Lennar Corporation (LEN) Q4 2013 Earnings Report, Transcript and Summary

David M. Collins - Principal Accounting Officer and Controller Stuart A. Miller - Chief Executive Officer, Director, Member of Executive Committee and Member of Independent Directors Committee Bruce E. Gross - Chief Financial Officer and Vice President Richard Beckwitt - President Jonathan M. Jaffe - Chief Operating Officer and Vice President Jeffrey P. Krasnoff - Former Chief Executive Officer, President, Director, Member of Executive Committee and Member of Stock Option Committee

Stephen F. East - ISI Group Inc., Research Division Alan Ratner - Zelman & Associates, LLC Stephen S. Kim - Barclays Capital, Research Division Michael Jason Rehaut - JP Morgan Chase & Co, Research Division Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division Adam Rudiger - Wells Fargo Securities, LLC, Research Division Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division David Goldberg - UBS Investment Bank, Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division

Thank you for standing by, and welcome to Lennar's Fourth Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now turn the call over to Mr. David Collins for the reading of the forward-looking statement.

Good morning, everyone. Today's conference call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include 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.

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

Thank you, and good morning, everyone. Thanks for joining us for our fourth quarter and year end 2013 update. We're very pleased to share our results with you this morning. This morning, I'm joined by Bruce Gross, our Chief Financial Officer; David Collins, who you've just heard from, who's our Controller; and Diane Bessette, our Vice President and Treasurer. Additionally, Rick Beckwitt, our President; and Jeff Krasnoff, Chief Executive Officer of Rialto, are here as well for our question-and-answer session. And Jon Jaffe, our Chief Operating Officer, is with us by telephone from California. I'd like to begin this morning with some brief overview remarks on the overall state of the housing market and then briefly overview our operations. Bruce, as usual, will provide further detail on our overall numbers and some further comments on our Financial Services segment. And then we'll open up to question-and-answer. [Operator Instructions] So let me begin. Over the past months, we've seen a pause in the rate of improvement in the recovery of the housing market as both volume and price appreciation have moderated in response to political turmoil and interest rate increases. We noted in our third quarter conference call that we were beginning to see signs of this moderation, but we believed then, and we continue to believe now, that the housing market remains on track for a solid recovery and is likely to continue to improve over an extended period of time. We continue to believe that the overriding driver of recovery in the housing market remains the production deficit of both single- and multi-family dwellings throughout the economic downturn and up to and including this year. This shortfall will have to be made up, and the builders of both multi- and single-family products will need to increase production, as inventories have remained extremely low and pent-up demand comes on to the market. And even as the market responds, inventories are likely to remain constrained, as production increases are limited by a shortage of entitled and developed land to build on in desirable locations. While we recognize the potential headwinds from recent moves to lower loan limits and raised guarantee fees on government-sponsored mortgages and the continued pressure on interest rates, we feel that the short supply of available homes and pent-up demand, along with a generally improving economy, will continue to drive the housing recovery forward. And we're anticipating a robust spring selling season, which historically begins just after the Super Bowl. Our view, and the primary driver of our business strategy, is that the housing recovery is still very much intact and that the fundamentals of that recovery remain solid. Currently, we are seeing, in the field, traffic patterns that indicate that buyers are coming to the market and finding short supplies. While this time of the year is our seasonal slow -- seasonally slow time of year for actually closing sales, we are continuing to see healthy interest in the field, which indicates that the 2014 selling season will prove to be very healthy for those who are well positioned with well-located assets and product. Against that backdrop, Lennar has finished up 2013 with a very solid fourth quarter and full year results that speak both to the solid management and execution of our articulated strategies and to the positioning of our company for performance in the future. Each of our businesses showed strong results for 2013, and we are well positioned for the future. As a company, we took advantage of the market cycle and, accordingly, we feel we have excellent asset positions to drive future growth. Homebuilding, of course, remains our primary driver of quarterly performance. For the fourth quarter, revenues grew to $1.9 billion, up 42% over last year, as we continued to focus on maximizing our pricing power. Our sales pace in the fourth quarter averaged 2.9 sales per community per month, which was flat or just short of last year at 3 per month. Our average sales price advanced to $307,000, which was a year-over-year increase of $46,000 or 18% and a 5.5% sequential increase from the third quarter. This improvement in sales prices covered increases in labor and material and the cost -- and land costs, as reflected in our gross margin. The fourth quarter gross margin improved year-over-year to an industry-leading 26.8%, a 330-basis-point improvement, reflecting the strength of our well-positioned communities. With SG&A of 9.9%, a 140-basis-point year-over-year improvement, we continue to improve our operating leverage. An example of this focus is in our advertising spend, where, for the full year, we increased new orders 21% over 2012, but we spent less in nominal dollars than we did in 2012. This operating leverage produced a 16.9% net operating margin for the quarter, which was a 490-basis-point improvement and close to peak quarterly operating margins. In our fourth quarter, new orders were up 13% over last year, while our new order dollar value of $1.4 billion was up 34% over the prior year, and our dollar value of backlog is up over 40%. We opened 77 new communities and closed out 54 communities during the quarter to end at 3 -- 537 active communities, a 17% year-over-year increase. As expected, our backlog conversion ratio was 95% for the fourth quarter, and we expect Q1 to be between 80% and 85%. Our fourth quarter performance highlights strong management execution but also indicates how well we are positioned for future performance. During the fourth quarter, we continued our carefully crafted land acquisition program and purchased approximately 11,000 homesites for $365 million, while we spent $197 million on land development. Combined, our land acquisition and land development spend was up about 76% over the prior year period. As in prior quarters, money was invested geographically in the markets where we saw the best opportunities. In addition, we signed contracts to acquire approximately 3,000 homesites. As we look ahead to 2014 and beyond, we feel fortunate to have the land in hand to meet our projected deliveries through 2014 and well into 2015, and this positions us well to maintain gross margins that are consistent with our reported full year 2013 25% growth. While recent sales have seen mild increases in the use of incentives on selected inventory, we expect that margins will continue to remain steady. Over the past quarters, we've augmented our land strategy with the addition of shorter-turn, quicker -- shorter-term, quicker-turn purchases with high IRRs in order to continue to leverage our existing operating platform in 2014 and 2015. These are excellent deals for the company, even if they are at lower gross margins, because we can increase our operating margin, given that we already have the divisional fixed overhead covered for the next 2 years. At November 30, 2013, we owned and controlled approximately 154,000 homesites. And, as I mentioned before, we had 537 active communities. In 2014, we expect to be able to increase community count by approximately 15% year-over-year. Overall, our homebuilding operations have improved and will continue to improve due to a strong operating strategy complemented by an excellent management team and management execution. Complementing our homebuilding operations, our Financial Services segment had a very respectable quarter with operating earnings of $17 million, though down from the $33.2 million last year, when the refinancing business was booming. Our mortgage company captured some 75% of Lennar homebuyers within the markets in which we operate. While mortgage and title operations have benefited from a robust refinancing market in past quarters, that part of the business has now all but evaporated. Lennar home mortgage and title continue to grow, however, alongside our expanding Homebuilding business, as well as to serve a growing number of non-Lennar purchasers in a growing number of markets across the country. While our Homebuilding and Financial Services divisions are the primary drivers of near-term revenues and earnings, our 3 additional operating divisions are all continuing to mature as excellent longer-term value creation platforms for the company. Rialto has continued to grow as a blue chip capital investment management company and commercial real estate capital provider. While past quarter earnings slowed as we have shifted from a balance sheet investment company to a fund investment model, the current quarter results for Rialto demonstrate prospects for future consistent earnings. Almost 2/3 of the almost $14 million pretax contribution from Rialto this quarter is a direct result of our new mortgage loan origination business. As we mentioned last quarter, earlier this year, we brought on board one of the industry's most experienced commercial real estate loan origination teams. The initial objective for Rialto Mortgage Finance has been to originate and securitize long-term fixed rate loans on stabilized cash-flowing, institutional-grade commercial real estate properties. By quarter end, we had successfully originated approximately $700 million of mortgage loans and completed 4 securitizations, generating over $23 million of gross profit. This business has also been a perfect fit with our existing Rialto franchise, which already has been the market leader in CMBS B-piece investing and special servicing. In addition, now that the business is ramping up, we expect it will begin to generate more predictable and -- a more predictable and recurring component of earnings for Rialto and also begin generating excellent opportunities for our other investment vehicles and for us. The rest of this quarter's contribution is from our previously existing real estate investment business. Our first real estate fund, in which we invested approximately $1 billion of private equity, including $75 million from us, continues to perform well above expectations. With next week's distribution, our investors will already have received back $420 million, representing 60% of their original equity commitments, in less than a year since we closed our final investment in the fund. Our second real estate fund is also well on its way, finishing out its $1.3 billion equity raise this week. We far exceeded our $950 million fundraising goal, and Fund 2 has already invested or committed to invest approximately $600 million in 40 transactions. We are also continuing to raise our first mezzanine fund that is focused on investments in real estate loans that fall below -- just below the Fund 2 return threshold. We've already raised and invested a little less than 1/3 of our targeted $300 million of equity. In addition, we are now managing a $200 million separate account for a major insurance company. At this point in time, while we currently are paid fees and are reimbursed certain costs by our investors from these vehicles, our financial statements do not reflect any carried interest, as we don't recognize this component of income until it becomes due and payable. Looking forward, we continue to see compelling opportunities in our core areas of expertise, including the continued clearing of distressed and sub-performing assets from financial institutions, providing the vital capital and management to reposition and refinance real estate assets as the markets continue to expand, and the growth of commercial real estate finance, where we've been a market leader in new B-piece investing and special servicing and, now, new loan origination and securitization. As with Rialto, we are pleased with the progress of our multi-family apartment business. This business began operations in early 2011 and is positioned to be one of the leading developers of new Class A apartments in the United States. We've assembled a seasoned team of professionals across the country that is leveraging every aspect of our company. In the fourth quarter, we commenced construction on 5 new apartment communities and now have 11 active communities and 1 completed community, totaling approximately 3,250 apartments with an estimated development cost of some $590 million. In addition to these communities, we have a geographically diversified development pipeline that exceeds $3 billion and represents over 12,500 additional rental apartments. As we've discussed in the past, we're building these apartments with third-party institutional capital, and each deal has been conservatively financed with nonrecourse debt. In addition, we've underwritten our investment using today's rents and unlevered yield on cost that are 125 to 200 basis points over prevailing cap rates. With our conservative financing and underwriting, we're positioned to earn IRRs exceeding 25% and cash multiples greater than 2x. We anticipate that the construction of our development pipeline will be completed over the next 4 years. And as a merchant builder of apartments, we plan to sell our apartments once rents and occupancies have stabilized. We should begin to see returns on invested capital by the middle of 2014 with a more meaningful contribution from our Multifamily segment in fiscal 2015. Finally, our FivePoint Communities continues to mature as a long-term strategy as well and is quickly moving to bring developed land in premium California locations to market to fill the growing demand for well-located approved and developed homesites. In our second quarter, we saw our first earnings contribution from this division. We believe that FivePoint will create excellent long-term shareholder value for the company. In conclusion, let me say that, while we are aware of the concerns that are being reflected in current market volatility, our company strategy continues to be driven by our belief that the market remains positioned to continue to recover and that our company is very well positioned to benefit. The housing market is healing, and we believe that the recovery is driven by shortage of available inventory, by pent-up demand and limited land available for building. While political and interest rate headwinds have tended to slow the recovery for the short term, our traffic patterns indicate to us that a generally improving economy will drive improved household formation and increased demand as we enter the 2014 selling season. Lennar's homebuilding operation and asset base is extremely well positioned for the year ahead. We have excellent land positions in all of our major markets, while the overall land market is very constrained, and we have continued to fortify that position. Our Homebuilding and Financial Services operations will continue to be the company's primary driver of current earnings. Our ancillary businesses of Rialto, Lennar Multifamily communities and FivePoint continue to mature and expand their franchises and will provide excellent longer-term opportunities to enhance shareholder value. We are very pleased with our progress and performance in 2013 and look forward to a very successful year ahead. Thank you, and let me turn over to Bruce.

Thanks, Stuart, and good morning. I'll add some color to the numbers that were in the press release today, starting with Homebuilding. Our results reflected strong top line growth as our revenues from home sales increased 50% in the fourth quarter, driven by a 27% increase in deliveries and an 18% increase year-over-year in average sales price to $307,000. Let me give you some more details of that average sales price by region: the East region was $274,000, up 12%; Southeast Florida was up 13% to $299,000; Central region, $270,000, that was up 17%; Houston, $277,000, up 15%; the West region was up 31% to $407,000; and Other was $382,000, up 9%. The gross margin on home sales that Stuart talked about, up 330 basis points to 26.8%, was driven by a couple of things. Primarily, sales incentives were $20,600 per home in the quarter, and that was an improvement of 270 basis points. It came down from 9% in the prior year to 6.3% in the current quarter. The gross margin percent improved in every one of our regions during the quarter and was highest in the East, Southeast Florida and West regions. Our new communities purchased since 2009 continued their margin outperformance and represented approximately 2/3 of the company's deliveries in the fourth quarter. The strong gross margin performance was partially offset by a 12% increase in labor and material cost to just under $47 per square foot. Sequentially, this is about a 3% increase from the third quarter. Labor costs were up a little bit more than material costs during the quarter. And we did benefit from the lower lumber cost earlier in the year that started to benefit our closings in the current quarter. We do expect that there will be continued cost pressure in 2014 as the supply chain works to catch up to increased production levels. In addition to the significant operating margin leverage that Stuart commented on, we have additionally recognized operating leverage in our corporate G&A line, as our corporate G&A improved 60 basis points to 2.3% of total revenues, and that compared to 2.9% in the prior year. The other income net line totaled $13.3 million of profit during the quarter, and this was due to the sale of a rental operating property. This transaction resulted in a net loss of $3.2 million after including the reduction to the noncontrolling interest line of $17.6 million because this was a consolidating joint venture. This is not part of our new Multifamily operating segment. This building was repurposed from condo to rental use during the housing downturn, and the sale positively impacted the balance sheet by generating $53 million of cash and retiring $88 million of consolidated debt during the quarter. Turning to Financial Services. This segment generated operating earnings of $17 million versus $33.2 million in the prior year. Our mortgage pretax income decreased to $14.3 million from $30.9 million in the prior year. Mortgage originations declined approximately 9% from the prior year to $1.3 billion. As I have been highlighting for several quarters, we have been expecting the number of refinanced transactions to decline and the profit per transaction to moderate, and we did see that in our results this quarter. Refinanced loan origination volume declined about 80% from the prior year's quarter, and this has also resulted in margin compression as more competitors focused on the purchase business. Our mortgage operations have shifted to purchase business, with the mix now 93% purchase transactions and only 7% refinance transactions. Our title company also experienced a significant reduction in refinanced transactions but delivered a $3.4 million profit in the quarter, compared with $2.9 million of profit in the prior year. Turning to our Rialto segment. They generated operating earnings of $13.9 million, compared to $4.6 million in the prior year. Both amounts are net of noncontrolling interest. The composition of these earnings by type of investment is as follows: the investment management business, these are the funds that we manage, contributed $7.2 million of earnings; the direct investments, which are the FDIC and the bank portfolios, contributed a net of $9.2 million of earnings; and these amounts were reduced by $12.7 million of G&A and other, and that's net of management fees. Our new Rialto Mortgage Finance operations contributed a net $10.2 million during the first full quarter of operations. Rialto's balance sheet is well positioned, as we fully paid off the remainder of the $627 million of FDIC debt. And during the quarter, we issued $250 million of 7% senior notes due in 2018 in Rialto. The net proceeds were used primarily to originate loans in Rialto Mortgage Finance and repay $100 million of capital to Lennar for the monies that were advanced to start up Rialto Mortgage Finance. Turning to the Multifamily segment. This is a new segment that we separated this quarter as a result of the significant growth in the multi-family business. The initial results are the start-up expenses relating to the strong team that we've put in place that has already built the $3.7 billion pipeline that Stuart highlighted. Turning to our balance sheet, our liquidity and leverage both improved during the quarter. We ended the fourth quarter with $700 million of cash and 0 outstanding under our $950 million unsecured revolving credit facility. Our Homebuilding net debt-to-total cap declined sequentially from 53% to 45.6%, driven by strong earnings and the conversion of the entire $277 million of principal amount of 2% convertible senior notes. The shares from this convert were always included in our fully diluted EPS calculations, so there's no additional dilution that is suffered from this conversion. Stockholders' equity increased by $754 million during 2013 to end at $4.2 billion. Our book value per share increased to $20.39 per share. So now let's look forward to 2014. I'd like to summarize some of what's been said on this call and highlight a few additional goals for 2014. Number one, deliveries. We are currently geared up to deliver between 21,000 and 22,000 homes for 2014. I want to clarify the backlog conversion by quarter. We do expect a backlog conversion ratio between 75% and 80% for the first quarter, and then it jumps to 80% to 85% for the second and third quarters. And then, over 90% is expected for the fourth quarter. As Stuart mentioned, our gross margin is expected to average about 25% for the full year, and then there's going to be the normal seasonality applied between the quarters, which is lower at the beginning of the year and higher, typically, in the fourth quarter at the end of the year. SG&A expenses. We do believe that there's an opportunity to continue to increase the operating leverage that we've been seeing, and we expect up to another 25 basis points of potential improvement in 2014. Our Financial Services operations are expected to be in the range of $65 million to $75 million for the year. We have very tough comparisons in the first half of the year, due to the loss of the refinanced business that I discussed. We expect the first quarter, which is typically the slowest quarter for Financial Services, to be under $5 million of profit for that quarter. Turning to Rialto, we expect a range of profits between $30 million and $40 million for the year, with the first quarter close to breakeven and then picking up and having more consistent earnings for the rest of the year. The Multifamily segment, we expect, will be another start-up year. We might sell a building or 2 later in the year, with the bottom line expected to be between a range of $15 million and $20 million of additional net start-up loss, while we're positioning for a much stronger 2015. On the joint venture line, some of you might have heard recently, we had a press release about the El Toro community. We received entitlements for the 9,500 homes at the El Toro Great Park Neighborhoods, and during this process, we held off on incorporating the expected development changes until those entitlements were finalized. As a result, we're not expecting any large land sales to third-party builders until our first quarter of 2015. However, Great Park has been a tremendous success. It's approximately 30% sold out already, and we're experiencing rising sales prices. So we continue to build tremendous value in the FivePoint assets. However, the joint venture profit line for the entire year is expected to be about breakeven. Our 2014 effective tax rate is expected to be about 37.75% for all of 2014. And then the net community count, as was highlighted, is expected to increase about 15% from our ending count of 537 to a range of 600 to 625 by the end of 2014. So with that, let me open it up for any of your questions.

[Operator Instructions] The first question is coming from Stephen East, ISI Group.

Stuart, I'll just get it over with so you won't have to answer the question and over and over. Can you talk about the progression of the orders through the quarter, what you were seeing, trend-wise, anything post-quarter? I know it's not very long. And then also, could you just -- your West was much better than we expected; and Southeast Florida, worse than expected on orders. Just maybe a little guidance on that, what was going on?

Yes, let me turn that over to Rick and to Jon, Steve. Rick, go ahead.

So Steve, from a quarter standpoint, we saw a sequential improvement during the quarter from September through November, pretty consistent month-to-month. That was consistent with regard to both number of homes sold, as well as pricing, ASP increases. So I think that, that -- we view that as a positive. As you know, it paused in sort of the late summer, and it was nice to see the improvement sequentially. As we look at -- just specifically with regard to Southeast Florida, we made some conscious decisions there to slow things down, so don't be alarmed with the decline in year-over-year new orders. The thing I would point out is we have an incredibly strong backlog there, up 50% year-over-year. And if you look at the price, ASP in Southeast Florida, you'll see that, that was dramatically up as well. So we made some conscious decision to slow things down. Jon, how about California?

Yes, Steve. In the West, we saw pretty consistent sales throughout the quarter, following the same sequential trend that Rick spoke about. But certainly, we were benefited by the grand opening at the Great Park, El Toro, generating a lot of sales there. We found Vegas was a strong market for us throughout the quarter, with good sales, and Northern California. And compared to some of the reports that you and others have put out, showing sort of declining sales in the West, we found our sales held up pretty strong and had very limited incentives that were needed to move inventory.

Okay. That's very helpful. And then Stuart, if you look at -- you talked about being optimistic on the spring. What are you looking for? When will you start getting signs of what the spring is doing, and what type of milepost would you look for to either continue to ratchet up pricing or start to use incentives in a greater way?

Well, historically, the exact date that the spring starts to be indicated moves around a lot. And especially over the past years, that has been the case. We always peg Super Bowl. I mean, it seems a little bit irrational, but it seems that when the Super Bowl ends, people start getting out there and looking for homes. It's more towards wintertime than actual spring, but that's when we start to get our early indications as to what's coming. What makes us think about spring as a -- or early indication being that spring is going to be a pretty responsible season is the progression of sales. As we've watched the market adjust to the interest rate increases and to the political environment being in a pretty solid state of turmoil, we did see the market adjust. And it started with traffic, but as Rick indicated and Jon indicated, we did see sequential improvement as we went through the quarter. And that, together with our traffic patterns, gives us pretty good sense, right now, that the spring selling season is starting to shape up. I'm not going to say -- I'm not going to be too aggressive in my statement, but we feel that it's shaping up to be pretty strong, given the demographic trends that we know exist, the pent-up demand that we are pretty sure exists, and some of it just coming pent-up demand from the political turmoil that we've seen. We think it's going to reveal itself in the spring, and we feel like we're really well prepared for it.

The next question is coming from Ivy Zelman, Zelman & Associates. Alan Ratner - Zelman & Associates, LLC: It's actually Alan on for Ivy. Stuart, just on the spring and your comments there. And obviously, you said you expect to see some robust activity in the spring. I was curious what kind of the mix of that looks like between volume and price because a lot of other builders, and maybe you guys to a lesser extent this year, obviously, focused on price over volume. And I think that this quarter, we've seen a modest uptick in your incentives. And I'm curious, when you think about what a robust spring selling season means, is that double-digit volume growth for you, or is it some type of combination between pricing and volume? And if the volume doesn't materialize, at what point do you use price as a lever to drive additional sales?

Maybe I'll take that. This is Rick. It's going to be a combination. I think that we've seen and, as you've noted, in our numbers throughout the year, you've seen some pretty dramatic price increases. I think you'll start to see some of that normalize to maybe single-digit, low double-digit paces. And as Stuart mentioned early on, we are very focused on operating margin as opposed to just the pure gross margin line. So you'll see us play a little bit with pace to accentuate some communities where we can pick up some incremental absorption to push the bottom line. Alan Ratner - Zelman & Associates, LLC: That's really helpful. So just to kind of interpret that, then, you're confident that you could drive additional volume, even continuing to push price in that high single-digit or even low double-digit range in 2014?

Generally speaking, we're -- it remains our view that inventories are pretty tight out there, both on the existing and the new home front. And with rental rates having continued to climb, we feel that, as the season starts to present itself, we feel it's more likely that we're going to be able to both see volume increases and be able to manage the higher ASP. Alan Ratner - Zelman & Associates, LLC: Great. And then, just one additional one. On the gross margin guidance for flat margin guidance next year, obviously, this quarter came in above your expectations that you laid forth last quarter. Curious, what portion of that conservatism is a function of more of those quicker-turn deals that you referenced earlier? Or is it truly just higher land cost, higher cost falling through that you expect to offset the benefit of the robust selling season?

Well, it's a combination. We have some of those shorter-term positions that are starting to -- that are flowing through. But let's not minimize the fact that, in what I have characterized as a somewhat squishy environment, given the higher interest rates, given the political environment, now, incrementally, as we start to look at what the FHFA announced yesterday with higher guarantee fees, lower loan limits, although that's a little bit varied across the geography, there are some areas that you have to look at and conservatize your outlook. And that's exactly what we did as we presented for the third quarter. We were interested in looking and watching at how the market evolved. Likewise, as we look ahead to 2015, remember, we're getting pretty close to peak margins, both at the gross line and at the net line. And so we want to take a responsible and conservative look at where we think we're going to be. We feel comfortable with a flat and attractive margin for 2014. And we think that the environment will enable us to maintain those high and responsible growth margins as we grow our business.

The next question is coming from Stephen Kim of Barclays.

My first question relates to land spend. I noticed that the percentage of revenues that's your land spend declined pretty noticeably this quarter, which would -- particularly from what you'd been running at earlier this year. And I guess I was curious as to if you could comment on if there's anything that we should read into that about what you believe the trajectory, near-term trajectory of land prices is likely to be or if you've see the value of land actually decline, generalizing there across the country, since, let's say, the second quarter or so?

Well, Steve, remember, we got way out ahead of the rest of the pack. And we bought sizable parcels of land and land positions in all of our major markets early on. We really used the cycle in a very constructive way in positioning our company for the future. So as we look ahead, I've noted in my remarks that we have been adjusting our land strategy. We are focused on leveraging the good parcels that we've purchased. It necessitates buying somewhat less land as we go forward. Now, of course, growth will necessitate that we pick up that amount -- or the amount of the spend. But you are seeing somewhat of a trend. Our land spend is down a little bit right now, and if you look at the number of homesites that we've put under contract, I highlighted 3,000 homesites that were put under contract. We are moderating. As land prices have bumped up, we're in the enviable position of not having to push the market, and we're really carefully managing the land spend. And as the market matures, you can expect to see that we will be purchasing less in the way of longer-term positions, auctioning land more aggressively and also making sure that our land purchases, land that we put under contract, comes onto our books in more of a just-in-time fashion.

Steve, the other thing I'd point out is -- and you see it in the numbers that our land development spend increased. And that's a function of the fact that, when we were early-cycle in buying some of these pieces, we're now putting the money into the ground in order to maximize the value of these assets and build on it. So I think, as Stuart said, we're in a transition point right now.

Yes. Absolutely. Okay. That's very helpful. The second question relates, I guess, more to a comment I thought I heard Bruce mention about operating leverage. And by that, I'm reading into that as sort of SG&A. And I think, Bruce, you made a comment that you still think that there's additional opportunities for overhead -- or rather, operating leverage. I think you said 25 basis points in 2014. Is that -- should I be thinking that, therefore, SG&A/corporate, as a percentage of homebuilding rev, might be down like 25 basis points, but probably not drastically more than that?

That's our expectation right now. We've gotten down to a point that is lower than we've been at for the last number of years. We do have some leverage, and I think 25 basis points is a good place to think about us as we look at next year. So I wouldn't go beyond that at this point.

The next question is coming from Michael Rehaut, JPMorgan Chase. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: First question I had was on gross margins, just to go back to that, obviously a pretty important area in terms of modeling going forward, notwithstanding additional SG&A leverage. But with the guidance of roughly flat for the full year, and you also alluded to some seasonality, weaker in the -- lower in the first half, stronger in the back half. It would imply, if you're just kind of working off of 25% as an average, pretty sizable sequential decline from where you are right now relative to, let's say, at the end of '12 into early '13, it was more of like a 150-ish type sequential decline. And so just trying to get a sense if there's any conservatism there or any product mix shift or geographic mix that might be influencing those comments because, obviously, to end the year with an average of around 26% is pretty strong. And as you've alluded to, you still have a lot of high-quality land coming through the income statement.

Well, this is Rick. I think you've got to keep in mind that we are going into the seasonably lower period where we're going to get deliveries in our first quarter. Historically, our gross margin in Q1 has been 100 to 200, 300 basis points, depending on the year, lower than what our Q4 has been. You've got costs associated with winter starts and deliveries. So it's consistent with where we were last year. Keep in mind, last year, in Q1, I think we were at 22.1% gross. So guiding towards -- we're still, on a year-over-year basis, much higher than where we were last year. I guess the other thing I'd point out is, when you look at gross margins, we are so far ahead of where the rest of the pack is out there that at 25% growth, it's pretty strong.

And I would just add, Mike, when you think about the first quarter gross margins with that lower volume, all of our field expenses for all the construction we have get allocated over fewer closings. And that's one of the reasons why the margins are lower in that first quarter. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Right. No, that makes sense. And just on this topic, longer-term, I think, Stuart, you mentioned that perhaps you'd be trying to shift over the next year or 2 towards more auctioning and faster-turnover type land deals. If you could just give us a sense what type of gross margin those might represent relative to the land that's flowing through now or that you've worked on, where you had more of a longer-term approach that, typically, higher risk, you require a little bit more of a margin to offset that. If -- certainly, from an, again, an operating margin perspective, you're looking for still very solid results and further leverage on SG&A, but would that also kind of influence this idea that, hey, gross margins might move a little bit perhaps away from peak, that the shift in land purchases are part of that overall comment?

Yes, listen, I think that we are looking at varied margins across the platform. Some of that -- some of the shorter-term land positions are kind of at our average, and some of them are down into the high teens. So it's really a varied mix across the platform. But I don't want to overstate the shorter-term positioning that we're taking. We are also looking at more conventional land sales. It's just that, given the fact that we are able to look for land for 2016, 2017, we're really able to put things under contract that we don't have to take down until later. And those will keep -- those will be underwritten to much higher margins. So really, our averages should remain very, very strong. Some of the shorter-term positions, where we have an operating platform that's already paid for and in place, really makes sense for the company as we drive volumes and prices going forward into the recovery. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. And just clarification on a prior guidance. Can you just restate, Bruce, what you said the tax rate you expected to be for '14? And in the SG&A leverage, is that inclusive of corporate G&A? Or would you expect, maybe, another 10 or 20 bps of incremental leverage on the corporate G&A side?

Sure. We did bring down our expectations for our tax rate for next year from 38% to 37.75%. And the 25 basis points of leverage I would look at as a combined leverage between those 2 categories at this point.

The next question is coming from Jade Rahmani, KBW. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask about the Rialto lending business. Can you speak to the kinds of loans you're looking to close and what the pipeline is and whether you -- I think your comments alluded to this, but whether you would do any on-balance sheet lending, such as transitional first mortgages and mezzanine loans?

Jeff?

In terms of the securitization business, what we're doing is we're originating what would be more typical conduit loans, which are stabilized loans on pretty much everything from office, retail, hotel, et cetera. So it's pretty much straightforward. There's clearly an active and growing market in that arena, and our team has been doing it for over 20 years. As it relates to transitional lending, we are not doing any balance sheet transitional lending. And we are doing some mezzanine loans, but we're doing those mezzanine loans, as Stuart mentioned, in a separate vehicle, for which we are in the process of raising additional capital right now. Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division: Great. Can you talk about if -- I mean, what you kind of expect for overall origination volume next year and what the size of the current pipeline is? And if you could just speak to the average loan size that you're able to take down?

We haven't started looking forward and putting out projected numbers. This is still -- we still view ourselves as being in a startup mode. We think that the $700 million of originations and securitization in the fourth quarter gives a good indication of the potential power in this segment of our Rialto business. And we do think that, over time, it's going to help define and refine a visible and predictable stream of earnings. But I think it's a little too early to start putting out projected numbers and to start putting too much quarterly pressure on that group. As I say, we're still starting up and getting the engine well oiled.

The next question is coming from Adam Rudiger, Wells Fargo Securities.

You mentioned -- I think, it was in the release that the -- and in your prepared commentary, that the Rialto segment was transitioning into more of an asset-light segment. And I was curious -- I understand the light activities that you're doing there. I was curious what the -- if there was any change or any speedup in terms of the plans for disposition of the more heavier assets, meaning the FDIC and the bank portfolios, and what the strategy there is?

Yes. As we're positioned right now, we have about $400 million invested on balance sheet in some of those earlier asset-heavy kind of acquisitions. We expect, over the -- if you kind of straight-line over the next 3 years, we think that's kind of a good benchmark. There will be some stragglers that go into the fourth, but that's kind of a good benchmark as to how those assets will be liquidated and, ultimately, come back into cash. As far as investing going forward, we really aren't doing any new investing outside of the platforms that we have in place. And of course, with the $1.3 billion raise now basically completed, that gives us a lot of runway in terms of being able to invest in new assets going forward. And the mezzanine program, of course, is a complement to the fund management business that we've had in place to date.

Okay. And then, did I hear correctly that the FDIC loan is paid off, so that, that $400 million, or the underlying investments behind that $400 million, will start flowing back to you now?

Yes, that's correct. We had a little over $600 million of debt that had to be paid off in its entirety first. That was paid off in 2013. And we are already seeing cash flowing back on the equity investment. Jeff, what was the amount that's actually come back?

It was -- in total, so far, it's $80 million. We're 40% of that, so it's a little over $30 million that's coming back -- that has come back or is coming back over the next couple of days.

And we anticipate seeing greater cash flows as we go through 2014.

The next question is coming from Ken Zener, KeyBanc Capital Markets.

Gentlemen, versus your guidance, do you think you're more likely to be over on gross margins or closings? As it seems to imply, your guidance for closings, vis-à-vis your community count, seems to imply only modest sales gains in the sales pace, so basically seasonality. What does that ramp look like in communities off the 4Q base?

Look, the balance between volume and margin is more of an art than a science, and we'll have to manage that as market conditions present themselves. I think the question as to whether we're more likely to beat on one or the other, I think that we're giving guidance thinking that's where we're going to actually be. And as we go through the year and as we feel market conditions present themselves, I think we're going to navigate that balance on a day-by-day basis in each division at a very local level. One of the complications in our business is the business is so local that, that balance being struck at the local levels, you can't really nationalize what's actually happening until you actually roll up the numbers. So to give you a good answer on that, as it stands right now, I would -- looking at -- looking ahead to next year, I would have to say where we're more likely to outperform is probably both, and that's kind of our feeling right now. But staying conservative, we've given numbers that we feel comfortable with.

And if I could follow up, given your -- I appreciate your conversion rates. I think it tends to reflect the fact that you build homes outside of backlog. Could you comment on the margin spread you are seeing between spec homes and backlog? Given the conversion rate, that could be part of your margin swing as well. And, to the extent you noticed a difference between spec buyers who might be moving related to jobs compared to someone that's perhaps more patient and taking down a home out of backlog?

Jon, you've been quiet. Why don't you take that one?

Those tend to be higher-margin on our backlog, which are presales before construction. But as Stuart said, it's a very local business. And that will range dramatically from state to state and even within local markets, depending on product type. So a multi-family condo or townhome will have a smaller spread than, perhaps, a larger single-family home. But we do see the buyers who are relocation tend to be more of that spec buyers or someone coming out of an apartment, whereas someone coming out of an existing home is someone, typically, that is going to be a presale.

The next question is coming from David Goldberg of UBS.

My first question, obviously, the pickup in incentives was very small. And I not to put too fine a focus on it, but I kind of want to think a little bit bigger term here and think about other builders are reacting when they're seeing an increased use of incentives. Are you finding your competitors in markets are trying to match you guys, outdo you for sales at this point, or are they kind of holding back more? And I mean, how would you expect that -- just given your historical experience, how do you think that's going to play out as you go through the selling season if it ends up that demand isn't quite as good as you think?

I think that everybody is really carefully managing the balance between leveraging their overhead, increasing their average sales price and maximizing the good land assets that they have, recognizing that they're very, very difficult to replace. So you have, in my opinion, a very responsible competitive environment pretty much across the platform right now. And if you think about that and put it in historical perspective, David, there have been times where land has been more plentiful and more easily replaceable. And in those kinds of times, you probably have a much more competitive spirit in terms of just driving volume. That does not seem to be the case right now. Everybody's trying to manage that balance between volume and maximizing return on what they view as a scarce asset.

That's very helpful color. I was wondering, Stuart, you've given some really good color on the mortgage market loosening in past quarters. And I wonder if you could talk about kind of what you've seen in the most recent quarter? I know you talked about the FHFA and higher G fees and maybe some changes with the FHA, but as you look out to 2014, what are your expectations in terms of mortgage market, maybe from reemergence of private mortgage insurers and the impact that's going to have on the entry level as we move kind of into the next stage of this recovery?

Well, we're at an interesting inflection point where the mortgage market is evolving, in a free market sense, but the government is very involved, and there are a lot of opinions at the governmental level right now. We see an outgoing Ed DeMarco waving goodbye in a very complicated way at a complicated time with the announcement yesterday. And we have an unknown in the incoming head of FHFA. I think that everybody's aware that a derailing of the mortgage market in the context of a somewhat tepid recovery to date is problematic for overall economic recovery. So I think we're going to have to kind of wait and see over the next month how the mortgage market presents itself and what kind of governmental adjustments will or might be made. I wouldn't be surprised if some of what's been that gets rolled back. I wouldn't be surprised if there are more incremental difficulties presented for the mortgage market. That being said, I think that they will be incremental. I think that the overall housing market will find its way to adjusting, and we'll have to navigate our way through it. But I think that there are some question marks and headwinds out there, but I think that the strength in the recovery and general strength in the economy are going to overcome them.

But is it fair to surmise you're not expecting much loosening as you move into next year as you kind of look out to your estimates in your land purchasing?

That I would not be expecting as much loosening? I think the banks are going to continue to loosen. Remember, the refi business has all but evaporated. It's a small shadow of itself. And the banks are really replacing some of that income stream by taking away some of the overlays that they've had in place. I think there's likely to be some loosening as we go forward, but there will be some counterbalancing to that with some other elements, higher interest rates and other things. But overall, I think, everybody is holding hands, recognizing that a vibrant mortgage market is the key to the housing market continuing its recovery and, ultimately, to creating jobs and creating economic prosperity across the country.

The last question is coming from Jack Micenko, SIG.

Two questions. First one. Looking at, first, wondering if you could help us on homebuilding land sales. The top line sale number's come down year-to-year, and I'm thinking about it in the context of slowing your land investment and more of this old high-margin land becoming more of the mix. Should we think about homebuilding land sales continuing to decline on sort of the trajectory we saw in '13 versus '12, or can you give us any feel for how that would look, potentially, for modeling purposes?

Sure. From the standpoint of modeling purposes, we're not expecting much in the way of sales of land. So the number came down. We're certainly not anticipating it -- sometimes, you have the opportunity to move out of one position into another opportunity that's nearby. So generally, we're not anticipating land sales. If they happen, it's more of a strategic focus as we're looking at other opportunities. But for modeling purposes, generally, we don't model land sales, and it's something I would say not to include in the model any land profit. It's not what we're focused on.

Okay. And then, Jeff, on the commercial mortgage side. With the $700 million in production, I'm wondering if you're seeing any behavior changes at the competitor banks. Are they potentially responding based on -- if you're hearing anything around price on the spread or maybe on the term or duration of the loan, anything there, as you sort of create another option for stabilized borrowers out there?

It's a competitive market, but we have a very, very strong eye on credit. So we maintain our position. But it's a growing market. And you have -- over the next several years, you have hundreds of billions of dollars of loans that are coming up -- coming to maturity that are going to need to be refinanced. So we see our position as a great position as that market continues to expand.

Okay. Good. And then, on the credit side, do you said you have recourse on those loans. And what's the nature of the recourse if you do?

The typical conduit loan is a nonrecourse loan, and we're looking to the credit of the underlying real estate as support for the -- and again, these are stabilized assets that have cash loans coming from rents or under leases.

Okay. Very good. That wraps up our conference call for 2013. We look forward to reporting a successful 2014. Thank you, everyone.

This will conclude today's conference. All parties may disconnect at this time.