Buoyed by continued improved orders and rising backlog, Lennar CEO Stuart Miller predicted the company would start booking profits next year.
"We think that we can be both cash flow positive and profitable in 2010," he told investors during the company's Monday morning conference call after releasing its third-quarter results.
The company is moving closer. It lost $0.97 a share in its third quarter, which ended Aug. 31, and $0.76 of that was from write-offs and deferred tax asset evaluations. Orders were up every month during the third quarter, Lennar had the biggest backlog since the third quarter of '08, and the incentives it has been offering to sell homes decreased to $42,000 from $46,000 each.
"It is starting to feel that there are enough positive indicators out there that they are starting to define a real trend," Miller said.
Still, as usual, Miller's optimism was tempered with caution. "By no means would I suggest that housing is out of the woods," he said. "If we have seen stability, I think we are running across a very rocky bottom," he added later in the call.
Climbing foreclosures, fluctuating mortgage rates, rising unemployment and gas prices, and the uncertainty of whether the government's tax credit programs will continue are all potential rain clouds on the horizon, he said.
Whether the improvements continue or more setbacks remain, either way, Miller said the company is ready "with one foot on the gas and one foot on the brake."
An example of that foot on the brake and accelerator approach is the company's starts. It accelerated starts to 3,100 for the quarter, but that number matched almost exactly its sales for the quarter.
Under questioning about whether the increase in starts had the intention of increasing the number of spec homes it had available for buyers in a hurry, Miller replied, "To the contrary, we continue to tighten up in that regard."
"We are not out there chasing the opportunity to add production," Miller continued. "We want to do it profitably on a home-by-home basis."
In another move to increase profitability, Lennar has retooled product to appeal to first-time and "value-oriented" buyers, decreased the number of home plans offered, and value-engineered those that remain to make them more profitable, all in an effort to improve margins.
Lennar is also poised to "make the [down] cycle our ally, not our adversary" by taking advantage of opportunities created by the distress, Miller said.
The resolution of the LandSource bankruptcy is one such opportunity, he said. Lennar spent $140 million to buy 15% of LandSource's new incarnation, as Newhall, as well as to buy some other assets of LandSource outright.
"This is an excellent deal for the company that will hold us in good stead for years to come," he said.
In addition, Lennar has been buying heavily discounted finished lots just in time for home construction, which should improve its margins as well. Meanwhile, its raw land will remain raw for now. "Investment in development right now does not return adequately to merit the investment, and that is why we are looking at primarily buying finished home sites at a lower price than you could actually develop them today," he said.
Lennar is continuing to set in place a separate company named Rialto and funded by private equity capital to buy other land opportunities, not restricted to residential development.
"Rialto is doing a lot of what we have done as part of our DNA" in the past, Miller said. "It's kind of out there looking for pure distress and opportunity [for Lennar] to not only participate, but provide solid management and expertise."
Miller likened Rialto to LNR, a company that Lennar helped to build and then sold.
"The money is not yet raised, and the opportunity set is not yet defined, but it might include pieces of RMBS (residential mortgage-backed securities) and CMBS (commercial mortgage-backed securities) traunches that become available. It's a really different business segment that is a piece of what we have done historically and created tremendous value."