Lennar Q1 Earnings Call Transcript

123jump.com Staff
16 Apr, 2009
New York City

The homebuilder quarterly revenues plunged 44% to $593 million. Net quarterly loss rose 76.7% to $155.9 million. The company lost 98 cents a share compared to a loss of 56 cents a year-ago quarter. New home deliveries declined 40% to 2,142 and backlog plunged 52% to 1,647 homes in the quarter.

Lennar Corporation ((LEN))
Q1 2009 Earnings Call Transcript
March 31, 2009 11:00 a.m. ET

Executives

Scott Shipley - Director of Investor Relations
Stuart A. Miller – President, Chief Executive Officer & Director
Bruce E. Gross – Executive Vice President & Chief Financial Officer
David M. Collins - Controller

Analysts

Dennis McGill - Zelman & Associates
Carl Reichardt - Wachovia Securities
David Goldberg – UBS
Rob Hansen - Deutsche Bank
Jay McCanless - FTN Midwest Securities
Stephen East - Pali Capital, Inc.
Michael Rehaut – JPMorgan
Daniel Oppenheim - Credit Suisse
Josh Levin – Citigroup
Timothy Jones - Wasserman & Associates
Susan Berliner – JPMorgan

Presentation

Operator

Hello, and welcome to Lennar’s first quarter earnings conference call. At this time, all participants will be 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, please disconnect at this time. I will now turn the call over to Mr. Scott Shipley, Director of Investor Relations for the reading of the forward-looking statement.

Scott Shipley

Good morning. 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 condition, results of operation, cash flow, 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 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 like to introduce your speaker for today''s call, Mr. Stuart Miller, President and CEO. Mr. Miller, you may begin.

Stuart A. Miller

Thank you, and good morning, everyone. Thank you for joining us for our 2009 first quarter update. I''m joined this morning by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President and Treasurer, and David Collins, our Controller. After my opening remarks, Bruce will provide additional detail on our numbers and then we will open the phone to your questions. David and Diane will be available to answer questions as well.

Now just as a housekeeping item, before I begin, I would like to request that during our question-and-answer period that you please limit to just one question and one follow up so that we can be as fair as possible to all of our participants.

This morning I would like to begin with a brief overview of the state of the current housing environment, then comment on our efforts to streamline our home building operations for profitability as the market stabilizes, and finally, to focus on the progress that we’ve made on managing our balance sheet and our joint ventures. Throughout our first quarter the housing market continued its downward slide driven by a combination of mortgage foreclosures adding to inventories of homes for sale, increased and escalating levels of unemployment, and declining consumer confidence. These factors maintained a steady downward pressure on home prices and sales space as home inventories have continued to rise while home buyers have remained on the sidelines.

While there are to be sure some indicators that suggest that the market is beginning to stabilize, they do not feel like they are actually defining a trend yet. The slight increase in the number of home transactions still appears to be primarily driven by investors purchasing investment properties from banks at distressed prices. The stabilization of inventory seems to derive primarily from the postponement of foreclosures by many banks and the GSCs at the end of last year. And the stabilization of existing home prices in February over January seems to have more to do with a seasonal bump in demand than market strength.

Nevertheless, interest rates are at an historical low and have been falling. Lower rates together with seasonal trends have clearly moved sales higher in the past few weeks and rates are likely to continue to have that affect if they continue to drop. Affordability is at an unusually high level across the country given the fact that home prices have come down dramatically and that combined with low interest rates; ensure that monthly payments in relationship to income are low. The $8,000 first time purchaser tax credit nationally and the additional $10,000 tax credit in California are drawing attention to the home purchase opportunity. Sales have been higher in the beginning of the second quarter and we are hopeful that the broader impact of the national stimulus plan will continue to support this trend as we start to see the gap that separates the fear of purchase and price decline from a sense of opportunity from market recovery having that gap converge.

In the context of difficult market conditions, Lennar''s strategy has been to streamline our core home building operations for profitability, and to position it as a pure play home builder in a stabilizing and then recovering market. Concurrently, we have been recasting the asset management side of our business to move from defense to offense as distressed market conditions give rise to unique opportunities to combine capital with management expertise, to position good assets for an evolving market. We''ve continued to make significant progress in both of these areas.

In terms of our operating home building strategy, we’ve made a number of strategic operational changes to address today''s depressed home building environment and to position us for future profitability. These initiatives fall into three distinct yet overlapping areas - SG&A control, efficient low cost plans, and market tuned product. While we’ve not recognized the full impact of these initiatives we believe that we are well along the path to recapturing profitability.

We''ve restructured our operations to eliminate significant overhead costs. At the peak of the market, we had 10 operating regions and 124 home building and land divisions. Today, we have four operating regions - northeast, southeast, central and west and 29 home building divisions. These changes have reduced our G&A by over $500 million on an annual basis compared with the first quarter 2006. More importantly, we are positioned to leverage this lean operating structure with minimal incremental expense as housing markets recover.

Prior to our reorganization, we operated in extremely decentralized organization with each division having its own accounts payable, processing and purchasing personnel. Today, we''ve strategically centralized these functions in three regional operating centers across the country and we''ve significantly reduced our overhead by having shared services executed by a small group of associates.

Centralized purchasing through our regional operating centers has allowed us to leverage on a nationwide basis the expertise of three lean purchasing teams. These three teams have the most updated and detailed cost information so that pricing and cost knowledge is available to every division every day. Over the past year, we have debundled labor from materials in all of our bids which give us increased visibility and cost control. This purchasing structure allows us to procure materials and labor by unit cost versus purchasing by plan or community. In each region we are buying materials and labor at the same price across all product lines. Through this process, we are able to identify the most cost effective plans to build, and bring them to market quickly in any of our operating divisions. This approach has enabled us to reduce our cost per square foot by some 11% year-over-year, even while the square footage size of our homes is down approximately 12%.

We believe that architecture and product by its nature is very localized. As a result, our product strategy is extremely market driven and designed to quickly adapt to market changes both up and down. Today, we are focused on offering homes that are priced and designed to offer great value in each market. Tomorrow, the market may demand larger homes with greater specification. We recognize that the value equation is different from Baltimore to Dallas to San Francisco, as well as in both up and down market cycles.

Given the continuing shifts in market driven consumer demands, our operating systems focus on the speed to market and a detailed financial analysis of each product offering. In the last 12 months, we’ve reduced the number of floor plans that we offer by 29% from 1,262 to 892 and at the peak of the cycle we built almost 3,000 different plans. Through our regional operating centers we were quickly able to identify our most efficient and highest gross margin plans and provide detailed cost information to our operating divisions. While customers are demanding more affordable smaller square footage homes and with volume declining in a shrinking market, we have focused on rebuilding a streamline centralized home building machine that will thrive when the market stabilizes and will comfortably scale larger and adapt to changing consumer demands as the market expands again.

On the asset management front, we fortified our company by continuing to manage and restate our land asset while we carefully manage our inventory of completed homes and reduce the number and composition of our joint ventures. We''ve continued to review all of our land assets on a quarterly basis and have restated asset values to match market conditions. Over the past years, we have significantly reduced our land asset which now requires less management time and is a far smaller base to impair should market conditions continue to worsen. As I''ve said in prior quarters, we''ve done a great deal of the heavy lifting on impairment and are now situated with stated assets that can and will produce improving margins when the rate of decline in market pricing subsides. While this is an ongoing process in a declining market, we''ve come a long way.

We’ve also reduced the number of joint ventures that we carry. The number of ventures has fallen from 270 at the peak in 2006 to 95 currently and that''s down from 116 last quarter. Additionally, we''ve continued to reduce maximum recourse debt to the company to $474 million, from $520 million last quarter and that represents a 48% drop from the first quarter of ''08. Concurrent with this press release we’ve also filed an 8-K with a PowerPoint presentation containing material additional disclosure on our joint ventures. We hope that this disclosure will help shed some light on this part of our business strategy and Bruce and Scott will be working to answer questions as you have time to review these materials.

Our balance sheet remains strong at the end of the quarter with a substantial cash position of $1.1 billion. Additionally, there is nothing borrowed on our revolver and we have a responsible debt to total capital position net of cash that is 37.4%. Our balance sheet and cash position enable us to continue to seize opportunity where distress creates a unique value rather than walk away from that opportunity. We anticipate that we will continue to use available cash to harvest value and opportunity from our joint ventures and other sources as they arise. Against that backdrop we are happy to see that land source is working its way through the bankruptcy process. We''ve always believed in the strategic value of land source, and we''re pleased to be part of its future. We are also pleased to see that the senior lenders to land source see the value in Lennar''s management expertise, and the continuity that we bring to the table. This opportunity also allows us to create an independent management team to be involved in these longer term strategic assets and moves Lennar closer to our goal of being a pure play home building company.

Additionally, in the first quarter we have continued to mature our distressed asset go forward strategy. As I noted in our last quarter call we have been preparing to be a significant participant in the distressed opportunities that naturally present themselves in down cycles. The team is formed and we''ve launched a program to raise independent capital. While it is still premature to be making asset purchases our strategy is to segregate our home building manufacturing programs from the more capital intensive asset opportunity program, much as we did in the early 90s when we build LNR Property Corporation. We are confident that as the market corrects we will be able to create meaningful value for the company through this vehicle.

In conclusion, let me say that we''ve made a great deal of progress in a very difficult market. We’ve prepared our company for market conditions as they currently exist and we''re not projecting a material improvement for sometime to come. Nevertheless, I remain quite optimistic about our business and the housing market in general. Interest rates are low, and seemingly headed lower. Significant governmental stimulus is approved and has yet to kick in to the economy. Tax credit incentive and lower home prices are beginning to peak the interest of primary purchasers. The government is squarely focused on reducing the number of foreclosures by enabling homeowners to keep their homes. And our government seems determined to use trial and error and trial again in order to fix the economy.

Although it is too early to say that the market has stabilized, one can sense that resolution is not too 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 rebound in order to stimulate the rest of the economy back to its feet. And as the market finds a bottom and begins to recover we will be well positioned to participate.

At Lennar, we''ve made significant progress in repositioning our home building business as a scaled down and lean operation. We strategically positioned our asset management business to participate as opportunity presents itself. We have adequate resources to weather these difficult market conditions, and we continue to focus on the operational elements that will drive us to profitability and continued positive cash flow in the future.

With that let me turn it over to Bruce.

Bruce E. Gross

Thank you, Stuart and good morning. In the first quarter, we continued to focus on maintaining our balance sheet strength with ample liquidity and low leverage as Stuart highlighted. One number I wanted to include here is that we also reduced financial letters of credit to $247 million from $278 million in the fourth quarter of 2008.

During the quarter, we continued our trend of significant progress towards reducing the number of unconsolidated joint ventures and related recourse indebtedness. Although our unconsolidated joint venture disclosures have been made in accordance with Generally Accepted Accounting Principles, investors and analysts have requested additional information on our joint ventures. We solicited ideas from the investment and analyst community during the quarter as to the additional information that would be the most meaningful in further evaluating our joint ventures. We thank all of you that did give us information and input and as promised we filed the additional joint venture disclosures in an 8-K available to you this morning.

And Scott and I, as Stuart mentioned, are happy to walk through these with you and answer your questions. I did want to highlight some of the new additional joint venture disclosures that are included in this presentation. Our 10 largest joint venture investments, our types of joint venture partners, our joint venture composition by type of debt, Lennar cash payments for recourse reductions, and future joint venture debt maturities. I would like to highlight that when we look at future joint venture debt maturities; these are debt maturities of the joint ventures and are not estimates of Lennar''s obligations. As a reminder, we reduced joint venture recourse indebtedness by $1.3 billion since the end of 2006 and Lennar''s cash payments as part of the recourse reductions were only $374 million.

Project financing loans typically mature within three years. We have continued to be successful in restructuring, refinancing or extending the maturities of these project loans. Even during this quarter we have extended approximately 10 of the joint venture loans that you see included in this presentation. Additionally, joint ventures with recourse debt have substantial assets of $2.2 billion and equity of approximately $1 billion at the end of the first quarter. The company has continued its aggressive focus on reducing the number of joint ventures, and as we mentioned it''s 95 at the end of the quarter. And of those 95 remaining joint ventures only 36 have recourse debt.

We continued to make significant progress with reducing maximum recourse indebtedness and reducing the number of joint ventures and we''re confident that we will continue to have success as we continued to reduce those numbers throughout the year. The total cash payments relating to unconsolidated JV recourse debt during the quarter was $19 million and that compares with $90 million in the prior year''s quarter.

We have continued to carefully manage our inventory levels as we continued to reduce starts which are down 41%, year-over-year, and 9% sequentially from the fourth quarter. And our homes under construction declined 32% year-over-year and 12% sequentially from 4,200 in the fourth quarter to 3,700 under construction in the first quarter of this year. Land purchases were only $75 million during the quarter and that compares to $354 million, in the prior year''s quarter. The finished homes and construction in progress inventory was reduced sequentially from $2.1 billion to $2.0 billion. And land under development including option deposits increased slightly from $1.7 billion to $1.8 billion, from the fourth quarter to the first quarter of this year.

Our unsold completed homes increased during the quarter to 1,321 from 1,140 in the fourth quarter as a result of the weak market conditions. However, there is an upside here as this will positively affect our cash generation in Q2 as we are intensely focused on aggressively reducing this number. This week in fact we implemented a national program that offers a 3.58% 30 year fixed rate mortgage program for our home buyers to specifically target the reduction of these completed unsold homes. Our home sites owned and controlled were again reduced sequentially this quarter from 113,000 in the fourth quarter to 108,000 owned and controlled in the first quarter. We ended the quarter with substantial equity of $2.5 billion and this is a book value of $15.38 per share and I would like to highlight that this is net of a deferred tax asset reserve of just under $5 per share.

Turning to the operating results for the quarter, for the quarter we had a loss per share of $0.98, this included $0.35 per share of charges related to valuation adjustments and other writeoffs and a $0.36 per share charge related to a non-cash deferred tax asset valuation allowance. Revenues decreased 45% to $523 million that was driven by a 38% decrease in home deliveries and a 12% decrease in average sales price to $244,000. The average sales price is net of sales incentives, which averaged $50,500 per home during the quarter versus $48,000 per home in the prior year''s quarter. The average sales price regionally was broken up as follows - in the East it was $224,000, down 17%, Central, $194,000, down 12%, in the West, $349,000, down 10%, in the Houston region it was $194,000, up 2% and in the other region it was $289,000, which was flat.

Our gross margin was 14.3% before impairments. The pre-impairment gross margin declined 280 basis points over the prior year and the primary driver of this decline was the very challenging sales environment in the first quarter resulting in a 240 basis point increase in sales incentives as a percentage of revenues. As Stuart discussed, we''ve continued to successfully drive down construction cost as we improve our home building efficiencies. This quarter however, our progress was offset by additional warranty reserves relating to Chinese drywall issues. Most of you are familiar with the defective Chinese drywall issues facing the US home building industry and while many home billers chosen to ignore the industry wide issue; we have been proactive and have chosen on the work closely with our homeowners to replace this defective product at our expense. Fortunately, we have only experienced Chinese drywall problems in a very small percentage of the homes we build in Florida. And while we have insurance in place to cover much of the potential expense associated with this problem, our gross margin this past quarter was negatively impacted by approximately 150 basis points associated with the Chinese drywall repair and replacement cost. We have filed suit against the manufacturers and suppliers of this defective product to recover all of the costs associated with this issue.

Turning to impairments, during the quarter we continued our process of reviewing each asset and each joint venture for impairment. We recorded $88.5 million of valuation adjustments and writeoffs compared to $107.1 million in the first quarter of 2008 and compared to $221 million sequentially in last year''s fourth quarter. The categories for first quarter were as follows - home building recorded a $40.8 million impairment, land sold during the quarter was $200,000, writeoffs of option deposits and pre-ac were $10.2 million, and joint venture write downs were $37.2 million.

We have continued to focus aggressively on reducing SG&A costs and although SG&A declined during the quarter year-over-year by $74 million or 42%, revenues declined more, and therefore, SG&A as a percentage of revenue went from 18.4 % to 19.4%. New orders were down 28% during the quarter compared to the prior year and the number of homes in backlog declined year-over-year 52%. The cancellation rate was 21% for the quarter versus 32% in our fourth quarter of last year and 26% in the prior year''s first quarter. Our backlog conversion ratio was 134% during the quarter, and we expect to continue to operate at a very high backlog conversion ratio.

We have returned to profitability in our financial services operations as we earned a $500,000 profit this quarter compared with a $9.7 million loss in the prior year. This is the first quarterly profit for financial services since the second quarter of 2007 and we are realizing the benefits from the aggressive cost reduction initiatives implemented throughout the downturn. Mortgage pretax increased to a profit of $6.2 million from a profit of $1.1 million in the prior year and our capture rate improved from 80% to 85% year-over-year.

Our title company reduced its loss to $5 million from a $12.3 million loss in the prior year. The first quarter is typically the slowest quarter for a title. However, they have implemented cost saving strategies to position themselves to return to profitability as well. During the quarter we recognized a $57.7 million deferred tax asset and recorded a non-cash valuation allowance against the entire amount. The company is financially strong and our operations are scaled down and lean, positioning us well as there is ultimate recovery.

And with that I would like the turn it back to the operator to open it up for questions.

Question-and-Answer Session

Operator

If you would like to ask your question at this time, please press “*1” on your touchtone phone and you will be announced prior to asking your question. If you would like to withdraw your question, please press “*2”. Once again to ask your question press “*1” on your touchtone phone. Our first question is coming from Dennis McGill of Zelman & Associates.

Dennis McGill - Zelman & Associates

Good morning, guys. And thanks for all the added disclosures today. Stuart, you talked a little bit about land source and I was hoping you could maybe talk to it as far as the perception of an additional joint venture or another structure or how it might be structured in theory or -- for investors that would be concerned that joint ventures are certainly a long-term opportunity but they''re also a near-term uncertainty. And your comfort level with establishing something under the joint venture umbrella again at the same time you are trying to make it easier to understand the balance sheet in investments.

Stuart A. Miller

Well Dennis, we are really limited on what we can talk about relative to land source, it’s still kind of an ongoing discussion in the bankruptcy process. The only thing I would say is that land source -- I think that the area of joint ventures that has given rise to the greatest concern is the debt associated with joint ventures and land source would be likely reconstituted with limited or no debt.

Dennis McGill - Zelman & Associates

Okay. From a cash standpoint can you talk about in the quarter kind of the uses -- the major uses of the cash? And I believe there was $250 million tax refund. So just understanding kind of the puts and takes of cash in the quarter. And then how you guys think about that over the next year or two as you have the maturity that was paid off in March and obviously some cash outflows for things such as land source. How would you think about the capitalization structure over the next couple of years?

Bruce E. Gross

Well, let me highlight the uses of cash during the quarter. And as we did mention on our last call, we had a $250 million cash receivable that had been received during the quarter. The uses of the cash because the cash balance was flat with our fourth quarter at $1.1 billion was really split between three areas - inventory, and as we mentioned we have some more completed unsold homes this quarter than we would prefer and we''re very focused on those. Joint venture, contributions were approximately $60 million during the quarter. And the last item was related to just accounts payable and accrued liabilities which typically after year end, which is the quarter with our most volume, that number tends to be a little bit higher in the first quarter. So the $250 million was primarily split between those three items.

Dennis McGill - Zelman & Associates

Okay. Can I just follow up on the inventory part of it and then I will get back in queue, I would have thought because of the significant amount of closings you had this quarter you were able to actually reduce spec inventory but it sounds like it''s above where you like to be. So was it something that happened towards the end of the quarter that caused inventory to be above where you like it? Or how should I think about the closings in the quarter versus spec inventory still on the books?

Bruce E. Gross

Yes, it was really a function of the slow sale space during the quarter, Dennis. We were anticipating that we would have had higher deliveries during the quarter. That''s answering the spec question. Want to highlight one other item that did impact inventory this quarter and if you remember what Stuart was saying about a tax credit in California effective March 1st, there was a $10,000 tax credit that was put in place to buyers of new homes. We had about a 100 of our home buyers that elected to defer the closing of their purchase to after February 28th, which was another item that impacted inventory during the quarter.

Dennis McGill - Zelman & Associates

Okay. Thanks guys.

Operator

Our next question is coming from Carl Reichardt, Wachovia Securities.

Carl Reichardt - Wachovia Securities

Good morning, guys. How are you?

Stuart A. Miller

Good morning Carl.

Carl Reichardt - Wachovia Securities

Stuart, you mentioned debundling labor and materials in the subcontractor trade which as you know is kind of the Holy Grail of managing the direct construction cost side. I am kind of curious if you could give me more detail on what particular trade you''ve been able to do that in. And what kind of savings you are driving from that given that you are trying to move to being a more efficient builder from a construction perspective? That seems real important to me.

Stuart A. Miller

Well, we have been able to unbundle and we have been working at this pretty consistently for about three years now. We''ve reduced our cost structure to 32 different cost categories that really follow the stages of construction and we''ve unbundled down to basically what it costs for a box of nails. The unbundling which has been implemented across the company at this point -- it''s really been utilized across all of our trades. And I guess as examples in an area like windows we''ve seen a 10% to 15% reduction, in an area like granite we''ve seen as much as the 25% reduction. So the reductions in cost by way of unbundling vary quite a bit from category to category.

Carl Reichardt - Wachovia Securities

Okay. And then on a different topic, just to -- I am sorry if I missed this, you mentioned sales in March have been higher I think you said, is that a function of year-over-year versus March last year or is that a function just of sequentially versus February in terms of gross orders?

Stuart A. Miller

Well, as you know, Carl, we don''t comment much about that, but I will say it''s more a sequential sense of the market. We have seen in the beginning of the quarter, even towards the end of February, a discernible uptick, but I still attribute a lot of that to seasonality. I mean we really are entering or we''ve entered the season, but there is absolutely a discernible uptick as we’ve gone in to the second quarter.

Carl Reichardt - Wachovia Securities

I appreciate that. Thanks, Stuart.

Stuart A. Miller

Sure.

Operator

Our next question is coming from David Goldberg, UBS.

David Goldberg – UBS

Thanks. Good morning, guys.

Stuart A. Miller

Good morning, David.

David Goldberg – UBS

First question has to do with the disclosure on the recourse debt that is coming due in 2009, the $215 million. Just trying to get an idea of how you guys are thinking about how that''s going to get either repaid or pushed off or how we should think about potential cash usages towards that amount of money?

Bruce E. Gross

Sure, David. Just a reminder these are obligation to the joint venture. So this is not an estimate of what Lennar''s future cash payment will be. So that''s the first thing I would like to highlight. The next thing is as these maturities come due, we have been successful in extending the loans. As I mentioned in the first quarter we extended approximately 10 of our joint venture project loans because these project loans typically only go out up to three years and that''s been the way it’s worked for years. We continue to see that success and these are entities that still have significant assets and significant equity within the joint ventures. There is about billion of equity relating to the joint ventures with recourse. So we believe that either the assets in the venture or we will be successful in extending a good majority of these and some of them will require some cash and as you look backwards, we''ve paid down or we’ve reduced recourse by $1.3 billion since the end of ''06 and paid about less than 30% of that from Lennar.

David M. Collins

I think David, just to add to that, if you were to look backwards at some of the maturities that have come at us historically, you would have asked the same questions for sure in prior years. And it is as I''ve said about ventures throughout our reporting history, you kind of have to recognize that everybody is in this together - lender, borrower. And we find a way to manage those numbers to be able to affectively manage cash requirements and the program going forward. I think historically we’ve done a good job of managing the cash requirements down, and we think that we will be able to do the same going forward.

David Goldberg – UBS

Got it. The follow-up question was actually on the program to -- the 3.58% mortgage -- rate mortgage program. Trying to get an idea just how widespread it is, how successful it''s been? Kind of how you guys think about the cost to you -- I assume you just buy down the loan from the bank. What the cost is like relative to home prices and then also if that''s included in the incentive number that you guys give, total incentives per home?

Stuart A. Miller

Yes, the program that Bruce talked about this morning is new, so we don''t have history on it, can’t give you much color on that though we expect it will positively affect the market. It''s geared towards our standing inventory. And yes, it is a buydown and we basically enter the market and make the buydown decisions on a very short-term basis. And those numbers, the cost of the program is included in our sales incentives, David.

David Goldberg – UBS

Okay. Perfect. And do you have any idea, Bruce what kind of like -- on maybe as a percent of home price what that would look like? What the cost of the program might look like on a house?

Bruce E. Gross

Well, it varies. And we are going through this, the market changes quite a bit. So there isn''t a number that''s always going to be the same for that program. Typically they run 6% or so, give or take.

David Goldberg – UBS

Got it. Thanks so much.

Operator

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

Rob Hansen - Deutsche Bank

Hi, this is actually Rob Hansen on for Nishu. We appreciate all the additional disclosure on the JVs. Just had a question in terms of your – the peak net recourse debt has come down by around $700 million or so, and the number of JVs down about 170, how much of that debt has been assumed by Lennar and then how many of the JVs have actually been consolidated?

Bruce E. Gross

We do have some of the joint ventures that have been consolidated that''s reflected on our financial statements. Let''s see if we can give you a total for the quarter, dollar amount. It''s approximately $230 million is the debt associated with consolidated joint ventures where there is recourse debt.

Rob Hansen - Deutsche Bank

Okay and that’s over time or is that just the quarter?

Bruce E. Gross

That''s at the end of the quarter.

Rob Hansen - Deutsche Bank

Okay. And then, have there been any failures by your partners under the reimbursement guarantees?

Bruce E. Gross

There have been any failures under the reimbursement agreement -- each of the joint ventures involve some type of negotiation at times, so wouldn''t really say there has been failures per se but often there are negotiations that we work through in trying to resolve the outcome of the joint venture.

David M. Collins

Yes, I think it would be more accurate to say though you wouldn''t call it a formal failure, in the negotiation, certainly one of the things that has to be considered is the availability of a venture partner to perform on one of those reimbursement guarantees. And there have been instances in some of the ventures where we’ve had to deal with the likely inability of one of our partners to pay. That''s all part of the negotiation process and we have absolutely had to deal with that.

Rob Hansen - Deutsche Bank

Are you in that process with anybody now or --

David M. Collins

Well, I guess you are asking are we in the process of negotiation with anyone now who might have an inability to pay.

Rob Hansen - Deutsche Bank

Yes.

David M. Collins

I can''t think of an instance but I don''t want to say no to that. First of all, it''s possible and I don''t want to mislead you. Many of our ventures right now, most of our ventures right now we have healthy what you call counterparties. But gee, I don''t know, I think that the whole world''s health is in question these days. So I certainly don''t want to give an unqualified no.

Rob Hansen - Deutsche Bank

That is true. Thank you very much.

David M. Collins

You''re welcome.

Operator

Our next question is coming from Jay McCanless, FTN.

Jay McCanless - FTN Midwest Securities

Hi. Good morning, everyone. Congratulations on the improvement in the can rate. Wanted to see how you were able to keep that low in the first quarter and whether that''s carried through to the second quarter?

Stuart A. Miller

Well, listen we do an awful lot to make sure that we are selling to qualified purchasers and to get our purchasers approved. And we do that so that we are not leading ourselves down a bad path. As we''ve gone through the downturn, we''ve spent a lot more time making sure that when we look at our backlog it''s a backlog that we can trust in. And I think that we''ve done about as much as we can do to refine that process. The biggest issue is that you end up with a -- the higher the can rate the higher the uncertainty of closings taking place and it is easier to build up inventory. So it''s all about the process that we use to manage our standing inventory.

Jay McCanless - FTN Midwest Securities

Okay. Wanted to follow up on Houston. Friday one of your competitors had some positive commentary on the area. Wanted to get your current take and find out if you are taking any market specific actions to -- whether it''s mixed shift, etc. to try and get closings there in the Houston area?

Stuart A. Miller

Well, as you might know, we are either the largest or one of the largest builders in the Houston area. It is a market that has been more vibrant than some of the others, more than almost any other market in the country. We continue to adapt our product to current market conditions and in Houston that has meant a late to the market declining market. What I mean by that is Houston has been one of the later declining markets so we have begun shifting some of our products to more affordable product types. These are product types that we already have in place and designed, so it''s fairly easy for us to do. And we certainly remain very focused on being among the largest in that market.

Jay McCanless - FTN Midwest Securities

Okay, great. Thank you.

Stuart A. Miller

Sure.

Operator

Our next question is coming from Stephen East, Pali Capital.

Stephen East - Pali Capital, Inc.

Good morning, guys.

Stuart A. Miller

Good morning.

Stephen East - Pali Capital, Inc.

If I could follow up on Dennis'' question, the cash flow expectations, you’ve got a series of debt maturities, this year, next year in 2011, I know you just paid off this year''s. But it''s just about equal to your cash on your balance sheet now. As we look at it how should we think about ''09, the rest of ''09 as far as land spend and can you generate cash from operations? Or do you need to do other things to satisfy your maturities, as they come due over the next couple of years?

Bruce E. Gross

Well, let me answer the way that we are focused on our inventory spend, Stephen, in generating cash. As you noted the last two quarters we''ve had a significant reduction in the amount of land that we are purchasing. As we mentioned in Q4 it was about $60 million, it was $75 million the first quarter, we will continue to be reducing the amount of inventory spend relating to land purchases. Our starts have come down pretty significantly. Our focus as we go in to the second quarter in generating cash we have about probably 300 plus million of dollars tied up in completed unsold homes and that is a primary focus in cash generation right now.

So what we can control is land spend, starts, we are focused on that. We are significantly reducing as we look at Q2, completed unsold homes. And we''ve significantly reduced our overhead so that we could be lean and start rebuilding to profitability. So those are the items that we are focused on controlling. And at some point if you go in out 2009, ''10, ''11, at some point you have to figure that we don''t just pay off debt each year that there will also be the ability to have debt financing over the next several years.

Stuart A. Miller

And as we look at our business model, Stephen, we definitely think that we will be positively producing cash from our primary operations. Of course that''s going to be market determined. But we feel that even on a scaledown basis we will be producing cash.

Stephen East - Pali Capital, Inc.

Okay. That''s helpful. And then the other issue, one quick house keeping on the Chinese drywall, the 150 bps, was that a one-time event? And then the other more important issue, Stuart you talked about you''re making some strategic moves to become a pure play, I guess if you could just elaborate on an update from last quarters?

Bruce E. Gross

Let me just answer the question on the Chinese drywall first. We did increase our warranty reserve in the fourth quarter as well. So we did take charges both in the fourth quarter of last year, and the first quarter of this year. And we think we are appropriately reserved at this point.

Stuart A. Miller

In terms of becoming a pure play, remember that it really is within Lennar''s DNA to be market active as market conditions recover and opportunity focused. We’ve really shifted our focus to building those structures, that type of structure in an off balance sheet setting, in a fund like setting. Again, while these might -- these types of structures might resemble joint ventures, they are likely to have very little if any debt whatsoever associated with them.

And it''s really our expectation to have one or two strategic funds that will focus on opportunities while the core business will be a pure manufacturing model cash flow positive focus driven by absorbing existing homesite inventory that''s on the balance sheet, reducing the balance sheet, and buying home sites on a rolling option basis where we can make a profit on a per home basis.

Stephen East - Pali Capital, Inc.

Okay. Thanks.

Stuart A. Miller

Sure.

Operator

Our next question is coming from Michael Rehaut, JPMorgan.

Michael Rehaut – JPMorgan

Hi, thanks, good morning everyone.

Stuart A. Miller

Good morning.

Michael Rehaut – JPMorgan

First question if we could just go back I know there has been some questions asked around the JV detail which I thought was really extremely helpful by the way. In looking at the upcoming maturities over the next couple of years, particularly this year, certainly noted that you have been able to restructure and push out and extend the debt maturities, but just wondering if you could give us any type of color, I know perhaps you are in the middle of working through it as we speak. But any type of expectation in terms of what portion of that debt you expect to be able to push out versus your ultimate cash payment obligations or what you would have to take on to the balance sheet over the next 12 months?

Bruce E. Gross

It would really be difficult to comment on that Michael, because each deal has its own unique negotiation. To presume the outcome, to presume to know the outcome, at a moment in time to things that are going to happen or that are happening with a future result, I think would be too bold of us. I think we have to let that play out. That has been the case historically. We have had exactly the same landscape as we look in the rearview mirror and we''ve have had to deal with each asset as its own unique negotiation. So the answer is that there is not an answer at this point.

Michael Rehaut – JPMorgan

Okay. Maybe to kind of attack it a different way. Because I think part of the issue is that as you are able to kind of push out and restructure the debt in the last year or two, the credit environment I think has gotten that much more difficult. Is there a way to give us a sense of the JVs with the recourse debt that are coming due, over the next 12 months, the proportion of those that the JVs are actually functioning where the creditors would -- that the ability to restructure that debt is more of a realistic proposition given that the actual underlying assets are performing?

Bruce E. Gross

I hear you struggling with the disclosure that''s been given. And we''ve always said that no matter what we gave there would be a drive for more. It sounds like what you would also like is a forecast within each one. I just don''t think we can get there.

Michael Rehaut – JPMorgan

Right. No, I understand. And again appreciate the detail but just trying to get my arms around that 214 due over the next year, and again the ability to work through that.

Bruce E. Gross

Right. I understand the question and the difficulty in getting your hands around it. From a management standpoint that clearly is one of the difficulties that we deal with on an ongoing basis. And it''s what has defined our workout over the past years as well.

Michael Rehaut – JPMorgan

Let me ask it another way. The recourse debt that''s come due over the last 12 months, how much of that have you been able to push out and kind of restructure versus take on to your own balance sheet?

Bruce E. Gross

I don''t have the exact number. But again, we went from at the end of 2007, we had $1.34 billion of joint venture recourse debt and it came down to 520, now 474. And Lennar''s cash payments were approximately $218 million relating to that reduction, so some were extended, some were reduced. I think one thing that people forget with these joint ventures is the leverage is reasonable. These assets have been marked down just like the wholly owned assets on a regular basis. There''s $2.2 billion of assets relating to these ventures with recourse debt and $1 billion of equity. So there are still assets to sale, there is still the ability to work with the banks because they are not highly -- more highly leveraged than most of the home builders today.

Michael Rehaut – JPMorgan

Right. And I guess of the 474 that’s remaining right now, it''s within that that was restructured, because obviously going from a billion to 520, that''s the gross reduction, not -- it doesn''t even include the restructuring of what is left?

Bruce E. Gross

Right. So I think you have to look backwards, Mike, and say, this number was $1.8 billion at the end of ''06. We have been successful in working through these and we are comfortable that we are going to continue to have success as we work through these going forward. And certainly the amount of cash that Lennar would pay would be significantly less than anything you are seeing on these maturity schedules.

Michael Rehaut – JPMorgan

Right. If I could just ask one other question on the Chinese drywall. You said it was about 150 bps that hit you in the gross margins this quarter. Where are you within that process in terms of actually in the field kind of fixing and repairing the homes and how much more should we expect this issue to continue for?

Bruce E. Gross

There has been a small number of homes in Florida that are at issue, and we have been proactive for some time being in the field and working with our home buyers. So from a standpoint as far as an expense we think that we are fully accrued at this point. At this point we are not expecting additional expense. So, if your question is related to expense, that''s where we are. And we continue to work with home buyers to make sure this issue is appropriately resolved.

Michael Rehaut – JPMorgan

Okay. And the 150 bps includes the reserves and any additional costs and what was that number in 4Q?

Bruce E. Gross

The dollar amount was similar, but the impact on the gross margin was a lot less because we had more volume.

Michael Rehaut – JPMorgan

Okay. And that included the reserves and anything else associated with it?

Bruce E. Gross

Yes, that''s the -- that''s the accrued expense for the quarter.

Stuart A. Miller

Mike, I think to be fair we''ve got to move onto the next question.

Michael Rehaut – JPMorgan

Thanks very much.

Stuart A. Miller

You''re welcome.

Operator

Our next question is coming from Dan Oppenheim, Credit Suisse.

Daniel Oppenheim - Credit Suisse

Thanks. Good morning.

Stuart A. Miller

Good morning, Dan.

Daniel Oppenheim - Credit Suisse

Good morning. I was wondering if you can talk a little bit more about what you are doing in terms of reducing the spec inventory you talked about, more the product repositioning and looking to generate cash flow from that. How much in terms of the sales activity here in March do you think is a function of more product repositioning? Give us a sense in terms of where you are in the process and a sense of whether you are getting more aggressive on the pricing side given where the backlog is and the desire to bring that down to inventory.

Stuart A. Miller

That is an interesting question, Dan. I think that in the context of the discussion this morning, the program that Bruce talked about, that program is new as I said before. I think that the market, the market uptick is not brought on by an additional marketing campaign. In fact, I would say that pretty much every week we are going to market and have been for the past year, going to market with new aggressive marketing campaigns. And I think this goes for all of the builders, we are all aggressively marketing with incentives and programs on a regular basis. So, while this interest rate program is one form, there might have been another form last month or the month before. So when you ask the question about volume picking up, I think that you are really looking at a pretty steady state of marketing expense, maybe formulated differently, and I think you are seeing legitimate uptick in sale.

Daniel Oppenheim - Credit Suisse

Okay. And in terms of the joint ventures, wondering if you can give a sense in terms of what the asset value was on those and what there is in terms of overall impairment levels on the JVs and think about that relative to balance sheet assets.

Stuart A. Miller

We sensed that this question might come up. Again speaking to additional disclosures, I think that we are disclosing what we put out. We really didn''t want to get in to and we are not disclosing impairments on individual assets. And s o, as it relates to this, we actively thought about it. We knew it would drive a bigger question that we just never get to a point of answering. So we are just not going through individual impairments.

Daniel Oppenheim - Credit Suisse

Okay. Thanks.

Stuart A. Miller

You bet.

Operator

Our next question is coming from Josh Levin of Citi.

Josh Levin – Citigroup

Hi, good morning, everyone.

Stuart A. Miller

Good morning, Josh.

Josh Levin – Citigroup

With regards to the proposed land source transaction, would it be fair to say that it''s a purely voluntary transaction on Lennar''s part meaning that this in no way is a recourse obligation in disguise?

Bruce E. Gross

Yes, that''s correct.

Josh Levin – Citigroup

Okay and I know you''ve been trying to raise capital for new land fund and maybe you can give us an update on how that''s going and what investors are saying?

Stuart A. Miller

Unfortunately that''s what I can''t do. You might know that this is structured as a private placement, and I can''t really do anything or talk much about it, without stepping on some of the disclosure rules. But I think that just in a general sense we are out talking to investors and look forward to having a program in place.

Josh Levin – Citigroup

Okay. Thank you very much.

Stuart A. Miller

You bet.

Operator

Our next question is coming from Timothy Jones, Wasserman & Associates.

Timothy Jones - Wasserman & Associates

Good morning.

Stuart A. Miller

Good morning, Tim.

Timothy Jones - Wasserman & Associates

First question is quick, of the $300 million, first of all why did your unsold units rise to almost 200 units in the fourth quarter? You touched on it but I didn''t quite understand that.

Stuart A. Miller

Well, there were a number of issues, or a number of reasons. First of all, in California right towards the end of our quarter, there was a new tax credit announced that didn''t kick in until the first day of our new quarter.

Timothy Jones - Wasserman & Associates

Yes, but they wouldn''t be unsold, they would be sold.

Stuart A. Miller

Oh, I''m sorry. I thought you said --

Timothy Jones - Wasserman & Associates

No, why did unsold units rise 200 units, in between the fourth quarter and the first quarter, the $300 million of completed and unsold.

Bruce E. Gross

Yes, it was really a result of the market conditions, Tim.

Timothy Jones - Wasserman & Associates

Do you think a 3.58% program, do you think you could sell at least a third of them this quarter?

Bruce E. Gross

We would be disappointed if we didn''t sell and close many more this quarter.

Timothy Jones - Wasserman & Associates

Really. You are looking for over 50% then?

Bruce E. Gross

We are looking to significantly bring down that number as we close out Q2.

Timothy Jones - Wasserman & Associates

That will help the cash flow. Now the second one you talked about reducing the size of your homes by 12% and the cost by 11%. Were you talking to a specific -- was that companywide or specific number of homes or what?

Stuart A. Miller

No, that was company wide.

Timothy Jones - Wasserman & Associates

Okay. How much have you reduced the land on these homes? The size of the lots?

Stuart A. Miller

We haven''t reduced the sites of the home sites.

Timothy Jones - Wasserman & Associates

You haven''t. But you reduced the different size of the -- why is that because it takes too much to go through the permit process again?

Stuart A. Miller

The land in many of these instances is already developed, the cost of redevelopment would be very expensive and the time involved would also be expensive.

Timothy Jones - Wasserman & Associates

And lastly related to this, your gross margins went down, you were hit with 150 basis points, you''d still have like a almost under a 16% gross margin versus 17% to 18% in recent quarters. You really have not increased your incentives, in fact you decreased it, what else has hit you there given the fact you reduced your cost per home and per square foot by 11%?

David M. Collins

Just to go through the math on the incentives though, Tim, as a percentage of the sale price, the incentives actually went up 240 basis points.

Timothy Jones - Wasserman & Associates

As a percentage of the sales price, okay, thank you.

David M. Collins

You''re welcome.

Scott Shipley

And why don''t we do one more question.

Operator

Our last question is coming from Susan Berliner, JPMorgan.

Susan Berliner – JPMorgan

Hi, thanks.

Stuart A. Miller

Good morning.

Susan Berliner – JPMorgan

Two quick questions, one is I was wondering -- I know a lot of people are trying to get at the cash flow number. And I guess the land spend is a big variable. Would it be fair to say to annualize that1 $75 million number you gave for the first quarter?

Bruce E. Gross

I think it''s fair to say that we are keeping our land purchases down as much as we can. It doesn''t mean as the year progresses that we might not find an opportunity. But I would say that that''s a good starting point.

Susan Berliner – JPMorgan

Okay. And then my other question was I was wondering if you could tell us what your availability on your bank line is right now?

Bruce E. Gross

Sure. Let me just highlight and I think you all appreciate when you see the 10-Q that we will be filing next week. We''ve decided to include the calculations of tangible net worth covenant, leverage ratio and the borrowing base amounts that are available. And we are going through the calculation right now with borrowing base but I could tell you that we are in a position where we can borrow. If you remember in prior quarters, we weren''t able to because we needed to use our cash first, we are in a position to be able to borrow under both of the borrowing base tests. And on the tangible net worth calculation we have between $500 million and $600 million of cushion available. So those calculations and exact amounts will be available to all of you next week.

Susan Berliner – JPMorgan

Okay, great. Thanks very much, Bruce.

Bruce E. Gross

You''re welcome.

Stuart A. Miller

Okay, great. Well thank you everybody for joining us for our first quarter update and we look forward to keeping you posted on the progress within the company as we go forward. Thank you.

Operator

This will conclude today''s conference, all parties may disconnect.