Management fees and other expense, net, totaled $83 million, which included $85.8 million of valuation adjustments, compared to management fees and other income, net, of $9 million in the fourth quarter of 2006, net of $14.5 million of valuation adjustments.
- Minority interest income, net was $1.3 million compared to minority interest expense of $1.4 million, in the fourth quarter of 2006.
- Sales of land, equity in loss from unconsolidated entities, management fees and other income (expense), net and minority interest income (expense), net may vary from period to period depending on the timing of land sales and other transactions entered into by the company and unconsolidated entities in which it has investments.
Operating loss for the Financial Services segment was $18.7 million compared to operating earnings of $42.9 million last year.
The decline in profitability was due to overall weakness in the housing market, which led to a decrease in volume and transactions for the mortgage and title operations compared to last year.
Corporate general and administrative expenses were reduced by $1.7 million, or 5%, compared to the same period last year.
As a percentage of total revenues, corporate general and administrative expenses increased to 1.6% compared to 0.8% in the same period last year, primarily due to lower revenues.
Fiscal 2007 Highlights
- Revenues from home sales decreased 36% to $9.5 billion from $14.9 billion in 2006. Revenues were lower primarily due to a 33% decrease in the number of home deliveries and a 6% decrease in the average sales price of homes delivered in 2007.
- New home deliveries, excluding unconsolidated entities, decreased to 31,582 homes in from 47,032 homes last year. In the year ended November 30, 2007, new home deliveries were lower in each of the company''s homebuilding segments and Homebuilding Other, compared to 2006.
- The average sales price of homes delivered decreased to $297,000 from $315,000 in 2006, primarily due to higher sales incentives offered to homebuyers ($48,000 per home delivered in 2007, compared to $32,000 per home delivered in 2006).
- Gross margins on home sales excluding inventory valuation adjustments were $1.3 billion, or 13.9%, compared to $3 billion, or 20.3%, in 2006.
- Gross margin percentage on home sales decreased compared to last year in all of the company''s homebuilding segments primarily due to higher sales incentives offered to homebuyers.
- Gross margins on home sales were $570.7 million, or 6%, which included $747.8 million of FAS 144 inventory valuation adjustments, compared to gross margins on home sales of $2.7 billion, or 18.4%, in the year ended November 30, 2006, which included $280.5 million of FAS 144 inventory valuation adjustments.
- Selling, general and administrative expenses were reduced by $396.6 million, or 22%, compared to the same period last year, primarily due to reductions in associate headcount and variable selling expenses. As a percentage of revenues from home sales, selling, general and administrative expenses increased to 14.5%, from 11.9% in 2006. The 260 basis point increase was primarily due to lower revenues.
- Loss on land sales totaled $1.7 billion, which included $740.4 million of FAS 144 valuation adjustments on the inventory acquired by the Morgan Stanley land investment venture previously discussed, $426.9 million of FAS 144 valuation adjustments and $530 million of write-offs of deposits and pre-acquisition costs related to 36,900 homesites under option that the company does not intend to purchase. In the year ended November 30, 2006, loss on land sales totaled $30 million, which included $69.1 million of FAS 144 valuation adjustments and $152.2 million of write-offs of deposits and pre-acquisition costs related to 24,200 homesites that were under option.
- Equity in loss from unconsolidated entities was $362.9 million, which included $364.2 million of FAS 144 valuation adjustments related to the assets of the company''s investments in unconsolidated entities, compared to equity in loss from unconsolidated entities of $12.5 million in the year ended November 30, 2006, which included $126.4 million of FAS 144 valuation adjustments related to the assets of the company''s investments in unconsolidated entities last year.
- The company recorded goodwill impairments of $190.2 million related to its homebuilding operations.
- Man in the year ended November 30, 2007, which included $132.2 million of valuation adjustments, compared to management fees and other income, net, of $66.6 million in the year ended November 30, 2006, net of $14.5 million of valuation adjustments.
- Minority interest expense, net was $1.9 million and $13.4 million, respectively, in the years ended November 30, 2007 and 2006.
- Sales of land, equity in loss from unconsolidated entities, management fees and other income (expense), net and minority interest expense, net may vary from period to period depending on the timing of land sales and other transactions entered into by the company and unconsolidated entities in which it has investments.
- In February 2007, the company''s LandSource joint venture admitted MW Housing Partners as a new strategic partner. As part of the transaction, the joint venture obtained $1.6 billion of non-recourse financing, which consisted of a $200 million five-year Revolving Credit Facility, a $1.1 billion six-year Term Loan B Facility and a $244 million seven-year Second Lien Term Facility. The transaction resulted in a cash distribution to the company of $707.6 million, but reduced the company''s resulting ownership of LandSource to 16%. If LandSource reaches certain financial targets, the company will have a disproportionate share of the entity''s future positive net cash flow. As a result of the recapitalization, the company recognized a pretax gain of $175.9 million in 2007 and could potentially recognize additional profits in future years, in addition to profits from its continuing ownership interest.
- Operating earnings for the Financial Services segment were $6.1 million compared to $149.8 million last year. The decrease was primarily due to a decline in profitability from both the segment''s mortgage and title operations and $28.4 million of partial write- offs of land seller notes receivable. The decline in profitability was due to the overall weakness in the housing market, which led to a decrease in volume and transactions for the mortgage and title operations compared to last year.
- Corporate general and administrative expenses were reduced by $20.1 million, or 10%, compared to the same period last year. As a percentage of total revenues, corporate general and administrative expenses increased to 1.7% in the year ended November 30, 2007, compared to 1.2% in the same period last year, primarily due to lower revenues.
- The company has completed an amendment to its senior unsecured revolving credit facility that modified certain covenants, which included minimum tangible net worth, borrowing base and maximum leverage ratio, as well as added a new covenant to reduce the recourse indebtedness of joint ventures in which the company participates. Under this amendment, the maximum amount the company can borrow was reduced from $3.1 billion to $1.5 billion.
Key questions from the fourth quarter earnings call conducted by Lennar Corporation on January 24, 2008.
Ivy Zelman (Zelman & Associates): You still have $1 billion of recourse debt in your plan as to continue to reduce that further. How do you give the market assurance that your balance sheet is strong?
Stuart Miller: We are still going to be subject to market conditions, but as we look ahead it was focused on getting each of our divisions and position to have a clear profitability model and that profitability model is focused on every home, it goes under production right now on home sight that should be properly priced. They positioned themselves with the right product and construction costs; it should be able to be profitable as we turn into the second half of the year. The market continues to deteriorate at an accelerated basis; we are not going to get there. I personally have some hopes that there are going to be some actions by the Federal Government that will shore up some of the market condition even as they still have the tendency to fight. As we get to the back half of year, I do not expect to see sales and home prices accelerate but I am hopeful that the slide does not continue at the accelerated rates and I think that we are currently well positioned in each division to be able to start saddling back. One of the strong things that we have in our favor in times like this is that we worked hard on our balance sheet as prove to good times to be able to withstand and absorb some steep shock. even as we have gone through the recalibration that we have gone through now we still been able to maintain a balance sheet in good shape, in good shape and we have been able to generate cash both from operations and more importantly by doing some heads of things in the marketplace. We will fight not only to our balance sheet assets, but also to our joint venture assets today. Nothing is going to isolate us completely from a complete melt down in the marketplace beyond where we are, but to the extent that assets retain any value at all. We have taken the charges to-date that we think are appropriate. For any kind of market conditions with some softening ahead but not with an exaggerated softening ahead, we think, we are well positioned to move forward and to remain stable.
Bruce Gross: Looking at the total joint ventures there is a total of $5.1 billion of debt of which $3.4 million is recourse debt. There is also $2.7 billion of equity and this is after we have gone through the review just like we do with our wholly owned assets of our joint venture investments, investment-by-investment for any potential impairments and there have been impairments for the last few years that bring down the investment to the appropriate stated value, we have taken significant valuation adjustments. There is significant equity and then there are hard assets that are additionally supporting the debt within those joint ventures. Although, it does not mean we can not have a re-margining comeback to as such as we mentioned we had $84 million this year. There are hard assets, there is significant equity and the net recourse exposure has continued to decline to the company as well. In addition to the JV recourse indebtedness coming down to a billion, we have also reduced the net recourse exposure to the company from last year at $ 1 billion to the end of this quarter at $795 million.
Ivy Zelman (Zelman & Associates): Could you talk about the joint venture transparency?
Bruce Gross: We do go through and identified all of the different categories of joint venture indebtedness, and we have again, significant detail disclosure on all of these, on the joint ventures, the various categories, the balance sheet, the debt side. There is significant increase in the transparency from where we have been in the past. That should be filed Tuesday, next week. We have made efforts to get ahead of the curve. It is almost axiomatic that you can not make money on land that is improperly evaluated, it does not matter how good your homebuilding operation is. We are positioning to get ahead and relative to some of the land positions that we have and joint ventures that we have.
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