Lennar FY 1Q15 Earnings Call Notes

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Still in the early stages of protracted, but slow, housing recovery

“Consistent with our prior conference call messages, we continue to believe that we are still in the early stages of a protracted, slower-than-history-would-suggest housing recovery, and an early read from this year’s spring selling season suggest that the market is continuing to improve at a very steady pace. This recovery continues to be driven forward by a strong backlog of pent-up demand for housing that is constrained by the mortgage market.”

Multi year production deficit and pent up demand

“Pent-up demand is derived from a now multi-year production deficit that is continuing to grow even at current production levels. At the same time, volume growth has been constrained by overly conservative lending standards, a regulatory environment that discourages mortgage lending and a negative consumer bias overhang against homeownership. ‘

We continue to see outsized improvement in rental market

“we’ve seen and continue to see outsized improvement in the rental market in terms of low vacancies and higher rental rates. This trend, of course, has benefited our multifamily strategy rather dramatically, but also sets the stage for further improvement in the for-sale market as new households looking for a place to live compare monthly payments.”

Mortgage lending is starting to open back up

“it’s becoming more apparent that the mortgage market is loosening incrementally with time and enabling more demand to be realized as household formation begins to return to more normalized levels. ”

Downside for housing market is very limited

“We have believed and we continue to believe that the downside in the housing market is very limited and the upside is very significant. We believe that the market is downside supported by the many years of production deficits that have yielded a limited supply of both rental and for-sale housing in the country.”

We are continuing to undersupply the demographic needs of the country

“At 1 million homes of multifamily and single-family production per year, we are continuing to undersupply the demographic needs of the country and this will have to be made up.”

Labor and material costs are about $50 per sqft

“The gross margin decline year-over-year was also due to a moderation in pricing power, at the same time as labor, material, and land costs increased. Year-over-year, labor and material costs are up 6.6% to approximately $50 per square foot, but are flat sequentially with the fourth quarter. ”

Own 133k sites

“In the first quarter, we purchased 4,200 home sites totaling $421 million versus $505 million in the prior year’s quarter. This is consistent with our strategy articulated last year to softly pivot from longer-term land parcels to shorter-term deals. Our home sites owned and controlled now total 163,000 home sites, of which 133,000 are owned.”

Stronger traffic in Houston at the low price points, but slowing traffic at higher price points

“let’s talk about Houston because I know it’s in everybody’s thoughts right now. I’d tell you that across the board, we had good traffic in all price points. Definitely stronger traffic and absorption at the sub $350,000 price point; real, real strong between $200,000 and $300,000. As you got above the $400,000, $500,000 price point, it’s slowing down.

Traffic is still strong. The buyers there are just more cautious in pulling the trigger on the sales side. But we really think that the Houston market is a strong market. We decided not to chase prices down and focus more on gross margin in Houston. We’re very positive on the Houston market”

You have demand pushing up but supply constraints pushing down

“So, you have demand pushing up, you’ve got constraint pushing down, and all of this is happening with inventories very, very tight across the country, both on the existing and the new home and the rental side of the equation. So the market condition generally has been choppy.”

Bad weather wasn’t just confined to the Northeast

“you’ve seen some rather severe weather conditions in a number of parts of country that have really limited the ability of buyers to get out of their home and go look for a home if they’re even inclined to. And you’ve not just seen that in the Northeast where it’s been kind of most aggressively articulated. It’s in Dallas. It’s been in Atlanta. We’ve had weather conditions in a number of places across the country.”

Mortgage origination moving slightly from big to small but not enough to move the needle

“So the mortgage market, even though we’re seeing that originations are finding their way across smaller lenders and less traditional lenders in the market at large, it doesn’t move the needle dramatically to see the shift from big banks to others in terms of healing the mortgage market. It’s more about the regulatory environment softening, the punitive side being softened and lenders just feeling their way through this kind of turbulent landscape. ”

Land is another constraining factor

“Now a secondary limiting factor, because we have been constrained in production, the land development machine has not reemerged in this housing recovery in full force. So it takes time to get land entitled. I keep going back to the fact that there is a land shortage, and that means entitled developed land is in short supply. So if you see an uptick in the marketplace, land will continue to be a constraining factor.”