Highlights From Lennar's (LEN) Q2 Conference Call: Uptick in Q2 Sales Volume; Homebuilding Has To Rebound In Order To Stimulate Rest of Economy

June 25, 2009 3:40 PM EDT

Lennar Corporation (NYSE: LEN) reports Q2 loss of $0.76, or a loss of $0.11 adjusted, versus the analyst estimate of ($0.64). Revenue for the quarter was $891.9 million, versus the consensus of $597.49 million. Shares are up over 16% today and the Residential Construction sector is leading the charge up 5.5%.

Highlights From LEN's Q2 Conference Call:

• (CEO) Since quarter end, I've continued my quarterly operation reviews by going out to each of our operating divisions to monitor progress and I'm pleased to say that many of our divisions are already there, and the ones that are not are well on their way. I can clearly see light at the end of this tunnel.
  
• In Q2, we saw discernible uptick in our sales volume which has convinced me that while there continue to be significant headwinds that limits stabilization and recovery both for the economy in general and for housing as well.
  
• The abject pessimism that has defined the overall market sentiment for the past year or more seems to have given way to a sense that opportunities are available for those who can qualify.
  
• Additionally, pent up demand is beginning to reveal itself. In the foreclosure arena we're beginning to see a greater number of primary buyers looking to purchase bargain homes, as primary residents - as primary residences, as opposed to investors looking just to make money.
  
• The academics and demographers have long said that stabilized demand for new homes in the United States is in the 1.6 to 1.8 million homes per year range and current market conditions have driven production to record lows reported yesterday at an annualized rate of some 340,000 homes.
  
• We're also seeing that there are fewer impediments out there and signs of danger. Still, there are other factors that remind us that we still have quite a long way to go. Foreclosures are building, and adding to inventories at accelerating rates.
  
• Mortgage interest rates have been moving upward and in fact have climbed some 100 basis points over the past couple of months. This negatively impact affordability.
  
• Through our regional operating centers we're able to quickly identify our most efficient and higher gross margin plans and provide detailed cost information to our operating divisions. Additionally, over the last year, we've reduced the number of floor plans that we offer by approximately 30% in order to additionally promote efficiency.
  
• Over the past year, we've de-bundled labor from materials in all of our bids which gives us incredible visibility and cost control. This purchasing structure allows us to procure materials and labor by unit costs versus purchasing by plan or community.
  
• This approach has enabled us to reduce our cost per square foot by up to 20% even while the square footage size of our homes is down by approximately 12%.
  
• Clearly, this market (Chicago area) has gone through enormous change. At the peak we employed over 400 associates and occupied 92,000 square feet of office space, and we delivered over 1200 homes. Today, we have a group of just 31 professionals. Our office space is roughly 6900 square feet, and we're positioned to deliver approximately 225 homes. This group is rapidly approaching breakeven performance and will be looking for new opportunities in the distressed market very soon.
  
• Now while we've not yet recognized the full impact of all of our initiatives in every division yet, in all of our divisions, as in Chicago, we're well along the path to recapturing profitability.
  
• On the balance sheet and asset management front, we've continued to fortify our company at the corporate level by continuing to manage and restate our land asset while we continue to manage our inventory of completed homes and reduce the number and composition of our joint ventures.
  
• The number of unconsolidated joint ventures has fallen from its peak at 270 joint ventures in 2006, to 83 joint ventures currently, and that's down from 95 last quarter. Additionally, we've continued to
  reduce the maximum recourse debt to the company to approximately $442 million from 474 last quarter and from 1.8 billion at the peak, or approximately 76% decline.
  
• Our balance sheet remains strong at the end of the quarter with a substantial cash position of $1.4 billion. Additionally, there's nothing borrowed on our revolver and we have a responsible debt to total capital position net of cash that is at 32.9%.
  
• Our balance sheet and cash positions continue to provide stability as the market declines. And enable us to seize opportunity where distress creates unique value as the market stabilizes.
  
• Although it's too early to say that the market has stabilized, one can sense that resolution is not far off.
  
• Although it is sometimes difficult to find reason to be optimistic in these turbulent market conditions, the home building market will rebound. It will have to in order to stimulate the rest of the economy back to its feet.
  
• (CFO) In Q2, we made significant progress on strengthening our balance sheet and liquidity position, and we improved that liquidity position by generating positive cash flow from operations as well as by accessing the capital markets.
  
• We cut our completed unsold number of homes by 53% from 1,321 to 626. We also continued to reduce our start pace down 39% year-over-year to 2,724 homes. Our homes under construction also declined year-over-year 38% to 4,025 in this quarter.
  
• Land purchases were only 58 million during the quarter, and that compares to 162 million in the prior year's quarter. Land development spend was reduced to 16 million from 55 million in the prior year's quarter.
  
• During the quarter we issued 12.8 million shares, raising 126 million at an average price just under $10 per share. Additionally, we raised 400 million of senior notes maturing in 2017, and this debt was issued with an investment grade covenant package.
  
• During the quarter we paid off our maturing 7 5/8% notes totaling 281 million. These capital market transactions, along with the positive cash generated from operations, have positioned the company with 1.4 billion of cash, which is ample liquidity to fund near term debt maturities, JV fundings, operations, as well as new opportunities as they present themselves.
  
• Additional, we reduced our financial letters of credit to 239 million. That's down from 278 million at the start of the year and down from 728 million at the peak back in 2006. We ended the quarter with substantial equity of 2.5 billion and ended with approximately 175 million shares outstanding, which is a book value per share of $14.16, and it's close to $19 per share if you add back our deferred tax asset valuation reserve.
  
• If you look at the average sales price to give a little bit more color, by region, the east was down 13% to 220,000, the central was down 9% to 197,000. The west was down 4% to 350,000. Houston was down 1% to 201,000. And then the other area was down 10% to 271,000.
  
• Overall, the average sales price decreased to 8% year-over-year to 251,000, and that is net of sales incentives which averaged 53,000 for the quarter, versus 49,000 in the prior year's quarter.
  
• Turning to impairments, in this quarter we recorded 99 million of valuation adjustments and write-offs, compared to 137 million in the same quarter last year.
  
• We have continued to focus aggressively on reducing SG&A costs, which declined 44 million year-over-year. SG&A as a percentage of revenue was 14.3%, which improved 110 basis points from the prior year and 510 basis points sequentially from Q1.
  
• We recognized significant improvement in our financial services division as we earned a $16.5 million profit this quarter, compared with a $3 million loss in the prior year.
  
• Our title company return to profitability as it earned 3.2 million compared with a loss of 10.8 million in the prior year.
  
• (Q&A) First on the JVs, I guess if you could just sort of give us an update, more broadly speaking, where the charges were occurring. Your JV loss before charges jumped up year-over-year, and just wondering what was going on there and then any land source update you have with the JVs. (A) Let me answer relative to the JV charges. We had 57 million of charges during the quarter. We had 59 - or 60 million in total of losses from the JVs.
  
• I was wondering if there are any JVs that accounted for a big chunk of the charges, and then also the 10 million in loss before the charges, what was driving that? (A) There were a few JVs that had larger charges. A couple of them based on - in the west coast generated the bulk of the loss, and then one that was diversified over different geographies. And then the $10 million loss before the impairments, there was not one item in particular that stood out, it was just a combination of losses in different joint ventures.
  
• And then you did a great job on the orders, and you all had said you were going to clear out specs and you did. As we look forward on the orders, does this give you a big hangover, so to speak, or - and do you think you can continue to put a similar type of order stream in place? (A) Unfortunately, the answer to that is, just as you asked looking forward, and I think that the question looking forward is really market dependent. But I think the import of your question is do we feel that we've stressed ourselves in the prior quarter by kind of stealing from the future, and I don't think we've done that at all.
  
• I was wondering if you could talk about and I wanted to exclude any joint ventures or land funds and just talk about directly with Lennar's capital what kind of inventory investments you've made or what you plan to make or talk about finished lots versus unfinished option lots, and maybe talk about what the 58 million you said you spent during the quarter was on. (A) Well, to answer the first part, and Bruce will come back and answer the second part, but as we look ahead right now, and as we're looking in many of our divisions, we think that the opportunities that are presenting themselves to grow organically and to look at next communities are going to be almost exclusively with rolling options homesites. There's availability in most markets. We're not going to expand until we've achieved operational efficiency in each market. But as we do, we will look for those kinds of opportunities. We don't see any reason to start taking any kind of land risk, and we think that the cash outlay will be small.
  And then, relative to the land that we did purchase during the quarter, which is down very significantly again, the 58 million is in areas where we're taking down homesites, primarily to put immediately into production, and it was diversified in different markets across the country. So it wasn't one transaction. We weren't buying large land parcels. It's for immediate use in construction in progress.

Lennar Corporation operates as a homebuilder in the United States.

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