With the much anticipated spring selling season, so far, a bust, Lennar Corporation's CEO Stuart Miller sees no end in sight to the new home market's blood-letting, he told analysts during a conference call this morning (March 27). The call was held after the release of FIRST-QUARTER EARNINGS earlier in the day.

The pall cast by the uncertainty in the mortgage lending market isn't helping matters either and could slow down sales even further, he said. "It's unclear today whether there is another shoe to drop," Miller said.

On the other hand, the company's plan to convert homes and land in the pipeline into cash as quickly as possible through discounting homes to whatever level it takes to sell them is working. The company's debt level dropped to 30.9% from 36% of equity in the first quarter of 2006, it reported Tuesday. Of course that conversion carried a steep cost to margin.

"While margins have eroded, our balance sheets have improved," Miller said. The company gave away an average of $45,500 worth of incentives per home delivered in the first quarter of '07 compared to $13,800 per house in the same period last year to push those homes out the door quickly. Those incentives helped lower the average house price to $303,000 from $326,000 last year.

Even with the discounts, new orders were down 27% first quarter '07 from '06. And the cancellation rate, at 29%, was still running higher than the company's historical average. Each of Lennar's divisions and the home office are all having daily meetings to review backlog with an eye on keeping it scrubbed free of likely defaults, Miller said.

The company's next target is to rebuild margins by cutting costs. Stuart said Lennar should get a boost in that direction because new homes sold this year will have cheaper land costs, thanks to earlier write-offs plus renegotiations of sales prices with sellers.

In addition the company has instituted the "four legs of reengineering margins," which include:

  • Continuing to convert sales staff from order takers to drivers of sales.
  • Negotiating and renegotiating every land deal.
  • Reducing and right-sizing overhead
  • Re-bidding construction costs.

The latter efforts, which included telling subcontractors to cut their prices for work already done or face a yearlong furlough, has generated negative press reports. Miller defended the tactic. "Some in the press have suggested we have been somewhat heavy-handed," Miller said. "Intensity is required if we really want to get costs in line."
There were two bright spots in the conference call - a $175.9 million gain in the first quarter on the sale of 34% of Lennar's 50% stake in the LandSource joint venture. Over time, that sale should generate $700 million.

The other was the company's financial services segment, which had $15.9 million in earnings in the first quarter compared with $10.6 million in the same quarter of last year. Capturing 70% versus 62% of the buyers plus an increased percentage of fixed-rate loans accounted for the earnings increase.

Company officials also said they have looked at backlog to determine how much potential loss there would be as lenders tighten loan requirements for subprime and Alt-A loans and determined the effect should be minimal, although the company has no way of estimating the fallout for the 30% of its business which chooses outside lenders to finance their purchases.

"It's unclear how the underwriting for these products will change," said Lennar CFO Bruce Gross. "We do know that some of these (low-down- or no-down-payment mortgages) were the mortgage of choice for speculators (who have since moved out of the market). They may already be accounted for in our previously indicated decline of home building volume in 2007."