Lennar Q1 Earnings Conference Call: Full Transcript

Operator:

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 open up the question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect that this time. I'll now turn the call over to David Collins for the reading of the forward-looking statements.

David Collins: Controller:

Thank you and good morning everyone. Today's conference call may include forward-looking statements including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies, and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors includes those described in this morning's press release and our SEC filings including those under the caption ‘Risk Factors' contained in Lennar's Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

 

Operator:

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

 

Stuart Miller: Chief Executive Officer:

Hi. Very good, thank you David and thanks everyone for joining us for our first quarter 2016 conference call. This morning I am joined by Bruce Gross, our Chief Financial Officer; Dave Collins, who you just heard from; Diane Bessette, our Vice President and Treasurer; Rick Beckwitt our President; Jeff Krasnoff, CEO of Rialto are here as well, along with a few other Members of our Management Team and John Jaffe is joining by phone from California, some of this group will join for our Q&A period. I am going to give some brief remarks to begin about the business.

Bruce is going to jump in and break down our financial picture, and then always we are going up to Q&A and as we have in the past, we'd like to request that each person limit yourself to one question and one follow up.

So let me begin and let me begin by saying that our first quarter 2016 marks the beginning of another year of strong operating results for the company. Even while the month of December was defined by the first interest rate hike by the Fed since the great recession which turned into capital market turbulence and fears of recession as we entered calendar 2016, we have seen only mild negative impacts to our business and have continued to be able to perform as expected.

The Management Teams across our platform have recognized the challenges of these sometimes complicated market conditions and have adjusted strategies to meet those challenges and have often turned them into unique opportunities. Each segment of our company has positioned itself for continued performance in 2016 and beyond and we believe that we remain very well positioned to execute our operating plans and strategies in each of those segments.

In light of the Fed's move in interest rates early in this quarter and the turbulent market conditions that followed, let me speak briefly about our outlook for the housing market in general.

There have been some questions raised about the relationship between housing and interest rates, about the possibility of recession, about consumer confidence in a globally terror-stricken world, and about the implications of a god-awful election season in the United States. In times like these, it's probably best to put the blinders on and focus on the road ahead because it seems almost impossible to avoid the distractions of the environment around.

To answer the questions directly, we feel certain that modest moves in interest rates tied to low unemployment and some wage growth, will be a net positive for housing. We do not see the tell-tale signs of recession. Global terror seems to highlight that the US is the safest place to be and to invest in the world and keeps US citizens focused right here at home. And as for the election, well they say that in America always gets to the right answer right after we've tried all the wrong ones, we will see.

As we've noted consistently over the past few years, the overall housing market has been generally defined by a rather large production deficit and this has resulted in a growing pent-up demand. Stronger general economic conditions including lower unemployment, modest wage growth, and general consumer confidence, are still driving consumers to form new households and to rent and to purchase apartments and homes. We expect the demand will continue to build and come to the market over the next years and will drive increased production as the deficit in housing stock ultimately needs to be replenished.

Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand while the mortgage market will continue to constrain purchaser's access to mortgages. These conditions will continue to result in slow and steady positive homebuilding market conditions and will enable slow steady though sometimes erratic growth across our platforms. This has been our consistent guiding theme for the past years and we've mapped our strategy around this view. Even with the somewhat erratic conditions that define the first quarter, we remained resolute in our view and have adhered to our strategies.

Against this backdrop, let me briefly discuss each of our operating segments. Our for sale homebuilding operations have performed extremely well in the first quarter. Our results reflect slow but steady growth in the over homebuilding market as our new orders increase 10% year-over-year. Even while continued labor shortages and land and construction cost increases have tested our ability to match sales and delivery pace.

Our management team has carefully managed sales prices, maximize margins and focused on reducing SG&A to offset and maintain strong net operating margins.

We have noted in the past quarter conference call that given the now mature recovery we have been and continue to carefully manage our growth in order grow our bottom line and to drive strong cash flow. We've moderated our growth targets to achieve the growth rate in the 8% to 10% range as we've redirected our management efforts towards creating operating efficiencies and leveraging SG&A.

We have also talk consistently about our soft pivot in our land strategy away from the land heavy acquisition strategy in the early stages of the recovery and we are now targeting land acquisitions with a shorter two to three year average life. Generally we've moderated our land spend as a percentage of revenue and this will be reflected in future quarters. This has been and we'll continue to be the strategy driving our homebuilding platform as we managed land acquisitions to taper the growth rate in both community account and home sales.

With less pressure on growth rate, we can intensify management's focus on driving bottom line growth, cash flow and maximizing pricing power while using innovative strategies to drive SG&A down. Under our company Montreal of what we can manage we can change, we are focused on changing and improving quite a lot in operations. As one example of this focus, we have been working on reducing customer acquisition costs. We have been moving our spend away from conventional marketing and advertising to a digital platform.

We willing the digital advertising can be much more targeted and much less expensive. We believe that once fully implemented, we will see up to a 50 basis points reduction in SG&A while driving an increase in qualify traffic.

In the current quarter, we are already starting to see results from these initiatives. With demand growing steadily, land limited labor tight and constrained mortgage availability, we feel that we're in an excellent environment to run our business at a steady and consistent growth rate with strong bottom line profitability and strong cash flow by measuring and changing our way to greater efficiency and performance in our core four sales homebuilding segments.

Next our financial services group has had an outstanding first quarter as well. While the financial services operations have grown one side of our core homebuilding business. We've also benefited historically from a strong those sometimes erratic re-fight market as well as from expansion of retail opportunities in both our mortgage and entitled platforms. These side core opportunities will continue to expand in 2016.

Our strategy for the future for Lennar financial services continues to be to construct and maintain a fully self sufficient financial services platform that benefits from Lennar homebuilding business that drives profitability from retail operations as well. This growth overseas this operation and we'll discuss it further in his comments.

The first quarter has continued to display our outstanding positioning for LMC Lennar Multi-Family communities as well. We closed one property in the quarter and continue to develop our extensive over $6.5 billion pipeline of quality properties across the country. Our multifamily program continues to complements our for sale operation . Since household formation has recovered at a slower rate than expected, and new households have been more inclined to rent than purchase, we address these markets with rental communities that are desired or can be afforded.

First time home purchasers have come back to the housing market more slowly than they have historically and more slowly than expected. While approximately 30% of our for sale homebuilding business continues to be geared to first time home purchasers, our broader new household strategy has remained primarily at the rental market. We have continued to expand our national footprint and grow from a merchant-build program to a build to own program. In the first quarter, we got equity commitments for additional $300 million for our Lennar multifamily venture to bring our raise to just over $1.4 billion.

Our apartment strategy is proving to be very well timed as rental rates continue to decline and vacancies are at historic lows. The rental product is going to continue to be needed and we are well positioned to continue to fill this need and grow our multifamily platform.

Also in the first quarter, our Rialto segment saw both challenges and opportunity. While the collapse of the capital market in the beginning of the calendar year negatively impacted current quarter earnings for Rialto, the volatility did create unique opportunities for investment for the future. During the quarter, volatility within the capital markets pressured the pricing on a variety of fixed income products including new issued commercial mortgage backed securities. Accordingly, Rialto Mortgage Finance, RMS, saw its net spread dwindle to unusually low levels while volume dropped as well.

Although profit expectations were missed, excellent management kept us in the black in a stressed market and Rialto was able to make strategic purchases CMBS pieces at advantaged prices for future profitability.

Overall, our Rialto platform enables us to invest across real estate and financial product types as an opportunistic play on the long duration of this economic recovery. The dysfunction in the financial markets along with new risk retention rules will ultimately work to the benefit of Rialto's core confidence in CMBS and financial products and will continue to grow as a best in class manager.

Finally, let me mention briefly our Five Point properties strategic investment and its management team which positions us to continue to benefit from some of the best located land in California as that market continues to improve.

As noted in our last conference call, Five Point has confidentially filed a registration statement for an initial public offering. Of course the difficult market conditions of the first quarter has kept us on the sidelines but we'll keep you posted as further information becomes available.

In conclusion, let me say that we are very pleased to present our first quarter results this morning. We feel confident that our view of the market and the strategies that define our business segments have worked well to position us for continued performance and for future growth. As I've said in the past many times, we are very confident that we at Lennar have the right people, the right programs, and the right timing to continue to perform this year and in to the future.

With that let me turn you over to Bruce.

 

Bruce Gross: Vice President & Chief Financial Officer:

Thanks Stuart and good morning. Our net earnings for the first quarter were $144 million which is a 25% increase over the prior year. Revenues from home sales increased 25% in the first quarter driven by a 12% increase in wholly-owned deliveries and a 12% increase in average selling price to $365,000.

Our gross margin on home sales in the first quarter was 22.7% which was in line with our expectations. The prior year's gross margin percentage was 23.1%. The decline year-over-year was due primarily to increased land costs. Sales incentives as a percent of home sales revenue continued to decline as this quarter was 5.6% versus 6.3% in the prior year.

Gross margin percentages were once again highest in the East and West regions. Direct construction costs for a single-family detached homes were up 5% year-over-year to approximately $53 per square foot and that was driven primarily by labor increases.

Our selling general and administrative expenses as a percent of home sales revenue improved 60 basis point to 10.8% in the first quarter. We were successful on improving SG&A operating leverage by growing volume organically in our existing homebuilding division and additionally we continue to see the benefits of our focused on digital marketing. This resulted in the lowest first quarter SG&A percentage in our history.

Operating margins on home sales also improved and this was improved by 20 basis points to 11.9% in the first quarter. This quarter we opened 62 new communities to end the quarter with 684 net active communities. New home orders increased 10% and new order dollar volume increased 15% for the quarter.

Our sales days was slightly higher compared to the prior year at 2.9 sales per community per month versus 2.8 in the prior year. The cancellation rate decreased to 15% in the first quarter from 16% in the prior year. In the first quarter, we purchased 10,300 home sites totaling $537 million versus $421 million in the prior year's quarter. We continue to focus on our soft pivot land strategy.

However our land spend in 2016 is weighted more heavily to the first half of the year. Our home sites owned and controlled now total 168,000 home sites of which 132,000 are owned and 36,000 are controlled.

We continue to carefully manage inventory as are completed unsold inventory ended the quarter with approximately 1200 homes which is in our normal range of 1 to 2 per community.

Our financial services business segment had strong results with operating earnings of $14.9 million and that compared to $15.5 million in the prior year. Mortgage free tax income decreased to $13 million from $14 million in the prior year and mortgage originations increased 2% to $1.7 billion from $1.6 billion in the prior year. Refinance volume decreased 47% year-over-year which created a more competitive market for the remaining purchase business. We did however increase our purchase origination volume by 17% as a result of increased Lennar home deliveries and an extended retail presence.

The capture rate of Lennar home buyers improved to 82% this quarter from 79% in the prior year.

Our title company's profit decreased slightly to $2 million in the quarter from $2.1 million in the prior year primarily due to lower volume versus last year. Our Rialto segment produced operating earnings of $1.9 million compared to $4.6 million in the prior year both amounts our net of non-controlling interest. The investment management business contributed $23.2 million of earnings which includes $1.5 million of equity and earnings from the real-estate trends and $21.7 million of management fees and other.

At quarter end, the undistributed hypothetical carried interest for the Rialto real-estate earns 1 and 2 combined now totaled $136 million. Rialto mortgage finance operations contributed $380 million of commercial loans into two securitizations with an average margin of 1.6% totaled in their earnings of $3.9 million for the quarter and that was before their G&A expenses.

Our direct investments had earnings of $1.8 million and Rialto G&A and other expenses were $20 million for the quarter and interest expense was about $7 million. Rialto ended the quarter with the strong liquidity position with $112 million of cash. The multifamily segment delivered a $12.2 million operating profit in the first quarter primarily driven by the segments 20.4 million in share of again from the sales and the operating property as well as management fee income partially offset by G&A expenses.

The apartment community sales this quarter was amounting via California and we resolve to -- providing corporate housing for companies including Google and Facebook. This will be the most profitable apartment communities throughout this year.

We ended the quarter with 6 completed an operating properties, 28 under construction five of which are in lease up totaling over 8000 apartments with the total development cost of approximately $2.1 billion. Our tax rate for the quarter was approximately 28%. The rate was benefited by a favorable settlement with the IRS as well as the extension of the new home energy efficiency credit. The remaining quarters of the year should have a tax rate of approximately 34%.

I was -- division has grown successfully and was operating from Palm beach to Miami.

As a result in the first quarter, we split the division into two operating divisions to maximize operational efficiencies. The South East Florida segment no longer needs the reportable segment criteria and as now part of the homebuilding East segment.

Turning to the balance sheet, liquidity remains strong with approximately $511 million of homebuilding cash and $500 million of borrowings under our $1.6 billion of revolving credit facility. Our leverage improved by 240 basis points year-over-year as our homebuilding net debt to total capital was reduced to 45.3%. We grew stockholders equity by 18% to $5.8 billion and our book value for share increase to $27.11 per share.

During the quarter we converted $163 million of our 2.75% convertible notes for $163 million of cash and 3.6 million of shares with an average price of approximately $44. At quarter end, the remaining balance to be converted was $71 million. In March, we issued $500 million of 5-year senior notes at 4.75% which will be used for working capital and to retire our $250 million 6.5% senior notes. This will continue to reduce our borrowing rate while extending our maturities.

Finally I would like to update our 2016 goals. 2016 homebuilding goals are right on track with the guidance we gave in December with just a couple of quarterly refinements. Deliveries are still on track to be between 26,500 and 27,000 homes. We expect the backlog conversation ratio in a range of 80% to 85% for Q2, 75% to 80% for Q3, and 90% to 95% for Q4.

Operating margins are still on track to be flat to down 50 basis points for the entire year.

The full year gross margin is still expected to be in the range of 23% to 24%. The second and third quarter are expected to be at the low end of this range and the fourth quarter is expected to be at the high end of the range. We are still on track to achieve the lowest SG&A percentage in our company's history in 2016 with the greatest leverage coming in our higher delivery quarters in the second half of the year.

Our other company goals are all on track except given the turmoil in the capital markets we now expect Rialto to earn between $15 million and $20 million for 2016 and that's weighted more heavily towards the fourth quarter.

We are off to a strong start in 2016 and with that let me turn it back to the operator and open it up for questions.

 

Question & Answer

 

 

Operator:

Thank you. Our first question is from the line of Bob Wetenhall from RBC Capital Markets. Your line is now open.

 

Bob Wetenhall: RBC Capital Markets:

Good morning and congratulations on a really strong quarter. Stuart just taking from your remarks, I was hoping you could give little bit more regional detail in terms that how the spring selling season has started to unfold. You guys saw tremendous delivery growth in the central west regions and I was also curious what you are seeing in Houston and how it is compared to prior years.

 

Stuart Miller:

Okay good Bob. I am going to turn it over to Rick and to John to give greater detail on the region.

 

Rick Beckwitt: President:

Yes from an overall standpoint we saw good sequential improvement throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we have got. We saw that with regard to both the home sales activity as well as pricing, so we are optimistic that we are entering the sale season, although we are at the very beginning stages because our quarter ended in February. Geographically, we saw the numbers are pretty similar probably our toughest market was Houston. Sales were down 3% but I think we outperformed in the market there because on the new home side as we calculated, the market was down about 10% during the comparable period.

We saw good pricing power because we are as Stuart said and Bruce mentioned earlier balancing pace and there. Sales prices were up to 5% . A margin took it a little bit on the chain because we're keeping our inventory active and we are optimistic that we are going to phase starts to deal with the market on the higher price points that the lower price points still performing extremely well, but once you get about 350,000 - 400,000 it's down quite a bit and we anticipate the numbers that you see in the magnitude as I said last quarter around 5% to 6% down for the year as where we think we were going to hand-on. But we have tapered back our starts given some of the weakness on the higher end.

Jon talked about the any western markets.

 

Jon Jaffe:

Sure about as you know California is too big to refer to as one market. So as you look at the segments in Southern California we're seeing good strength in on Orange County and San Diego in a way that's only supported by our activity, but when we look at our 5 point master plan communities at the great park you've seen same seasonality we Rick described, but selling at almost four sales per month for community for the builders at the Great Park at the LensAR we are seeing over three sales per month per community. So it shows very good activity in those markets.

Northern California bay area remains very strong really defined by a shortage of both housing and particularly in Silicon Valley by shortage of a skilled labor in the tech and biotech world so that continues to feel demand there and then in Sacramento we've seen a nice recovery with that become a strong market. Lennar Park Central Valley I describe more stable good market healthy and as robust as Northern and Southern California and then across the rest of the West Colorado on the -- Arizona are very stable markets and then specific we see continue good strength up there again defined by very strong job demand and very short supply of housing

 

LEN:

And then if you look at the other big markets we have Florida was clearly we're seeing good strength there and the other markets in Texas we are upgrade big deal. So in our largest areas of California and Florida and Texas we are doing extremely well.

 

Bob Wetenhall:

Thant's a great summary. Thank you. Wanted to ask and maybe this is for Bruce to address your gross margin guidance 23 to 24 you're deciding some pressure there from land and labor cost at the same time you are making very big side in managing SG&A Stuart said you're managing what's you can measure and not really asking about 2016, but as a company when you thinking about net margin and profitability going forward in ‘17 and ‘18 are you thinking that like 20% plus or 22% gross margin is sustainable given current pricing trends and land cost and how much more opportunity do you have to leverage SG&A. Thanks very much good luck.

 

Rick Beckwitt:

So Bob this is Rick. I will take margin side of that for the next couple of years. Clearly we are continuing to benefit from some of the land we purchased in the last cycle going back to 2009 and some of the land we are continuing to close I was put under contract a couple years back. As we move later in the cycle it's going to be more difficult to keep the margins up where they're now but under riding deals today North of 20% across the board and we are being relatively conservative with regards to pricing so as we look at it the company has historically done produced a margin that's north of 20% and it's the balance of fine finished home sites on a retail basis and doing some pivot and doing some land development where you've got some wholesale purchasing and one thing to consider is we are focused on two things, we've got a race car that's on the race track that is moving through year after year we are buying land and we are selling homes and at the same time off the track we are refining the engine and we are tuning it up.

What we can measure we can change is a major focus off the track.

We are looking at refining various component parts of our business. I've given one example. We have others in our pipeline and we think that the opportunity to refine SG&A is more significant than what we outlined but we don't want to set out pipe dreams that have not been proven yet. So we are trying to give examples as we undertake them but we think that there could be a lot of refinement in SG&A as we go forward.

We are pretty optimistic about where our net operating margins are going to hold steady.

 

Operator:

Stephen Kim from Barclays.

 

Stephen Kim: Barclays Capital:

Okay sorry about that guys can you hear me?

 

Stuart Miller:

Yes we hear you.

 

Stephen Kim: Barclays Capital:

Okay sorry about that yes so a good quarter I wanted to ask a little bit about your land spend. I think you give a figure of $537 million I think that was that just acquisition and if so can we get sort of break out of acquisition and development in the quarter?

 

Bruce Gross:

Sure Steve. The $537 million was just the acquisition the land development spend was $271 million and that's down about $20 million from last year's first quarter.

 

Stephen Kim:

Got it. That rate of land spend do you feel like there was anything in that number which was a little elevated relative to your expectation going forward over the remainder of the year?

 

Rick Beckwitt:

Yes Steve, it's Rick. As I said earlier on the markets, we closed on probably half of the land that we acquired in the quarter was in Florida. Deals that we have been working on for really past couple of years that just came to fruition now, really excited about the positioning that we acquired and I think you will see as move to the year land spends sort of taper down.

 

Stephen Kim:

Okay great. That's very helpful. Next question was just about next-gen can you give sense of roughly how much of your sales are utilizing that sort of multi-generational or multi-generation type floor plan and just in general how have you seen that portion of your product array performing?

 

David Collins:

Its David. For us we are seeing over 5% of our net sales is coming from next gen platform. We continue to roll it out across more and more of our markets. The good example of that is recently a bigger push in Texas where we are seeing very good receptance of the product as we bring it to market there, continues to sell very strong and some of our markets were affordability is more of a pressure like Arizona, Inland Empire, Central Valley we see tremendous demand in those markets.

Florida as an example see very strong demand. So we're bullish on that product somewhere to Stuart's comments we continue to refine and learn as we go and make sure that we are tweaking that product to meet what we are hearing back from consumer demand side.

 

Operator:

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

 

Ivy Zelman: Zelman & Associates:

Good morning and congratulations guys in this quarter. Stuart, you talk a lot about not a lot but you spoke about digital marketing and appreciation of the opportunity to leverage SG&A. I guess if you can really expand on the marketing in absolute dollars and what you think what will drive this internally is there collaboration people understand and may be may be some example -- digital marketing at the group kind of get it but may be expand on that please.

 

Stuart Miller:

So we've focused on the broader concept of customer acquisition cost and that cost is about 10% of our SG&A. There is a larger opportunity to reduce that cost. The first part of that is the migration from conventional to digital marketing. If you think about it, conventional marketing is going to a newspaper ad and basically shot-gunning across the wide population a message that might or might not resonate with that population.

Using an example we think first time home buyers as most likely to decide to purchase a home when they are getting married or when they are having children. In a digital platform, we can target our message to people who are looking for wedding dresses or purchasing cribs. That's a more targeted focused audience and it costs a lot less to target that group. Digital marketing enables a greater penetration to the people that we want to hear our message less scattered delivery of our message at a much lower cost.

That's been driving our marketing and advertising costs down and we are at the front end of that. There are other benefits that will flow from that as we become more proficient at that form of marketing and I think that our industry and our company are at the front end of really redefining right that cost structure can look like.

 

Ivy Zelman:

Well that's really helpful I guess the internal buy-in and appreciating all the divisions are they doing it by themselves or they coordinated can you give people a better understanding how the collaboration works?

 

Stuart Miller:

So changing a group of divisions that operate fairly independently across country is a little bit complicated. We have the way that we have kind focused on rolling out our thinking is first we proved concept in one division we had one division teach a second division to see if the metrics still hold true and then we basically have used a metrics calculation and almost gained within the company to create a competition to roll this out across the company and we've seen this program really take hold across our company and start to create a great deal of enthusiasm around not only a focus on migrating some conventional to digital marketing , but really on looking at to broader concepts around SG&A as well. So I think we've kind of led but I would called transmission lines throughout the company to really faster change and rolled it out across a broad spectrum.

 

Ivy Zelman:

Sounds great. Well good luck if I can sneak in another one. You guys had talked a lot about the opportunity to generate consistent cash flow and improving returns over the cycle I am just looking at cash flow that you actually have to -- versus generating cash could you talked about what we should be expecting with respect of cash flow and what you think there is the opportunities on cash flow going forward.

 

LEN:

Sure. We start talking about our soft pivotal land couple of years ago and we started a process I think the homebuilding business more like a cruise ship than a speed boat. There is a lot of momentum in the direction that we're headed. It's hard to turn in short distances.

The land acquisition program is that kind of a momentum program. We start negotiating lands positions years and advance of actually closing on Rick is already articulated that our land spend this quarter enlarge part derived from negotiations and contracts that we're entered into 2 and 3 years ago. So as we look out towards future quarters we're going to see the work the redirection that was put in place 2 years earlier. So over the next quarters and over the next couple of years we'll see our land spend sub-side as a percentage of total revenues and we'll see the impact of that soft pivot.

As I articulated we focused on land acquisition is generally targeted towards two and three year duration land purchases that doesn't mean where we find the unique opportunities that we won't buy something larger we most certainly will because we are opportunistic in that way. But it's going to be priced in the certain way. Generally speaking you will start to see that soft taper be incorporated that numbers that I'll reported that's not case for this quarter.

 

Ivy Zelman:

Got it. Thank you and good luck.

 

LEN:

Thanks.

 

Operator:

Thank you. Our next question is from Steven East with Evercore ISI. Your line is now open.

 

Analyst:

Thank you this is actually Paul -- on for Steven. I was wondering if you might able to give us little bit color on your entry level strategy I think you said it was 30% of your business this quarter. How does that compare to year ago and if it's up has it had any impact on margins and then what regions would you see the more the shift entry level and then on Huston side is there any pressure from the multifamily operators that might forget way through the entry level buyer in that market.

 

LEN:

So first on the trend line for first time buyer. You're right on 30% it's up from about 25% of our mix form the prior year. I think as you start to look at us going forward you are going to see in the markets that will includes Texas, Carolina, Atlanta, Florida that those percentages are going to go off as we move through the balance of this year into 2017. Consistent with the land strategy that we articulated going back to couple of years.

It's on a mix basis I think you'll see probably 10% to 20% increase in the amount of first time penetration that will do in those specific markets and as we've said before, we're really not chasing tertiary business on the first time side. These are more in-fill oriented first time positions and but we are not going out to what we would normally call the C-type markets. That answer your question?

 

Analyst:

Yes I guess and then we have heard some rumors that apartment operators were give a couple of months' rent free in Houston. Has that started to work its way entry level demand I know you say the under I think it was 250 price point has remained rather strong?

 

Stuart Miller:

we haven't seen any impact from the multi-family side on the for sale side but Mark, there's just not a lot of inventory to be had and that benefits us as well as other builders in the market.

 

Analyst:

Okay and then one final question your conversion was a little bit better than we expected. Is that a function of just better weather this quarter or are we actually start to see to improvement in labor and if so do you think that hold now going in to the second half of this year or are we going to still have some kind of hangover like we saw in the second half of last year?

 

Stuart Miller:

John you might went to comment on the picture.

 

Jon Jaffe: Vice President & Chief Operating Officer:

Yes we are not really seeing a recovery and a labor picture. I think that when we look at internally from our perspective, our everything is included platform combined with our scale and market share in the markets that we're in will allow us to manage that very effectively. Everything's included in particular it's a very simple program in this environment the benefits are trades and it benefits us particularly as we manage our job side readiness and being prepared for the environment so that we can manage on daily basis of having a simple program so we have seen a very steady environment for us in terms of cycle time very little increase in cycle time year-over-year but that doesn't mean that the labor market is improving any.

 

Operator:

John Lebover (ph) with Bank of America. Your line is now open.

 

Analyst:

Hi guys. Thanks very much for taking my call as well. First question is you discussed the trend of your some first time buyers shifting towards rental. I wonder if you're seeing any increased demands from other demographics maybe move down segment.

 

Stuart Miller:

Rick there is no question there's been movement in a number of segments. Clearly relative to the empty nesters rethinking their living conditions there has been some movement in the direction of rental versus home ownership there as well. So we've seen that the rental option the reduction in home ownership rate is something that is broader than just affordability. It reflects also appetites and desires that have evolved since the recession and we think that some of those trends will continue.

 

Analyst:

Okay that's helpful. In terms of the digital marketing strategy, if I heard you guys I think you guys talked about a 50 basis point potential benefit to SG&A overtime maybe little more but for the 50 basis points specifically did you guys give a timeframe of when you think that's achievable.

 

Stuart Miller:

I don't want to get out over my skies and start wrapping time frames around the roll out of a program Mike this and its adoption is something that gets in incorporated as culture allows changed to happen. So we see this as an opportunity, but the 50 basis points is a starting point for us. We think there is a lot more fuel in that tank around customer acquisition cost which is a larger broader number and just marketing and advertising and so I think that what I would say at this point this stay tuned will give further reports on this as it develops.

There are other areas of SG&A that we are also targeting, but we think technology, measurement and focus can bring change in reduction to when I would say again we don't want to over excuse that I want to make promises, but we can't live up to. So over the next quarters we expect to be reporting more on that.

 

Analyst:

Okay, thanks a lot guys.

 

Operator:

Thank you. Our next question is from Michael Rehaut with JP Morgan Chase. Your line is now open.

 

Michael Rehaut: JP Morgan Chase:

Thanks Good morning everyone. First question I had was just for a in terms of Stuart your opening remarks right at the top you kind of mentioned the fed rate high consumer the volatility in the markets during the first couple of months of the year and you said since kind of almost from trying to --here since the fed rate hike you've seen only a mild negative impact struck me is a little surprising giving that the order trends we're kind of right in line with our estimates and I'd expect your expectations were you what we're your referring to exactly when you kind of said a mild negative impact in a my only though would be perhaps the reduced profitability of Rialto, but I was wondering if there is anything else because obviously its sales pace was up little bit and I believe Jon also talked about good improvement in order trends throughout the quarter and across all regions so I was hoping to get a little more granular there.

 

LEN:

Well Mike, I think that the comment was what I was trying to get across is look you saw a shock to the financial system and clearly within the Lennar environment the biggest is shock is rippled through on our amount and the capital markets approach through Rialto, but relative to our company it was relatively minor and skilled. Really homebuilding if you look at it step back from it road through some pretty -- with timing in the first quarter pretty much on scale there might have been some pull back in some consumer confidence and we all that kind of on the age of our seats waiting to see how the springs selling season might present itself and I think there was lot of question as questions about recession in the US economy started to kind of being steamed and among the economist.

So I think that what I am trying to express is that it was shock to the system. There were some impacts to certain parts of our business though they were minor the homebuilding side really grow through in intact and there was little bit of anxiety in terms of anticipation about what might evolve and I still think that people are saying turn because they don't think that there is complete view that we are out of the world. So we are going to have to wait and see what Seth says and see how the markets present themselves. I hope I communicated that all right.

 

Michael Rehaut:

That's helpful and that's kind of what I thought but it's good to hear you verbalize that for clarity's sake particularly on the home building side. Secondly just kind of looking at big picture and you kind of mentioned the soft pivot and how you are adjusting as the cycle matures, I was hoping if you could just kind of revisit capital deployment over the next 2 to 3 years in a broader scale and specifically now that as some of your ancillary businesses I believe are still capital neutral in terms of their requirement if not giving back some capital what that might mean in terms of the balance sheet from a leverage stand point and also any thoughts around share repurchase?

 

Stuart Miller:

Yes so our balance sheet was getting stronger every quarter. We have profitability reflecting on equity adding to equity we have in December a convert that is converting that will be an addition to equity I am sorry to November. -- our balance sheet continues to get stronger just like the operation of our business in terms of cash flow as noticed and answer to an earlier question turning the tide on land acquisition and actually turning to that real cash flow program with a lower gross rate and a soft -- strategy will take some quarter to ahead of us but with our ancillary businesses at least neutral some of them cash flow in positive apartments still being some of the cash flow negative. We really think as we get into 2017, we have a fortified balance sheet we continue to recast our business with our soft pivot.

I think that we are going to see that cash start to come in. It's most likely to start to reduce our debt dependence and that's where our focus will be initially and then ultimately with excess cash from operations, we will start to buy back stock but that's not going to happen in 2016.

 

Michael Rehaut:

That's helpful and then one last quick if I can squeeze in technically just a clarification in terms of the 2016 guidance other than the Rialto adjustment in terms of the expected profits there the only other thing I was able to gather was that the tax rate is going to come down slightly relative to the first quarter benefit and that impact on the full year 34 for the next three quarters but other than Rialto and the tax rate it did appear that all the other elements of guidance were reiterated. Is that correct?

 

Bruce Gross:

That's correct Mike. We just had some minor shifts between the quarters as I get that detail but otherwise everything else should be the for the year.

 

Michael Rehaut:

Right great perfect. Thanks so much.

 

Bruce Gross:

You're welcome.

 

Operator:

Our next question is from Mike Dahl with Credit Suisse. Your line is now open.

 

Mike Dahl: Credit Suisse:

Hi thanks for taking my questions. I wanted to start out with the SG&A and maybe take a step back some of the divisional changes because it clearly seems that aside from just the efforts to lower customer acquisition cost and transform to digital you found plenty of other areas to lever SG&A and that if anything is tracking I -- that the high end or even better than the guide for the full year and so I am wondering if there are anything any other things like disputing of divisions that we should be thinking about for the next couple of quarters that at least from a near terms standpoint are creating some, some additional cost that won't really be leverage until may be later in the year, next year or just how to think about kind of the cadence of the SG&A improvement.

 

Bruce Gross:

Mike this is Bruce. As you look at the cadence of the SG&A improvement it's really coming from two main areas it's the focus on digital marketing and it's the operating leverage because our additional deliveries are coming out of the existing divisions other than the one divisions, that we mentioned. So as you think about that cadence you will have more homebuilding revenue as you get later in the year. So there will be more leverage later in the year.

So that's way the think about the cadence. The second quarter of this year is going to have a figure improvement in SG&A and that's driven by the increase volume.

 

Mike Dahl:

All right. I guess on a year on year basis though I guess what I was getting at as it seems like seems like the current guidance somewhere is could even be conservative and I am just wondering if just given the level of improvement you're already seeing and then you will be getting into better leverage quarters and some of these initiatives will be gaining tractions so I guess just wondering how to think about the level of conservatism or if there are other one off cost we should be thinking about of why we shouldn't see the same magnitude of improvement as we get through the year.

 

Bruce Gross:

Well look we are investing in technology so there is obviously some other cost involved with our focus. But the most part you're looking at similar leverage that you saw in the first quarter and the second half of the year as you looking year-over-year and that's going to be driven by the volume increases. So there isn't a lot of additional other costs to you really think about.

 

Mike Dahl:

Got it. Okay and then just shifting gears to RMS I guess the Rialto as a whole was product of the overall and our strategy of being very opportunistic at the right points in the cycle and as you see things changing and so just curious how your how you made some comments about your looking at it as you're now looking at this and some of the challenges and CMBS is being an opportunity and so it does feel like it's potentially early on and some of disruption in that market. So just wondering if you can give us some sense of just how you're managing or mitigating some of the near term risks and balancing that versus the potentially looking at some opportunity to expand part of the business.

 

LEN:

Okay. So we remember the we have been in the CMBS markets for a couple of decades now. We will probably one of the most we'll probably be most seasoned participant in those markets. We've recognized the -- flow of demand and supply in CMBS markets and we've recognized we see the when the markets drives up sometime there is more demand then there is supply and we generally sit on the side lines as we are right now.

At those times the demand side seems tends to go away and as the supply side starts to come back represents unique opportunities for the participants for the -- to participate. So the way we think about that market is in recognizing that ebb and flow uniquely relative to its market, recognizing that this function generally works to our favor given our experience I think that the events of the past quarter will tend to drive participants out of that market. Mike sidelined the supply side of the market for a period of time.

It will ultimately come back and we'll be well positioned to be a leader in the market as it re-emerges. So that's kind of the way that we think about it but our position derives directly from our long term experience. Jeff do you want to answer that.

 

Jeff Krasnoff: CEO of Rialto:

No I would I would just say anecdotally on the buy side in terms of our investment vehicles we've actually -- for months it's probably been some of the busiest since we've been in business just on the buy side just because it's been such a diminishing demand at the end of the day.

 

Stuart Miller:

and the capital markets ended up taking a lot of participants out of the market so there weren't any buyers there.

 

Jeff Krasnoff: CEO of Rialto:

Exactly and from the origination perspective which is the other side of business and again it gives you sort of a leg up on really understanding what's going on there. There you saw the widening out of spreads so and will see how that market behaves going forward as the supply and demand ebbs and flows.

 

David Collins:

Okay let's have one more question.

 

Operator:

Our last question is from the line of Nishu Sood from Deutsche Bank. Your line is now open.

 

Nishu Sood: Deutsche Bank:

Thank you. Wanted to follow up on some of Rick's comments. Rick you mentioned the first time buyer percentage which at 30% is been roughly that we could expect to see some improvement. I am sorry some gains on that 10% to 20% I think you said and that a lot of your investments were in closer in areas so I just want to dig into that a little bit.

You would think that the opportunity for closer and first time product would necessarily be limited just because if you have a highly desirable closer in lot you maximize your return by putting a more expensive product on it. So just wanted to get a sense of how much growth potential do you see and making of closure investments what would drive what would you folks need to see in the market to begin to move to more traditional further out call it areas that tend to support first time buyers demand so just wanted to get more details on your thoughts please.

 

Rick Beckwitt:

Okay so let me just reiterate. In the market of Texas, Carolina, Atlanta, Florida, those areas we have been targeting for last year or so a couple of years to increase our first time presence by about 10% to 20% most of that focus going back a couple of years ago in securing land positions that were more closer to where people want to live in the tertiary areas and you can do that generally in the markets that we talked about because there is still good employment there is good trend as a result of that those positions are going to be higher are type of opportunities and well gross margins opportunities because you just on the juice in those deal it's really get higher margin in more retail positions. That's not the suggested that we aren't moving out into a little bit further -- organic crisis, but you won't see a going now outside of what we've call core markets. Hopefully that answers your question.

 

LEN:

Just had some clarity at what out West, we don't see the same opportunity that Rick described in Texas, Carolinas and Florida so it more traditional market the central valley and Venice with the more like our company average 30% to 35% affordable but in near other markets in the western -- earlier they release in that opportunity unless you go way out in to a share market and we are just a boarding in that not chasing the business.

 

Nishu Sood:

Got it that's helpful and another question just in terms of the recovery and where we at one of the in the closer areas the move up market which is said most of the recovery so far there is some concerns at with pricing gains now and there in there fourth in agree into the 5 year some pretty strong -- that we had in 12 and 13 in terms of home price appreciation that afford ability is potentially constrain on housing recovery continue -- volume perspective there still lot of room to grow but what are your broader thoughts in that in your specially if you give some context from what your what you're seeing in the ground in terms of the afford ability issue.?

 

LEN:

Yes I think -- have the good way to ramp up into bringing to an end bring our -- end and in that regard I think that we continue to see fairly strong demand I think afford ability is a illuming question as prices have tended to go up. They tend to go up because the supply we read about it we see it all the time both on existing homes and new homes as fairly tight and the demand as emerging it hasn't emerge, but it still emerging and I think that there is sizable tend up demand. Your question about move up purchasers in the market we're generally still seeing relative strength across the board from first time buyer all the way through to move up there are certainly markets that are little bit different.

The Houston market as we've noted has been softer at the higher end the California markets have remain robust. So it's not a national picture anymore, we have to look at local markets more directly, and but we are still seeing strength. I think the thing to be remember for everyone in the back of their mind is that you have to measure affordability against the alternatives, and the alternative is what is the rental market look like rental options, and was the rental rates moving up more and more people are thinking to kind of stabilized their outflow of capital of personal capital into their housing cost by purchasing as appose to renting because on an annual basis the rental rates are going up.

So that picture is one that continues to define the housing market today. Production deficit supply is tight demand is growing rental rates are going up and this order book as the affordability picture as a bit of question but I think in the mix it probably gives way to a strong consistent slowly growing housing market and with that I think we're going to bring it to a close and say thank you all for joining us and we look forward to continue into report on progress.

 

Operator:

Thank you speakers and that concludes today's conference. Thank you all for joining. You may now disconnect.