Lennar Earnings Call Insights: Start Performance and Homebuilding SG&A

Lennar Corporation (NYSE:LEN) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Start Performance

Alan Ratner – Zelman & Associates: It’s actually Alan on for Ivy. The question I had just relates to your stock performance year-to-date, which is underperformed despite obviously the very strong performance in your homebuilding business. We’ve heard from some client’s just general concerns or questions about your expansion into some of the other ancillary businesses such as apartments and obviously the Rialto business, which profitability has declined here a little bit. I was hoping you might be able to put the rising rates, put some perspective behind that on the impact on those ancillary pieces of your business, and obviously Rialto specifically given high-yield investments there if you would expect to see any impact on future profitability from higher rates?

Stuart A. Miller – CEO: That’s a lot of questions in one, Alan, but let me see if I can (tackle that). First of all, as it relates to start performance, as a management team, we are highly focused on operational performance in the Company, and the investor community is going to have to interpret things as they might. We of course pretty much gotten out ahead of the rest of the market in terms of land acquisition and…

Alan Ratner – Zelman & Associates: I’m here, Alan. I jumped off.

Stuart A. Miller – CEO: So, let me just continue. So, we’ve gotten out ahead in terms of land acquisition and margin enhancement, and we’ve had pretty strong margin growth early on in the recovery cycle. So, we’ve enjoyed I think a pretty good program relative to our position within the industry and our stock price as well. Perhaps that’s subsided a little bit. I’m not really sure and of course, interest rate has kind of altered the landscape for the entire industry, at least over the short-term. As it relates to our fundamental business, we’ve said consistently our primary driver is and continues to be our homebuilding operations. We are extremely well-positioned from a land standpoint. We are well-positioned in terms of margin generation, and our management team really is hitting on all cylinders. With that said, our ancillary businesses are really well-positioned for future growth and for future contribution. Frankly, I’ve not been more excited than I am today about the prospects for Rialto, and as well the prospects for our multifamily, even given the increase in interest rates that we’ve seen and the changing environment. Rialto has more from an on balance sheet to a private equity model. In doing so, you’re seeing fewer earnings flow through to the bottom line right now, that will change over time as our press starts to be brought into earnings in the future. But as it relates to our Fund I performance, it has been nothing short of exceptional and Fund II monies are already starting to be invested. We are providing capital for commercial real estate financings and other positions within capital sect, we think that this business is going to continue to grow and is going to be a very exciting part of our story going forward. As far as the rental apartment property division is concerned, we have a growing pipeline growing from $1.5 billion to $2 billion in properties that are going to be coming online. As I noted in my opening comments, we have five properties under construction, and I think in the context of a market that is short on dwelling units overall, people are going to be looking to purchase because the monthly payment is lower if you’re able to purchase, but if not there is a growing demand for rental and we think that rental rates are going to continue to be pushed up higher. So, even with interest rates going up, we feel pretty comfortable about the rental community development as well…

Rick Beckwitt – President: I guess the only thing I’d add too is all the time, we’ve been expensing the start-up cost associated with these businesses, and our pre-tax income has doubled on a year-over-year basis and our margins are up on a year-over-year basis, so I think we’ve been good stewards of the castle.

Alan Ratner – Zelman & Associates: Rick, I appreciate that. And sorry I jumped on late, and you guys couldn’t hear me, I was muted, but I think that Stuart, you know, as the most senior tenured leader of the industry, I think people would really appreciate maybe a little bit more specifics on your view of the backup in rates. I know you said that you commented that we have a lot of room to grow, but what rate starts to get you nervous and I recognize you can’t really think about rates in isolation. So, can you give us your more elaborate expectations on what really starts to make a difference from the consumer’s affordability?

Stuart A. Miller – CEO: Well, I mean the first thing that I’d say is that rates have been at historically low levels. They are reverting and maybe they are actually starting the movement or maybe it will ebb and flow a little bit, but they are going to ultimately revert to more normalized levels, but you can’t look at the interest rate in isolation. We have to be looking at interest rate in the context in which they are moving, which means an improving economy, an improving employment picture, we are seeing labor shortages across the country, not just for the homebuilders and people in the field, but for manufacturers and distributors, we’re hearing from all of those people that not only there are labor shortages, but wages are moving up in order to get people off the sofa and back into the field and this portends goods things for demand for housing both on the for sale and the rental side. Interest rates that are moving higher in the context of economic improvement, employment improvement, at the same time, it really reflects a healthy economy and a healthy movement. For housing, in general, has historically meant that housing is going to thrive as more people are able to afford to buy or to rent and to matchup with the supply that is available. And of course, right now, we’re looking at a supply shortage so that means that even in the context of rising rates and a better economy we’re likely to see price increases and rental increases as well.

Homebuilding SG&A

Jade Rahmani – KBW: I wanted to ask on homebuilding SG&A. I think last quarter you provided some sequential comparisons and expectations for the rest of the year. I think given the step function down this quarter, would you comfortable providing any expectation for the rest of this year on that line item?

Bruce E. Gross – VP and CFO: I think as you look at the next quarter I’d expect a similar type of SG&A percentages as we had this quarter and a little bit more leverage as we go into the fourth quarter as we expect to add more deliveries in Q4. So, we’ll see what that percentage is, but figure flat next quarter and a little bit of improvement going into Q4.

Jade Rahmani – KBW: Regarding Rialto, is there a way we can think about the value of the carried interest benefit that you could receive and have your — or your comments meant to suggest that this could be a 4Q event or would that be next year?

Stuart A. Miller – CEO: I think I’d be looking to next year and we haven’t given guidance on the magnitude of the carried interest, but we are becoming more enthusiastic about our prospects in all of our fund investing, and I think that we’ll have to ask you to be patient, so we have better clarity to bring to the market.

Jade Rahmani – KBW: Finally the pickup or reportedly Rialto has begun conduit operations or is in talks regarding that. I think you alluded to that in your commentary. Should we expect all of those lending programs to flow through, through the private equity funds rather than through the wholly owned subsidiary earnings?

Stuart A. Miller – CEO: No. Lot of the capital activities will be wholly-owned. So it will be – some of that will be split between the private equity and the – on balance sheet, but the operations that are kind of the natural evolution of that business, the conduit activities – the origination side is generally on balance sheet, the purchase of securities and special servicing is going to flow more through of the private equity, so it’s kind of split.

A Closer Look: Lennar Earnings Cheat Sheet>>