Welcome to Lennar’s Third Quarter Earnings Conference Call. [Operator Instructions] Today’s conference call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Alexandra Lumpkin for the reading of the forward-looking statement.

Thank you and good morning. Today’s conference call may include forward-looking statements, including statements regarding Lennar’s business, financial conditions, 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.

Thank you. I would like to introduce your host, Mr. Stuart Miller, Executive Chairman. Sir, you may begin.

Very good and thank you. Good morning, everyone. This morning, I am here with Rick Beckwitt, Chief Executive Officer; and Jon Jaffe, our President and Chief Operating Officer; and Diane Bessette, our Chief Financial Officer and of course David Collins is here and you just heard from Alex Lumpkin. So, I'm going to start with a general strategic overview. Rick and Jon will give the land and operational overview, and Diane will deliver further detail on our third quarter numbers as well as some preliminary guidance for 2019. When we get to Q&A, as always, I'd like to ask that you limit your questions to just one question and one follow-up, so we can accommodate as many participants. So let me go ahead and begin by saying that our once again strong quarterly results derived from a seasoned, well-coordinated operating team that is hands-on and hitting on all cylinders. With pro forma new orders up approximately 11% year-over-year and pro forma deliveries up 11.4% year-over-year, we are tracking above our own internal targets of 7% to 10% per year growth, even through the integration of the CalAtlantic merger. As the coordination of systems integration continues and synergies are run from operations, our management team and operating groups are fully engaged in making the adjustments that keep our performance industry leading and consistent. Over the past quarter, market data -- sorry about that, little technology issue. So over the past quarter, market data has sent mixed signals about the current state of the housing market in general. Sales, permits, starts and existing home sales have all shown decelerating growth rate and on their face seem to indicate slowdown. A natural mortgage application slowdown, which is normal as interest rates have trended higher and refi business dissipates, has contributed to the discourse.…

Thanks, Stuart. Let me start quickly by summarizing our results in the third quarter and then Jon and I will update you on some of our strategic focuses. Net earnings for the quarter totaled 453 million, up 82% from 2017. Our core homebuilding operation really produced. New orders for the quarter totaled 12,319 homes, up 62% from the prior year with the dollar value of approximately 5.1 billion, representing a 73% increase from last year. On a pro forma basis, new home orders increased 11% from the prior year. We delivered 12,613 homes, which was up 66% from 2017. Revenues in the quarter totaled 5.7 billion, representing a 74% increase. We ended the third quarter with a sales backlog of 19,220 homes with the dollar value of 8.4 billion, up 88% and 105% respectively from 2017. Our gross margin, excluding the backlog and construction and progress write-up totaled 21.9%, which exceeded the top side of our guidance last quarter. Finally, our SG&A in the quarter was 8.6%. This marks an all-time third quarter low and a 60 basis point improvement from 2017. It also highlights the success of our CalAtlantic integration and the power of our increased local market scale and our operating leverage. With the CalAtlantic integration behind us, we are laser focused on three strategic areas. First, construction costs and operating efficiencies; second, land acquisition and development and third, technology that improves our business. On the construction front, we are leveraging our local market and national scale to be the low cost producer. Jon will review our activities in this area, which also focused on adjustments to how we build and procure materials to lower our overall installed cost. On the land front, we've continued to execute our soft pivot strategy, with an emphasis on controlling more land…

Thanks, Rick. Today, I'm going to give an update on integration, cost synergies, the lumber market, the US Mexico Canadian agreement’s impact on lumber as well as an overview of some of the markets in our western area. First, I want to let you know what we mean when we say we are substantially complete with the integration of CalAtlantic. In all of our divisions and all communities, we are either set for building out the remaining home sites under a modified design studio program or have converted the remaining communities to Lennar’s Everything’s Included platform. Going forward, in 2019, all communities will be under the Lennar’s Everything’s Included platform, with the exception of some minor build-outs of existing communities. With respect to systems migrations, this month in October, we will complete 100% of the conversion of our ERP and construction management systems as well as a complete rollout of sales force lightning as a new company wide CRM platform. This is another great example of Lennar’s execution that we feel is best in class. It's fair to say that most companies will take about two years to roll out just the Salesforce CRM, while in just 9 months from the closing date of the merger, we'll have completed the entire migration and rollout of all systems. As we complete 2018, we will do so as one company with the merger integration behind us, focused on delivering our fourth quarter and our goals for 2019. Next, I want to confirm that we're on track to deliver the synergies targets we gave you last quarter of $160 million for 2018. This is split evenly between corporate and SG&A savings and direct construction cost savings. I also want to confirm that we're confident with our prior guidance of achieving synergies of $380…

Thank you, Jon and good morning to everyone. So before I provide the details of our third quarter results, let me give a simple analysis of our numbers as compared to consensus, as I did last quarter, to assist in understanding some of the noise that continued this quarter. Our reported EPS is $1.37 and the average of all analysts’ estimates is $1.17. The difference is $0.20. This difference of $0.20 can be separated into two categories. First, non-operating items, representing $0.14 of the difference, and second, operating items, representing $0.06 of the difference. The $0.06 is our operating beat or our outperformance, as you compare our actual results to expectations. So let me give you the details of these two categories, starting with the non-operating items. There are two distinct components to this category. The first item is the CalAtlantic purchase accounting write-up of backlog and construction in progress. The expectation for Q3 was to record approximately $100 million of write-up. The actual amount recorded was approximately $84 million. The difference between these two amounts is just timing and will flow through in subsequent quarters. The second item is tax rate. Our expected Q3 tax rate was 24%. The actual tax rate was 17.8%. The difference primarily relate to a one-time benefit from a tax accounting method change, implemented during the quarter and energy credit taken in the quarter. So now, let me turn to the operating items category. The difference here between our actual results and expectations relates to an increase in Q3 deliveries, average sales price and net margin. And as I previously stated, again, that's our operating outperformance. So hopefully that helps simplify our results from a top level. Now, let me walk through the details of our third quarter, starting with homebuilding. As we’ve mentioned,…

[Operator Instructions] And we have a question coming from Stephen Kim from Evercore ISI.

Thanks for all the commentary and the guidance and good job on the quarter. I do want to ask you a little bit about the land agreements you’ve struck with the three regional developers. You mentioned, I'm trying to get a sense for what is really different between what you've done here versus what you have done on an ongoing basis in your history. You indicated there’s exclusive assets, I guess to the 55,000 homes sites, but you didn't mention anything about the terms as far as I heard and I was curious if you've given any guarantees, if you could talk a little bit about what the timing of the cash flows might be in terms of the amount of deposits you put down and other things like that that might be relevant to helping us frame how these arrangements might be a bit different from what you've done in the past?

So Steve, it’s Rick. At this point, we're not going to get into a lot of the details associated with those agreements, because they're confidential at this point. And -- but I can tell you, there are no guarantees. These are very strategic, well-crafted structures that really guarantee us pipeline that these guys develop. And I can't go into a lot of the details at this point. As we move forward, we’ll give you a little bit more color as to what the structure of the deals are, but it's confidential at this point and for competitive reasons I don't want to get into it.

But, the two things I would note Steve are, this is the beginning of the reflection of using size and scale in local markets to be able to comfortably absorb what some of the better developers are bringing in their pipeline to market. And it is also reflective of ours -- continuation of our soft pivot to migrate towards fewer home sites purchased for longer period of times on book and using strength and relationship with proven actors in the land market to have more of a just-in-time delivery system for home sites with a greater focus on returns on assets.

Steve, this is Jon. One other thought on this, and I've talked about it, it's really another reflection of our position where we have dominant market share of being the builder of choice for land developers. So they know and they've discussed with us that we're going to be the dominant buyer of their land and so it's getting ahead of that and figuring out a structure that allows us to control what they'll be delivering in the future for them to know that their pipeline will be absorbed by us in a structure that creates a true win-win situation along the lines of what Stuart and Rick described.

Yeah. Sure. It absolutely makes sense. Well, great, well, we look forward to getting more info on that as it comes. I guess my second question related to the guidance you gave and in particular, Diane, I think, you had mentioned a gross margin number, 21.75% to 22%. And earlier, Jon had mentioned about, I think, 70 basis point benefit roughly, given the $3,000 benefit in the first and second quarters from lumber. I was curious to what degree your guidance of 21.75% to 22% incorporates an assumption that the lumber prices remain where they are for the remainder of next year, if you could give us some sense of what kind of lumber contribution is embedded in that guidance? And also, if there is -- I was a little surprised that you mentioned that the option strategy was going to be manifested in the gross margin next year. I was a little surprised that it would happened that quickly, so maybe if you could just kind of elaborate on why the -- why you call that one out as a driver to the gross margin being a little lower than it otherwise would've been.

Let me start here, Steve. I think Rick wants to chime in after, but let me just say that, one of the -- we've not generally given guidance for the next year until the fourth quarter. So, one of the problems with getting out a little bit farther ahead and we do want to give guidance and give some direction, as the combination has brought some increased question or discussion around where we're going. But those numbers are moving around a little bit, so you very accurately highlight the flow through of the lumber numbers and how a migration towards more options might flow through those numbers. Right now, it's an imperfect calculation and so we’ll refine those numbers as we go forward, but directionally, we wanted to give you a fairly decent understanding of where we see ourselves headed, given current market conditions and given a best assessment of what we see for the next year. Rick?

Yeah. And I guess in addition to that, the soft pivot strategy has been going on for several quarters now. We have -- we mentioned on prior calls that as we utilize more third party retail option type structures that the gross margin associated with that is a much lower margin, but a higher IRR. So, you're starting to see some of that kick in in 2019. In addition, the deals that I outlined included with them, a immediate position in the portfolio that these guys are developing. So it's not that's just the future deals, it's their current pipeline. So that's why we’ve put in about 25 bps of margin differential from where we were prior.

We have a question coming from Michael Rehaut from JPMorgan.

First question, I just wanted to get a sense a little bit on your comments around some of the slowdown that occurred during the quarter, as you looked at your order trends. I don't know if there's an ability to kind of give us a sense of the organic growth, how that tracked throughout the quarter, if there's a sense of month to month of the 11%, was it stronger in the first month or two and below that rate in the last month. And also, if I just heard correctly that you expect the orders for 4Q to be 11,400. I think that was only a 200 unit decrease, which seems relatively mild.

So let's just talk about the quarter. I think we saw sequential improvement month to month throughout the quarter. And when you're talking about whether it's organic or not organic, we're comparing to pro forma numbers. So organic -- it was all organic. With regard to the Q4 lowering of a couple of hundred home -- new order on the home site, that's a contribution of some homes having slipped because of the storm, the hurricane into Q4 that we lost in Q3, but also some delay associated with the storm going forward. So it's, I think, what we feel relatively positive about the market, as Stuart and Jon said, the market has paused a little bit, but we're seeing consistent normalized demand.

If you think about Michael, in some of the markets, as I articulated, when you're at a pace above five sales per community per month, that's really not sustainable. You're going to run into resistance at some point and where it has shifted to is a very normal rate. In some cases, above that level for that one a week that we sort of strive for as ideal in many of our markets. So, there is – on a relative basis, right, a slowing, but when you step back and look at it, it's a very healthy, sustainable rate that we're at right now.

No, no. I appreciate that Jon. I guess secondly, and I realize, Stuart, as you said, it's kind of an early number and probably you will be sharpening the pencil perhaps over the next three months ahead of your 4Q call. But I think a lot of people will be focusing, as Steve before was asking around the 2019 gross margin number. And I think it was helpful, I believe, Rick that you mentioned that perhaps the higher level of optioning might be a 25 bp headwind. You also have an expected roughly 100 bp tailwind from increased synergies, that roughly 220 million as well as some tailwind from lumber. So the offsetting headwind I guess is what I'm trying to get my head around, when you think about the fact that 2018 will be 22% or a little bit below 22% gross margin ex purchase accounting if I have that math right. Where is the other offset? Is it mix? Is it higher priced land coming through? The difference more perhaps, either -- again mix being either geographic or demographic, any help there would be helpful?

Michael, it’s Jon. Relative to gross margin, mix it not the major driver there, but we do see that we’re in an environment where it's constrained relative to land and labor. So, you do have year-over-year flowing through higher land cost and higher direct construction costs. So with Lennar, you have a story of what's happened in the marketplace relative to that constraint, offset by synergy savings to marketplace benefit of what's happening with lumber that will show up in the first half of next year. So you have, as you know, both headwinds and tailwinds. So I’m balancing as we forecast a long time ago, we felt that post-merger would be around 22% gross margins with the benefit of the synergies. And so I think you see all of those components, both headwinds and tailwinds reflecting in that preliminary guidance that we gave.

Our next question is from Scott Schrier of Citi.

I appreciate all the color that you gave earlier in the call regarding California. I'm just curious if I can dig a little bit deeper into it, obviously, your ASP growth there was exceptional. Can you speak to the role that mix had there? And then if you're talking about how you had this temporary slowdown, you had absorption slow, is some of the reason there behind tax and if so, when you expect this to pick up again, do you expect to pick it up again after absorptions pick up again at the expense of ASP growth or do you look at this as sustainable.

There's not a one size fits all answer to that. In some cases, the ASP change is mix, as I tried to highlight in that Orange County example. And in many -- most cases, it's really just price appreciation in local markets, market like Seattle that's been driven by tremendous job growth. You just had year-over-year price acceleration, in the Bay Area, with the boom in the tech world, you've seen year-over-year price appreciation. So, you have both things going on, but more price appreciation than mix. As far as being able to look forward and predict when we'll see pace increase, that's very hard to do. What we see is we see demand, we see people with lot of interest, we see people pausing as we all have said and just not having the urgency to buy now. So we don't want to suggest that people have left the marketplace or have lost interest in purchasing. It's more that they're stepping back and as we've seen in past market cycles, adjusting to new pricing, which results in a higher monthly mortgage payment. And if people adjust to that, we expect that they'll come back in to the marketplace.

Yeah. Embedded in your question, you asked about the tax effect and I think that as we look at the market right now and take its temperature, I think that we would say that you're seeing more impact from just price and interest rate migration and adjustment to where the market has gone than any discernible connection between a lack of demand or change in demand pattern, relative to where tax rates have moved and any impact in California, we just haven't seen that yet, not in our price ranges.

And just for my follow up, I'd like to round out that discussion on some of your other main areas, if you could just talk about absorption trends, directionally in areas like Texas and Florida that would be great.

So, if you look at our other major markets, which are really Texas and Florida, I would tell you that we had strong performance in those markets. Texas was up significantly year-over-year, almost 20% in new orders as a whole state. We look at Florida, the Florida markets continue to be robust. That said, there are, in the Dallas market, at the higher, the price points that market has gotten a little bit softer, but really across the board, it's your sub $3000 in price point, it's a very strong market. And we saw continued strengthen in Florida, so you know pretty much across the board, other than on the West Coast, where there was a little bit of softness, as prices have increased dramatically, we feel that we're in a relatively normalized market right now.

And our next question is from Stephen East of Wells Fargo.

Actually, this is Paul Przybylski on for Stephen. Considering the new demand environment, is your focus more on orders or margin and as kind of have this pause, do you think the industry is maybe protecting that backlog right now and the stock has continued until the fourth quarter that we may actually see industry move to even higher incentives?

Well, as you saw during the quarter, we really didn't increase the incentives for Q3. We’re very focused on converting our backlog into revenue. As we do, we're focused every quarter and as we run the business, as we talk about in the past, we are constantly balancing sales pace and margin. There are dynamic pricing models that Jon has really led the company.

Yeah. As we've talked before, it's really a market by market, community by community analysis, relative to price and pace and we make that decision very, very locally. And with respect to backlog, we're not talking about a market shift that would cause us or any other builder, I think, to be concerned about their backlog. What we're talking about is just a market that has, on a relative basis, shifted from very strong to more normalized paced in the cases that we're talking about.

Let me circle back to something that I highlighted in my comments, because I think it is kind of a direct answer to the question, which is our view is that the market has kind of reacted to price and rates having moved fairly dramatically over the past quarters and years. But we go back and we constantly look at the production pace that we've seen over the past years. The constraint of land and labor that is well documented that has narrowed the funnel through which supply shortage could be addressed and can be addressed and we look at the normalized demand level for the country and though some might argue that 1.5 million isn't the same as it used to be, we've been producing at a significantly lower level for the better part of the past decade. So we've been building pent up demand. I think our view and I think generally the industry view is that embedded in these numbers, there is a demand pattern and basic economic strength underlying it that will help correct and drive the market forward. So I would say, pretty aggressively that we're not protecting backlog and certainly nothing reflective of what we've seen in past cycles. Instead, I think there's a pause. I think, there's a catch up and I think that will, with economic drivers driving forward, see a resumption of or a normalization of the patterns going forward.

And just as a follow-up on the integration or synergy savings, you're referring that? Are there any risks or upside potential you see moving forward?

We feel, as I said, pretty comfortable. We have a lot of clarity to the synergies that we've identified. There's a lot of work to do to realize them, but we've seen that come into place relative to 2018 as we're in our last quarter of 2018, we feel that those are very much locked and loaded, agreements are in place with national vendors that will carry it through the full year of 2019. So, I don't see a lot of risk. Is there upside? There's always the potential for upside, as we dig deeper into it and one synergy builds on the next, but for us, the focus is the day-to-day blocking and tackling of executing on what we've identified and making sure that we deliver on that.

And we have a question from Alan Ratner of Zelman and Associates.

Okay. And we’ll make this the last question. Go ahead, Alan.

Thanks for squeezing me in here and nice job, given the choppier environment of late. I think, taking a step back, if mid to high single digit growth is bad as it's going to get, it’s certainly not draconian view that the market seems to be expressing right now. But, just as far as what you're seeing as far as the deceleration, is there any notable differences you're seeing across the various price points you build out? I know, you gave the geographic exposure, but any main differences you're seeing across your buyer pools and does that impact how you're thinking about land investment today as far as maybe shifting the portfolio subtly over the next couple of years.

Well, sort of on a general basis and there are some exceptions. At the higher price points, it's gotten a little bit softer than the lower price points had been. And that's not unusual in a market that there's a lot of publicity as to what's going on in mortgage rates and price appreciation, because the more fluent buyer time their purchase based on where they think the world is going. And so, we think, as we said consistently that this is just a market adjustment to a more normalized market from what was really a red hot market in some of these markets. With regard to land and our land strategy, we have consistently said for the last year that we've been shifting a lot of our land investment to the entry level and that first time move up buyer, because it's the fat of the market and our teams have been focused on making investments in that area.

And then, I think on the capital allocation side, you mention share repurchase activity potential, which I think makes a lot of sense at the current levels. One thing I don't think you mentioned was the possibility of more M&A and I know while it's no fun to see stock prices go down, you guys have historically been very opportunistic on the M&A front during periods of disruption in the equity markets. So, just kind of curious how you're thinking about the possibility of doing another deal, now that the CalAtlantic integration is behind you and are there any interesting opportunities, either public or private, starting to pop up now, given some of the pullback in the share prices.

Well, Alan, as you can imagine, we probably won't comment too deeply on the answer to that question, but you know us. Number one, everything is on the table and from our company's perspective, we love a bargain, we're very opportunistic and always have been, we're always focused on competing alternatives. We are -- we have highlighted that we've been very cash flow focused. We've really positioned our balance sheet very well. Diane's done a great job of managing our capital allocation and programming to date. We sit with an excellent balance sheet in just a short time after completing a transaction and integration complete, it really positions us to look at organic growth, at M&A, should there be unique opportunities, but everything measured against the most obvious bargain, which is the group of assets that we know best, the group of assets that we control, the least form of friction and that is buying back stock. So as we sit here today, and we look at the capital markets, not enamored with the home building sector, as we look at the landscape with the growth rates as we see them today and the production deficit as we see that -- as we see it today and as tomorrow we have our board meeting and we sit and talk to our board for advice, very much on the table is the question of allocating capital in balance between paying down debt and buying back stock as against some of those other alternatives. So never think for a minute that anything is off the table with Lennar. We love a good bargain and this is an environment where you start to find them.

Okay. So with that, we'll wrap up. Thanks for joining us and we look forward to updating again for our fourth quarter and into 2019. Thank you everyone.

Thank you and that concludes today’s conference. Thank you all for participating. You may now disconnect.