Lennar Corporation Q3 2013 Earnings Conference Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Bob Wetenhall - RBC Capital Markets - Analyst : Congratulations on a solid quarter. I wanted to ask -- it was a strong quarter in terms of gross margin performance and incremental operating leverage. Could you help give us a sense of where you see gross margins going in the next two or three years if volumes continue to recover?

Question: Bob Wetenhall - RBC Capital Markets - Analyst : That's really informative. I appreciate the granular detail. If -- on a follow-up, Stuart had said that interest rates are probably having an impact on order growth, but he characterized the impact as being temporary and mild and touched on the production deficit. If rates stay in the current context for 30-year fixed, how do you think the recovery looks from here on out during the next 12 months? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Bob Wetenhall - RBC Capital Markets - Analyst : Thanks very much. Good luck.

Question: Stephen East - ISI Group - Analyst : Stuart, you talked about what you were seeing with demand a little bit. If you could talk a little bit more, just what you all were seeing as you went through the quarter and post quarter, for demand and pricing. Then as you go through this a bit slower time, what is your strategy -- or how does your strategy change a little bit to navigate through this period?

Question: Stephen East - ISI Group - Analyst : Okay. That's really helpful. Then if we look -- you can grow one of two ways. You can buy the lots and the land, or you can buy the Company. There are -- both are pretty fluid right now. On the M&A side, we're seeing some small deals, but then we also have the two big ones that are sitting out there. The land environment itself looks like it is getting a bit more rational. Can you talk about those two? How you all view your appetite for potential M&A? Then what's actually going on in the land market?

Question: Stephen East - ISI Group - Analyst : Has the land market changed? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Stephen East - ISI Group - Analyst : Okay. Thanks. That's very helpful.

Question: Ivy Zelman - Zelman & Associates - Analyst : Congratulations, you guys, on a solid quarter. Two questions. One question really pertains to incentives. Recognizing, I think the way you described it, Stuart, is that you are using it selectively where necessary, to move inventory. Maybe Rick, you were the one that said it, one per community. One of the concerns we have is that unlike any other cycle, we have actually seen pricing spikes at the front end of the cycle. Volumes usually are the ones to increase and follow that pricing. So now that weaned the consumer with the spike in pricing off of incentives after six tough years of negotiations, aren't you opening up the door for a slippery slope of undermining consumers' confidence in the value of the homes they're buying? Not just you. I'm talking about the industry, because there are a lot of private builders that want to take their working capital out of the ground. We're hearing more of them talk about using selling incentives. Although, still moderate today, how do you control it? In prior cycles have you seen the use of selling incentives after periods where home prices had gone up and then see it resume?

Question: Ivy Zelman - Zelman & Associates - Analyst : Okay. That was very helpful. One more question. A big broad bear view out there that I would like to have you dispel if possible, is that today the housing starts normalizing given the deficit of shelter out there, with respect to single family production predominantly if you can drill in on that. Given where your average home price is and many of the builders focused on more of a move-up, more affluent buyer. But today's student loan debt and young adults that historically have been our first-time home buyer, many believe that the demand just isn't there with credit constraints and debt burdens that today's first-time entry market won't be there to support a resumption or a normalized level of new construction, predominantly on single family. Can you comment, please, Stuart, on that?

Question: Ivy Zelman - Zelman & Associates - Analyst : Would you provide the lot for that entry level buyer with respect to recognizing where today your average home prices are? Strategically, do you feel that's a market that you'll expand as the market fluctuates or the credit loosens? How should we think about the industry's penetration of that market? Is it fluid?

Question: Ivy Zelman - Zelman & Associates - Analyst : All right. Thanks, guys.

Question: Stephen Kim - Barclays Capital - Analyst : There has been a lot of talk on incentives. I think you guys obviously did a good job, better than we were fearing, actually, in the quarter, on incentives, actually coming down. But I guess in general, you've talked about stepping up the incentive activity a little bit here. Can you give us a sense for what the response has been so far on the part of buyers to this very selective increasing of incentives on standing inventory?

Question: Stephen Kim - Barclays Capital - Analyst : Got it.

Question: Stephen Kim - Barclays Capital - Analyst : Yes. No, that's very helpful. Another question that I had -- I guess a second question, sort of a broader question, about your opportunities that you see currently in the land market and for your Company generally. You've talked about the fact that you are stepping up. You have been very active on the land purchasing side. We can see that in the numbers that you've provided, much higher levels than relative to your burn rate, if you will, than would be considered sustainable. I mean I would say almost double what would be considered sustainable. So clearly, there is a cyclical component to what you're pursuing. But you've also talked about shortages in the land market more broadly that strike me as being also somewhat cyclical and therefore somewhat temporary. I'm curious as to, whether you can comment on how much longer you think the land market is going to be in its current severely constrained state, so that it would justify your accelerated level of land purchases? Are we talking two years, three years? Do you think this is somewhat systemic? If you could just give us some sense of that, that would be great.

Question: Stephen Kim - Barclays Capital - Analyst : Thanks very much, guys. Appreciate the thoughts. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Jade Rahmani - Keefe, Bruyette & Woods - Analyst : Just a quick one on your average sales price. Given the average order price, do you expect the average sales price on deliveries in the fourth quarter to be in the $300,000 range?

Question: Jade Rahmani - Keefe, Bruyette & Woods - Analyst : Okay. Just on Rialto, I think you mentioned the balance sheet is underlevered with the FDIC debt having been fully defeased. Can you talk about options to add leverage? On Rialto Mortgage Finance, when you think that the CMBS loan conduit originations would commence in full and start contributing to earnings?

Question: Jade Rahmani - Keefe, Bruyette & Woods - Analyst : Okay. Available for the addition of leverage?

Question: Jade Rahmani - Keefe, Bruyette & Woods - Analyst : The loan conduit, do you think that is something that would contribute to earnings in 2014?

Question: Jade Rahmani - Keefe, Bruyette & Woods - Analyst : Great. Thank you very much.

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : Nice quarter.

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : First question I had was on sales pace. So far this year, you have been doing plus or minus 3% to 4% a month on average. As far as we understand -- generally, builders will typically look for, depending on the market, et cetera, 4% per month is a pretty good yardstick. Maybe sometimes a little more depending on the ASP and the density. Is this something that you're comfortable with at this stage in the cycle? As we get more to, let's say, the middle part of the cycle, would you see that sales pace change at all materially?

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : No I understand. I appreciate that. It's kind of why I gave a range of 3% to 4% and understanding seasonality. I guess I was just thinking more from the perspective that there are other builders, let's say, that have kind of put sales pace out there and said, hey, relative to the early 2000s, late 1990s, overall we're still 25%, 30% even off of our -- what we would consider a LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. normalized sales pace with all those factors considered. I was just wondering if that is a statement that applies to you? Or that it again -- given the mix and everything else, that the sales pace that you're currently seeing is something that you would expect more in the middle of the cycle? Or maybe that is just not the case for you, that you're more or less hitting what you were hoping to hit as the communities are coming through?

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : Great.

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : No, I appreciate it. That's helpful. I guess the second question, just on equity earnings and Rialto. The $10 million of profit in the equity earnings line, I guess from some additional sale of homesites from El Toro -- when you reported the profit from El Toro last quarter, I believe then you said that you would be releasing the next phase somewhere over the -- in mid 2014. Just thinking about that going forward, is that something that the $10 million -- or this additional flow of lot sales, is that something that we should expect to be a little bit more regular? Also, I'm sorry to kind of bring in another question, but on Rialto, now that you've defeased the debt should we expect a different flow of earnings from the -- now that the distributions might come in a little bit more on a regular basis?

Question: Michael Rehaut - JPMorgan Chase & Co. - Analyst : Okay. Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Eli Hackel - Goldman Sachs - Analyst : Just two questions. First, Stuart, you mentioned a little bit more on banks loosening up. You can just give a little bit more color? It sounded like in the last couple of weeks you even noticed a change. Have you seen anything related to just them saying, well, QRM's here, refi revenues down, wanting to make that up. Then just on the incentives, I know you talked about it a little bit, but is there any region or price point that it was more prevalent in? Thank you very much.

Question: Eli Hackel - Goldman Sachs - Analyst : Sure. Just in the beginning of some prepared remarks and some questions, just from banks, maybe potentially loosening up a little bit more, you said you have noticed some signs of that, I was just hoping for a little bit more color there? Then sort of how fast could that -- maybe it speeds up with refi revenues down 50% or 60%. Just wanted your thoughts there.

Question: Eli Hackel - Goldman Sachs - Analyst : Then just incentives, just if they were concentrated in a region or price point? Thank you.

Question: Eli Hackel - Goldman Sachs - Analyst : Okay. Thank you very much. Appreciate it.

Question: Ken Zener - KeyBanc Capital Markets - Analyst : So your guy's delivery can come through more communities, or greater sales pace. If the sales pace is going to follow the vagaries of the market and it seems more as the seasonal versus cyclical right now. Can you -- with all your land in hand, can you give us, or comment on 2014's expected community counts' growth rate, right now?

Question: Ken Zener - KeyBanc Capital Markets - Analyst : Okay. Then the second point, with your closing guidance suggesting mid 90% backlog turn. It obviously indicates quite a bit of pre-build homes already in inventory. So does that -- two questions here. Does that approach -- is that more common in less land constrained areas? Or are you actually using that kind of pre-built but not sold on the price as a way to kind of leverage price gains, kind of a call option for your margins? Within that, is there -- it's an obvious margin spread between your pre-sold homes, as opposed to ones that you started building and then sold them? Thank you. LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Susan Maklari - UBS - Analyst : My first question is on the cancellation rate. Can you give us a little more detail into what caused the sequential increase that we saw? Then are you comfortable with the current level? Or how should we think about the potential trends in that going forward?

Question: Susan Maklari - UBS - Analyst : Okay. Perfect. Then just one last question. You spoke to the fact that you are still able to offset the input cost increases that you're seeing with the home price appreciation that you're getting. If we get to a point where the home price appreciation slows somewhat from what we're seeing -- can you talk about maybe potentially some of the things you can do to help offset those input prices and continue to maintain the somewhat -- the margins that you're seeing there? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies.

Question: Susan Maklari - UBS - Analyst : Okay. Great. Thank you.