Lennar Earnings Call Nuggets: Mortgage Market Visibility and Business Outlook
Mortgage Market Visibility
Ivy Zelman – Zelman & Associates: I wanted to drill down little bit on your comments related to the mortgage market. I guess my first side is do you think that the stringent mortgage environment is impediment to growth for 2013. 2014 and beyond and that is necessary for that marginal buyer to have access to mortgage liquidity, or can you continue to show robust growth despite the fact that there is credit stringent, if you do business not pent-up demand or incremental buyers and have the credit. And then secondly on the QM, you mentioned QM, the clarity we have, do you have any comments for us to understand that 3% cash flow as it relates to your mortgage company please.
Stuart A. Miller – CEO: As to the first question, Ivy, I think that there is a lot of pent-up demand and that’s what we are seeing in the field. There is a lot of sentiment that people want to find their way into home ownership and are willing to push through a much more conservative mortgage market in order to do that, remembering that new homebuilding is coming off historic lows and trending upward. We think that that there is a lot of room for growth even in a somewhat moderated environment. I think that the mortgage market does present itself as somewhat of a limiting factor. We do not see nor do we think it’s healthy for the mortgage market to revert back to the liberal standards that we came from, but a reversion to normal, which will take some time, is likely as certainty has brought to the rules surrounding the financial market. So, given the fact that there is very, very strong demand, very compelling reasons to move from a rental world to a for-sale world given the low monthly payment and given the fact that at the margins, the mortgage market is opening up a little bit at a time, we think that there is – there are very healthy growth prospects as we look ahead to 2013. And Bruce, I’ll give it to you for the second part.
Bruce E. Gross – VP and CFO: Sure. Let me comment on the Q end definition that just came out this past week. So, there is a year before this goes into place and it’s been given a year to work through some of the clarifications that are included. So, this clarification needs quite a bit of further clarification. So, it’s unclear at this point, how it’s going to work out, but right now, the 3% we think if you include the closing cost that we contribute to the buyer in the process, if that’s not included in the 3% then it’s essentially a very minimal issue. So, the clarification of how our contribution is included is…
important to figuring that out. We have a year to work through that. So, certainly no impact this year and we think it’s likely to be worked through and we’re not expecting any major impact as we go into next year at this point.
Ivy Zelman – Zelman & Associates: And I guess my follow-up question, Stuart, did you talk about a lot of the variables in the market that you’re faced with and challenges, there’s a lot of concern in the investment community about cost inflation which you addressed, plus labor shortages, and certainly (you talked) about land inflation. It seems as if your greatest concern will more likely be about, at least from your company’s perspective, is the continuation of replenishing losses that get absorbed probably more quickly than you had anticipated. Can you just give us sort of a ranking of the challenges and that cost inflation and labor shortages, just a natural part of the cycle and it’s not a concern for you? Certainly execution is everything, but I think it would help if you clarify to the investment community your thoughts on these issues that are the most pressing and yes challenging but not debilitating.
Stuart A. Miller – CEO: Well, okay. So look, I think I said there are political and economic headwind risks out there. There’s a big noise factor and some of these things can impact the market, especially consumer confidence. But I think overall our view is that we’re coming off of a very severe downturn. The fundamental reasons for recovery are really pretty solid and fundamental right now. We think additionally that consumer confidence is really on a recovery kind of ramp and so I’m going to kind of take the macro picture out of the equation in terms of my biggest concerns right now just because I think that the more housing recovers, the more jobs there are in the marketplace. The more jobs there are, the more confidence there is. And the more people are employed the more likely they are to go out and buy home. So to me I kind of feel like the toughest part of the business is probably the part of the business where we are at our maximum strength. And that is in recovering market land becomes the biggest constraining factor across the market right now it is the biggest constraining factor for builders, driving community count and finding new location is very difficult. I think we have the a team on the field both between Rick, Jon and their respective leaders of the company and our Rialto complementary component, I think that toughest risk factor, the land factor is one that we have well covered but I do think it’s a risk out there as you look beyond 2013, into 2014 and 2015 as the market recovers. On the cost side of the equation I think its…
healthy and appropriate that cost start to go up in a recovering market. And it actually portends better things for the economy, the fact that labor shortages are starting to present themselves and wages are starting to move up really says that the economy is on the man, unemployment is likely to go down and as unemployment goes down confident goes up. So, we are going to see some cost pressure but offsetting that cost pressure we think our increasing sale prices which if you look at the relationship in terms of percentages between cost and revenues, cost have to go often up and awful lot before revenues don’t cover. So, I think that there (Indiscernible) out there, I think the macro is manageable, I think land is our area of expertise and I think that the cost increases are actually healthy and will be offset by revenue.
David Goldberg – UBS: My first question has to do with the multifamily business and I think you guys did a great job talking about the capital allocation and kind of a capital build and equity build that you guys expect in 2013. What I’m trying to get an idea about is as you look toward the future and you look at the five different platforms, are they competitive for internal capital and I’m going to get little more color about the decision making process as you think about allocating capital between the businesses because it seems like the hurdles that you are kind of solving for aren’t that dissimilar between the homebuilding business, Rialto, the multifamily business and then anything else?
Stuart A. Miller – CEO: Well, I guess from an overall capital perspective, David, I would tell you that all capital competes within the Company. We invest in the individuals and the assets that produced a highest return, that’s what we have done consistently throughout this recovery. We dedicated a certain amount of capital for each platform in order to grow those platforms and create value. And depending on how each one of those platforms is capitalized because the multifamily operation includes a lot of third-party capital. We can grow very sizeable business quickly without using a lot of Lennar capital. So, we do dedicate capital to each business. The returns have a tendency to be consistent amongst all of the businesses, which is a good thing and that gives us the luxury of investing in the best of the best.
Bruce E. Gross – VP and CFO: Let me just add to that, David, that one of the advantages that the public companies have right now is access to capital that is…
very, very strong, in many ways unprecedented. It gives us a lot of opportunity to deploy capital and having various arms through which to do that is we think a real benefit. But keep in mind that whether it’s the Rialto strategy or the apartment strategy or FivePoint, all three of these are primarily focused on third-party capital primarily with a small portion of company capital invested at sizable returns in line with what we do on the homebuilding side, but we’re building franchise value and ultimately long-term shareholder value in building these platforms and growing them forward. It’s multiple avenues for investments, limited investment in some of these programs with a strong opportunity for franchise value in the future.
David Goldberg – UBS: And then just as a quick follow-up. I kind of wanted to ask Ivy’s question about labor in a different way. What I wanted to get an idea about was how you feel like your labor subcontractor force is capitalized and do you think one of the reasons they’re a little slow to react in terms of new hiring expansion is because they’re having trouble financing that expansion, and how does that affect you and how can you guys help?
Stuart A. Miller – CEO: No, from what we’ve been able to see in the field it does not seem to be that our subcontractor base is limited by their ability to capitalize their growth. We think that they’re getting paid almost on a real-time basis as the competition for labor out there requires current payment. So that’s not really the limiting factor. I think you have somewhat of a natural dislocation of the labor force through a downturn where the labor force especially in a protracted downturn seeks and moves elsewhere and goes to other parts of the economy. Drawing that labor back is a function of job availability and wages starting to move up that’s happening in the field right now and I think you’re seeing a little bit of a timing issue that is going to work its way out.
Jonathan M. Jaffe – VP and COO: I’d just add to that David, that for the trade they want to be cautious not to hire and then find that because political noise and headline risk, the market is not as robust as it seems and then they have to get to lay off again. So, there is a lag time as Stuart said between when we will actually feel comfortable on hiring and when we need them to be hiring.
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