Lennar 1Q16 Earnings Call Notes

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Stuart Miller

Have only seen mild negative impacts on business from Fed

“Even while the month of December was defined by the first interest rate hike by the Fed since the great recession, which turned into capital market turbulence and fears of recession as we entered calendar 2016. We have seen only mild negative impacts to our business and have continued to be able to perform, as expected.”

We do not see telltale signs of recession

“To answer the questions directly, we feel certain that modest moves in interest rates tied to low unemployment and some wage growth will be a net positive for housing. We do not see the telltale signs of recession. Global terror seems to highlight that the U.S. is the safest place to be and to invest in the world and teach U.S. citizens focused right here at home. And that’s for the election. Well, they say that America always gets to the right answer right after we’ve tried all the wrong ones, we’ll see.’

Housing stock has been under-built

“As we’ve noted consistently over the past few years, the overall housing market has been generally defined by a rather large production deficit, and this is resulted in a growing pent-up demand. Stronger general economic conditions, including lower unemployment, modest wage growth, and general consumer confidence are still driving consumers to form new households and to rent and to purchase apartments and homes. We expect the demand will continue to build and come to the market over the next years, and will drive increased production at the deficit and housing stock ultimately needs to be replenished.”

Labor and land shortages will constrain supply

“Land and labor shortages will continue to constrain supply and constrain the ability to quickly respond to growing demand, while the mortgage market will continue to constrain purchaser’s access to mortgages. These conditions will continue to result in slow and steady positive homebuilding market conditions and will enable slow, steady, though sometimes erratic growth across our platforms.”

Recovery is mature

“We have noted in the past quarter conference calls that given the now mature recovery, we have been and continue to carefully manage our growth in order to grow our bottom line and to drive strong cash flow. We’ve moderated our growth targets to achieve a growth rate in the 8% to 10% range, as we’ve redirected our management efforts towards creating operating efficiencies and leveraging SG&A.”

Moving away from heavy land acquisition

“We’ve also talked consistently about a soft pivot in our land strategy away from the land heavy acquisition strategy in the early stages of the recovery. And we are now targeting land acquisitions with a shorter two to three-year average life. ”

First time purchasers continue to come back more slowly

“First time home purchasers have come back to the housing market more slowly than they have historically and more slowly than expected. ”

Digital marketing enables greater penetration

“we think first time homebuyers as most likely to decide to purchase a home when they’re getting married or one they’re having children. In a digital platform, we can target our message to people who are looking for wedding dresses or purchasing cribs, that’s a more targeted focused audience and it costs a lot less to target that group. Digital marketing enables a greater penetration to the people that we want to hear our message”

There’s been a shift from buy to rent

“relative to the empty nesters rethinking their living conditions, there has been some movement in the direction of rental versus homeownership there as well. So we’ve seen that the rental option, the reduction in homeownership rate is something that is broader than just affordability, it reflects also appetites and desires that have evolved since the recession. And we think that some of those trends will continue.”

There’s some dysfunction in CMBS markets

“Okay. So remember that we’ve been in the CMBS markets for a couple of decades now. We’re probably one of the most – we’re probably the most seasoned participant in those markets. We’ve recognized the ebb and flow of demand and supply in CMBS markets. And we recognize we see when the market dries up, sometimes there’s more demand than there is supply and we generally sit on the sidelines as we are right now. At those times, the demand side seem – tends to go away…the way we think about that market is in recognizing that ebb and flow uniquely relative to its market recognizing the dysfunction generally works to our favor, given our experience.”

Demand is strong but affordability is a question

“I think that we continue to see fairly strong demand. I think affordability is a looming question as prices have tended to go up. They tend to go up because the supply, we read about it, see it all the time both on existing homes and new homes just fairly tied and the demand as we emerging. It hasn’t emerged, but it’s still emerging and I think that there is a sizable pent-up demand.”

Rick Beckwitt

Things got better throughout the quarter

Yes, I would tell you from a – an overall standpoint, we saw good sequential improvements throughout the quarter, December being the lightest and clearly February being the strongest month, pretty much spread across every operating territory that we’ve got, and I’ll address Houston in a little bit. We saw that with regard to both home sales activity as well as pricing, so we’re optimistic that we’re entering the sale season

Jon Jaffe

Northern California remains very strong

“Northern California, the Bay Area remains very strong, really defined by a shortage of both housing and particularly in Silicon Valley by a shortage of skilled labor in the tech and biotech world. So that continues to feel demand there. And then in Sacramento, we’ve seen a nice recovery where that’s become a strong market.”

Not really seeing a recovery in the labor picture

‘Yes, we’re not really seeing a recovery on the labor picture…we’ve seen a very steady environment for us in terms of cycle time, very little increase in cycle time year-over-year. But that doesn’t mean that the labor market is improving any.”