LEN
#Great, thank you, <UNK>
This morning, I'm with Rick <UNK>, our President; <UNK> <UNK>, our Chief Financial Officer; Dianne Bessette, our Vice President and Treasurer; and of course, <UNK> <UNK>, who you just heard from
And we also have Jeff Krasnoff, CEO of Rialto here and Eric Feder, from the Rialto Group; John <UNK>, our Chief Operating Officer; is also with us by phone from California and will participate in the Q&A portion
As always, I am going to start with a brief overview, <UNK> will deliver further detail, and we’d like to ask that during the Q&A portion that you limit your questions to one question and one follow-up, so that we can accommodate as many participants as possible in the hour allotted
So let me go ahead and begin by saying that we are very pleased to announce a very strong earnings for the second quarter, with strong and balance results being reported by each of our operating segments
While in our first quarter, we noted that the somewhat sluggish overhang from the end of 2016 had negatively impacted margins and therefore our operating results
We felt that the market was improving, as sales picked up throughout the first quarter
We anticipated that the spring selling season would be solid and that we would in fact see improved results as the year progress
These are exactly the conditions that drove our results for the second quarter
We have continued to see strength in the housing market through the second quarter and have seen new orders, home deliveries and margins exceed our initial expectations
Generally speaking, in spite of the often noisy political environment, there continues to be a general sense of optimism in the market, there continues to be a perception that jobs are being created across the country and that wages are generally moving positively
We often discussed labor shortage in many sectors of the economy is translating into a sense that many job sectors compensation is moving up and while much of the data collected by the government doesn’t seem to reflect significant wage growth
The customers visiting our welcome home centers are reflecting an optimistic sentiment
There continues to be a general sentiment that the business environment is positive and that the governmental pro-business environment will result in at least job security and possibly some tax relief as well
Overall, the attitude of our customers continues to confirm the sense that we have as business operators that the economic environment in general is strong and stable and improving
The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal
We continue to feel that limited supply and production deficits from the past years are now intersecting with land and labor shortage and we started to see some pricing power as we have moved through the selling season, somewhat offset however by construction costs increases
Additionally the economic realities of a constrained and supply of housing options and the economic realities of higher rental rates are beginning to have a rational impact on decision making for the first time home buyer as millennials are continuing to come to the housing market
Across our platform each of our business segments benefits from the overall improvement in the market as we look ahead through the remainder of 2017. We are expecting that each of our business segments will continue to grow to mature and to improve as we enter the back half of the year
Against that backdrop, let me briefly discuss each of our operating business segments
To begin, our for sale core homebuilding operations continue to be extremely well positioned for a very strong 2017. Deliveries for the first quarter increased 15% and our gross and net margins improved 40 basis points and 130 basis points sequentially
In the second quarter, new orders were up approximately 12% year-over-year, driven by higher sales pace of four homes per community per month versus 3.9 last year, combined with a community count growth of some 6%
Interestingly, our strongest markets Portland, Seattle, Inland Empire, Coastal California, the Bay area, Tampa and Southeast Florida, all had a sales pace of over five homes per community per month
We continue to gain stronger results, powered by our focused strategy on driving better quality traffic to our digital marketing efforts
Today, our social media outreach generates internet leads that now surpass 100,000 per quarter
And that is driving our marketing and advertising spend, which is now down year-over-year for 10 consecutive quarters
We continue to operate at a very high level of operating efficiency and we're continuing to focus on improving from here
Alongside our digital marketing effort, another example of one of our technology initiatives is the implementation of our dynamic pricing tool
This technology provides a dashboard for real-time matching of deliverable inventory so that it can be priced and delivered more efficiently
We saw the power and success of the dynamic pricing tool during this quarter as we exceeded home delivery expectations by reducing our completed unsold inventory by 17% without sacrificing margin
As you've heard from us in prior quarters, we're using various technology initiatives to dramatically improve our operating model, fueled by our digital marketing efforts, our dynamic pricing tool and other technology initiatives as well
We continue to focus on overall operational efficiency driving our SG&A to historic lows for our first quarter and now for our second quarter as well
We're simply building a better mousetrap one technology at a time
In addition, we closed on the WCI acquisition in the first quarter and the integration, which is being guided by Rick <UNK> and his team led by Fred Rothman and Darren McMurray is progressing exactly as planned
WCI will continue to contribute to earnings as expected as purchase accounting and non-recurring cost dissipate and as cost benefits and SG&A savings accumulate
Overall, our core homebuilding strategy remains to pivot our land strategy towards shorter term land acquisitions and to maintain a 7% to 10% growth rate for the company, while we enhance our operating platform by reducing SG&A
Parenthetically, given the WCI addition, our 2017 growth rate should be on the higher side or little bit overall goal for the year
Additionally, we are focused on expanding our first time homebuyer offering with our mix now standing right at around 40%
Combined, these strategies ---+ these strategic elements will produce very strong cash flow for the company and will result in continued balance sheet improvement
Let me turn briefly to our Financial Services segment
As you've seen, our Financial Services segment is continuing to perform well in the second quarter as it contributed operating earnings of almost $44 million
Of course, the business is growing and lockstep with our homebuilding operations and with the addition of the WCI acquisition as the refi business has diminished over the past year Lennar Financial Services is continuing to expand its non-Lennar business reach and bottom-line to replace those earnings
<UNK>, who oversees this operation will give additional color in just a few minutes
LMC, Lennar Multifamily Communities, our Multifamily Apartment segment has continue to grow and exceed expectations
LMC generated $6.5 million of earnings in the second quarter driven by the sale of one of our merchant build apartment communities
While we have continued with the development of our merchant build communities, we also have grown LMV our build-to-core program, which is cash flow focused on building an apartment portfolio
In the second quarter, we started 1,140 apartment homes in 4 communities, with the total development cost of approximately $520 million
As of May 31st, we had a geographically diversified pipeline of 76 communities, totaling approximately 23,600 apartment homes with a total development cost of approximately $8.2 billion
These included 37 merchant build communities totaling approximately 12,000 apartments with a total development cost of $4.1 billion
And 39 LMV build-to-core communities totaling approximately 11,600 apartments with a total development cost of approximately $4.1 billion
Our Multifamily platform continues to grow and to perform beyond our projections and expectations
Turning to Rialto, Rialto contributed $6.2 million to the bottom-line this quarter versus a loss a year ago
Rialto's investment and asset management platform has continued to grow its asset base as well as harvest value for investors and for us
Our first two flagship opportunity funds continue to be top quartile performers
We are also pleased that our third opportunistic fund held its final closing with approximately $1.9 billion in total commitments and it has already invested or has under contract 33 transactions involving the investment of over $600 million of equity
And to complement our opportunistic funds, we also have over $1.1 billion of investor equity dedicated to investment CMBS, mezzanine and transactional lending, which we also will be looking to grow this year
On the Rialto Mortgage Finance side of the business, market conditions have continued to be favorable for RMF, which has maintained its position as one of the largest and most profitable non-bank CMBS originators
RMF completed its 39th and 40th securitization transactions during this quarter with net margins averaging 5.8% selling over $392 million of RMF originated loans
Our direct investments should be winding down over the next quarters as the remaining assets are monetized and cash is recycled into our higher returning businesses
Going forward from that point our focus will be solely on our investment management and RMF business segments there
Finally, FivePoint successfully completed its IPO this quarter and now enters the public market as a pure play California, master plan community developer
We expected overtime the value embedded in the FivePoint management team and its extraordinary asset base will be realized as the appreciation cycle of these extremely well located communities will be revealed through transparency and public filings
Certainly from a Lennar perspective the new stock symbol FPH will afford Lennar shareholders greater transparency to this part of our balance sheet
Finally in conclusion, across the platform, our company is very pleased with the accomplishments of our second quarter and we're feeling very optimistic about the reminder of the year
We are clearly well positioned to capitalize across the platform on the strong market conditions that have materialized and seem to define the market in the near future
Each of our operating segments is mature and positioned to perform and strengthening market conditions
People, assets and operations are all align to perform in 2017 and we look forward to keeping you updated
So with that let me turn over for greater detail to <UNK>
Sure, look I think that ---+ I think it’s clear pricing has been moving up and even the line between first time and move up buyer is starting to get a little blurry and has been moving up over the past couple of years
I think that ---+ I am going to turn over to Rick and Jon to give some color from the field
I think generally speaking we are seeing that people though the pricing is moving up people are finding that the affordability from employment wage growth and general economic factors is increasing as well and enabling people to come to the market
John, you want to weigh in on that
I think there are some governors out there IV and we've mentioned this in past conference calls
I think there is the limitation on land availability, land pricing that yields to affordable housing
I think there are labor shortages generally
I think that while demand is continuing to grow, I think there are some limiters on how quickly the production can keep up and can expand to meet that demand
The question is to whether there is going to be a flood to B and C locations, there are certainly more demand for those locations as the market expands
As we've highlighted before, it's our strategies to stay inside those outskirts
And so we think that our strategy is really well crafted for where the market is going and we certainly don't want to get way out on the outer trenches
Rick you want to add to that?
So Bob, I would turn the sentiment around and say that we feel that we're at the very beginning stages
We are articulating our successes relative to digital marketing and now dynamic pricing because we can point to some tangible effects that people can latch on to
But this is a big strategic initiative within the company
We feel that we're at the very early stages, very early innings of what I said in my comments building a better mousetrap
We think that there is a lot more leverage
I think it arrives from a lot of smaller initiatives adding up overtime
And as they become more provable, we'll start to put them on the table
I don't want to start getting out over my skies or creating false optimism it has been done before
But as we prove these up, we're talking about them a little bit more
I think that many know, many people know that this is a very big strategic focus for the company
And we think that we can produce a lot of operating leverage and bring our operating margins up
I don't want to quantify it, but we don't think it's tens of basis points we think it's much bigger than that and it will be overtime
So, we’ve highlighted in past conference calls that we’re very focused on reverting to pure play to the pure play homebuilding model
Of course we’ve talked about the IPO of FivePoint, we think that brings growth transparency and visibility
But we’re working every day on some of the other components of our business
You've heard us talk a lot about LMC or multifamily apartment rental program, that program as we move through our merchant build assets and migrate towards our build-to-core strategy this sets up an opportunity for us to maintain this strategy within the company if it strategically make sense as a core asset or to do some kind of alternative transaction and that can very well happen over the next couple of years
On the Rialto side, you’ve seen the buildup of our investment management business, you seen the buildup and execution around Rialto Mortgage Finance and you are seeing a very focused strategy on liquidating our core holdings our assets that where we invested Rialto capital
So that we're going to reduce that business to just those two core business lines of RMF and investment management
And as we do that we come to the end of 2017 the next few quarters, we're really going to have something that will be able to be either combined IPO or spun out and we look forward to doing that over the next couple of years as well
So, we think as we look forward expect to see a refined pure play homebuilder over the next couple of years
We haven’t broken that out by region, but that’s something on a follow-up I could certainly talk though with you
So, I think you are talking about the four star news that's out there as those of you that don't know Starwood Capital has that as a merger agreement to acquire that company
Another builder has recently announced that they have an interest in trying to put something together that buys the majority of the company and run it as a land bank type of machine that would feed that company
It’s an interesting set of cards, we really don’t want to comment on the viability of that platform or the stub piece that would trade in the market, but as we look at we have had absolutely no problem sourcing land
We do a lot of partnerships and have a tremendous depth of connectivity with the land sellers and land developers out there
And we think that we’re going to continue down our path and continue to grow the company
Let me just add to that and say WCI really is a textbook merger and combination integration story, it happened very quickly, very efficiently
We are as Rick says up, we are one company at this point
The positive side of that is that we have clean and clear operating strategies going forward
And the two pronged programs that lead to the best operating results and that is the ability to apply our construction cost preferred customer approach to dealing with subcontractors is really going to benefit the WCI business going forward
And the SG&A leverage that we have been improving on the Lennar platform, we think better than others is going to help leverage the additional volume that we see from WCI in the future, getting the integration behind us quickly and efficiently really enables us to take advantage of those two strategic advantages
And we think we’re going to see that going forward
So [indiscernible] Steve, we are very focused on cash flow generation
And focused on really improving the balance sheet as we go forward
That's ---+ first of all FivePoint today is a strong independent company with a strong Chief Executive Officer, Emile Haddad
And I certainly don't want to take away from his articulation of strategy
But having been on the road show with him now for a few weeks I do feel that I can comfortably say that FivePoint strategy is to remain focused as a California pure play master plan community focused developer
It has a strong complement of assets that it is focused on today
And it's not going to be distracted by a land strategy for Lennar or any other builder across the country
It's going to stick to its core competence
We endorse that strategy for FivePoint, we think that's how they're going to drive bottom-line and execute their strategy in the public markets as they've articulated it
So they are ---+ for those who might think about the Four Star strategy and applying that to a FivePoint that’s just simply not our thinking about strategy nor is it the articulated strategy of FivePoint
Jon leads that, a lot of that effort and he has done extraordinary work there
Jon, why don't you take that?
Within our environment, we've really engineered and Jon has sphere headed using our everything included marketing strategy as a mechanism for creating Lennar as a builder of choice among subcontractors
And we've built a lot of partnership to be able to strategize in how we can breed efficiencies into our building process and our cost structure
And I think we've made some meaningful inroads along those lines
Well, look, number one I think that transparency associated with FivePoint being a public company
That really helps our shareholder base understand its horsepower
Now that story is going to evolve over the next quarters and years as residential lands are sold, as infrastructure improvements add to value, as the cycle of appreciation embedded in master plan communities really reveals itself through quarterly conference calls and accomplishments
Our shareholders are going to be able to see FivePoint’s improvement through the transparency and articulation through the public markets
I think that FivePoint’s strategy as it’s been articulated is very focused
There is excellent management team in place
We are happy to number one, be invested in the assets that are ---+ that make up FivePoint, invested in the management team that makes up FivePoint and we think that giving California’s land constraint, we’re going to have ---+ we’re going to see tremendous appreciation overtime
It’s a little bit of both
We are seeing some mix, but we are seeing some price appreciation, the 3% this quarter gave us the confidence as we looked at our backlog the increased average sales price for the rest of the year
So, it’s a little of both
Good morning
Jon, want to give prospective there?
There is always a question around mix versus price appreciation when you are rolling up numbers from across the country and it’s very hard to disentangle
I think that there is some offset with construction cost and labor cost and everything else, it’s really hard to get these margin numbers and everything perfectly refined as we look ahead and it moves around through the quarter
So, it is as you said in your prior question Mike, it’s in exact science and I think we’re all kind of trying to look ahead to what the trend looks like
Generally speaking we’ve seen some initial pricing power, some initial sense of pricing power
But remember that you also have the offset of construction costs and labor costs that are moving in tandem
So we will see how the quarter unfolds, we have given the best guidance that we can at this point
You bet
I think we have time for one more question
We don’t use Foo Foo, well, less specialness on the outside let’s say
Just easier to build, faster from the production standpoint
Next question, Steve
Let me add to that and say that, I think, Jon highlighted earlier that a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits, it’s the notion that all of this is in exact science, interest rates and affordability and wages and pricing all play a part and what people can afford and how the math actually works out
But the confidence that people bring with them to the table about whether their job is table and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity
Whether they have been to able accumulate a down payment or in excess of a down payment, or whether their family members that are able to help support with the gift or something else, all of these are moving parts that define this in exact science that we are all trying to kind of define going forward
So it’s kind of hard to wrap all of our heads around where the market is going, but the general trajectory is positive and even at the first time buyer level as the millennials start to unwind their doubling up and come to the market realizing that rental rates have gone up and there is a real reason to go ahead and purchase
That first time buyer segment is showing some optimism and some ability to be flexible in and around the affordability levels and as prices move up
I don't know if that's helpful or not Steve, but…
Well, first of all let me say I'm so happy to hear that people are listening to my opening remarks and you did reside back to the ---+ as you have clearly listened
Look, these initiatives are really core to what we are working on day-to-day inside the company
And your questions are good one, the answer is that those metrics are the starting metrics for those two initiatives, but they are not the only metrics for those two initiatives
There are other embedded metrics that we're working at
So relative to digital marketing, the very first thing was proving that we could improve our traffic particularly the quality of traffic
Put aside the quantity for a minute, but the quality of traffic while reducing the spend
So it was really can we cut the spends by 50 basis points while we improve the quality of the traffic and continue to grow our business
And that was the beginning metric, but as we become more proficient at digital marketing and as we can expand the flow of qualified traffic I highlighted 100,000 customers, qualified customers coming to the doors driven by social media and internet marketing
As we can expand the number coming through the doors, we are probably going to be able to see greater pricing power and other efficiencies as well
And I'm not going to go through and start articulating those matrices, but we think there is more firepower in the digital marketing strategy and we are very focused on that on a regular basis
Likewise with the dynamic pricing tool, what you're seeing in a reduction in standing inventory is a starter, but the ability to sell homes that are not standing inventory at the end of quarters helps elevate the need to use discounting mechanisms or incentives to move that inventory
And so as we move forwards with those digital tools or technology tools, we think that there is more firepower in them
But we have a whole host of initiatives of that we're working on, that we don't articulate
Because we're simply not getting out over our skies, but we are telling you that we're working on these things every day and we are committed and think we will build a better mousetrap
Okay, you bet
And I do want to say thank you everybody for joining us
We look forward to keeping you updated as we move through the rest of 2017. Thank you
