Welcome to Lennar's First Quarter Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for their reading of the forward-looking statements.

Thank you. Good morning, everyone. Today's conference call may include forward-looking statements including 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'd like to introduce our host, Mr. Stuart Miller, CEO. Sir, you may begin.

Great, thank you and thanks, David. This morning, I'm out west with Rick Beckwitt, our President; John Jaffe, our Chief Operating Officer; and Eric Fader from our Rialto Group. We're going to begin our trade partners summit later tonight. That's why we're out here and this is where we invite many of our manufactures, suppliers and distributors to discuss the homebuilding landscape and to consider better ways to partner and to keep costs and profitability properly aligned. On the call from Miami we have Bruce Gross, our Chief Financial Officer; Dianne Bessette, our Vice President and Treasurer; and of course, David Collins, our Controller, who delivered our forward-looking statement; and we also have Jeff Crasnov, CEO of Rialto. I want to apologize in advance if we're a little disjointed as we're going to attempt to coordinate from different locations. As always, I'm going to start with a brief overview and Bruce will deliver further detail and guidance. As always, after our prepared overview, we will open to Q&A and I'd like to request again that you limit your time to one question, one follow-up so we can enable as many participants as possible within the hour that we've allotted. So let me go ahead and begin and start by saying that market conditions certainly feel like they are strong and strengthening. The slow and steady, though sometimes erratic, market improvement that we've seen for the entirety of this recovery seems to be giving way to a more definitive reversion to normal. While our first quarter operating results, particularly gross margins, reflect some of the sluggishness seen at the end of last year, our sales results went from tepid to better to strong as the quarter progressed. Limited supply and production deficits are now intersecting with land and labor shortage and…

Thanks, Stuart. On February 10, 2017, Lennar closed on the acquisition of WCI Communities that was previously announced in September 2016. The purchase price for WCI totaled approximately $643 million which we funded with cash and we also assume $250 million in senior notes. The transaction combined two of the largest home builders in Florida and significantly expands Lennar's product offerings to include luxury, single-family and multi-family homes. WCI is focused on amenity-rich lifestyle master plan communities catering to the move-up active adult and second home buyers, truly compliments Lennar's leading market position in the entry-level and move-up markets in Florida. During our extensive due diligence period, we identified five main drivers of value creation and synergies. I will go through each of these drivers in a second, but I'm happy to say that the WCI integration has gone very smoothly and that we're ahead of schedule which will lead to a timely realization of this value creation for our shareholders. The first driver was WCI's portfolio of low-cost land, located in most of the highest growth and largest Florida coastal markets. We acquired over 13,500 home sites, adding 51 actively selling communities and an additional pipeline of future community openings for the next several years. This land portfolio will produce strong gross margins going forward. The portfolio included many large amenity-rich A plus master plan communities that would be impossible to purchase in today's land constrained market. We have great confidence that we will produce extremely strong returns from these assets as they will be managed by some of the best performing and most profitable positions in our Company. When we closed the acquisition, we acquired 361 homes in backlog with an average sales price of $516,000, totaling $188 million in near term revenue and cash flow. In addition,…

Great. Thanks, Rick. As you can see, I think we've got our WCI transaction well in hand and we're very enthusiastic about it. So to wrap up homebuilding, I wanted to say we've noted before that our strategy remains a clear pivot in land strategy towards a shorter term land acquisition and towards a 7% to 10% growth strategy. Given the WCI addition, our 2017 growth rates should be on the higher side of our goals or a little over that goal. We've also refocused on expanding our first-time buyer offering with our mix now standing at right around 40%. Combined, these strategic elements will continue to produce very strong cash flow for the Company and will result in continued balance sheet improvement. Now let me turn briefly to our other segments. As you've seen, our financial services segment is also off to a great start in 2017. Of course, the business is growing in lock step with our homebuilding operations and will expand with the addition of the WCI acquisition, but it's also expanding its non-Lennar business reach and growing bottom line. Financial services results exceeded last year's first quarter result by 38%, driven in part by increased profitability in title operations and Bruce, who overseas this operation, will give additional color in his portion. Lennar multi-family. We couldn't be more pleased with the evolution and performance of LMC. Our entry into the apartment development business was timed perfectly and LMC continues to execute flawlessly. LMC, under the leadership of Todd Farrell, has reached maturity and is poised for continuous annual profitability. As noted in our press release, this segment generated $19.2 million in pretax income, up 57% from last year as we sold another two communities under our merchant build program. During the first quarter, we started some…

Thanks, Stuart and good morning. Revenues from home sales increased 13% in the first quarter, driven by a 13% increase in wholly-owned deliveries and a consistent average selling price of $365,000. WCI had a minimal impact to revenues in the first quarter as there were only 51 deliveries from the acquisition date until the end of the quarter. Our gross margin on home sales in the first quarter was 21.1% and as Stuart mentioned, we're still on track with our previously stated gross margin goal of 22% to 22.5% for the full year. The gross margin decline year-over-year was due primarily to increased land and construction costs. Our gross margin percentage was impacted 10 basis points due to the write-off of WCI backlog inventory that closed during the first quarter. Sales incentives were 5.9% this quarter compared to 5.6% in the prior year, but it improved sequentially from our fourth quarter total of 6.2%. Gross margin percentages were once again highest in our homebuilding east segment. Direct construction costs were up 4% year-over-year to approximately $55 per square foot and that was driven by approximately a 6% increase in labor and 3% in material costs. SG&A percentage, as a percent of home sale revenue in the first quarter, was 10.3%. We're continuing to improve SG&A operating leverage by growing volume organically in our existing homebuilding divisions and benefiting from the focus on technology investments that Stuart mentioned. Included in the SG&A in the first quarter were one-time expenses related to the WCI acquisition, mainly offset by one-time legal and insurance benefits resulting in a net one-time charge of approximately $2.7 million or 10 basis points impact to SG&A percent during the quarter. Other income was $5.7 million compared to other expense of $600,000 in the same period last year. Equity…

[Operator Instructions]. Our first question comes from Carl Reichardt from BTIG. Your line is now open.

Stuart, I wanted to ask about your comment related to pricing power. First of all, does the overall guidance for the year assume that you'll be able to push those prices? Is that largely on the low end where you think you might be able to do that and in the context of the potential for higher rates, flattening rents, certainly plenty of competition from peers, what gives you confidence that you may have that ability?

Interesting. Carl, our guidance is really tied to the current state, the current market environment, the way that we see things right now. The discussion, the statements that I made on the conference call, on the, my prepared comments and in our quote, really are kind of forward-looking given the temperament of the market right now and kind of what we see around the corner or what we feel like we're seeing around the corner. I don't want to get too far out over our skis. We're not injecting that optimism in our guidance right now, but what we're seeing and what we've heard a lot about, is supply constraint across all kinds, all dwelling product types from rental to for sale and we have also seen that we're land constrained and production constrained and that's been the case for some time. The injection of some market optimism and what we saw in our sales pace as we went through the quarter really gives me reason to believe that as we look out ahead a couple of quarters, we're going to start to see prices move just as we would expect with a demand and supply imbalance, with demand increasing and supply somewhat constrained. So that's kind of where we're on that. Our guidance was really rooted in where we've seen things on more current basis.

And my follow-up is you made a comment about banks making more overtures to borrowers. And I wonder if you could flesh that out in terms of mortgage lending, particularly to first-time customers and then also, in terms of community banks or I guess even money center banks, financing developers and the potential that you could start to see some more opportunities to option finish lots, since that's been, something that's been lacking for awhile. Thanks, Stuart.

Yes, sure. So my comments about banks is more narrative that we're hearing from the banks than actual action in the field at this point. The banks are definitely starting to talk about the regulatory environment shifting and the enforcement environment shifting and reverting to a more normal state. The banks are starting to talk about their ability to think about getting back into the mortgage market and lending to smaller businesses which I think is sorely needed and these things will all ripple through the housing market in a positive way. Let's go on to the next question.

Our next question comes from Alan Ratner. Your line is now open.

My questions relate to the cost side and, Stuart, maybe since you're on the verge of meeting with a bunch of your trades, hopefully, you'll get more insights here. But, if you look out in California, there's been some pretty wet weather there and I know there's some concern that we might see something similar to what happened in 2015 as an industry when I think Texas in particular felt some pretty significant headwinds from a wet Spring. As the year went on, I think a lot of builders struggled to get homes closed and costs went up. And you guys obviously navigated that very well, but it certainly does create risk from the industry is concerned as far as costs going up. So, A, I'm curious what you're hearing there as far as the general availability of labor and the industry's ability to deal with some of those weather headwinds. And second question, just about California specifically, there's some news about a proposed bill out there that would potentially raise construction costs quite a bit, with the prevailing wage requirement in communities there. So, I was curious if you looked at that at all, what impact that might have, given your pretty significant land position in California and how you would handicap the likelihood of that passing at this point. Thank you.

Okay so, wow, that's a real fist full of questions. Let's start with the California question and let's remember that there are always legislative moves afoot to alter the landscape in California. The legislation that's proposed at this point is just another one of those that comes down the pike on a pretty regular basis and we'll just have to see where it works out. It's a bill that, if implemented as it's described, would have an impact on costs relative to residential construction. Some communities out there, including some of our larger scale communities in FivePoint, might be exempt from the legislation, so it would be a mixed bag of impacts, some of them positive, some of them negative. I think, overall, negative for affordability in California and so this is going to be talked through, worked out and see where we actually end up. But this is the landscape in California and I think that all of these type of legislative initiatives come with positive and negative impacts and we'll just have to see where this one shakes out. As it relates to construction costs overall, the story around construction costs has been one of increases over the past many quarters. You've heard us talk about that. I think that as we think about our numbers, construction costs as a percentage of our sales price has probably moved up around 100 basis points and there's most certainly pressure on construction costs in the labor constrained market and this is why we focus on our trade partner Summit, our relationship with our trade partners, making sure that we're the builder of choice for our trade partners. We think that this is a strategic advantage for the Company and we've spent a lot of time developing relationships throughout our trade. So let me just turn it over to Jon and ask him because Jon really spear-headed this effort within the Company and has done a remarkable job.

So, clearly, the pressures remain from a labor constrained market. What we see a little bit different is we have seen some pressure on the material side. Lumber, for example, is up about 9% since December and we've seen an impact there and even with all of the commodities, they all have moved up. In part, in reaction to expected expenditures by the government with infrastructure and that's affecting the supply chain. But as Stuart mentioned, our focus is that those cost pressures are going to be what they are. And we position ourselves to how we take advantage of the marketplace of what our landscapes in front of us and I think we have excellent communication relationships with our trade to make sure we're well positioned. There will be a spike of activity once the weather dries up in California, as you know and we're in deep discussions with all our trades about how to manage that as it comes out and I think we'll navigate those waters very well.

Our next question comes from Stephen Kim from Evercore ISI. Your line is now open.

Stuart, I wanted to ask or maybe Rick could also chime in here, I guess, on the community count guide. It was a little lower than what we had been thinking initially and, I guess, obviously, demand has been better than expected than we might have thought. And so, we're trying to figure out whether or not this means that you're going to be selling out of communities a little quicker or if it means, on the other hand, that in response to the strong demand, you're going to actually open up more communities to the greatest of your ability. And so how that all nets out. We're curious as to whether or not you think that you're going to be able to accelerate community openings as you get maybe into the back half a little bit more than what you, than what your guidance would seem to suggest. Are you just being conservative in that regard or do you think the cost demand is going to be good? Just going to sell out of stuff a little quicker and so maybe it's not until 2018 that we see an improvement in -- an additional step up in community count.

So, Steve, this is Rick. I think you really nailed it. It's a combination of some acceleration of absorptions in some really well located communities. That combined with weather impacts that have delayed some of our communities opening and there's also a portion of it where we buy home sites from third party developers and we can't control the schedule that they deliver the home sites to us. I think as we approach the back half of the year, you'll start to see an acceleration of community count. Clearly into 2018, we'll be on a pretty good run rate at that point.

Steve, let me just chime in and say that community count is Rick's least favorite number.

Yes, likewise.

It is the one number that is like three-dimensional chess trying to figure it out there. A lot of moving parts as you go through the year. There's some prediction, anticipation, some guesswork and it's because, as demand moves around a little bit, as weather impacts, as third party participants, as we have moderated down our ownership of land, we're more dependent on third party. All of these places play a part in making it a hard number to get your head around and so we do conservatize it a little bit as well.

Sure, well good news is you always have price which you can use to modulate things too, so that's good. My second question relates to tax rates and I know that tax policy is certainly a very nebulous issue right now. However, it doesn't stop people from running some hypotheticals and I imagine your Company is no different. So, obviously, if the corporate tax rate were to drop, that will be fairly straightforward. However, in the case of builders, there's at least three things that seem to be coming up in conversations with investors that could be offset. I was curious if you might be able to opine on in general sense of order of magnitude how this all may come out in the wash, those other three components being the reduction of interest deductibility, energy tax credits and perhaps the manufacture's deduction and maybe I'm missing something else. But, could you give us a sense for what the relative order of magnitude is in terms of the size of the significance of these three pieces to your tax rate?

Well, you're right, we've definitely looked and we're looking at each of the component parts. I will say that I've had a recent opportunity to listen to Steve Mnuchin, the Treasury Secretary, who seems to be in a lead position there. And the two things that I take away from listening to him is that he's very smart, very thoughtful in his approach and I frankly derived a lot of confidence listening to him walk through the thinking. The other thing that I walked away with is a sense that he and this administration are listening carefully knowing that there will be winners and losers, there will be ups and downs, in any configuration of the tax revamp and so there is, virtually, no ability to draw certainty today from what pieces and in what proportion they are going to be woven into a new tax program. So with that, Bruce, why don't you take a swipe at giving some relative proportion to the various pieces?

Sure. If you look at our current tax rate of 34%, the question is going to be whether it goes down -- what rate it goes down to, but for the three items you mentioned, Steve. Energy credits which we do have some, we have the manufacturing credit and the interest deduction, corporate interest deduction. Those three, based on our current numbers, are approximately 5%, give or take, so that would take the 34% rate down to about 29% or so. I'm sorry. There would be about 5% in total from those of a reduction from the 34% and I need to just add one more component. If the tax rate went down to 20%, that's where we'd get down to about a 5% reduction of call it 29%. If the tax rate was maybe coming down to 25%, in conjunction with that, then it would be pretty much a push and there wouldn't be any positive impact.

Our next question comes from Stephen East. Your line is now open. From Wells Fargo.

Stuart, you gave a ton of information, so I'll try to keep my compound questions to a minimum here, but on the order growth side of it, obviously, you're seeing a lot of acceleration as you go through. You talked about a bit. Can you give us a bit more color about what's going on, where you're seeing it more? It sounded like entry level was a big part of it and yet at the same time, your incentives have moved up and your growth rate was above your targeted rate. So I'm just trying to reconcile the incentives versus what you all are seeing on the ground and how you want to manage that demand as you move through the year.

Hello, Steve. You really see the absorption pace moderate by market. So, for example, California and the Pacific Northwest are strongest from a pace. California is up 4.5 sales per community. I think that our Company average is three. So, in those markets, you see that incentives, you see more pricing power. And in other markets, the Tampa and Orlando, we saw healthy pace there of 3.7 sales per community. Even in Houston we saw an improvement as we reduced our community count, but our sales pace picked up a little bit year-over-year. So, in those markets, I'd say that it affects both the starter price point and the move-up price points. In Texas which is marked as more flattish from a sales pace standpoint, there you see a differential where the first time buyer product moves at a faster pace than the move-up product.

Okay and from an incentive perspective, I assume as you go through the year, we would expect to see that come down. Is that a fair expectation?

Yes, that's what we expect. We're setting out in the winter months, December, January, we saw more incentives. We've seen that come down and we would expect to see that continue to come down.

Okay. And then, on the gross margin, you all are comfortable with it moving back up to full year, staying within your range and yet, it surprised us below what we were expecting. I guess a couple of things, given that you've got a lot of cost flowing through lumber, et cetera, labor, land, what gives you the comfort there that you're going to be able to, one, not only cover that cost, but make it up quite a bit? And then how much in purchase accounting is embedded for WCI in that 20% to 22.5%?

Let me start and then have Rick and Jon weigh in, but as I said in my opening remarks, some of what you saw in our gross margin reflects some of the sluggishness that we saw towards the end of last year. Remember that what we're selling two quarters ago, we're closing now and as we went through the election season, as we went through some reconciliations in November, the market was a little bit slower than reported and we saw that bleed into December. We went from kind of sluggish, to better, to strong -- in terms of sales. So as you see things firm up, there's a little bit less incentives and a little bit more price. Construction costs have been moving up at the same pace. We feel pretty comfortable as we look at our numbers, as we look at our backlog right now, that our margin is coming back up. Rick?

Yes, I guess the thing I'd say to add to that, Stephen, is we're spot on with where we thought we would be for the quarter with regard to gross margins.

Okay.

I think that the analyst community put too much margin in the first half of the year than in the back half of the year. We're on the trajectory to get to where we guided to. With regard to WCI, as Bruce said, it'll have about a 20 to 30 basis point impact in Q2. But given the fact that WCI had a low cost land position with high gross margins, it will not negatively impact margins for this year on an annualized basis.

Our next question comes from John Lovallo from Bank of America. Your line is now open.

First question would be the year-over-year decline in backlog conversion in the west. How much of that was due to weather and can you quantify potentially the impact on ASP and on potentially gross margin?

This is Jon. For the most part, it was due to the weather. More impacted in terms of starts than the closings, but there were markets where it was impact as well. We couldn't complete landscaping which prevented us from getting COOs, as an example. I think that we will make up the majority of that. It will push towards the back of the year and a little of it will slide into where multi-family type of for-sale product in the Bay Area, as an example. There's condominiums. That might push out beyond the year. But I don't think that we'll see any impact to our margins from those weather impacts and delays, just some timing issues.

Okay. That's helpful. And then, in the central division, it looks like orders were actually down slightly on a year-over-year basis. Can you maybe give us a little color around that?

I think some of that is driven by the impact of still, a little bit of sluggishness in Houston, but with regard to Houston, we have seen a pick up. We're starting to see a little of an increase in rig count and we still have a divergence in sales pace between the higher priced and the lower priced ones. So, Houston was a little soft, but it looks like it's, the picture is getting a little brighter there as we move through the year.

As we look at that -- this is Jon -- we strategically reduced our community count in Houston which brought the total community count in the central region down a little bit year-over-year and our sales pace was actually just up a tick year-over-year, so I think it's pretty steady there and we're managing our portfolio of communities adjusting it to the market conditions.

Our next question comes from Michael Rehaut from JPMorgan. Your line is now open.

First question I just had, Stuart, I wanted to go back to some of your opening remarks about sales pace being better than expected and referring to some optimism in the marketplace and you mentioned that the sales pace, when we look about sales pace, excuse me, we calculate if you strip out WCI, that sales pace was up about 7% year-over-year. That's versus roughly 5%, 5.5% in 4Q, 5% in 3Q. So, definitely a touch better, but I was interested, if the sales pace increased materially throughout the quarter, during the quarter. Obviously, you also have your typical spring selling season pick up. But on a year-over-year basis, if the sales pace increased materially or, given that 7% is a little better than 5%, just wanted to know if there's any other kind of metrics that is driving that commentary.

Okay, so, I'm not really sure where you get your 7%, but let's put that aside and let's understand where my commentary comes from. Remember that when we're looking at our monthly year-over-year, we're looking at comparison to last year. So, let's take seasonality out of the equation because we're looking at December to December, January to January, February to February, so the seasonality is injected at both sides. And what we were seeing in terms of the numbers is a slower and lower comparison in December, a comparable comparison in January and a substantially higher comparison in February. So that's the numerical side of the commentary. But the empirical side is what I look to dovetail with the number side, as I think about these things and I try to think about them in realtime and balance what we're hearing at the front line in the field from our customers and measure that up against what we're seeing in the numbers. And so the commentary really derives from the kind of traffic patterns, the questions that people are talking about and the kinds of people that are showing up. What we're starting to see -- I think in my commentary I noted that the millennials are doubled up at about a 60% rate living at home with parents, relatives or roommates. It's at 115 year high as reported in U.S.A Today. I don't know if that's exactly the right number, but it is directionally interesting and we're starting to see some of that cohort start to come out to our sale centers and talk about the fact that rental rates are high, rental rates have been moving, rental rates create some instability. It's time to start thinking about buying a home, 30-year mortgage, fixing the monthly payment and looking at the possibilities and benefits of actual ownership, dovetailing that with the banks talking about coming back to market. These are the components that kind of make up my sense that there's something afoot in the market that's broader than just one month in a row positive comparison. So that's kind of where it comes from, Mike.

That's perfect. And yes, definitely thinking about it in terms of year-over-year, so appreciate that. I guess, secondly, just on WCI and obviously, congrats on the closing of that transaction and it looks like you're going to extract a lot of value there. I was interested, you mentioned that there's a low cost basis there and attractive margins. At the same time, you're going to have the typical purchase accounting impact on 2Q, but once you work through that, from my understanding, purchase accounting typically does impact what's the overall lot position as well and I was just curious to get a sense maybe, Bruce, if you want to throw out some -- opine here or talk about what's been able to be worked through or worked out from an accounting perspective? How should we think about the gross margins from WCI because, typically, from my understanding, those are written up as well. I don't know if there was different nuances or idiosyncrasies with this particular acquisition.

Well, what I would say, Mike, is that, as we go through the purchases accounting exercise, we look at all the various assets and the assets will be, let's just to use an estimate, be somewhere close to the margins that we get within that marketplace where the assets are. So as we're performing at a certain level, we would expect the assets in that same market to be somewhere close. So, the real purchase accounting impact is really in the second quarter as we write up backlog and then as you get beyond the second quarter, for the most part, the integration costs, the write up of backlog is all behind us, we expect. And then for the second half of the year and beyond, you get back to more normal type of margins that we would expect in that market place and that's probably the best way to think about it.

Are margins in your home Florida market above corporate average?

They are just a little bit ahead of the Company average.

Our next question comes from Jade Rahmani from KBW. Your line is now open.

You mentioned WCI should be accretive for the full year 2017, primarily in the second half, so wanted to see if you could provide any commentary, a bit high level, regarding 2018. Should the main areas of potential further improvement from that acquisition come through the SG&A leverage and financial services?

Yes, this is Rick. We haven't really given any 2018 guidance, but you could expect from my comments earlier that we will get SG&A leverage, you will see a benefit to some gross margin because of lower costs and operating efficiencies and as we move into the tail end of this year, we'll give guidance for 2018.

And on the financial services side, can you just provide further color on what drove the uptick in title? Any changes into how you're marketing the product or any additional services you're offering home buyers?

I could take that. We have a little static in the background, but, Jade, titles, first quarter is typically the lowest quarter of the year, so that increase is on a very low base and, essentially, we just had some additional pricing in terms of the average sales price of the transactions we had during the quarter were higher on the same overhead base, so we got additional leverage. So, percentage wise, it looked really good, but nominally, it was really just a small increase.

Okay, so with that, let me say thank you to everybody for joining us. We feel really good about how our Company is positioned and how the year is starting to shape up. We think that the overall environment is strong and we look forward to reporting back to you as we go through the rest of the year. Thank you.

That concludes today's conference. Thank you for participating. You may disconnect at this time.