David Collins - Controller Stuart Miller - CEO Bruce Gross - CFO Rick Beckwitt - President Jeff Krasnoff - CEO, Rialto Jon Jaffe - COO.

Michael Rehaut - JPMorgan Eli Hackel - Goldman Sachs Ivy Zelman - Zelman & Associates Stephen Kim - Barclays Capital Stephen East - ISI Group Robert Wetenhall - RBC Capital Markets David Goldberg - UBS.

Welcome to Lennar’s Third Quarter Earnings Conference Call. At this time, all participants are 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 David Collins for the reading of the forward-looking statement..

Thank you, and good morning, everyone. Today’s conference call may include forward-looking statements, including statements regarding Lennar’s business, financial condition, results of operations, cash flows, 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 affect future results and may 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 in this morning’s press release and our SEC filings, including those 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..

Thank you. I would now like to introduce your host, Mr. Stuart Miller, CEO. Sir, you may begin..

Great. Good morning, everyone, and thanks for joining us for our third quarter update. This morning, I’m joined by Bruce Gross, our Chief Financial Officer; Dave Collins, who you just heard from; and Diane Bessette, our Vice President and Treasurer.

Additionally, our President, Rick Beckwitt, is here and Jeff Krasnoff, our Chief Executive Officer of Rialto; and Jon Jaffe, our Chief Operating Officer, is on the phone from California and they’ll join in on the Q&A.

As is customary on our conference calls, I want to begin this morning with some brief overview remarks on the housing market and our operations in particular. Then Bruce is going to give greater detail.

We will then open up for question and answer, and we’d like to request that during our Q&A, each person please limit themselves to one question and one follow up.

So let me go ahead and begin and let me begin by saying that we’re very pleased to report another very solid quarter of performance for our company with profitability in each of our major segments.

Our third quarter results demonstrate that our company is positioned to be able to continue to perform extremely well in current market conditions due to a carefully crafted and balanced operating strategy. Generally speaking, the market has continued a slow and steady recovery that is markedly different from past down cycle recoveries.

History would suggest a more vertical recovery especially given the severity of the economic decline. This recovery has been a decidedly different experience as the slope of recovery has been shallow and the expected acceleration has not materialized.

While this is generally the case for the overall economy, it is very much the case for housing in particular. The housing recovery has been moving gently upward in a fairly narrow channel with movement up and down along the way.

That channel has been downside supported by the significant production deficit that has resulted from the extremely low volumes of dwelling both single family and multifamily that have been built over the past seven years. Before this downturn, anything below 1 million housing starts in a year was considered almost a housing depression.

This recovery is just now getting us back to that level of starts. We’re still adding to a deficit in production given the housing needs of the country and that in our opinion limits the downside for the recovery going forward.

At the same time, the recovery has been and likely will continue to be upside constrained by a limited supply of available homes, new and existing, on the market, limited supply of land available to add to the supply of homes and constrained demand from purchasers who would like to buy but are unable to access the mortgage market.

While many investors have been disappointed that 2014 sales to date did not develop the steep vertical acceleration that they had anticipated, the market did continue to move slowly and steadily forward driving volume upwards and still driving price upward though at a somewhat slower pace.

I would suggest that this is a very healthy and comfortable environment for the well-capitalized national builders and for Lennar in particular.

The shallow slope of recovery is likely to provide a steady backdrop for market share expansion in a fragmented industry and an extended recovery duration for those who are able to participate by leveraging a strong capital base.

We continue to believe that the fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture, unlocking pent-up demand while supplies remain constrained to meet that demand.

We continue to believe that there remains a production deficit and that this shortfall will continue to define the housing market for the foreseeable future and will drive the housing recovery forward.

A slow and steady housing recovery will also continue to benefit the rental market as first-time home purchasers find limited access to the for sale market barred by higher down payments, very strict underwriting standards, invasive approval processes and increasing fee structures from the government and banks.

This will likely continue to put upward pressure on rental rates and drive valuation for rental properties upward as well. Lennar has navigated the first three quarters of 2014 with very solid results as each of our businesses showed strong performance and are well positioned for continued future performance.

A combination of solid management execution of our articulated strategies and strategic investments in core assets combine to produce strong results and will enable continued industry-leading performance throughout the year. Homebuilding, of course, remains the primary driver of our quarterly performance.

Lennar’s strategy was to carefully balance pricing power, sales incentives, brokerage commissions and advertising spend to maximize our results. The execution of this strategy produced 23% sales growth, 25.2% gross margins and a 14.8% operating margin.

Homebuilding revenues grew to $1.8 billion, up 25% over last year while deliveries were 5,457 homes, up 9% over the prior year. Our sales pace in the third quarter were 3.3 sales per community per month and this was basically flat with 2013 second quarter pace of 3.2. Our average sales price increased by 14% year-over-year to $332,000.

During the quarter, we opened 73 new communities and closed out 49 communities to end at 603 active communities, a 17% year-over-year increase. Q3’s SG&A was 10.4%, a 20 basis point year-over-year increase.

We did not benefit from much operating leverage this quarter as the cost of opening new communities, cost associated with developing our new Internet site and digital platform for marketing and some additional advertising and brokerage fees associated with the competitive landscape added to SG&A.

Nevertheless, we continue to expect to benefit significantly from SG&A leverage as we grow volume in the future. With many of our competitors offering large incentives to drive sales, we controlled our incentives at a 5.8% rate for the quarter, which was down year-over-year and sequentially from 6% and 5.9%, respectively.

In place of increasing incentives across the board, we strategically used them on specific communities where we thought the sales pace was a little slow and we selectively marketed more aggressively to both the brokerage community and to consumers on communities as needed.

The net result was an absorption pace that was flat with last year, combined cost of SG&A and incentives that were also flat with last year and a 30 basis point improvement in our gross margin. Year-over-year, labor and material costs are up 8.5% to around $49 per square foot.

This represents a mild slowing of the pace of cost increases as last quarter, cost were up more than 9% over the year. These increases are both labor and material increases and the break down between labor and material is about 40% labor and 60% material, which has not changed materially in the past few years.

Our sales continue to benefit from the execution of our next-gen product strategy. Year-over-year, sales of our multigenerational brand grew by 24% totaling 275 sales in the third quarter.

We now offer next-gen plans in 208 communities across the country and in the third quarter, the average sales price for next-gen was about 34% above the company’s average. We continue to focus our homebuilding strategy on the move-up segment of the market as the first-time home purchaser has not yet been able to access the mortgage market.

With that said, we currently sell approximately 30% of our homes to first-time purchasers and we remain strategically positioned with both land and product to capture the first-time homebuyer demand when it is enabled by the mortgage market and it emerges with the inevitable strong and pent-up demand that we expect.

Complementing our homebuilding operations, of course our financial services segment continued to build its primary business alongside the homebuilder. Bruce will talk a little bit more about our financial services progress, which had a very respectable quarter with operating earnings of 27.1 million compared to 23.5 million last year.

While our homebuilding and financial services divisions are the primary drivers of near-term revenues and earnings, our three additional operating divisions are all continuing to mature as excellent longer term value creation platforms alongside. Let me start here by saying a hearty welcome and congratulations to our multifamily group.

This quarter marks the first sales of multifamily communities to third parties and the first profit contribution to the company from this segment. We couldn’t be more pleased with these results and the excellent management team that drives this business.

During the third quarter, we sold two apartment communities totaling 580 apartments and generated a $14.7 billion profit from those communities, which translated into an $8.5 million profit for the segment after overheads. Each of these sales exceeded our targeted 25% return on invested capital and 2x cash multiple.

These sales demonstrate the earnings potential of a maturing business as we develop our geographically diversified $5 billion pipeline. During the third quarter, we started development and construction on four new communities.

We now have 19 communities in production of which one is completed and operating, two are partially completed and starting a lease-up program and the remaining 16 are under construction. These 19 communities have approximately 4,800 apartments with an estimated development costs of approximately $1.15 billion.

As we have discussed in the past, we’re building these apartments with third party institutional capital and each deal has been conservatively financed with non-recourse debt.

Given the construction schedule of these units and the rest of our pipeline, our multifamily segment will become a more predictable source of quarterly earnings starting in late 2015 and into 2016.

In the third quarter, Rialto produced operating results of $12.4 million reflecting continued progress and transitioning from an asset-heavy balance sheet investor to a capital-light investment manager and commercial loan originator and securitizer.

Rialto has now returned $385 million of invested capital to the parent company since late last year and we expect to generate at least another $250 million of cash in Rialto from initial investments for us to recycle by the end of 2016.

Our investment management and servicing platform is growing assets under management and had the strong asset base from which to harvest value for investors and for our company. We’re continuing to build upon the base established with our first two real estate funds.

Fund I was fully invested in early 2013 and only 18 months later has returned some 80% of invested capital from income and monetization. Fund II has already invested or committed to invest approximately $1 billion of equity in almost 70 transactions and also continues to make distributions of income to investors.

We still have over $600 million of equity to invest and expect to begin raising our third real estate fund later this year. Additionally, Rialto mortgage finance, our high return equity lending platform is originating and securitizing long-term fixed rate loans on stabilized cash flow in commercial real estate properties.

During the quarter, we completed our ninth securitization transaction selling almost $300 million of RMF originated loans, maintaining our strong margins and bringing the total to almost $1.7 billion in only our first four quarters of operations.

Our FivePoint Communities program continues to make significant progress in developing our premium California master-planned communities. At El Toro, the first phase of 726 homes is over 80% sold out and the second phase of 1,000 homes will be sold to builders in the beginning of next year with a grand opening expected in the late spring.

In San Francisco, we’ve opened the shipyard where we’re pre-selling homes this quarter and are just now grand opening models. Currently, about 250 homes are under construction with another 100 scheduled to start and the venture will begin delivering these homes in 2015.

So, overall and in summary, our company is extremely well positioned to thrive in the current market conditions. The shallow slope of recovery with what we believe will be an extended duration provides an excellent backdrop for our management team to drive our business forward, pick up market share and product excellent results.

We have an excellent management team that is focused on a carefully crafted strategy that has positioned us with advantage assets that will continue to drive profitability in our core homebuilding and financial service business lines.

Additionally, we have a well diversified platform that will continue to enhance shareholder value as our ancillary businesses continue to mature. Today, we’re very proud to share with you our results for the first three quarters of this year and we look forward to sharing our further progress at year end. With that, let me turn it over to Bruce..

Thanks, Stuart, and good morning. Our net earnings for the third quarter were $0.78 per diluted share versus $0.54 per share in the prior year. I’m going to review some of the financial highlights starting with homebuilding.

Revenues from home sales increased 25% in the third quarter and that was driven by a 10% increase in deliveries that includes unconsolidated entities and a 14% year-over-year increase in average sales price to 332,000. Our gross margin on home sales was 25.2%, which was up 30 basis points.

Our excellent land position continues to be an important driver of our strong gross margins, and as Stuart mentioned, sales incentives improved by 20 basis points year-over-year.

The gross margin percentage for the quarter remained highest in the East, Southeast Florida and West regions while all other regions also improved their gross margin percentage year-over-year.

In addition to improving our gross margins, we continued to carefully manage our inventory as we reduced our completed unsold inventory sequentially from the second quarter from 905 homes to 862 homes.

In addition to the operating margin leverage that we received in the quarter, and Stuart went through the SG&A discussion, we have also recognized operating leverage on our corporate G&A line. That improved 20 basis points to 2.1% as a percent of total revenues. Our interest expense continues to decline.

It came down from 22.2 million in the third quarter of last year to 8.4 million in the current quarter, as we continued to open communities and increase the qualifying assets that are eligible for capitalization. This quarter we opened 73 communities and ended the quarter with 603 active communities.

We purchased approximately 5,400 home sites during the quarter totaling 273 million and now our home sites owned and controlled totaled 166,000, of which 136,000 are owned and 30,000 are controlled. Our financial services business segment increased operating earnings to 27.1 million from 23.5 million in the prior year.

The increased earnings occurred despite a continued challenging mortgage market with decreasing refinanced transactions.

Our mortgage pre-tax income increased to 20.6 million from 18.8 million in the prior year, although refinance originations continued to decline and now represent only 9% of total originations, we were successful in replacing this lost volume with increased purchase originations.

As a result, our mortgage originations increased 1.7 billion from 1.4 billion in the prior year. Our in-house mortgage capture rate of Lennar homebuyers was 77% this quarter and our title company’s profit increased to 7.1 million in the quarter from 5.2 million of profit in the prior year.

This was primarily due to higher profit per transaction and our title team’s focus on maximizing the title capture rate with our ancillary business transactions.

Our Rialto business segment generated operating earnings totaling 12.4 million compared to 1.5 million in the prior year, both are net of non-controlling interest and the composition of that 12.4 million in the three types of investments before G&A are as follows.

First, the investment management business contributed 35.3 million of earnings which includes 20 million of equity and earnings from the real estate funds and 15.3 million of management fees and other.

These numbers don’t include the carried interest which under hypothetical liquidation increased by approximately 19 million for the quarter and is now at 123 million for real estate Fund I. Again, that profit is not booked until we receive cash flow and their certainty with those numbers.

Second, our new Rialto mortgage finance operations contributed 292 million of commercial loans into one securitization resulting in earnings of 13.1 million for the quarter before their G&A expenses.

Third, our liquidating direct investments which are the remaining assets in the FDIC and bank portfolios had a net loss of 3 million which was primarily due to our share of impairments in the FDIC portfolios as we continue to focus on accelerating the monetization of certain assets in these portfolios and those numbers are partially offset by gains on sales of real estate and interest income.

Rialto G&A and other expenses were 25.6 million for the quarter and interest expense was 7.5 million. The interest again primarily relates to the 350 million of senior notes and the Rialto subsidiary. Rialto had a strong liquidity position with over 200 million of cash at quarter end. Stuart went through the numbers on multifamily.

Again, we had 8.5 million net profit in that segment which was 14.7 million for the first two apartment community sales and then the G&A net of management fees was approximately 6.5 million. Our investment in the multifamily segment is approximately 160 million as we continue to grow this business primarily using third party capital.

The tax rate for the quarter came down. It was 33.3%. This quarter we were successful as we were favorably impacted by the settlement of the state tax exam and additional energy tax credits.

We expect the tax rate for the fourth quarter to be around 36% as we start to receive the full benefit of the domestic activities reduction deduction, which is Section 199 now that we have fully utilized our federal net operating loss carryforwards. Turning to the balance sheet.

Our balance sheet liquidity is strong as we ended the third quarter with 542 million of homebuilding cash and 70 million was outstanding under our $1.5 billion unsecured revolving credit facility. Homebuilding net debt to total cap was 47.5%. Stockholders’ equity grew to 4.6 billion this quarter.

That’s a 23% increase over the prior year and our book value per share increased to $22.32 per share. We received a credit rating upgrade during the quarter as SMP operated Lennar’s corporate rating to BB and subsequent to quarter end, we retired 250 million of our 2014 senior notes which matured on September 1.

Finally, let me summarize the updated goals for 2014. Starting with deliveries, we are confirming our previously stated goals to deliver between 21,000 and 22,000 homes for 2014 with a backlog conversion ratio for Q4 of 95% to 100%. This puts deliveries around the middle of the range, which ties in with the way we see the market today.

Gross margin consistent with what we have previously said and given the competitive pressures in the market, we expect our gross margins to be around 25% for the fourth quarter.

Rialto, we still expect a range of profits between 30 million and 40 million pre-tax for the year and looking at SG&A and corporate G&A, we continue to focus on leveraging our G&A lines and still expect at least a combined 25 basis points of improvement for all of 2014.

We still expect financial services profits to be in the 65 million to 75 million range for the year and with multifamily, since we closed on the two potential apartment communities available to sell in 2014 in our third quarter, as we look forward to the fourth quarter, we’re not expecting any additional apartment community sales.

Therefore, the multifamily segment will have start-up overhead expenses similar to what you saw in the second quarter of this year. We’re not expecting any significant sales activities in the joint venture and land line for the fourth quarter. That should be close to breakeven.

And as I mentioned, our fourth quarter effective tax rate should be around 36%. We’re still expected to end 2014 with a range of approximately 600 to 625 communities. With that, let’s turn it back to the operator and open it up for your questions..

Thank you. (Operator Instructions). Our first question today is from Michael Rehaut from JPMorgan..

Hi. Thanks. Congrats on the quarter..

Thanks..

The first question I had was on trends during the quarter. Stuart, you referred to in your commentary that some competitors are offering large incentives and Bruce most recently said that given some of the competitive pressures, you expect gross margins to remain around 25% for 4Q.

But in that last comment, Bruce, you think that if competitive pressures are really materially increasing, gross margins could come under a little bit of pressure in 4Q versus 3Q but that doesn’t appear to be the case.

And so I was hoping, Stuart, and if Rick or Jon wanted to join in, but just elaborate on that view of incentives during the quarter if incentives really have increased to a material degree and if that’s the case gross margins going into 4Q?.

Thanks, Mike. Let me let deferred to Rick and Jon. They’re very close to the action on the field..

Hi, Michael. It’s Rick. Bruce did highlight that we think we’ll be around 25% for the quarter. I think we’re always very straight up as to what guidance we give you with regard to margins. We have seen various competitors do different things out there with regard to incentives.

As we’ve said all year long, we’re balancing pace and price to maximize the value of the assets that we’ve got. Based on the visibility of that we’ve got today, we’re not anticipating anything going outside of that range. Our incentives this last quarter did go down and we’re balancing that in every community we’ve got across the nation..

Michael, it’s Jon.

I would add to that that it clearly is a community by community focus and one of things that gives us comfort that we have the visibility in the fourth quarter is our Everything’s Included program which gives us a different value proposition for the consumer so that we can compete against incentive programs that other builders may have and continue to our pace and pricing strategy..

Okay. I appreciate that. And I guess second question on the order trend in sales up 23% and even the average community count approach, sales pace up roughly 4% year-over-year for the quarter. I was hoping – and that came a little bit above our expectations and I think the Street as well.

I was hoping if possible if you can give us a sense month to month? I know month to month can sometimes be volatile, but if any trends if you’re going through more granularly, would that – the order growth, the 23%, was that similar throughout the quarter as well as the sales pace anything to note from the intra-quarter perspective?.

Not a lot of significant differences in monthly sequentially. It follows the normal season pattern for the summer. July was probably the strongest month, but June and August were very healthy both on pace and price..

I’d just say, Michael, I think that what we’ve been seeing is that the market is tending to move a little bit around; a little bit up, a little bit down. You get that sense on a weekly basis and on a monthly basis.

But the trend line is decidedly upward and as I’ve said – I probably said it three times in my remarks, it’s a gentle upward slope and you’ve got upward and downward movement around that kind of direction. And I think that’s what we’re seeing basically in our sales as we go through the months and through the weeks..

Great. Thanks very much. I appreciate it..

Sure..

Thank you. Our next question is from Eli Hackel from Goldman Sachs..

Thanks. Good morning.

Just starting off, just wanted to touch on the pivot you’re doing in terms of your land strategy and I guess the overall question is, as you go into the cycle and as we bought a lot of land early and your ancillary businesses should be increasingly cash flow positive, how are you thinking about use of cash with respect to maybe the balance sheet or respect to dividends or share buybacks as we go forward? Thank you..

Eli that’s a top-of-mind question but it’s still a question that’s a little bit off in the future. We’re still we think deep in the midst of the investment cycle in the business. As I noted, the shallow upward recovery is a very solid backdrop for us to continue investing. I think it lends itself to a longer duration upwardly trending market.

And we do continue to invest in significant land assets. What our pivot has really reflected more recently is that we’re kind of pulling down the duration of land that were purchasing and it is a slow process and one that is going to present itself over the next couple of years.

But think in terms of over the next period of time, we’ll continue investing our capital in growing our business forward and just making sure that we’re not getting out over our skis in duration exposure.

With that said, as we do become more cash flow positive and we will, as our ancillary businesses do start returning capital as we’ve already seen with Rialto and as we’ll start to see with some of the others as well, and as we lighten up on the percentage of our revenues that we’re reinvesting in land, cash will start to turn decidedly positive.

And I think that we will take somewhat of an opportunistic view of the market thinking strategically about how to best deploy that capital, whether it’s in the form of dividends, stock buyback or some other form of investment, we’re going to keep an open mind and the management team will be considering it..

Yes, I guess I’d add one other thing is if you look at our land spend this year and fiscal 2014, you saw we were heavier in the first quarter and it’s been ticking down. First quarter we’re about 500 million, this last quarter we’re about 272 million.

Contrary to that we’ve had increased spend on the development side and it really goes back to the opportunistic purchases that we had in the previous years and now we’re developing that property.

We’re fortunate to not have to go out and buy land today and consistent with what we’ve said in the past, what we’re doing is we’re working with sellers out there and helping them entitle their land, tying it up without having to put actual dollars out. So that’s another example of the soft pivot that we’re doing..

Great, thanks. Just one quick follow up. Can you just remind us or at least in the last quarter, what percentage of your deliveries were from the new higher margin communities and what the delta is between those communities and your legacy? Thank you..

That percentage is somewhere around 80% now, Eli..

Great. Thanks very much..

You bet..

Thank you. Our next question is from Ivy Zelman from Zelman & Associates..

Thank you. Good morning and congratulations on a great quarter, guys. I think big picture question first for Stuart and anyone else wants to opine on this, but then second I want the development activity.

So first question recognizing it’s been a choppy market, Stuart, and as you very eloquently discussed the trajectory pointing upwards, can you give us a sense to why Lennar seems to be able to hit the ball down the fairway and consistently deliver good results and some of the differences, you don’t have to mention names, but there is clearly a dichotomy of performance and I think it’s an opportunity to talk about what you guys do differently? And prior to that, the second question, just quickly on development activity.

There has been a lot of noted shortfalls in community new openings. It seems as if you’re also managing to still deliver on community count growth.

Can you comment on delays and some of the impediments to getting that supply to market and if those delays are being worked through or mitigated, and what we should anticipate going forward on community count for the industry?.

Starting with your first question, Ivy, I think you know well that I hold the competitive landscape in very high regard and I think that everybody’s – the large well capitalized builders, the strategies of the competitive field are all strong and viable and somewhat differentiated.

Our strategy, which we’re quite pleased with, is very focused on a combination of good strategic land purchases and really hands-on community by community management. So as you know we got out ahead of the market in terms of land acquisition.

We bought great strategic communities in really well located positions and we’ve been able to really leverage the harvesting of those communities, continue to leverage the community positions that we have.

But I think that maybe the equally important component of this is our management structure and management team is very focused on a community by community basis of managing every day and the balance between volume, margin, SG&A spend, all of the components that drive and add to the decision making about pricing and incentives and everything else.

The decisions are made on a daily basis in the field. They’re made cooperatively between division president, regional president and Rick and Jon respectively. It’s just a very active management program that is vibrant and very connected to the market in general.

So that’s our structure and our program and we’ve been very pleased to be able to be balanced in the way that we approach the business to date. I think that you can expect a lot more of the same. As it relates to community count, it does get a little bit more difficult to develop communities going forward.

I think that we’re pretty well advantaged by having loaded up on our community count early and gotten into the development and whatever entitlement necessities that were earlier. With that said, it’s still difficult to bring community count online.

As I’ve told you and others before, community count is one of the most elusive parts of our business and it’s part of our balance. It takes a lot executive management to keep focused on it. I think we do an excellent job but it’s the component of business that continues to be a difficult part of management. Rick, maybe you’d want to add to that..

Yes, probably the toughest thing out there to control, Ivy, is the volume going through the municipalities. The towns and cities still haven’t staffed up to date to handle the volume of the activity.

And with regard to that, even on the housing side, there is buffers that we have to go through in order to get the approvals, not just the approvals on paper but the site approvals, the inspections. And fortunately we’re blessed because we have really great people. They try to stay ahead of it.

The land development business is all about timing and knowing what to do, when to do it and what to expect. And I think we just have good people..

Great. Well, enjoy your day. Congratulations..

Thank you..

Thank you. Our next question is from Stephen Kim from Barclays..

Hi, guys. Congratulations on a strong quarter..

Thank you..

I had a couple of questions, not to take anything away from what you’ve done, but wanted to just ask about the SG&A. Over the last three quarters, the SG&A rate if you include corporate, hasn’t really changed much.

I know you talked about the fact – you gave some of the reasons for that in your opening remarks and you talked about to some degree the ramping community count that you’ve been experiencing as being a reason why your improvement in SG&A hasn’t manifested itself yet.

My question essentially is that if we assume that community count were to grow let’s say – continue to grow roughly at the rate that it’s been growing this year, would the likely impact of that be that SG&A improvement would probably be delayed for another year or so until that growth meaningfully decelerates or are there other factors that you think will allow your SG&A to start showing that sort of 7% incremental that you talk about even if your community count growth remains at let’s say about mid-teens kind of level?.

Steve, this is Bruce. I’ll take that one. As you look at the community count growth and if you look at the SG&A numbers that we talked about today, the increased communities was the smaller portion of the explanation.

So as we go forward, we are expecting to get the leverage and again, we’ve kind of laid out how we get that operating leverage because most of the growth is coming from existing divisions or existing communities. So we do expect to get that leverage and we don’t expect it to be deferred into some future year.

We expect next quarter to get some leverage and going into 2015 to get additional leverage..

Bruce, if I could just sort of get you to talk a little bit more broadly about, I mean one of the things that we get pushback on and I’m sure you probably do too is the fact that for most builders that we talked too, the 125 to 225 basis points of leverage which some of your graphics would suggest you can achieve seems much higher, much, much more lofty goal than I think other builders would feel comfortable talking about.

Some of that has to do with the fact that when you look historically, you guys carried perhaps a greater overhead structure than you intend to going forward and I think you talked about U.S. Home in the past playing a role in that.

Could you just elaborate a little bit more on why Lennar may have sort of an outsized opportunity in SG&A versus peers?.

Well, I think it starts with we already have a national platform. So as you’re comparing across the field, our focus for growth isn’t needing to go into new markets and that’s the more expensive component of SG&A.

So in the past we did a lot of aggressive growing in the last decade and we’ve consolidated in the markets we want to be in and we’re now about 30 divisions. Our growth going forward is primarily coming from those 30 divisions where the incremental SG&A is around 7%. And I think that’s probably the biggest differentiator as we think about our program.

That’s where most of the leverage will come from..

But more specifically to the question that you were asking, Steve, historically we were configured with multiple divisions in the same market. We’ve walked through that with many and we were about 124 different operating divisions across the country; sometimes two or three divisions in one geography.

We used the downturn as an opportunity to really rethink the configuration of our operating platform and I think that Rick and Jon have done an extraordinary job of putting leadership in place in geographical places where we’re not going to have to expand into multiple divisions in order to grow this time.

Instead, we think that we’re going to be able to comfortably grow. We’ll add a few divisions as we get larger and as geographies get a little bit stretched. But right now we’re 30 divisions.

We were at a 124 and we might end up with 35, 40 divisions as we grow our volumes back remembering that the largest opportunity to grow volume and to leverage overhead still remains in recapturing a traditional four homes per community per month absorption rate, and we still haven’t seen that growth.

So the ability to leverage overhead directly derives from the way that we’re structured today and we think that we have a hearty focused structure that can bear a lot more growth..

Great. Thanks very much. That was a great answer. Last question related to the apartment business.

Did you retain an interest in those two apartment complexes that you sold off and can you talk a little bit about what you intend to do in terms of capturing value that you create beyond just the construction of and the lease up of the units as you go forward?.

In the short term, as we’ve said in the past, Steve, we’re in a build to sell mode. We’ve been dealing with third parties; buying the land, starting a venture, constructing, developing and then selling the asset once it’s stabilized. And we’ve had two of those to-date.

I think as we move forward into 2015, given that we’ve got ventures set up with the 19 things that are under construction or completed at this point in time, you’ll see a similar type of trajectory on those assets. We have not retained an ownership interest.

We are working on some things where we hopefully will be able to maybe get a profit as well as continue to have an ownership interest but we haven’t set that up yet..

Just to add to that, what we’re trying to articulate quarter-to-quarter is that we are going to define this business as a merchant-build business in order to prove the power of this backlog that we’ve been creating. You’re seeing the first evidence of that.

This is a proving ground for what we have in our pipeline to demonstrate that number one, we have a strong pipeline; number two, we can design, build, lease-up, stabilize properties.

And as we prove this property after property to a broader market, I think that the next thing that we will focus on is the opportunity that’s embedded in this pipeline of product that’s very desirable to the investment markets and we’ll take that opportunity and wrap some kind of a fence whether it’s a REIT or whether it’s a private equity program around it and have further monetization.

But we said very clearly that step number one is to prove the platform and I think that we’re – you’re starting to see the proof..

There’s no question we could one way or the other. The true magic is can we get both and that’s what we’re focused on to create a platform where we can generate the income so it’s great for our stockholders on a current basis and predictable, but still have an ownership piece in these assets as NOI as we go forward..

Great. Thanks very much, guys, and good luck..

Your next question is from Stephen East from ISI Group..

Thank you. Congratulations, guys. Just to follow-on that a little bit, you say it was about 15 million – a little bit less than 15 million you profited. If I backed into it, you sold it for around 60 million.

Is one, is that accurate? And two, what type of cap rate does that imply because I know, Stuart, you all have talked that you thought you would be able to capture that construction delta on the cap rate?.

Steve, it’s Rick. We have continued to get in those two deals north of the 200 basis points spread on cap versus yield on cost. You’re somewhat in the ballpark with regard to proceeds. There were two different sales and the returns were really off the charts..

Okay so, so much better than the 25% that I’m sort of backing into there?.

Yes, you’re right..

Okay.

And you all move forward, you said it was late '15 that you thought you would be able to start rolling these out quarter-by-quarter and judging by what you’ve seen so far as you get later into '15 and '16 for these sales, does that hurdle rate 25% plus? Does it start to ratchet back down?.

Starting with the hurdle rate, I don’t think it does. Everything’s been underwritten to that kind of IRR for us given that – remember that the structures allow us to promote as we work through the waterfall. With regard to potential sales for 2015, it’s probably going to be in the neighborhood of five to six apartment communities.

We may see one in the first half of the year and the balance in the latter half of the year. The heaviest quarter would be the fourth quarter..

Okay. And then, Stuart, in our field research we’ve seen not only you all but other builders starting to ramp up broker incentives more versus other type of incentives.

And I guess I’m interested in what’s the rationale there, why that which could be true dollars out of the door versus some other things and what do you think happens as you go through call it the next six to 12 months as far as broker incentives versus other types of incentives?.

Well, it’s an interesting question, Steve. The first thing that we have to recognize is that we live in a competitive world and a competitive field, and so in part we can be self determined and in part we still have to recognize what the competitive field is doing. So to the extent that the field moves in a direction, i.e.

ramping up brokerage fees in order to keep within the acceptable ranges with the brokers, we might have to move in that direction too. I do recognize that our business is defined at a very local level. So in some markets you’re seeing some of the competitors move very much in favor of ramping up brokerage fees.

I think that our view and the way that we’ve run our business is we’re probably behind others in how they’ve ramped up, but we still want to stay in the good graces of the brokerage community, so we really can’t fall too far behind in those select communities.

So it really kind of comes down to the mechanisms by which some of the competitors might at moment in time in specific locations decide that they need to ramp up volume. So you’re seeing some of that move around as people define their business and define their strategies.

And it’s not our preferred direction in terms of managing the pact, but at the same time we want to make sure that we stay in the good graces of the brokerage community. They are a vital part of our business..

Yes, fair enough, I get it on that.

Do you think the incentives are above normal levels at the broker level right now?.

Again, I just want to highlight that the way the question is framed, it’s almost like a national question and it is a very local kind of activity that we all average up to the national level. But what I really want to keep in your mind and people’s mind is that the market itself is kind of moving gently upwards but up and down along the way.

And it has caused some and in some markets to really try to focus on driving volume at moments in time. So I think I would answer your question by saying that at times, it does get a little bit overheated both in incentives and in the fee for brokers. And at other times it curtails backwards.

So it’s a moving evaluation rather than one that’s static and consistent. So I think a lot of it depends on – a lot of the answer to your question depends on how the market kind of gyrates up and down and people need to drive sales or competitors need to drive sales. It gets a little frothy at times; it pulls back.

We try to remain pretty consistent and not move just directly in response but remember as it relates to brokers, we’re trying to stay in the game and make sure that we remain in the good graces in that part of our business..

Okay. Thanks a lot. I appreciate it..

Sure..

Thank you. Our next question is from Bob Wetenhall from RBC Capital Markets..

Hi, good morning. Nice quarter. I was just outside of Houston and Katy at a Cinco Ranch and we saw a lot of demand for EI product at the lower end of the price range and it seems like there is a lot of demand for first-time homebuyers.

And I wanted to see if you a) are seeing a return of the first-time homebuyer and b) how you’re thinking heading into 2015 if the first-time buyer is coming back, the tradeoff between incremental operating leverage and mix?.

Hi, Bob, it’s Rick. As we said in the past, we have been very focused on that first-time buyer and maybe I’ll give you a little bit of color as to what we’ve been doing over the last year and how it will play out in our operations within the next 12 months. We really view that first-time buyer as a sub 175, sub $200,000 price point.

And let’s just take Texas as an example. As we move into 2015, under 200,000 we’ll have about 26% of our communities. In Dallas, it will be about 20%, Austin the same and the same with San Antonio. So we’ve been putting these positions together over the last year to really target that buyer.

It’s a little bit tougher to get under 175, much, much tougher because of the land cost to get under 150, but we do view that as a very viable piece of the business. We still will have the higher price stuff, but you’ll start to see that move through in our closings..

I just want to go back to something I said in our opening remarks. We haven’t at all neglected the first-time buyer market. About 30% of our business overall is kind of geared towards that first-time buyer. We have that cork squarely in the water.

Rick and Jon have been very focused on positioning the company to participate as that market returns, but let’s not underestimate.

It’s still very difficult for that market to get reignited until we start to see a little bit more movement in terms of access to the mortgage market remembering that there are really three barriers to the first-time buyer coming back. First, it’s the down payment.

Then it’s the very stiff underwriting and the bank overlays relative to accessing mortgage credit. And then finally the process itself has become fairly invasive, at least as far as people see the process and feel the process.

And every time I say this to a group, there’s at least three or four people in the group that raise their hand and say, yup, I know what you mean by invasive. So the process is almost designed to scare people away. The barriers are a little bit steep right now. It’s going to moderate.

And as I noted, we’ve got our cork squarely in the water and we’re ready to participate as the market really comes back in earnest..

I hope it does. Was going to ask Jon, you made some comments about FivePoint making some progress. It looks like the first phase at El Toro is set up.

If you can give us a little bit more color what you’re seeing in terms of demand patterns both at El Toro and the shipyard just to give a view on southern and northern California, that would be great? Thanks very much..

Bob, El Toro has remained very strong since we opened in October. We’re 80% sold out of 726 homes from the various builders in a very short period of time that covered the slowest part of the season as well. We’ve seen just continued strength in that market.

Irvine is a very desirable location and we see strong demand from builders’ interest in our next phase there. In San Francisco, we haven’t opened models yet.

That will happen later this quarter, but we’ve seen strong success with our presales which is just a very quiet program but steady demand, steady traffic, steady sales activity and a building interest. So we’re very encouraged by the early signals that we see there as well..

Are you still seeing good ASP growth?.

Yes, we are..

Great. Thanks very much..

Okay, I think maybe we got time for one more..

Okay. Our final question today is from David Goldberg from UBS..

Thank you. Thanks for taking my call and good quarter..

Thank you..

I wanted to follow-up, Stuart, on your commentary in response to Bob’s question there about the entry-level buyer and the constraints that are coming in the mortgage market.

And what I’m trying to get an idea of is how do you monitor those constraints and how that’s trending? So presumably you guys want to be a little bit proactive or more proactive than the other builders to kind of get out first or at least get out early to be on top of that.

So what are you looking at to try to get an idea about what’s happening in terms of credit availability, and do you think you can get an advantage over the other builders in terms of maybe a little bit earlier by looking at some of the signals?.

I think, David, that number one, the credit landscape is as I’ve basically described and that is deposit, credit underwriting and then the nature of the process, all being kind of defined and where they are. There has been some loosening of the credit underwriting at the margin, but it hasn’t been as significant as some has been reported.

We stay very close to the customer in the field, we see who is coming in, we see what their commentary is.

Remember that the rental market has accelerated in terms of its monthly payment requirement, it’s cost of living and that’s really driving people to say, I want to buy a home, I’d like to fix my cost, I’d like to find access to the mortgage market. So we’re watching what happens as they come in and staying very close to the purchaser in the field.

Now with that said, the barriers are high and over time the market adjust to those barriers. People start saving, more down payment. They find a way; they get help from family. They start focusing on credit statistics as rental rates go up and they become more volatile because each year there is a re-pricing.

People become ignited to get their credit credentials buffed and polished and ready for underwriting. They take a deep breath and they prepare themselves to go through the mortgage process. So you have two things kind of going in opposite directions. People are becoming more prepared and the mortgage market is opening up at the margins.

And the only thing that we can really do is stay very close to the purchaser in the field, see what they’re seeing, feeling and finding as they try to access the new home market and use that as a guide post for really diving in and participating.

Now, we’ve highlighted that we’ve gone out, we’ve tied up properties and positions that enable us to access the first-time market as it really starts to come back and we’re already very involved in the market. But the indicators to us that it is time to really start focusing on that market will come from the field at a very granular level..

That’s very helpful. And then just as a follow-up question, it feels like you guys and maybe a couple of the other builders are gaining share from maybe broadly the other public builders and maybe some of the private builders.

Do you think it’s true that you’re gaining share right now and the pie is relatively flat? And if so, do you think it’s sustainable as you go forward?.

I think there is a reality right now and that is the credit landscape is tight. It’s not just tight for the purchaser looking to gain access to the mortgage market but it’s also been very tight for smaller builders and for traditional land developers to get back in the market and to do the things that they do.

So I think the larger, well-capitalized builders with access to the land market in a more comprehensive way have been able to pick up market share and that is something that seems like it’s continuing going forward.

Of course, the small builders are resourceful and find their way to participate, but I still think that the larger builders have a distinct advantage in the current market condition and I do believe that the pickup of market share is sustainable and will continue. I know you said that the pie is fairly static.

It feels like over time the pie is going to be gently expanding as well, but with a gently expanding pie I think that you’re going to see pickup in market share as well..

Thank you very much..

Okay. You’re welcome. Thank you, everyone, for joining us. We’re sorry for those who weren’t able to get on. Of course, Bruce is available today to answer calls and we look forward to reporting again the end of our fourth quarter. Thank you..

Thank you. This does conclude today’s conference. You may disconnect at this time..