Lennar Q2 Earnings Call Transcript

123jump.com Staff
01 Jul, 2009
New York City

The homebuilder quarterly revenues declined 21% to $891.9 million partly on fewer sales of completed homes. Net quarterly loss widened 3.5% to $125.2 million. Earnings per share were 76 cents, flat with a year-ago quarter. New home orders rose 63% between the first and second quarters.

Lennar Corporation ((LEN))
Q2 2009 Earnings Call Transcript
June 25, 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

Analysts

Stephen East - Pali Research
Adam Ruter - Wachovia Securities
Ivy Zelman – Zelman & Associates
Josh Levin - Citigroup
Michael Rehaut – JPMorgan
David Goldberg - UBS
Nishu Sood – Deutsche Bank
Daniel Oppenheim - Credit Suisse
Timothy Jones – Wasserman & Associates
Megan Talbott McGrath – Barclays Capital
Jay McCanless – FTN Equity Capital Markets
Joshua Pollard – Goldman Sachs
Eric Landry – Morningstar

Presentation

Operator

Good morning and welcome to Lennar’s second 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 call is being recorded. If you have any objections, please disconnect. 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 related to Lennar''s future business and financial performance. These forward-looking statements may include statements regarding Lennar’s business, financial condition, results of operations, 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 second quarter 2009 update. I''m joined this morning as usual by Bruce Gross, our Chief Financial Officer, Diane Bessette, our Vice President and Treasurer, and David Collins, our Controller.

I am going to begin with some opening remarks about the current housing market in general, then comment on our homebuilding operations, and finally focus on the progress we have made on managing our balance sheet and asset base. After my remarks, Bruce will provide additional detail on our numbers and then we will open the phone to your questions. And of course I would like to request that during our question-and-answer period everyone please limit to just one question and one follow up so that we can be as fair as possible to all participants.

Now, as you can see from our press release this morning we got a very productive second quarter. In the second quarter we saw a 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 there are some significant positive influences out there that are beginning to shape a more positive future.

The abject pessimism that has defined the overall market sentiments for the past year or more seems to have given way to a sense that opportunities are available for those who can qualify. When low price points are offered in the marketplace we are seeing that there are more anxious buyers interested in making the purchase and home affordability is at record highs as well.

Additionally, pent-up demand is beginning to reveal itself. In the foreclosure arena, we are beginning to feel a greater number of primary buyers looking to purchase bargain homes as primary residences as opposed to investors looking just to make money. While there might be a temporary oversupply of homes defined by the foreclosures they continue to add to the available inventory.

Real purchasers are starting to take advantage of interest rates and tax incentives to satisfy real needs. 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.

Long term we are undersupplying the need for homes and we are seeing evidence that the demand side of the market is starting to weigh in once again. By no means am I suggesting that we’ve turned the corner. I am always suggesting that we are starting to see signs that there is a corner out there to be turned and that the fact that there are factors presenting that will at some point help make that turn.

We are 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 inventory 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 impacts affordability. Tax credit programs that have stimulated purchasers to make purchases are ending in California or coming close to an end nationally.

And unemployment and gas prices are on the rise. Today’s economic environment in the housing market is tenuous at best and still suggests a great deal of downside risk. But that’s materially better than the absolute hopelessness that has existed for so long.

In the context of difficult market conditions, Lennar’s strategy has been to streamline our core homebuilding operations for profitability and cash flow and to position as a pure play homebuilder in a stabilizing and then recovering market.

Concurrently, we have been focusing on the asset management side of our business and have fortified our balance sheet to provide a solid foundation for our operations and to be positioned for growth as market conditions stabilize.

We’ve continued to make significant progress in both of these areas. Our homebuilding operating strategy is well defined and focused at the divisional level. We have four operating regions – northeast, southeast, central and west and 29 homebuilding divisions. Each division is focused on reducing and refining its asset base, identifying its core communities and core product offering, generating current operating cash flow and operating at break even for profitability.

Since quarter end, I have continued my quarterly operation reviews by going out to each of our operating division to monitor progress and I am 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.

Divisions that are operating at a profitable level are beginning to look at distressed opportunities to grow and expand organically leveraging their well run operating platforms while divisions that have not yet achieved profitability are purely focused on getting there. How do they get there? It’s right product, right cost, flash price and right size G&A.

First, in every division we have reworked our product to appeal today’s value oriented, first time, and move-up purchasers. These are the customers that benefit most from the tax incentives being offered and from low interest rates. So today, we are focused on offering homes that are priced and designed to offer a great value in each market.

We also know that architecture and product by its nature very localized. The value equation is different from Baltimore to Dallas to San Francisco and as a result our product strategy is extremely market driven and designed to quickly adapt to market changes both up and down. Today, value defines the market while tomorrow the market may demand larger homes and greater specifications.

Given the continuing dynamic shifts in market driven consumer demand our operating systems are focused on speed to market for new products that adapt to current market sentiment and a detailed financial analysis of each product offering.

The second step to profitability has been to provide the right value proposition meaning the right price to the customer, which is defined by the right cost to construct and the right efficiencies in the field.

As customers have been demanding more affordable, smaller square footage homes and with volume declining in a shrinking market we focused on rebuilding a streamlined, centralized homebuilding machine that will thrive when the market stabilizes and will comfortably scale larger and adapt to changing customer demand as the market expands again.

Today, we have strategically centralized accounts payable, processing, and purchasing functions in three regional operating centers across the country and we significantly reduced our construction cost by having shared services executed by a small group of associates.

Through our regional operating centers we are able to quickly identify our most efficient and higher gross margin plan and provide detailed cost information to our operating division. Additionally, over the last year we have reduced the number of floor plans that we offer by approximately 30% in order to additionally promote efficiency.

Centralized purchasing through our regional operating centers had 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 everyday. Over the past year we have debundled 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 cost versus purchasing by plan for community.

In each region we are buying materials and labor at the same price across all product line. 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 up to 20% even while the square footage size of our homes is down by approximately 12%.

As I have gone on my division tours I am seeing examples of where costs are being reduced even more than these averages and those cost reductions are translating into meaningful value propositions for our customers.

The third step to profitability for each division is the right sized operating team of homebuilding professionals with the right organizational structure to keep our SG&A low and profit from the market as it exists. Our regional operating structure works with our lean division operating teams to keep our fixed cost down and to stay focused on maximizing cash flow while generating bottom line profit.

As I have gone out to each division, I’d met with the entire operating staff and have spoken with the people that are working in each aspect of the division. The focus incentive purpose can be felt. As an example, just yesterday I was in our Chicago division and that was where all the associates wear the Lennar name badge in that market. While we have materially reduced the size of the division the associates are a lean tight-knit group who are determined to get to profitability so that they can begin to look for new opportunity in today’s distressed environment. Clearly, this market has gone through enormous change.

At the peak, we employed over 400 associates and occupied 92,000 square feet of our office space and we delivered over 1,200 homes. Today, we have a group of just 31 professionals. Our office space is roughly 6,900 square feet and we are 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.

Our team in Chicago has endured significant and painful change but the spirit and positive attitude of associates like these keep us all focused on the opportunities in these difficult times. Now the Chicago example is just one example and is certainly alone. I could be speaking of any of our divisions that I visited. They are all in the same situation having reduced their operation and having repositioned themselves for a profitable future.

Now, while we have 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. More importantly, we are positioned to leverage our lean operating structure with minimal incremental expenses as the housing market recovers.

Prior to our reorganization, we operated in extremely decentralized organization while today we are organized for efficient operation in this most difficult market condition and prepared to grow as opportunity presents itself.

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 assets while we continue to manage our inventory of completed homes and reduced the number and composition of our joint ventures. We have 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’ve significantly reduced our land asset base which now requires less management time and is a far smaller base to a bear should market conditions continue to worsen.

As I said in prior quarters we have 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 quite a long way.

As you can see from our press release we have continued to reduce the number 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 million last quarter and from $1.8 billion at the peak or approximately a 76% decline.

We will continue to update the more detailed information on our top 10 joint ventures that we filed with our first quarter disclosures and we will file that update with our 10-Q in the second week of July. We hope that these disclosures will continue to shed light on the substantial progress that we are making 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 when they come out.

Our balance sheet remained 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 total debt to capital position net of cash that is at 32.9%. Our balance sheet cash position continued to provide stability as the market declined and enable us to seize opportunity where distress creates unique value as the market stabilizes. Accordingly, as you can see in our release today we have continued to fortify our balance sheet as we seek to provide further buffer against further erosion in the marketplace while having available liquidity to capture opportunity as some markets stabilize and improve. To that end we retired $281 million of senior notes in the past quarter while we issued $400 million of senior notes and approximately $126 million in equity.

In conclusion, let me say that we have made a great deal of progress in our second quarter even while the market has remained difficult. We have prepared our company for market conditions as they currently exist. We are well prepared for more downside even while we are beginning to see signs of real improvement. Although it is 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 homebuilding market will rebound, it will have to in order to stimulate the rest of the economy back to its feet and as the market finds the bottom and begins to recover we will be well positioned to participate.

At Lennar, we have made significant progress in repositioning our homebuilding business as a scaled down and lean operation. We strategically positioned our balance sheet to be able to participate as opportunity presents itself and we have adequate resources to weather the difficult market conditions that are in front of us and we continue to focus on the operational element that will drive us to profitability and continued positive cash flow in the future.

Thank you, and Bruce.

Bruce E. Gross

Thank you, Stuart and good morning. In the second quarter 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.

Operationally, we generated cash by carefully managing our inventory. As Stuart mentioned, we cut our completed unsold number of homes by 53% from 1,321 to 626. We also continued to reduce our starts base 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.

We continued to reduce our land purchases and land development spend as well. Land purchases were only $58 million in 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

Sequentially, our inventory before consolidated inventory not owned declined from $3.9 billion in the first quarter to $3.7 billion this quarter. We accessed the capital markets for both debt and equity this quarter. During the quarter, we announced an equity drawdown program to have access to the equity markets in a flexible manner if we choose to issue equity.

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% senior notes totaling $281 million. These capital market transactions along with the positive cash generated from operations had 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.

As Stuart mentioned, there we no outstanding borrowings on our revolver but additionally I want to mention that we have been in full compliance with all of our revolver covenants. Additionally, 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 is close to $19 per share if we add back our deferred tax asset valuation reserves. Our balance sheet liquidity position improved throughout the same time. We continued our trend of significant progress towards reducing the number of unconsolidated JVs and related recourse indebtedness. The maximum recourse indebtedness is down to $422 million, down $52 million from the previous quarter, first quarter of this year and we continue to see success in restructuring or refinancing joint venture loans as they mature.

The company has continued its focus on reducing the number of JVs. The 83 JVs that we have at the end of the quarter of those, 32 have recourse debt, 19 have non-recourse debt and 32 have no debt at all. We are confident that we will continue the significant progress in further reducing both the number of unconsolidated JVs and the maximum recourse indebtedness to Lennar. And we are happy as Stuart mentioned to go through any questions you have on the additional JV disclosure once that’s filed with our Q.

Turning to the operating results for the quarter, as mentioned in the press release we had a loss per share of $0.11 per share before the impairments and deferred tax asset reserve. If you look at the average sales price to give it 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 to 53,000 for the quarter versus 49,000 in the prior-year’s quarter.

Our gross margin was 14% before impairments. The pre-impairment gross margin declined 190 basis points over the prior year and the primary driver of this decline was a 220 basis point increase in sales incentives as a percentage of revenues as our primary focus has been on reducing completed unsold inventory and converting it to cash as we did this quarter. These higher sales incentives more than offset the progress that has been made in introducing new plans and reducing construction cost.

Turning to impairments in this quarter we recorded $99 million of valuation adjustments in writeoffs compared to $137 million in the same quarter last year. The categories were as follows – homebuilding was $35 million, land sold or under contract was $6 million, writeoffs of option deposits and pre-acquisition costs, $2 million and joint ventures, $57 million.

We have continued to focus aggressively on reducing SG&A cost 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 the first quarter.

Throughout this downturn we have implemented aggressive cost reduction initiatives resulting in a lean and efficient infrastructure and as volumes increase we will see the benefits of leveraging the sufficient overhead as noted by this quarter’s result.

New orders narrowed year over year declining to 19%. However, noted substantial improvement, up 63% sequentially from the first quarter. The cancellation rate was 15% for the quarter versus 22% last year in the second quarter, and last quarter we indicated that we expect to operate at a very high backlog conversion ratio and it came in at a 191% for this quarter.

We recognize 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. Financial services also implemented aggressive cost reduction initiatives through the downturn and during the quarter we were able to significantly lever this efficient operation also noted by this quarter’s results.

Mortgage pretax increased to a profit of $14 million from a profit of $8.1 million in the prior year. Low mortgage rates led to increased transactions and a higher profit per loan in the quarter. This quarter’s mortgage capture rate increased to 89% from 85% in the prior year. Our title company returned profitability as it earned $3.2 million compared with a loss of $10.8 million in the prior year.

The company is financially strong and our operations are lean and efficient from our cost reduction initiatives positioning us well for the ultimate recovery. And with that we would like to open it up for questions.

Question-and-Answer Session

Operator

We will now begin the formal question-and-answer session. If you would like to ask your question at this time, please press “*1” on your touchtone phone, you will be announced prior to asking your question. If you would like to withdraw a question, please press “*2”. Once again to ask your question, please press “*1”. One moment for the first question. Our first question is coming from Stephen East of Pali Research. Your line is open.

Stephen East – Pali Research

Good morning, guys. First on the JVs. I guess if you could sort of give 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?

Bruce E. Gross

Okay let me answer, relative to the JV charges we had $57 million of charges during the quarter. And to your question Stephen we had $59 or $60 million in total of losses from the JVs. Was your question wondering geographically where those charges were?

Stephen East – Pali Research

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 for the charges, what was driving that.

Bruce E. Gross

There were a few JVs that had larger charges; a couple of them based 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.

Stephen East – Pali Research

Okay. 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 and do you think you can continue to put a similar type of order stream in place?

Stuart A. Miller

Well Stephen, 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 for the future and I don’t think we have done that at all.

Stephen East – Pali Research

Okay, great. And then just the last thing, on your corporate SG&A you had a run rate that you saw in 2004, how much of that is related to consolidate synchronization that you talked about versus just really needing to get that cost structure down further.

Bruce E. Gross

Just to clarify Steve, you said corporate SG&A?

Stephen East – Pali Research

Yes, the corporate general and administrative line that you report.

Bruce E. Gross

Well, going through and answering that question relative to how much of that was relating to some of the centralization, the centralization of purchasing and accounts payable that Stuart mentioned that factors into SG&A, not into corporate G&A.

Stephen East – Pali Research

Okay and then if we look at corporate G&A your total dollars the first half of the year are about the same as they were in 2004. Can we expect a better performance there or you said something that you have reached the bottom line?

Bruce E. Gross

No, I don’t think we’ve reached the bottom line in corporate G&A. We still see opportunities to reduce legal costs for example so there’s no room to go down in the corporate G&A area.

Stephen East – Pali Research

Okay, thanks. Great quarter, guys.

Operator

Our next question is coming from Carl Reichardt of Wachovia. Your line is open.

Adam Ruter - Wachovia Securities

Good morning. It is Adam Ruter in for Carl. I was wondering if you could talk about, if you wanted to exclude any joint ventures or land funds and just talk about directly with Lennar’s capital, what kind of inventory investments you have made or you plan to make or can you 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?

Stuart A. Miller

I will answer the first part and Bruce will come back and answer the second part. But as we look ahead right now and as we are looking in many of our divisions we think that the opportunities that are presenting themselves to grow organically and to look at next communities which are going to be almost exclusively with rolling options home site. There’s availability in most markets. We are not going to expand until we’ve achieved operational efficiency in each market but as we do we will look for those kinds of opportunity. We don’t see any reason to start taking any kind of land risk and we think that the cash outlay will be small.

Bruce E. Gross

Ten 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 are taking down home sites 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 through immediate use and construction in progress.

Adam Ruter - Wachovia Securities

And did you during the quarter tie up any new option parcels? Excluding JVs just kind of direct, one-armed investment in option deals.

Stuart A. Miller

The answer is yes, a couple but we won’t specify.

Adam Ruter - Wachovia Securities

Okay. Thank you.

Operator

Our next question is coming from Ivy Zelman of Zelman & Associates. Your line is open.

Ivy Zelman – Zelman & Associates

Thank you. Good morning. Great quarter, guys. So you are very pleased with the progress. I just want to understand when you said your starts were down, Bruce, I think you said 37%, of those starts how much of it is based on specs? Obviously, you did a great job of getting your spec down but you also closed 191% in your backlog so when we look at conversion of backlog going forward I am trying to sort of gauge and get an understanding of what we should be looking at going forward? And your spec strategy and conversion.

Bruce E. Gross

The starts were down 39% year over year to 2,724 and the 191% backlog conversion ratio I would not expect it to be a side going forward because we did have a higher number of completed unsold homes that we are able to move and turn into deliveries quickly this quarter. So I would expect that conversion ratio to come down a bit and the balance between what’s started and what’s sold first continues to be balanced. It’s been running about 50-50.

Stuart A. Miller

One of the things that I think is noteworthy in particular as I have gone out to the field, I have seen that our cycle time is coming down dramatically just by a force of focus. So that impacts our ability to start to deliver in greater proximity to point of sale.

Ivy Zelman – Zelman & Associates

Great. Thank you for that. Just secondly, with respect to your opportunities to go out and capitalize on some of the distressed we look at your---however, we got your total lot count but roughly like a 5 to 6-year supply the way we calculate it in total and realizing that you might have opportunities, some are out there, we hear frantically looking for finished lots and trying to tie them up through soft takedowns and minimizing cash outflow, some are buying them and paying more than investors would pay and maybe a more opportunistic angst what they think the market will be or just generally more upbeat but also that the finished lots are diminishing in your overall portfolio in that you can’t develop ground right now because ground is arguably still too -- the original value is either negative or too low so you can’t put money in the ground. When everybody says those want to buy land the first question I get Stuart from every client is why the hell do they need land? It’s obviously helpful I think for everyone to explain how you balance that because you do have that returns that are going to be negatively impacted by carrying as much land as you have on the books despite the fact that you are saying you want to go out and buy land. Maybe put that in some perspective so that everyone is going to understand that.

Bruce E. Gross

Yes, thanks. I think that is helpful. The answer to that question is that when we look at the corporate level and we say okay, how many homes do we have divided by how many are we delivering over the course of the year, of course we can come to a 5, 6, 3 whatever number of the year’s supply but really when you operate the business you have to do at the local level and so while we might have land positions that are holdovers from prior purchases that might be larger land positions that have large number of home sites those positions might be absorbing at a disproportionately small level relative to -- we might have a 10-year supply in one place and a zero-year supply in another so when we are saying we are looking for land opportunities and maybe purchasing we might be purchasing a new community or additional home sites in an already existing well-run community where we have a short supply and yet in another part of the company we might be oversupplied. You are absolutely right. From a return on investment position it would be far more efficient if we could divest some of those longer term land positions but the market doesn’t afford that opportunity right now and those inefficiencies will remain embedded in our company’s balance sheet for some time. And I think that’s across the industry.

So our program is to look very locally community by community, find stabilization in each of our division, get to either breakeven of profitability and then add organically with low cost home site by home site position. Now you have also noted that there are others also that are looking for home sites frantically. In some markets there are precious few available, in other markets there are home sites available. So you can’t really listen to what one builder or another is saying because they might be focused on certain markets and not focused on others where we might be focused.

While we tend in this conference call look to that level when you get down to the division level and community by community the view of the market and the opportunities that exist are very different on locale by locale.

Ivy Zelman – Zelman & Associates

That’s perfect. Thank you for that. And lastly if I could sneak another one in, your comments when you opened were helpful and you sounded more optimistic, admittedly cautiously optimistic than you have been in a long time, what do you think about the tax credit going away and mortgage rates approaching 6%. I know that we are starting to see a little bit of following and it might just be summer, (inaudible) but isn’t it -- I think you said it’s worrisome but is it possibly portfolio demand because in fact people were purchasing and taking advantage, especially in California with the $10,000 new home tax credit that is not likely to be getting more money above the $100,000 million that they have allocated from what we are hearing.

Bruce E. Gross

My personal perspective is that from a demand standpoint we have pushed demand to a very low level. If you look at overall home transactions, not just new home transactions, not an annualized program of 340,000 but nationally I think you are under 5 million a year. We probably need to transact more than that in order to keep up with population trends. But today the economic environment is depressing that demand.

Ivy Zelman – Zelman & Associates

Is it also because your home ownership rates are 67% and are you believing you have people that maybe the demand isn’t going to be as significant, especially with home ownership rates so high.

Bruce E. Gross

Well, I think that we can only guess at the answer to that question because we can put really, really smart people together in the room and they will disagree. There are a lot of people who study this full-time who say that the demand is much greater than we are seeing and then there are others who say that hey, we have got too many people living in owned homes. I respect the debate. My personal perspective is that we are building pent-up demand and at the more normalized time we are going to see it is going to reveal itself. I feel like we are already seeing that.

I think that in prior quarters and what I was trying to suggest, in prior quarters we have seen a lot of activity out there that was primarily dominated by investors who are trying to make money on trading deals. I am seeing a much more fundamental primary purchaser enter the market today and I am not talking about our market. I am talking about the broader existing home market. We are seeing -- when we see foreclosures out in the field that the people showing up to make these good deals are people who need primary housing.

And now how the market is actually going to reveal itself and evolve over the next years I don’t know but I do think that we have population pressures that are ultimately going to turn into pent-up demand and undersupply demand at a point. So, I think we are in for a rocky road for the short term, at least over the next year, maybe two, but at some point that’s going to turn on itself. It’s my perspective.

Ivy Zelman – Zelman & Associates

Thank you. I appreciate it.

Operator

Our next question is coming from Josh Levin of Citi. Your line is open.

Josh Levin - Citigroup

Good morning, everybody. I wanted to ask about the timing of your equity issuance. Given the significant cash balance and the fact that your stock sells at a steep discount to book, why did you decide to issue equity this quarter as opposed to waiting until some point in the future, you have until 2011.

Stuart A. Miller

Josh, we view our balance sheet is kind of from two directions. Number one, we think it’s important to have a good, solid balance sheet that’s positioned to be stable but we also think it is really important in times like these to have an adequate what we feel is a buffer.

As I said in my opening remarks I see reason for some cautious optimism but there are still significant headwinds out there that define a lot of downside risk. To me, I don’t want to raise capital the last minute that I need it. I want to be ahead of the curve. I want to have a buffer because I am not willing to say that we have gotten past this storm and so I want to make sure that we have not only adequate capital to sustain ourselves through this market condition but I want to make sure that we have adequate capital to sustain and to grow as the market ultimately stabilizes.

So, I feel that I want to be three steps ahead of where I need to be. So we did get out there and raise additional capital through equity offering as well as debt and we are going to leave the options open to continue to do the same.

Josh Levin – Citigroup

Okay, one follow up question. Again about the stock valuation. When you obviously trade to the steep discount to book and also your peers, as CEO and a large shareholder, how do you think about the valuation gap? Is it something that you think about often? Is it something that can be addressed in the near term or just takes time, basically go away in time?

Stuart A. Miller

I realize Josh that I am talking to investors and analysts and I want to do that respectfully. I think a lot more about the day-to-day operations than getting out into the field and making sure that our operations are carefully adjusted to the current market condition and that we are getting to profitability. I think at the end of the day, as we perform the way that I would like to see us performing and the way that we will be performing. I think that the market will take care of itself. I think that most people know that I personally have spent the bulk of my time focusing on the operations as opposed to worrying too much about the stock price and that’s where you are going to see a lot of my time continue to be spent in the field working with the divisions to get to profitability.

Josh Levin – Citigroup

Okay. Thank you very much.

Operator

Our next question is coming from Michael Rehaut of JPMorgan. Your line is open.

Michael Rehaut - JPMorgan

Hi, thanks. Good morning, everyone. First question just on the level of impairments, if we go back over the last couple of years you guys obviously had a couple of very large impairment quarters in the third and fourth quarter of ’07, punctuated by (inaudible) with the big transaction you did but over the last six quarters much more muted and if you compare to many of your other peers over the last six quarters there have been larger impairments and typically what has been driving that from their perspective has been that you had a declining home price environment and you have actually had to re-impair many communities and sometimes that’s caught up in a much larger sense. So I was wondering if you could kind of comment on that and if there are different methodologies that you are using and why hasn’t the continued steady decline in home prices resulted in larger charges over the last six quarters.

Bruce E. Gross

I think you are right. If you go back over the last six quarters our impairment numbers are lower and I think what you are really alluding to is we were ahead of the curve in taking our impairments. We did a very large transaction and moved a lot of land off of our balance sheet with the Morgan Stanley transaction and you can’t impair what you don’t own any more. And then we also had a lot of joint venture investments where we shared impairments with partners.

We have a 20% discount rate as we look at the impairments so we are looking at this and I think our assumptions are very conservative and we have been believing for a couple of quarters that we are very near the end of the impairment process and the reason that we have impairments still is because prices have been coming down the last couple of quarters.

Stuart A. Miller

We haven’t talked about it much and we are not likely to spend a lot of time on this but the fact is we did get out early and we have reacted to the market condition early. Bruce is absolutely correct. We sold a number of parcels strategically earlier on in the cycle. Once you have sold something you don’t impair it any more, it’s gone, it’s turned to (inaudible).

Additionally, there’s been a lot of discussion about our joint ventures and we sat back and we focused on dealing with our ventures. In a lot of ways the term joint venture has become synonymous with something that is not good or evil or something. But remember, that each of our joint ventures was backed and is backed by an asset, a real hard asset. That is the way they were structured and they were structured as risk mitigating programs so there might have been debt at the time conservatively put in place but our ownership, our actual ownership of the land, the asset and participation in the venture was somewhere between 10% and 50%. So we might have had a very small piece of ownership in that overall asset. The more we tied up and had under control a lot of assets we were invested in a small percentage of it and I think that’s working a little bit to our favor right now. And I think that our impairment as we go forward, I think that we are taking as conservative and consistent a view of how to impair property. As anybody else we have suffered through the downward turn in market conditions and that’s why we continue to have impairments but I think we are benefiting from the fact that we got out early and we mitigated risk with some of our structures.

Michael Rehaut - JPMorgan

Great. I appreciate that, Stuart. Second question on the sales and order pace and certainly you came in solidly above my number and you commented on your thoughts of different drivers, I was wondering if you could perhaps by segment that you could break it up, perhaps highlight on a more metro or regional level, particular areas of improvement on top of the numbers that we see East, Central, West if there are some regions that maybe have performed better than the segment average or worse. And also, intra-quarter trends, in your prepared comments you had mentioned that perhaps more recently with higher rates or with the tax credit starting to reach their expiration, if you have seen any type of slowdown or any type of commentary on a broader basis in terms of months to months how it has progressed.

Stuart A. Miller

Well, Mike, first let me say, a) I know that that’s a compound question so it accounts for multiples ones, you don’t get any more. And second of all I would never presume to take away from Bob Toll the opportunity to grade each opportunity individually. So I can’t step on his toe but I can give you the following color. I can say that pretty much across the board the tax credit that was offered nationally has been somewhat of an incentive to the marketplace. It’s gotten a number of the markets moving for first time homebuyers and that is the $8,000 non-monetizable tax credit that was offered nationally.

I think what is most notable though is the California credit and the California experience where we have seen a discernible pick up in our California market primarily driven by the additional incremental $10,000 tax credit that has been offered in that marketplace and is on the verge of going away because the fund available were limited and were coming to the end of that. But the California example is a really good one in that it has done a lot to stabilize that market. It has a meaningful impact both on volume and on stabilizing pricing as well and the fact that that credit is going away will potentially have a negative impact.

The positive side of that is that we are kind of starting to see legislators, both locally in California and nationally, start to recognize that stimulating the market, bringing the demand side back to the market is what is going to stabilize housing prices and ultimately get the economy overall back on its feet and I think that we are seeing the key to the kingdom being highlighted right now whereas what we are also seeing is that the foreclosure prevention programs that have been highlighted and been primary drivers out there are having very little effect.

So the negative is that we could see a fall off in demand as these programs go away. The positive is that we are likely to see the program’s effectiveness that we have seen in California and to a lesser extent nationally translate into new programs being initiated. On the national front you are clearly seeing with Johnny Isakson reintroducing his Bill for $15,000 tax credit and the movement towards the monetization you are seeing that start to get into the active discourse and in California I can tell recently with a group of builders that were with the Governor and it is clear that that governmental group is looking at how they can get more money into the program because they have seen it have a meaningful positive impact in what is a distressed state.

So across the country we have seen impact from these programs. In California, we have seen even more impact from the program and I think that we are going to see more programs to help housing back on its feet and moving forward.

Michael Rehaut - JPMorgan

Just before I am cut off here returning to the question, any more granular detail on the East region in particular – Florida, New Jersey, Mid-Atlantic and also any commentary on intra-quarter trends?

Stuart A. Miller

On the eastern side in Florida we certainly haven’t sent the kind of accomplishments that we have seen in California at a market level. Relative to our divisions we are getting to stabilization, breakeven and profitability even in these distressed market conditions. Along the eastern seaboard we are seeing a little bit more stabilization and strength and you really have to look market by market, New Jersey and Virginia might be a little bit stronger than some of the Carolina markets. I really can’t go through each one now. I am not really prepared to go through each one. Okay, next.

Operator

Our next question is coming from David Goldberg of UBS. Your line is open.

David Goldberg - UBS

Thanks. Good afternoon, everyone. First question here, looking at new land deals and potentially purchasing lots when necessary, I am wondering what you think about risk control from that perspective. Should we see home prices come down more in certain areas? Should we see foreclosure levels start to rise driving pricing down? How do you think about risk control in terms of pricing when you look at new lots?

Stuart A. Miller

Good question, David. I think that in our world right now we are keeping our focus very, very short term for exactly the reason that you are highlighting. We are buying each home site. We are looking at buying home sites as we need them because the potential for the market to continue to fall is clearly out there and I guess the message I have made to each of our division is if we are going to explore new opportunity I want to make sure that we are not buying tomorrow’s impairment. So we are making sure that as we take down some home sites we are selling the home, we know what the purchase price is, we know what the profit is on that home and we are not obligated to take down the next two, three, four or five home sites without a price adjustment should we need one.

So we are really focusing on being pretty stiff backed on anything that we are looking to purchase going forward.

David Goldberg - UBS

And the fact is that you are not concerned about price decreases in the intermittent. It’s probably an act of the take down.

Stuart A. Miller

You mean after the take down of the home site?

David Goldberg - UBS

Exactly, before delivery.

Stuart A. Miller

So let’s say we sold a home for $150,000 and I have got a 20% baked in , the potential for home values to go down in that market before I actually deliver the home or the purchase contract being canceled I am certainly at risk relative to that pricing. But I think we are being pretty conservative and aggressive on pricing and leaving ourselves excellent margin, where if there is further erosion it’s still a positive net margin it might just be smaller. I think our risk is fairly short term.

David Goldberg - UBS

Second question, so you did a good job outlining I think some of the efforts in terms of supply chain, and purchasing, centralization. What I am trying to figure out is what’s the next step in that process? Where do you guys go from here now that you have achieved a lot of those benefits? What do you do to cut the cost structure further as you move forward?

Stuart A. Miller

Well, let me just change one word, you say that we have achieved, I want to make sure that I was clear and I think I said achieving. We are still mid-process in achieving the benefits associated with many of the changes that we have put in place. There’s more to be achieved and each division frankly is at a different point in that timeline.

I think the question where do we go from here; I think that we are getting to a point in our best run division where we are at a pretty high degree of efficiency. I think that we are delivering – actually we price product at a good margin. I think we are achieving being a low cost provider by having these national purchasing programs by disassembling materials and labor and really getting our hands around cost.

I think that the place that we go from there and as I said within each operating division that has achieved those efficiencies is to organically grow one small community, one small step at a time and adding profitability in that way I think will be fundamentally strong.

David Goldberg - UBS

Got it. Thank you.

Operator

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

Nishu Sood – Deutsche Bank

Thanks. First question I wanted to ask was the California Tax Credit has created a preference for specs clearly because the credit can only be applied for at the time of closing. So that probably has had helped you folks perhaps more than others because your skilled in handling specs. I wanted to ask your perspective on what you are seeing in other parts of the country. In other words during the spring season, did the low rates that the sense they were not heading into a Great Depression, did it also create a similar kind of urgency, preference for specs in other parts of the country.

Stuart A. Miller

A preference for specs. I am not ignoring any issue. I am trying to go through in my mind specifically what I heard in the field. I think it’s a mixed bag and I don’t know that it arrives exactly from the low interest rates or the tax credit or what not. I think in some markets we are seeing a greater propensity for people to be looking for something with a nearer term delivery because we are competing so directly against foreclosures and I think this goes across the industry. I think it’s why you are seeing new homes sales come down so dramatically. That 340,000 figure yesterday was -- that’s really life and I know that there are calls that people are saying that boy, we hope that no new homes are delivered but I think that’s pretty dramatic.

I think that the competition against foreclosures that are there available, ready to go is what’s driving that orientation towards, in some instances more of a desire to have specs on the ground. Now I would say that that’s more of a local phenomenon because when you are looking at foreclosures, not all foreclosures are generic or the same, many of them are in the intercity, many of them way are in the outlying areas, some of them are in total disrepair to the extent that a community in which we are building is desirable.

We don’t have to have specs on the ground or under construction in order to compete at all. So I think it’s a local market assessment that answers that question.

Nishu Sood – Deutsche Bank

Got it. I guess I know the debate about specs versus to be built preference, in a downturn is a debate that is always raging. I was specifically thinking about during the spring because your experience relative to the other builders who are let’s say more fixated on the to be built might give us a sense of whether or not the signs of stabilization or whatever you might call them are just capitalizing on a near term pulling forward of demand or as you were describing it might be the beginning of something more sustainable.

Stuart A. Miller

Well, first of all, I hope I haven’t come across as saying that I think I am seeing more sustainable. The one thing that I feel might be sustainable is I think that the mentality of the country has gotten out of this complete negative downward spiral mentality but that doesn’t completely offset the higher interest rates but more foreclosures, gas prices going up, unemployment going up. So there are a lot of headwinds out there.

I don’t think there’s an answer to your question. I think that we are going to have a bumpy road where there are going to be choppy data points that convince us one day that there is more downside and the next day we are stabilizing and I think we have to be prepared for the fact that we are not going to get a clear shot from Lennar from the other builders or from the market itself and there’s just going to be a bumpy group of data points to find where we are going for the time being.

Nishu Sood – Deutsche Bank

Got it, great and a very quick cash flow question. Did the quarter include prepayment for $140 million recap of land sources?

Bruce E. Gross

No, that would be a third quarter transaction would be our expectation if it gets approved.

Nishu Sood – Deutsche Bank

Okay, thanks a lot.

Operator

Our next question is coming from Dan Oppenheim of Credit Suisse. Your line is open.

Daniel Oppenheim - Credit Suisse

Good morning. I was wondering based on the more positive market conditions now, can you talk about the equity issuance which (inaudible) equity say it is priced during the second quarter, how do you look at that at this point?

Stuart A. Miller

We are going to leave all options open, Dan. We are trying to be smart about how we think about issuing equity. I think if you look at the way that we executed in the first quarter, when you talk about today’s price it moves around a lot, moving around a lot today.

I think that we have tried to be opportunistic if you look at where we issued stock in the first quarter. We really stay tuned to the market price. We are not saying today that we are going to be issuing more stock and putting more equity out there but we are not taking it off the table either and we’ll see what happens.

Daniel Oppenheim - Credit Suisse

Great and then the second question. I am just wondering I think you appropriately talked about the issues and a positive something come back to the market and also the interest rates. I was wondering about one other issue. We heard a lot about recently in terms of the appraisals on home code conduct are you finding more challenges with this, either during May or subsequent to the end of the second quarter

Stuart A. Miller

It’s been pretty consistent all the way through. The appraisal issue is out there and they are very real. We are finding a number of instances where we can sell a home and it’s hard to get an appraisal and this is a fight that takes place. We are going to be fighting this trend for some quarters to come as the market kind of repositions itself. So I think part of the problem of stabilization is going to be the appraisal market and how you get finance in normalized market conditions.

Daniel Oppenheim - Credit Suisse

Great. Thank you so much.

Operator

Our next question is coming from Timothy Jones of Wasserman & Associates. Your line is open.

Timothy Jones – Wasserman & Associates

I agree a 100% that you have been ahead of the market on your writedowns but I am very concerned about this $50 million writedown in your JVs which is obviously two areas in the West because that’s where the $50 million is and I want to know in California where were these two operations and why were they written down earlier? Were your partners trying to hold you back from taking the right dance because they felt West was bad for a year or two?

Bruce E. Gross

Tim, we go through this process every quarter and with the decline in prices that we have seen out there we have crossed over to the point where we thought there was an impairment necessary this quarter and then we discounted the cash flows as well. We didn’t think that our full investment in those joint ventures would be recovered but we look at these very close. We have been very conservative with this if we go back quarter by quarter. We have had much higher writedowns in investment JVs but this quarter we sell over the liquid fund on a couple of joint ventures out in California and it required a writedown.

Timothy Jones – Wasserman & Associates

Okay, second question is and I applaud you for the 20% reduction in square footage. Can you sort of give me a guess to how much of that is getting better pricing from your vendors, reduce labor cost from your suppliers, maybe less of amenities and more importantly redesigning and greeting the gains to build a house and can you give me a day, a number where have you gone from to just build a house?

Stuart A. Miller

Tim, that’s a great question and I strive to get the answer to that question at each division as I have gone out and the answer is it’s very different in each of our divisions and so when you roll it up and try to look at it on a national basis any of those percentages really, they don’t apply.

So, let me first correct the first piece of information. We said 12% in reduction in square footage, it was a 20% reduction in construction cost. So the reduction in construction cost derives from the following places. You are right, in part it derives from square footage, in part it derives from the reduction in features included in the home, and in part it’s materials and labor cost and I would have to say and it is a guess because it would be a compilation of a lot of different divisions with a lot of different data points but my guess is it’s probably about 50% from pure construction cost reduction and 50% from efficiencies in the home itself and when I say reductions in square footage I mean reducing the number of inclusions and then I don’t think I would include in that equation the efficiencies that come from cycle time reduction. We would see those flow through more in the finance cost, in the interest on assets deployed and so that efficiency would show up in a different place so it wouldn’t be part of that equation and the efficiencies we are seeing in the way that our field is structured would flow through G&A. So on the pure cost side I’d have to say that it is probably somewhere around 50% is just renegotiating contracts, 50% comes from efficiencies and what we are producing and there’s another peak that is interest reduction by having fewer assets employed for shorter periods of time, and then another piece in the SG&A part where we have reduced what it takes to have in the field to actually build the homes or our purchasing departments that have been regionalized.

Timothy Jones – Wasserman & Associates

Good answer. Thank you.

Operator

Our next question is coming from Megan McGrath of Barclays Capital. Your line is open.

Megan Talbott McGrath – Barclays Capital

Hi, thanks. I just wanted to follow up on a couple of earlier questions. First, a different way to ask I think a little bit what Nishu was asking around tax, which is if we have seen the California Tax Credit put some momentum into the market and assuming that the Federal Tax Credit does not get extended at the end of the year, are you looking out six months ahead and thinking about building more specs toward the end of the year to ensure that buyers can close on the home by the end of the Federal Tax Credit.

Stuart A. Miller

No, we are really keeping our spec level very close to the demand levels that we are seeing in the market currently and in areas like California we are anticipating that those demand levels will trail off and make the assumption that we are not going to see an extension of the program for the time being. That’s why you have seen our starts go down. We are really trying to keep very tightly focused on where we see the market going assuming the worst and hoping for the best.

Additionally, it’s why we are so focused on getting the cycle time down. I guess I spend a lot of time in the field with (inaudible) and there isn’t a time that goes by where he is not drilling down on what is the cycle time and how are we bringing it down and how are we getting focused on maximizing or minimizing the number of days it takes to build a home because we want to make sure we have the fewest number of specs anticipating that the market has some more downside risk.

Megan Talbott McGrath – Barclays Capital

Okay, thanks and just a follow up. While there is talk in the last couple of weeks on mortgage rates just wondered if you had any actual color or anecdotes where you have been hearing from people out in the field of the impact of these higher rates. Is it actually forcing folks to walk away just bringing fewer people in the door?

Stuart A. Miller

No, higher rates are clearly impactful, directly impacting affordability. It’s very clear that the Federal Government is well aware of that as they try to buy mortgages and securities in order to drive rates down. It’s not all that effective but in the field it is very clear that as rates have picked up you get an increase in traffic in purchases, people wanting to purchase but that dissipates pretty quickly as people are priced out of the market. The first impact comes from the fact that people want to get in before rates get