Jaffe - VP and COO: This is Jon. I'd also add that our EI platform makes it easier for us to ramp up our production, because we know what we're going to build. We don't have to wait for the customers' order as well as in markets where we're able to benefit from great appreciation by wading into the construction cycle since we know what's going to go into the home before we sell the home. So our EI platform is both very efficient as well as it allows us to maximum the margin having our costs locked in when we start the home before we sell it.

Sue - UBS: Then along those lines, as demand ramps up and as we get to the end of this cycle, are you seeing any changes in your cycle times and how do you think those will compare as demand improves relative to past cycles?

Jonathan M. Jaffe - VP and COO: This is Jon again, we're clearly seeing a small increase in cycle time as there is stress on the labor market as not only we but the whole industry is increasing the production flow that's out there. It's still below where it was at the peak of the last cycle and we feel like we're much better able to control it with our more focused product strategy and fewer divisions, so we have more consistency of product, but clearly, as you naturally expect as cycle picks up its volume, we are seeing a little bit of movement in cycle times.

Operator: Ken Zener, KeyBanc Capital Markets.

Ken Zener - KeyBanc Capital Markets: I wonder if you could give us, given your joint ventures are getting more active clearly, and places like (indiscernible) they are coming online. Can you give us one description of how much income you expect with an arranged – from your JV this year versus, let's say, last year and then taking a step back, are you more inclined to be the seller of the land or should we think that the buyer of the land is actually getting a better deal, however you want to cut a balance, because I would think the selling land would be in a better position than the builder, if you could just kind of give us a sense how you balance that in terms of the price you set to the other side, the buyers?

Stuart A. Miller - CEO: First of all, we're generally not giving an overall guidance as to what the joint ventures will produce. Those earnings will come as a compliment and they will tend to be a little bit lumpy from time to time. In terms of the pricing of the property, the land right now those ventures the five point deal – the deals that fall into the five-point umbrella are really uniquely positioned in just some of the – most of the desirable markets that are extremely land constraint and any time as an owner of land and a developer you find yourself in that position. Pricing really does come down to what the sellers are selling for. So, it really gives us some pricing power and opportunity to drive earnings as the market continues to improve and we just think that 5 point is very well-positioned. I think Bruce talked earlier about some of the timing relative to some of our positions – or Jon did, but that's about as much guidance as we give.

Ken Zener - KeyBanc Capital Markets: It seems like as a seller land you are in a better position. Maybe Bruce or whoever, I think people – investors have in their mind given that deflationary environment we faced or coming out of, that in fact specs our lower margin which in last four or five years has been the case. But it seems to me given pricing moving upwards more often than not, can you talk about specs and how you see the spec spread coming in because it seems if you – especially when everything include in-house if you start building in January and fix the price you can actually be in fact making more money on specs as you move through the cycle if in fact the helm is worth more in May when you are setting the price as opposed to have locking in January. So, can you talk about the impact of spec margins impacting you and if my thesis is correct?

Rick Beckwitt - President: This is Rick and I'll start out and if Jon's got something, he can add to it. We definitely have crossed the line where a spec is not something that's discounted. We are waiting to lock the price of that as late in the process as we can. Our inventory is working for us today as opposed to several years back, where someone wanted a discount if there was something that was standing tall in a community that was unsold. So we're letting the appreciation in the market work towards our benefit and what we are doing also is on presales, we're not discounting those as well to the extent someone wants a premium home site in a community. We're loading it with what that home site premium should be, and for them to choose a home site and a community in a particular home, we're loading that up at the front-end given the fact that it probably takes us two to three months to build it. Jon do you have…?

Jonathan M. Jaffe - VP and COO: Yeah, this is Jon. I would just add to that that as Rick said earlier, we manage this weekly in each of our communities, what the pace is and pricing. We're clearly able to drive more to our bottom line margin by having our construction cost locked in with a chartered home versus a presale situation and benefit from an appreciating market by selling later in this cycle. So, we should see incrementally more margin to specifically answer your question on a spec home versus a presale.

Stuart A. Miller - CEO: All right. Thant concludes our conference call. I want to thank everybody for joining us. Look forward to reporting as we go forward, and thank you.

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