Below is the transcript of the Lennar Corporation (NYSE:LEN)’s 4th Quarter 2014 Financial Results conference call held on Thursday, January 15th, 2015 at 11:00 a.m. EST.
Lennar Corporation (NYSE:LEN), founded in 1954, is one of the nation’s largest builders of quality homes for all generations. The company builds affordable, move-up and retirement homes primarily under the Lennar brand name. Lennar entities include Financial Services, Rialto Investments, Multifamily and Commercial segments.
Company Representatives:
Stuart Miller. Chief Executive Officer
David Collins, Controller
Jon Jaffe, Vice President & Chief Operating Officer
Bruce Gross, Vice President & Chief Financial Officer
Rick Beckwitt, President
Carl Garraffo, Chief Human Resource Officer
Analyst:
Steven East, Evercore ISI.
Steven King, Barkley’s
Micheal Rehall, JP Morgan
Eli Ekel, GMS
Allan Rattingnerm, Selmon
Megan McGrath, MKM Partners
Michael Doll, CS
Peter Gallow, ML
Jade Remanie, KBW
Operator
Welcome to Lennar’s fourth quarter earning conference call. At this time all participants are on listen only mode after the presentation we will conduct a question and answer session. At that time you may press *1 on your touchstone phone to ask a question, please limit your question to 1 question and 1 follow up question. Today’s conference is being recorded if you have any objections you may just disconnect at this time. I will now turn the call over to David Collins for reading up the forward looking statement.
David Collins, Controller
Thank you and good morning every one. Today’s conference call may include forward looking statements. Including statements regarding Lennar’s business, financial condition, result of operations as closed, strategies and prospects. Forward looking statements represent only Lennar’s estimates on the date of this conference call and I am not intended to give any assurance as the actual future results. Because forward looking statements relate to manners that have not yet occurred. These statements are inherently subject to risk and uncertainties. Many factors could affect the results and may cause Lennar’s actual activities or results to differ materially from the activities or results anticipated in forward looking statements. These factors include thus described in this morning’s press release and our SCC filing including those under the caption of risk factors contains the Lennar’s annual report on 410K most recently filed with the SCC. Please note that Lennar Corporation [NYSE:LEN]assumes no obligation to update any forward looking statements.
Stuart Miller. Chief Executive Officer
Alright. Well let me just jump in and begin. This is the Stuart Miller and good morning every one thank you for joining us for forth quarter and year end update. This morning I am joined by Bruce Gross Chief Financial Officer and David Collin that you just heard from. Diane Bessette our Vice President in Treasure. Rick Beckwitt of President Jon Jaffe Chief Operating Officer here as well and Jeff Krasnoff Chief Executive Officer of Realtor. They are all going to join in for question and answer. As discussed Mariana conference call I am going to begin with some brief overview remarks on housing market and our operations and then Bruce is just going to jump in with greater detail.
As always we will open up the QNA and would like to request that during the QNA each person is limit themselves to 1 question and 1 follow up. So let me go ahead and begin and let me begin by saying that we are very pleased to report another very solid quarter of performance for Lennar Corporation [NYSE:LEN]with each of our major segments performing better then expected. Our fourth quarter and year end results demonstrate that our company is very well positioned to continue to perform extremely well in current market condition and to continue to execute our carefully crafted and balanced operating strategy.
Generally speaking we continue to believe that we are still in the early stages of a protracted slow growth housing recovery. The recovery continues to be driven forward by increased pumped up demand, derived from a now multiyear production deficit and the increasingly high cost, monthly cost of rentals. At the same time Volume growth has been can constrained by overly conservative lending standards a regulatory environment that discourages mortgage landing by banks and a negative bias overs hand against homeownership. Complicating matters the housing recovery has been somewhat erratic as macroeconomic factor have continued to both positively and negatively affect that recovery.
As I have said before this market has continued a slow and steady recovery but it is markedly different from past down cycle recoveries. I noted in our last conference call that history would suggest that more vertical recovery especially given the severity of economic decline. This recovery had a decidedly different trajectory as the slop of the recovery has been shallow and the recovery has been choppy and volatile. While the reflection of this market, of the market has been come founding to many, we had very clear understanding that has informed our company strategy.
Simply put, we believe and continue to believe that the downside in the housing market is very limited and the upside is very significant. We believe that market is downside supported by many years of production deficits which is yielded of the supply of both rental and for sale, limited supply of both rental and for sale housing in the country. Any pull back and housing volume would be short lived as there is need for shelter in the country and there is very little inventory with almost no likelihood of mortgage foreclosures given the stringent underwriting standards of the past years.
And while demand has remained constrained by impaired consumer physiology burdens and mortgage underwriting standards and the banking regulations that discourage mortgage lending buyers have been federally returning to homeownership as the market opens up driven by the cost realities of a high priced undersupplied rental market. With recent pronouncements by FAHFA and HUD ended brining buyers back to the market with the consumer stimulus provided by lower gas prices with the employment and wages slowly mending, with lower interest rates striving greater affordability and with that multiyear deficit in production, the upside and housing remains ahead of us.
Even with questions raised about market like Huston giving the drop on oil prices and foreign purchasers giving the strong dollar their strong counter currents to act as an offset. At a million homes of multifamily and single-family production per year, we are continuing to undersupply the longer term needs of the country and this will have to be made up. The shallow slop of this recovery likely provides the steady backdrop for market share expansion in the fragmented industry and an extended recovery duration for those who are able to participate by leveraging strong capital base. I would suggest that this a very healthy environment for the wealth capitalized national builders and for Lennar Corporation [NYSE:LEN]in particular.
Our results for 2014 reflect our success in navigating this landscape and we believe that we are well position for strong results in 2015 and beyond. A combination of solid management execution of our articulated strategies and strategic investments in core assets combine to produce strong results and will enable to continue industry leading performance throughout next year. Home building of course remains a primary driver of our company’s performance. The factor that is driving this performance this quarter were job growth and encouraging dialogue regarding mortgage underwriting while the head winds remain a challenging mortgage approval process and aggressive competitor incentives. Lennar’s execution strategy remained balancing price and paid from a community by community basis to maximize our results and continuing our soft pivot towards the slower growth and the land lighter program.
The execution of this strategy produced 22% sales growth, 25.6% gross margin and 16% operating margin. Our operating margin for the full year a 14.9% matches our company high from 2005. Our self-paced end of the fourth quarter was three sales per community per month and this was flat with 2013 the fourth quarter pace of 2.9 and still is not enough to drive the operating leverage that should come from increased absorption. Nevertheless fourth quarter SGNA was 9.6 % on a 30 basis point year over year improvement. Our average sales pricing increased 7% year over year to three hundred and twenty nine thousand. During the quarter we opened 75 new communities and communities to end at 625 active communities for the 16% increase in the year over year increase. Year over year labor and material cost are up 7% to 50 dollars a square foot.
This represents a slowing of the pace of cost increases from a 10% plus year over year run rate for the past two years and that’s before the recent fall of oil prices. With oil prices down we should see cost in petroleum based products that just roofed shingle and asphalt come down as well as the broader reductions from the overall positive impact of lower transportation cost. Additionally the reduction in cost in copper and other commodities should add to cost reduction in the future. Remember however that increases are quick to be passed on while decreases are difficult and time consuming to realize. With many of our competitors offering large incentives to drive sale, sales incentive to 6.6% of the quarter compared to 6.3% last year and 5.8% last quarter. Our Realtor expanses was 2.8% of revenues compared to 2.5% last year.
We continue to strategically use incentives and or increase brokerage fees on specific communities where we thought the sales face. Selectively marketing more aggressively to both brokerage community and consumers on communities as needed. As we have noted before our sales and margins continue to benefit from our next Gen offering for the quarter our next Gen product had a year over year of growth rate of 38%. We now offers next Gen plans in 205 communities, in 14 of our 17 states with an average sales price 23% above our company average.
Our home building operating results for 2014 really speaks for themselves. As we look to 2015, well we expect to see some margin contractions due to competitive pressures and the inclusion of some of additional legacy land assets and our product offering. Our home building operating platform is well positioned to continue to drive strong profitability for the company. Of course, complementing our home building operations are financial service segment continued to build its primary business alongside the home builder. While continuing to also grow are retail platform. Bruce will talk more about our financial services progress, which had a very respectable quarter, with operating earning about 30.2 million dollars which is the 78% improvement over the 17 million dollars last year. While our home building and financial services divisions are the primary drivers of the near term revenues and earnings. Our 3 additional operating divisions are all continuing to mature as excellent longer term value creation platforms for the company.
Our multifamily operation has grown to 157 associates and regional offices nationwide. We currently have season professional and division offices in Atlanta, Beaverton, Charlotte, Washington DC, Chicago, Dallas, Denver, Phoenix, Orange County, San Francisco and Seattle. We ended the year with 22 apartment communities under construction, 3 of which are in lease, totaling with over 6000 apartments with a total development cost of approximately 1.4 billion dollars. We also have one completed fully leased and operating student housing community that serves the students attending the University of Texas at Austin. Including these communities, we have diversified development pipeline that exceeds 5 billion dollars and over 20 thousand apartments.
In 2014, we sold our first two apartment communities and given the construction schedule of our pipeline with position to sell another 5 communities and the back half of 2016. With these sales and our management, construction and development fields our multi-family business should generate between 15 and 18 million dollars of free tax earnings in fiscal year 2015. As we have discussed in the past, we have been emergent building our apartment communities buildings with third party institutional capital on a deal by deal basis. As we move into 2015, we are looking to create a multifamily fund that would allow us to both develop and hold our completed and least apartment communities as a portfolio in order to capture the recurring income stream from the portfolio.
We cautiously optimistic that we can take our apartment program to the next
level and create longer term shareholders value from this platform. In the fourth quarter Realtor produced operating earnings of 32.8 million dollars. Reflecting our continued progress and transitioning, from an asset heavy balance sheet investor, to a capital like investment manager and commercial loan originator and securitizer. Realtor has now returned over 400 million dollars of invested capital to the parent company just in last year and we expect to generate at least 250 million dollars of cash from our national direct investments. For us to recycle by the end of 2016. Our investing management and servicing platforms have been growing assets under management. While we have a very strong asset base from which we are harvesting value for investors and for our company.
We are continuing to build upon the bases established with our first 2 real estate funds. Fund one became fully invested in early 2013 and in less than 2 years our investors already have received well over 100% of their invested capital back from income and monetization and with the distribution of carried interest is quarter, we now have back 1.5 times our investment with a lot more to go. Fund 2 has already invested or committed to invest approximately $1.2 billion of equity in 75 transactions and also continues to make current distributions of income to investors but to date have exceeded over 18%. We still have almost $400 million dollars of equity to invest and expect to begin raising our 3rd real estate fund later this year and to complement our real estate funds we also have almost $500 million equity to investors. We have an outstanding investment team that is extremely well positioned to continue to build our asset management business. Additionally Realtor mortgage finance, our high return equity lending platform is originating and securitizing long term fixed rate loans on stabilized cash flowing commercial real estate properties.
During the quarter we completed our 12th securitization transaction selling over $500 million of RMF originated loans maintaining our strong margins and bringing our total to $2.2 billion in only our first five quarters of operation. Finally our five point communities program continues to make significant progress and developing our premium California master plan community. At heritage fields or El-Toro, builders in the first phase of 726 home site, have sold 660 homes over the 90% of the homes release for sale was strong pricing power and pace through the fourth quarter. Five points in to contract on the second phase with 9 builders for 14 neighborhood with 916 home sites. Lennar Corporation [NYSE:LEN]will build 253 homes in for the neighborhood along with 8 of the builders. The land sales will close in the first quarter and Lennar Corporation [NYSE:LEN]will recognize approximately 30 million dollars of income from these sales in that period. Additionally 5 points entered into the contract to sell 73 acres of land to Broadcom Corporations to the relocations of their headquarters to the great park neighborhood. They plan to build the campus with 2 million square feet of office base. The profit from this transaction will be recognized in Lennar Corporation [NYSE:LEN]2nd quarter.
At new home, we anticipate to begin land development later this year as new home success in monetizing non-core assets has allowed the venture to maintain a significant cash position of approximately 185 million dollars at year end. In San Francisco, sales continue to be very strong at the ship yard. We are now just about sold out of our first phase of 88 homes that will begin closing is March. There are additional 159 homes under construction, most of which will deliver in the fourth quarter of 2015. Also in the fourth quarter, we closed a joint venture with Macerich, a retailer to develop a 500000 square foot regional mall on the site of Candle of the Candle Stick Park Stadium. The mall along with additional 1800000 square feet of retail space is expected to open in the beginning of 2018. Overall and in summary, our company has been busy and our company has extremely well positioned to thrive in the current market condition.
The shallow slope of recovery with what we believe will be an extended duration, provides an excellent environment for our management team to drive our business forward. Pick up market share and produce excellent results. Over the past quarters, we have been articulating a soft pivot to a land lighter model in home building and an asset light model for our ancillary businesses. These initiatives are becoming a core strategy for our company as we develop a carefully refined asset allocation program for our now mature business line and focus on cash generation and deleveraging our balance sheet. As we move through 2015, we expect to amplify the company focus on moderating growth, focusing on ROYC and driving cash flow as we enter the back half of 2015 and into 2016. We have an excellent management team that continues to be focused on our carefully crafted strategy. This team has positioned Lennar Corporation [NYSE:LEN]with advantage assets that will continue to drive profitability in our core home building and financial services business line. Additionally, we have developed a well-diversified platform that will continue to enhance shareholder value as our ancillary businesses continue to mature. Today, we are proud to share our results for fiscal 2014 and we look forward to sharing our further progress as we move into a new year. With that let me turn over to Bruce.
Bruce Gross, Vice President and Chief Financial Officer
Thanks Stewart and good morning. Our net earnings for the fourth quarter were 1.07$ per diluted share vs .73$ per share prior year. I will provide some additional colors to the numbers starting with home building. Our gross margin on home sales was 25.6% compared with 26.8% the prior year. However this exceeded our fourth quarter gross margin goal discussed on our last conference call. The gross margin increased subsequently by 40 basis points. However defined 120 basis points year over year into a moderating and pricing power as labor, material and land cost increased. Sales incentives increased by 30 basis points the prior year. 6.6% as a percentage of home sale revenue. The gross margin percentage for the quarter remains highest in the East. South East Florida and West regions.
Additionally we had a 5.8 million dollar benefit for the gross margin during the quarter relating to Chinese rival settlements. In addition to the 30 basis points improvement in our SGNA, we have also recognized operating leverage on our corporate GNA line which improved by 10 basis points the 2.2% as a percent of total revenue. The combined categories of land sell income during venture profit and other income, netted to 14.4 million of profit this year vs. 20.1 million in the prior year. Other interest expense declined 75% year after year from 20.5 million in the prior year to 5.2 million in the current quarter. As we continue to open communities and increase the qualifying assets eligible for capitalization.
As Stewart mentioned we opened 75 new communities to end the year at 625 active communities. This is at the high end of the goal that we provided for 2014 and 16% increase over 2013. We purchased 44 home sites during the quarter, totaling 250 million. Our total land acquisition spend for the full year in 2014 declined by 21% to 1.4 billion from 1.8 billion in 2013. This is consistent with the strategy that Stewart articulated. To softly pivot from longer term land parcels to shorter term deals. Our home sites owned and controlled now total 165000 home sites of which 133000 are owned and 32000 are controlled. Our completed unsold inventory at quarter end is carefully managed, averaging 1.5 homes per community at 948 homes.
Turning to financial services. They had a strong quarter with operating earnings increasing for 30.2 million from 17 million in the prior year. Increased earnings was due to higher volume and higher profit for transaction in both mortgage and title operations. The mortgage pretax income increased at 23.9 million from 14.3 million in the prior year mortgage originations increased 52% to 2 billion from 1.3 billion in the prior year. The increased volume was the result of higher home closing by Lennar, a higher capture rate of Lennar Corporation [NYSE:LEN]home buyers and the expansion of our retail platform. The capture rate improved at 81% this quarter from 75% in the prior year. Our titled companies profit increased to 6.9 million in the quarter from 3.4 million in the prior year primarily due to higher profit for transaction. Our titled team continues to focus on maximizing the title opportunities within our ancillary businesses.
Turning to Realtor, the composition of Realtor’s 38.2 million of operating earnings by the three types of investments before GNA and Realtor interest expense rates follows. First the investment management business contributed 66.5 million of earnings which includes 16 million of equity and earnings from the real estate funds and 50.5 million of management fees and other. The 50.5 million includes 34.7 million of a carried interest distribution from Realtor fund 1. This was the first collection of funds pertaining to the carried interest which was distributed to cover the income tax obligation which resulted from allocations at taxable income to Realtor. The carried interest for Realtor Real Estate fund 1 under a hypothetical liquidation increased by approximately 22 million for the quarter. After the 34.7 million distribution, the carried interest is now at 110 million. Second, our new Realtor mortgage finance operations contributed 510 million of commercial loans and for three securitizations resulting in earnings of 19.2 million for the quarter before their GNA expenses. Third, our direct investments which primarily are being monetized at a profit of 200000 and will continue to liquidate these direct investments as we go forwards. Realtor’s GNA and other expenses were 40.2 million for the quarter and interest expense relating to the senior notes was 70.4 million. Realtor end of the year with a stronger liquidity position resulted 200 million in cash.
Turning to the multifamily segment, there were no apartment building sales expected during the fourth quarter and there were results reflect startup costs associated with the build out of our current construction pipeline which positions us for a well profitable 2015. Our investment in multifamily is approximately 200 million and we continue to grow this business primarily using third party capital. Our tax rate for the fourth quarter was 33.8% and for the year it was 34.8%. The rate was favorably impacted by the section 199 domestic production activities deduction which is now available to us since we have utilized our federal net operating losses and various tax credits.
Turning to the balance sheet, 2014 was another year of balance sheet strengthening. Our liquidity improved as our home building cash balance improved by almost 200 million with no outstanding borrowings under our 1.5 billion unsecured revolving credit facility at year end. Our leverage improved by 150 basis points as our home building net debt to total capital reduced to 44.1%. We grew stockholder’s equity by 658 million. The 4.8 billion and our book value per share increased at 23$ and 54 cents. During the quarter, we paid off 250 million of maturing 5.5% senior notes and issued 350 million of 4.5% senior notes due 2019. We continued to reduce our borrowing rate as a company’s financial condition strengthens.
Turning to 2015 Goals, I wanted to summarize what has been said on this call and highlight a few additional goals for 2015. Starting with deliveries, we are currently geared up to deliver between 23500 and 24000 homes for 2015. We expect to back log the conversion ratio of approximately 70% for the first quarter. 85-90% for the second and third quarters. 90-100% for the fourth quarter. Turning to gross margin, Consistent to the goal that we set at the beginning of 2014. Our gross margin percentage for 2015 netted to approximately 25% excluding insurance recoveries and other non-recurring items. We expect our gross margins in 2015 to average 24% for the full year. Although these remain healthy margins, the reduction is a result of less pricing power anticipated in 2015, bringing on some communities with modestly lower gross margins and a slight increase in the number of entry level communities.
There will be seasonality between the quarters with the first quarter being the lowest gross margin percentage and then improvement in the gross margin percentage as volumes increase throughout the year. Our SGNA and corporate GNA alliance will continue to focus on leveraging these lines and expect 15 to 25 basis points of potential improvement in 2015. Financial services earnings are expected to be in the range of 85 to 90 million for the year, the quarterly amounts are expected to spread similar to last year with the first quarter anticipated to be the lower quarter of profitability, for Realtor, we expect a range of profits of 30 to 40 million for the year and it is heavily waited for second half of the year. As a reminder 2014 included partial collection and recognition of carried interest from real estate fund one and additionally.
We had significant gain and increase in mark to market for asset held by our real estate funds which are not expected to be as significant in 2015 at this point. Multi-family is transitioning in 2015 into a profit center in the full year we are expecting five buildings to be sold all in the second half of the year with 2015 profit expected to be between 15 and 18 million. In 2016 we expect to have building sales coming from this segment in each quarter. During rancher in land sales the El-Toro joint venture which Stewart highlighted will result in profit to Lennar Corporation [NYSE:LEN]of approximately 30 million in the first quarter and additionally 10 million in the second quarter. We are not expecting other significant transactions and therefore the 3rd and 4th quarters for all of our JB’s are expected to be about flat.
We are expected in approximately 25 million of Apollio owned land sale profit in 2015 with the majority forecasted for the second half of the year. Our 2015 affected tax rate is expected to be approximately 34.5 to 35% and our net community count is expected to increase approximately 8% to 675 active communities by the end of 2015. With these goals in mind we are well positioned to deliver strong top line and bottom line growth throughout the year and with that let me turn it back to the operator for questions.
Operator
Fine if you would like to ask a question from the phone line please press * then 1 on your Touchstone phone press *2 to withdraw your request. Our first question comes from Steven East with Evercore ISI, your line is open.
Steven East, Evercore ISI.
Good morning thank you guys lost line the question I have been getting, line lost
Presenter
Steve I think we lost you
Operator
Yes that line has disconnected I apologize. Our next question comes from Steven Kim with Barkley’s. Kim with Barkley’s your line is open.
Steven King, Barkley’s
Thank you very much guys a lot of things to talk about, I did want to talk a little bit about the gross margin for the year, you talk about for the year there will be some improvement sequentially which is pretty normal but I’m guessing probably that the year in comparison will probably the decline will probably intensify in the back half of the year and you can probably confirm that’s the right way to be looking at it and also if you could talk about, you mentioned bringing back the Moth ball communities. Can you elaborate on that, sort of where, why now and what kind of margin at front do these project usually have? Thanks.
Rick Beckwitt, President
Hey Steve its Rick, I’ll answer this on the gross margin comparison year over year we sort of get into a 4% climb year over year going from 24 to 25%. In a typical year you would see the normal sequential improvement throughout the year, starting low and ending up higher and probably he peek to trough won’t be as dramatic with regards to the Moth Ball communities this has been something that we have been doing all, over the last couple of years evaluating when they are right to bring back on and this is just a continuation of our asset monetization program. They are really spread across the country not anything dominated in one particular area. If we were to look at 2015 probably in an order of magnitude of about 10% percent of our deliveries will come from things that were taking out of that mothball bucket and the margin differential is 200 basis points, 300 basis points plus or minus between what the average margin is for the company and those communities.
Jon Jaffe, Vice President & Chief Operating Officer
Hey Steve its John just to clarify that the 10% out of moth ball communities also open in 2014 and what will also open in 2015 if that represent that whole universe and relatively timely to the margin in your question as you know in our first quarter is always out lightest quarter for delivery, so we have field expense that’s impacting the margin there so it’s not really back end load in terms of the quantic. I think you will see pretty consistent throughout the year the differential we spoke about.
Steven King, Barkley’s
Ok that’s great, that’s very helpful thank you for that. I was wondering if you could talk a little bit about of what you are seeing in terms of incentive in behavior either from your competitors in the market place and maybe I assumed that may vary from region to region and I know people is going to be particularly interested in what you seeing in terms of posturing in Houston as well as in California so maybe you can just talk generally about qualitatively what you are seeing in terms of what you seeing in terms of incentive, behavior in terms of the field and also with a little bit of geographic flavor. Thanks
Stuart Miller, Chief Executive Officer
Ok. Let me take that Steve and say pretty much across the board were are seeing intense by competition as builders go out and chase volumes. It’s been what of you say complex market where lot of factors are impacting sales across the board, I must mention of course Houston where there are more question than answers right now from the field Houston of course is impart of an economy depending on the oil complex and the oil complex is going through a reconciliation. We haven’t seen a significant change in that market condition we have seen a little bit at the higher end of the pullback but we have anticipated in our projection, internal projection that there will be further reconciliation in that market place, it’s in part one of the reason for some of the reason the pullback in our anticipated margins and Houston is an important market to us. California we have seen less impact so far we continue to see continue to see pretty strong fine pattern in California, I know there are question about the currency changes what that will mean for some of the foreign buyers there but we haven’t seen much of a pull back there. I know there have been other reports, so across the landscape there are a lot of factors moving market and changing in the landscape and it certainly have intensified the competitive landscape for all builders.
Steven King, Barkley’s
Thanks very much.
Operator
We do have Mr. East back on the line one moment Steven East your line is open.
Steven East, EC ISI
Thank you, I don’t know I got cut off, I just heard Steve’s question but if I could just follow up a little bit, the gross margins if you could sort of break order going from 25 to 24 this year and the things you talked about the moth ball, the entry level etc., if you already answer that I apologies and I was also wanting to understand how important this mixture becomes for you as you go through 2015 and into 2016 as far as focusing on the entry level.
Rick Beckwitt, President
Het Steve its Rick we have articulated for quite a while now as that entry level market comes back there will an increasing participants in that market and we can find that in accordance, most of that activity is really geared toward Texas and parts of Florida for the most part. Also our other markets are heavily participant in that activity. In regards to the margin on that, the margin for us, on our entry level product, our lower entry product and that doesn’t mean from a pre-tax operating basis that the margin are significant difference it just the difference business model. Which regards to the legacy assets, the moth ball asset its 10% of our delivery 2015 will come from this community they carry lower margin but on blends we are pretty positive about our 24% margin for the year. It’s a good healthy margin and it could produce good bottom line profit through the company.
Steven East, EC ISI
Ok thanks. Just a follow up question on the West a big order gain I guess you can give us some clarity on what was really driving that and I heard some of the commentary about the Asian buyer etc. but a significant difference in the on last year performances vs. earlier this week and you can just paint it any color you get and how you explain the sustainability of that?
Carl Garraffo, Chief Human Resource Officer
We saw a healthy in the first quarter above the company average, we have built an empire which there are questions about, we saw paces up for sales per community per month, I think we have some located community due to our land position that we acquired earlier and we have some very strong master performing communities, in Bay area they are very well position we saw good activity through the central valleys, we really didn’t see must movement in incentives to drive that sales pace a little bit but I think because of the product and the location of our communities the performance remaining strong.
Next question
Operator
Our next question comes from Michael Rehall from JP Morgan, your line is open
Micheal Rehall, JP Morgan
Thanks good morning everyone, first question I just had if possible is reference to some of the expected key of the gross margin, throughout 2015, maybe starting a little bit lower than increasing throughout the year as typically occurs but maybe not to a wide variant of range. You know coming off falsie results was just wondering if it was possible to give a little better granularity being in terms of you coming off a 25.6 and I guess excluding the gains from Chinese try walls closer to 25.3. Here you would be looking at something around the 24% range that you looking for the full range for the full year are looking a little but below that and then I just have a follow up.
Bruce Gross, Vice President and Chief Financial Officer
Mike this is Bruce around 24% as the average for the whole year, the first quarters tends to be lower because we have less volume and we have more field cost which runs through margin which brings the number down. The first quarter is to be below the 24% for the average of the year and for the rest of the year the number should be closer to that the average than a little bit higher at the very end of the year.
Micheal Rehall, JP Morgan
Ok. I guess the second question you had mentioned that you would incorporate some caution, some change in the Houston market into your full year guidance, I was wondering if you could be more granular there as well. How much margin contraction you expect in Houston, if you can give us a sense of Houston in terms of revenue impact you had and if it’s operating right now above or below average of corporate margins.
Bruce Gross, Vice President and Chief Financial Officer
Mike you it have always been our objective to call them as it been to be straight and give the best estimate of what we are seeing and out ahead of ourselves and so as it relates to Houston it is not an exact science the market have not yet quite reveal itself but there are other cross current that are defining a lot of questions that exist in the market place and of course we have injected appropriate conservative in our thinking. So to get down and to get too granular I think that we are making educated guesses in each of our market amount where the market in potential trending. We can think across a broad landscape we think about the California market and some of the foreign purchases that have come into those markets as potentially something that have to be potential considered and factored into our equation likewise in South Florida
We have a pretty robust foreign investment group and those market all have more questions than answers right now and the estimates are somewhat imperfect. What we have done with each of our division and gone through and have them at a very local level and think about the impact not just the day to day the traffic coming in but the potential impact of macroeconomics factor that I noted in my opening are choppy and sometimes confusing evaluating the market. So I’m not sure we can get particular granular its really is a market by market and community by community assessment that have kind of rolled up but what we try to do is inject the appropriate conservatism and thinking about 2015 and the competitive pressure in the market place as we put together our planning for the year ahead .
Micheal Rehall, JP Morgan
If I could just squeeze in just one last one. On the incentive and then I will get back in queue seems like its broad-based I was just curious in terms of the increase in incentive if that was broad-based are more concentrated in certain market and just roughly how much of the roughly amount of the 100 bits of margin decline, gross margin decline the companies incentives being a cause of that 100 bits
Bruce Gross, Vice President and Chief Financial Officer
You know incentives is always an interesting question, it’s really is just a part of purchase price and has we noted is part of a community by community evaluation vary micro level. Incentives in some markets are running a lot higher in other markets there much low even within some markets there are some communities that have much higher incentives associated with them associated with them or purchase price associated alteration associated with them. We are very focus on looking at a community level figuring where the sales pace has slowed to a point where were no longer profiting leveraging overhead thinking about where we have incentive to bring that sale pace up so we maximize portability out of the community. So is it concentrated in an area? No, it’s a broad-based assortment that you can’t really put your finger on and alienate the market but it rolls up to what you seeing here.
Micheal Rehall, JP Morgan
Alright, than you.
Bruce Gross, Vice President and Chief Financial Officer
You bet.
Operator
Our next question comes from Eli Ekel with Gold Man Sacks, your line is open
Eli Ekel, GMS
Thanks. Good morning. You see exciting are positive incline of some of the market changes that have been announced. I just wonder your level of confidence these changes will actually impact the market from the previous announce changes really don’t think they have done much, just curious your thought around that.
Bruce Gross, Vice President and Chief Financial Officer
Well some of them are articulated and not quite implemented, I wouldn’t over emphasize my enthusiasm of these specific changes I think it is a beginning of a process and I think that the fact we are hearing this articulation at this point is suggested of the fact that people are starting to understand that perhaps we have overcorrected, perhaps its detrimental to the overall economy and to the landscape of the population and that we have to start getting and reverting to normal. I think our version to normal will unlock a lot of pens up demand and take some time and it is why I say on the horizon I see the best time for home building operation but do I see it correction that takes place, that alters the landscape in the next quarter I think no it more part of a process and I am fairly optimistic that politically as a country we are going to get to understand that capitalism is going to define, our access to capital is what is going to define what builds the middle class and some of that revolve around housing and I think people are going to be recommitted building a for sale housing market, that is going to work very well for us and other builders.
Eli Ekel, GMS
Thanks. I just wonder as you talk a little about but maybe go into a little bit more details about the ongoing process, soft pivot, capitol allocation, do you expect to be cash flow positive this year and if so what do plan on doing with that cash.
Bruce Gross, Vice President and Chief Financial Officer
We have been talking about this the last year and a half and it’s been very much part of management focus. We have been gently pivoting away from a land heavy strategy to a land lighter strategy and it is the focus on becoming cash flow positive but we do think as we get to the end of this year we do start to turn to cash flow positive with a healthier turn with even more in 2016. We are very focus on our return on invested capital, we think the first move with our additional cash flow with our additional capital will be in the form of depth reduction and focusing on our balance sheet but ultimately we will be considering where our excess cash flow comes from. Remember that it’s not just the home building should be cash flow generous ultimately our ancillary businesses also starts to contribute and we think we are going to have some important business to make as we get into future years.
Eli Ekel, GMS
Great, thanks very much.
Operator
Our next question comes from Allan Rattingner with Selmon your line is open
Allan Rattingner, Selmon
Hey good morning first a house keeping question the hunters points delivery is that going to flow through the JB are the consolidated funds.
Bruce Gross, Vice President and Chief Financial Officer
The Hunters points delivery will flow through the joint central line.
Allan Rattingner, Selmon
Ok. When you gave the guidance from the break even into the back half of the year IN JB, there was some delivery flunk through there, anything corporates in that guidance.
Bruce Gross, Vice President and Chief Financial Officer
It is and we are very well with sales at hunters points but remember we have a lot of front end development cost that are also running through that line in addition to the closings of the first deliveries at Hunters point, so you will see more contribution as we enter into 2016.
Allan Rattingner, Selmon
Got it thanks. Just on the slow pivot ROIC focus how should we think about longer term, how Lennar Corporation [NYSE:LEN]looks under that type of model because I think investors clearly have gotten use to you guys certainly outperforming on the gross margin line and probably the volume gross line as well, as you benefited from that long land pipeline you had. So should we ultimately expect margins to kind of revert more to that lower 20% range which I think that is indicative of a asset line shorter loan model or should we stop short of going all the way because your are going to settle out somewhere and I guess just kind of the cadence to get there. We are talking a multi-year process or something by 2016 or 2017 are you pretty much where you ultimate envision the company being.
Bruce Gross, Vice President and Chief Financial Officer
Look I still think we have an advantage in lands in that we have land position that carry forward that best enable us to kind of fish in a different pond and use our land expertise to continue to build price advantage land position that hold us in good stead. We think that has historically we will continue to outperform relative to gross margin, gross margin were bound to moderate at some point and shouldn’t catch anyone off guard but will and should be some moderation on gross margin as we become more of a retail purchaser of land but I think a normalize operating program of buying lands and becoming more of a manufacturing model as market matures there is less stressed out opportunities out there that is exactly what Lennar Corporations [NYSE:LEN] is focused on making sure we balancing buying good lands positioning, in the right location, operating a excellent manufacturing model on the home building side and really focusing on our balance sheet and generating the focus on cash and the turn on investment capital.
Stuart Miller. Chief Executive Officer
Might I add one thing on this, you know part of the pivot is managing the length of the deal and how long we are in an individual community and as we have bought various communities over the past in the down turn some of these communities were very sizeable that had multi, multi-year runs in order for us to build through them. As we are managing the cycle in this pivot changing focus on the length of how long we want to be in some of these communities given the fact that the market might change and we want to have a shorter term of exposure. Next question.
Operator
We have a question from Megan McGrath from MKM partners your line is open.
Megan McGrath, MKM Partners
Good morning, thanks. This is a little bit of follow up to that last question and the last commentary there is partially an answer but I think just looking at Texas now just looking at any market where you are starting to perhaps see some sign of slow down or you see some writing on the walls can you talk a little bit about leverage that at your disposal and maybe lessons learned versus the last down turn. Are there things you would likely do quicker, let say you start to see things slow down say perhaps try to pick up pace quicker or related to the last comment is your inventory different than it was say let’s say 9, 10 years ago that would just perhaps limit the over building that we would potential see in some of these markets in we see a vast slowdown in employment.
Bruce Gross, Vice President and Chief Financial Officer
I think that I noted in my opening comment that on the downside even in a market like Texas, like a Houston the down side is kind of defined by a change in employment structure of the market where you start to see oil complex sheds some jobs and that affect confidents in home sales. But I think there are some counter current kind of consideration, you know while the oil complex moves down, gas prices comes down and Houston is a more diversify platform that it has been in prior oil down turn. So we are not looking, we are not expecting a very sizeable down turn but I think that the way we have configured our company and we focused on purchasing assets, the locations that we have focused on as we have gone through even in the down turn scenario are the location that holds up the best that continues to perform the best in the market and we think that any down turn being fairly shallow and we move forward. So from a lesson learned perspective we clearly not gone out to the B-, C locations we have not gone out over our skis. We already have been tapering back on land supplies, the tail of land supplies and I think that we are really well positioned to be just in an orderly fashioned work through inventories even in a fairly aggressive down turn scenario and be positioned with strong cash.
Rick Beckwitt, President
I guess one comment on the Texas market being hat it have brought up a number of times. The overall economy in Texas is very strong you know if you look at just going back to Stewart opening remarks, job growth across the state have been incredible strong, inventories in the neighborhood are in 1 to 2 month of finish home supplies and the new side retail inventory is extremely low as well and you have just outside of Houston has a very strong economy with excellent job growth. Houston in particular as Stewart said we haven’t in particular seen too much of change in Houston yet but we are smart enough to know that if oil prices continues to be depress there will be some negative reaction in the market. It generally happens that it is price point focus and one of the things we been focus on is making sure we participating in all of the price point in the Houston market in order to insulate ourselves to as much as possible with the changes in the market demands. We are well position and smart enough to know that as oil moves down, there may be some job loss, primarily more on the higher end and it could impact pricing and that’s why we have given guidance a little bit lower margin.
Megan McGrath, MKM Partners
Great that’s helpful. Just to follow up around the commentary on some of the government initiatives, clearly too early to see anything on the FHA, you know it’s been a month or so since the announcement arrives from the FHA, FHSA, 3% down mortgages and any kind of early indication that that’s taking hold.
Stuart Miller. Chief Executive Officer
Not really, I think you have to look at the landscape relative to any of the articulation as a multi-dimensional one lever is probably not going to remove the needle I think we have to properly regard the fact the regulatory landscape really discourage mortgage lending. There is just more than just underwriting criteria, down payments at stake here we got to get people to back in the game of making mortgages to people that really need the money as oppose to making mortgages to people who are so far qualify that we never have to. If the only mortgage we going to make is to Warren Buffet we certainly not going to have any defaults and we not going to make a lot of mortgage and we got to be able to bring the risk profile to a normalize setting. In large part the regulatory environment that is defining some of that I think that the discourse the commentary that have been coming out FSHFA is positive and constructive people recognizing that perhaps we put too strong of a lid on mortgage business and you know if we listen to the commentaries coming out of the banks there still isn’t a lot of appetite to lend. So we haven’t seen a lot of movement in the field from these articulation but they are promising in terms of people, important people starting how the landscape has to migrate in order to bring the buyer back to the market.
Megan McGrath, MKM Partners
Great that’s helpful, thanks.
Stuart Miller. Chief Executive Officer
You bet
Operator
Our next question comes from Michael Doll with Credit Suit your line is open
Michael Doll, CS
Thanks for taking my question. Sir the comments on or the discussion around sound like the implication will be like the landscape will be down again in 2015 and if that’s the case then community count growth will probably moderate further in 2016 is that a fair way to think about how you are doing the landscape.
Stuart Miller. Chief Executive Officer
Well land spendable move around a little bit as we go through the next couple of years it’s a little bit hard to peg down. What I am articulating is a focus on management team to shorten the tail on some of the land that we are purchasing and really looking at the risk profile as we go forward that doesn’t necessarily mean we are curtailment on community count per expansion it might be a moderation of the rate of growth you see in community count I think we have articulated about an 8% growth years over years as we look ahead but I think you can look at that kind of a pace as we go forward as well as the duration of land so we expect to grow at a healthy pace as we go forward and over time. The way that I think of things of this management team is that when we focus we succeed, the articulation internally for our group is hey let’s bring the tail down, let’s bring the risk profile down, lets continue to grow our business but let’s not get over our skies as the market mature, as land pricing mature and let us continue to grow the business as the market permits.
Michael Doll, CS
Great and I guess as a follow up you have clearly articulated a number of things happening across specific market as you think about those is relative to your investments. Where are you looking to grow the most as you look out at the deals as you are instructing your field reps to go out after this year?
Stuart Miller. Chief Executive Officer
Ok so a piece of your question cut out on us but I think you questions where are you looking to grow the most. The answer to that question is almost a quarter by quarter evaluation on market by market basis is what we probably do the best. It’s all about allocating that capital to where that capital is performing the best based on the reading we are getting from the field base on the traffic that is coming in. Market that his healing and that is moving forward well is going to get more capitol allocated to it a market where we see a pattern of pull back, pattern of change in the market is negative, we are going to be investing less capital. So right now if you think about the things we have already talked about its kind of a wait and see mode relative to Houston we want to see a little bit more evidence of how the market is going to present itself and so we probably investing less capital there looking on excellent position to build on in the meantime. There are other markets like the Bay Area that continue to have strong growth we are investing more capitol there but it is a regular assessment that we put in place through our top management team communicating with our division base on the patterns we are seeing in the fields.
Michael Doll, CS
Ok thank you.
Stuart Miller. Chief Executive Officer
You bet.
Operator
We have a question comes from Michael Rockland with Mary Lynch your line is open
Peter Gallow, ML
Hi guys it is actually Peter Gallow I’m actually on for Mike. Good morning or afternoon at this point. Just a couple of housekeeping question for Realtor for the advance security interest thing is that one time thing this quarter or is something a reoccurring cash for going forward. What is the best way to look at that?
Stuart Miller. Chief Executive Officer
For this quarter it represented the actual last two and half year cash flow income calculation so it will be recurring but at a significant lower amount age next year. It is going to sustain through to next year as well.
Peter Gallow, ML
Ok. In your comments Stuart I think you called out some statistics in terms of order growth, do you have anything similar in your order growth or everything included.
Stuart Miller, Chief Executive Officer
You know everything included continue to be a marketing avenue that continues to be a differentiator but we haven’t got everything included question in a long time. But we still think it sets us apart in the market in a positive and instructive way. You know I always thinks plagiarism is the best form of flattery when we see other builder’s kind of jump on that kind of program which is what we have started to see that is something that attracts a lot of attention and sets us apart in a very positive light. Everything included in this program we have focus on a lot we think we can be a lot more efficient and effective in harvesting cost reduction as we deliver greater quality in a broader product offering. There is certainly segment of the market we want to customize we are not the builders of that segment of the market but we do offer an extraordinary value with our everything included program and that value is what have driven our sales as well as it as. Even with that said our everything included program has we have grown it over time thus enable some personalization so we broaden we offering to a solid range of the market and certainly enable us to capture more than our share of the business.
Peter Gallow, ML
Ok thanks.
Stuart Miller, Chief Executive Officer
Let’s make the next question the last question.
Operator
Our final question comes from Jade Remanie from KBW your line is open
Jade Remanie, KBW
Hi thanks for taking the question, just want to ask on Realtor, if you could comment on your view of the risk retention rules, whether you see this as a benefit whereas Realtor has given the benefit of a 5 year holding period and the 5% risk retention requirement.
Bruce Gross, Vice President & Chief Financial Officer
We are so happy that we have another Jeff joining in. From our perspective we look at it as a positive. In terms of the competitive that are set out there it’s going to be difficult for a lot of folks to do that because of some of the edge funds that have come with our 5 year retention in so we think that number 1 that is very good and number 2 is the 5% rule. We have a multi-disciplinary fund raising capabilities that our investors look for returns that fills from one end of the spectrum to the other so I think if we are going to be pre-uniquely qualified to be a buyer there we also expect before the rules goes into effect which is a little bit less than 2 years there will be a rush in increase supply. In which we are well position for.
Stuart Miller, Chief Executive Officer
I think the risk retention really speak directly to our core confidence, it kind of usher things directly into the arena that we have historically operated in and operated best. So the answer is yes we think its benefit Realtor.
Jade Remanie, KBW
Thanks. Secondly regarding the cash flow you expect to get back from Realtor how you see redeploying that capitol, will it be redeployed into Realtor and in other businesses?
Stuart Miller, Chief Executive Officer
Look Realtor has really taken on a mature position within the company, Realtor is the ultimate asset light model today, we have been investing primary capital deals in any significant way through Realtor. We have invested and will continue to invest in the funds that we create and participate as a limited partner in those funds, even though we act as the general partner as well. But those private capital funds are the primary source of investment of Realtor and really mark the future for the company. So the Realtor strategy has more in the direction that we want it to over the past years and Realtor’s position to carry forward with very limited means for capital, so we expect that capitol to be return to the parent company and we will be part of the cash flow that we talked about earlier
Jade Remanie, KBW
Thanks for taking my questions.
Stuart Miller, Chief Executive Officer
So thank you everyone for joining us, we look forward to moving forward and reporting on our progress thorough 2015. Thank you.
