David Collins - Principal Accounting Officer and Controller Jonathan Jaffe - Chief Operating Officer and Vice President Stuart Miller - Chief Executive Officer, Director and Member of Executive Committee B. Gross - Chief Financial Officer and Vice President Richard Beckwitt - President

Ivy Zelman - Zelman and Associates Rob Hansen - Deutsche Bank Securities David Goldberg - UBS Adam Rudiger - Wachovia Capital Markets Jason Marcus

Today's call may include forward-looking statements that are subject to risks and uncertainties relating to Lennar's future business and financial performance. These forward-looking statements may include statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could 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 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.

Okay, good morning, everybody. Thank you for joining us for our first quarter 2011 update.

We're certainly pleased to announce our first quarter results. Now although I'm in California this morning, I'm joined from Miami by Bruce Gross, our Chief Financial Officer; Diane Bessette, Vice President and Treasurer; and David Collins, our Controller.

Additionally, Jon Jaffe, our Chief Operating Officer, is here with me; Rick [Rick Beckwitt], our soon-to-be President, is in Miami with Bruce and group; and Jeff Krasnoff is actually out of the country so he won't be able to join us today. I apologize in advance if we're a little bit disjointed on the Q&A.

We're going to try to go back and forth and make sure the right person is answering questions. I'm going to begin with some brief opening remarks about the current housing market in general and the progress that we've made in managing our business, and Bruce is going to provide additional detail on our numbers.

As always I'd like to request that in our Q&A period, everyone please limit to just one question, one follow-up so that we can be as fair as possible to all of our participants. Let me start this morning by cutting to the chase, and let me say that the long-awaited selling season of 2011 has not yet defined itself as the beginning of a recovery cycle.

While we continue to see promising signs that a recovery is forming and that housing will rebound, there continue to be negative pressures on volume and sales prices. Nevertheless, specific submarkets continue to perform well, and MLS listings have declined in many of our markets and the foreclosure pipeline as measured by delinquency rates has trended down.

We've all seen evidence of a sluggish recovery in the reported national sales numbers for both existing homes and new homes, and we have clearly seen the same on a realtime basis in the field. We feel, however, that reported numbers will begin to show signs of life as we get into the second half of the year and comparisons become more favorable.

While traffic has at times felt promising and pointed to a potential start of a recovery cycle, it has been more in the nature of a head fake and has lacked any sustained substance that might define a clear upward trend. The state of the market is still generally soft with pockets in micro markets that are stabilizing.

As I've noted in many past quarterly conference calls, the housing, recession, depression that started well over five years ago has altered the landscape of the housing market in ways that will be with us for some time to come. We continue to believe that the housing recovery will take time and patience and will be inconsistent and uneven from submarket to submarket but ultimately, there will be a recovery and it will be strong.

Every day that the market languishes is another day that our industry is underserving the true need for shelter given our national population growth and household formation. Given the current landscape, we're very pleased to report a profitable first quarter with earnings of $27.4 million that comes from a contribution of solid Homebuilding and Financial Services performance, a strong contribution from Rialto and a strong focus by our management team on seeking the recovery of money spent over the past years.

At present, we're very comfortable with our operating strategy at Lennar and feel that we're properly positioned to be able to benefit from the current and future market conditions. Opportunistically, we've positioned ourselves to sustain our Homebuilding operation at breakeven or modest profitability while the market stabilizes.

At the same time, we are well-situated with our Rialto program to capitalize on distressed opportunities in the market as the market sorts itself out. Concurrently, our management team is looking for every opportunity to recover dollars that were spent as market conditions deteriorated over the past years.

On the Homebuilding side, we continue to focus on maximizing operational efficiency in order to achieve profitability in these difficult market conditions and benefit from real operating leverage as the market recovers. In every one of our divisions, we've created new product that is desirable in today's market while offering fewer plans and redesigning efficient plans that allow us to minimize costs.

We've used efficient designs as a foundation to renegotiate costs and to reduce those costs by an average of 25%, enabling us to achieve maximum gross margins. While some of these costs will rise as demand returns and will be passed on through price increases, many of the cost efficiencies will benefit our ongoing cost structure permanently.

Cycle times also continue to come down due to our new, more efficient product. We've simply never run a more efficient program in the field for both the building and the purchasing side of our business.

Additionally, we've reignited our Everything's Included marketing platform in order to ensure that Lennar Homes always offer the very best value proposition in the marketplace. Lennar's Everything's Included platform has always delivered the best value in our markets by targeting the options and upgrades that are most desirable to the customers, including them in the home offering and eliminating options and upgrades.

We've also rightsized our operations. We've reduced our SG&A in each of our operating divisions so that we are sized with appropriate personnel to operate profitably at today's depressed volumes, while maintaining our most talented associates who will be able to drive even greater earnings as market conditions improve.

Finally, and perhaps most importantly, we've continued to purchase strategic new communities in the best locations and submarkets and have used these community purchases to help drive gross margins higher. We've been very selective to purchase only those communities that will drive our gross margins to the upside, and we've avoided the competitive bids that have resulted in driving land prices higher.

Overall, we have carefully repositioned our Homebuilding operations to hold steady while the market finds a bottom and stabilizes. We're well positioned with real operating leverage to drive our bottom line when market conditions stabilize and improve.

Rialto continues to be a bright spot for the company. As distress continues to resolve itself in the markets overall, Rialto stands ready to invest in and manage the reconciliation of that distress.

If the market remains impaired, Rialto will find more business opportunities. And as the market recovers, both Rialto and our Homebuilding operations will benefit from both operating leverage and price recovery.

While Bruce will go into more detail on the numbers in a few minutes, similar to last quarter, the major contributors to Rialto's $11 million of operating earnings in the fourth quarter are our share of the profits from distressed real estate portfolio transactions, our Public-Private Investment fund activities with AllianceBernstein and the U.S. Department of Treasury, known as PPIP, and the fees that we received from others for our management of these investments.

During the quarter, we closed on two new transactions, representing an additional $130 million of unpaid principal balance. We've also tied up three new loan portfolios, which subject to completion of closing conditions, should add another $160 million of unpaid balance.

In addition, we are in the process of acquiring two new issue commercial mortgage-backed securities transactions representing $100 million of bonds. These CMBS transactions should provide a level of recurring cash flow and interest income along with outsized returns.

All of these new investments are being made by our Rialto real estate fund. As we reported to you at the end of the year, we had our first closing of approximately $300 million of equity commitments for our fund, which included the company's $75 million contribution.

Because we also received fees for pursuing and managing fund investments, it should also provide another opportunity for us to offset an additional component of our overhead and to earn incentive fees based on our performance. All told, in just the past year, we acquired approximately 6,000 loans and 300 real estate properties, with an unpaid balance or self-appraised value of approximately $4 billion.

With unpaid, accrued and default interests and other amounts due from borrowers, this is an excess of $4.6 billion. We acquired these assets for approximately $1.6 billion or $0.35 on the dollar.

And after accounting for solo financing and our partner’s equity interest, our net investment was approximately $460 million. Although we did not add significant new investments in our PPIP fund with AllianceBernstein over the past few quarters due to the increased pricing of our targeted assets, in a little over a year, we have invested approximately 85% of our $4.6 billion of purchasing power to buy $6.5 billion in face of RMBS and CMBS.

From the beginning, our focus has been on acquiring securities with resilient cash flows with the goal of collecting a mid- to high teens return by holding these assets until maturity. Nevertheless, while it is still early in the program, based on a mark-to-market of the underlying collateral and the principal and interest collected to date, our fund has operated at a gross 50% annualized internal rate of return while it continues to distribute an 8% current dividend.

We continue to benefit from these results due to the $64 million we have invested to date as part of our $75 million commitment. Note that this includes the approximately $2 million of annual management fees that we are currently collecting and our 22.5% share of the carried interest to be earned by our partnership group.

On the operations side, we continue to build an outstanding team of professionals that now approximates 129 associates across the country. While our detailed due diligence reviews combined with our resolution process and real estate operating capabilities allow us to look at distressed portfolios on a wholesale basis and through our operations bring value to individual assets on a retail basis.

Our disciplined loan workout and resolution process were initially designed almost two decades ago to maximize proceeds and returns from distressed assets. In our regularly scheduled Asset Manager meetings, our team methodically and professionally approaches and deals with the underlying borrowers and tees up many of the resolutions that have to date exceeded our initial underwritings.

We are now deep into all of our 2010 portfolios, having had contact with borrowers representing over 90% of the combined outstanding loan balances. And our first two transactions with the FDIC, for which we took over management almost one year ago, we have now fully resolved over 300 assets and have brought in over $213 million in cash, with our team achieving an average resolution of over $0.83 on the dollar.

We now have $201 million on the partnership balance sheet. Approximately $126 million of this is earmarked to defease the original $627 million of acquisition financing, and the rest is available as working capital to help maximize the resolution of these assets.

We believe that our team and the infrastructure we have in place today is already way ahead of the pack and is setting the standards for best practices in the industry. This has positioned us extremely well for a growing pipeline of opportunity from the FDIC, from banks and from others.

We remain very excited about our growing franchise and our current position in our marketplace and the synergies with the rest of the Lennar team, and we look forward to reporting to you on our progress in Rialto in the future. I feel that I would be remiss if I did not mention the activities surrounding the Nick Marsh, Barry Minkow accusations that hurt our company back in January 2009.

By now, I am sure that all of you are aware that Barry Minkow has been charged with conspiracy to commit securities fraud and plans to plead guilty to that charge this week. We believe that the investigation into other parties is ongoing as well.

While I do not want to rehash this very difficult time in our history nor do I want to find vindication in the uncovering of this crime against our company, I do want to highlight some important notes. First, you will note that we are reporting today a $37.5 million income item in the "other category."

As noted in our press release, this is a recovery that relates to a confidential settlement with a third party, not the developer, third party in connection with Lennar's ongoing dispute with Nicholas Marsh III and his affiliates. As a result of the settlement, the third party paid Lennar total cash consideration of $37.5 million.

While the terms of this settlement are confidential and we will not comment on it beyond this statement, the recovery repays some of the dollars that have been spent defending our reputation and demonstrates the conviction of our company when our reputation is attacked. Second, immediately following Misters Marsh and Minkow's accusations against Lennar, we countered with facts and figures to highlight that these claims were false.

At Lennar, we place the highest premium on integrity and work diligently to make sure that when we speak, every word can be trusted, not as spin, but as truth. We hope we have earned your respect in the way that we report our numbers each quarter and year, by the way that we deal with customers, partners and investors alike and by the way that we report on macro conditions relating to the state of the Homebuilding market and the economy.

We expect that the finding of criminal activities surrounding the dissemination of false information that clouded our company for some time properly validates the many responses we have given you over the past two and half years and allows us all to move on once and for all. Finally, we believe that this incident clearly validates the good work and important role of our industry analysts.

On January 9, with news hitting the press that caught us all by surprise, every one of our industry analysts jumped to action to investigate and respond with the best independent information available at the time. Over the ensuing days and weeks, there were countless calls and meetings hosted by this group that became the forum for reconciling what was said and what was real.

While we could not always convince them of our position without sometimes painstaking diligent research, they all listened to our position, reviewed our materials and became an independent voice for fact and fact-checking that we could not have provided to the market on our own. They were the independent voice for the investor community, and we thank all of you on the line for your work.

Overall, in the context of a very difficult market, we are pleased with the progress that we've made as reflected in our first quarter result and more importantly, with the general direction of our company’s strategy. Homebuilding and Financial Services remain positioned to be profitable in today's uncertain times and to drive materially improved profits as the market stabilizes and ultimately begins to recover.

At the same time, our Rialto strategy is building momentum in this distressed environment, as it grows both new and exciting opportunities to invest company capital and as well, real bottom line profitability. Our management team remains focused on finding recoveries of dollars that we’ve spent as the market deteriorated.

At the end of the day, our people continue to be the bright spot in our company. The dedication and focus in all parts of our company are reflected in our positive results in the toughest of environments.

From the execution of business plans in the field to the cooperative spirit that exists between the Lennar Homebuilding and Rialto segments of our company, from sourcing new business opportunities to finding dollar recoveries of money spent, our people are really making a difference. More importantly, our in-place management team and overall staffing are positioned to drive real operating leverage as market conditions ultimately improve.

While we remain cautious about the immediate future, we believe that we have properly positioned our company to succeed in the current environment and excel when the market recovers. We will continue to make strategic and opportunistic investments and focus on every aspect of our cost structure as we look forward to continue to be profitable throughout 2011.

And with that, let me turn over to Bruce.

Thank you, Stuart, and good morning. We indicated on our fourth quarter conference call that the first quarter will be challenged due to low volume expectations.

However, as Stuart mentioned, we still generated a $27.4 million bottom line profit, and I'll provide some more details behind those results. Revenues from home sales decreased 11% to $458 million.

That was due to a 4% decrease in home deliveries, excluding joint ventures, and a 7% decrease in average sale price. While the company's average sale price decreased to $240,000 from $258,000 in the prior year, it actually increased sequentially from the $238,000 reported in our fourth quarter.

If you break down the average sales price by region, the East was $225,000, which is down 2%; Central, $211,000, up 1%; Houston, $222,000, up 4%; and the West was $301,000, which was down 20%, and that was primarily due to a lower price product strategy implemented in our Las Vegas market and a product mix that was different in our California market during the quarter; the Other region was $265,000, and that was up 4%. So the average sales prices remained relatively stable over the last four quarters now right around that $240,000 mark.

Our gross margin on home sales improved to 20% during the quarter, and that compares with 19.2% in the prior year. Our gross margins were strongest in the East and West regions.

The improvement in gross margin continues to be due to a combination of deliveries from new communities with higher gross margins, the continued focus on controlling costs and a reduction in sales incentives on homes closed. Sales incentives declined by $4,000 from the prior year to $33,100, and this is flat from our fourth quarter results.

During the quarter, we had $4.8 million of homebuilding community impairments versus $6.1 million in the prior year's quarter. The pre-impairment gross margin, for those that want to look at it that way for the quarter, was up to 21.1% and that compares favorably to the pre-impairment gross margin of 20.3% last year in the first quarter and 20.8% in the fourth quarter.

Our SG&A as a percentage of home sales was 16.4% compared with 15.8% in the prior year. However, the absolute dollars declined by $5.7 million.

There were two non-recurring items included in SG&A this quarter. First was a $6.6 million charge relating to expenses associated with remediating an assumed liability from a previously acquired company; and second, $8 million of the $37.5 million settlement, that Stuart discussed, was classified as a reduction to SG&A.

Equity in earnings of unconsolidated joint ventures was $0.7 (sic) [$8.7 million] versus an $8.9 million loss in the prior year. The gain was primarily a result of restructuring of debt at our El Toro joint venture, which resulted in a $15.4 million gain.

This is our share of the gain from extinguishment of debt at the joint venture level. As part of this restructure, we also extended the debt maturity out to 2018, thereby positioning this venture's capital structure to be well-matched with the long-term strategic asset that we have at El Toro in the middle of Orange County.

This gain was partially offset by $4.5 million of valuation adjustments in our own unconsolidated entities. Other income net totaled $30 million in the first quarter versus $14.2 million in the prior year.

The main item here is $29.5 million of the $37.5 million settlement described by Stuart. Additionally, we were able to recognize $10 million of previously deferred management fees relating to one of our joint ventures this quarter.

There were $13.1 million of valuation adjustments relating to our unconsolidated entities and other during the quarter. Turning to Financial Services.

We generated operating earnings of $1.2 million versus a $900,000 loss last year. Mortgage pretax income was $3.4 million versus $2.9 million in the prior year.

During the quarter, FICO scores have remained relatively constant in the low 700s, and we're still seeing about 60% of our buyers using FHA-insured loans. Our title company had a $1.7 million loss during the quarter.

That compares with a $3.4 million loss in the prior year. And our Rialto segment generated operating earnings of $11 million.

This is net of $12 million of net earnings attributable to noncontrolling interests. As a reminder, we consolidate the FDIC portfolios and therefore, our results reflect all the activity from the FDIC entities, with an offset attributable to noncontrolling interest.

In order to simplify our Rialto results, I'll once again provide a summary of the $11 million of operating earnings by type of investment as follows: $9.3 million of earnings were generated from our 40% share of FDIC portfolios, plus $4.9 million from the non-FDIC portfolios acquired during the fourth quarter of 2010, $4.6 million of earnings from the PPIP, less approximately $7.8 million of G&A and other expenses. The $9.3 million of earnings from the FDIC portfolios this quarter is primarily from accretable interest income, which is based on the expected cash flows from loan payoffs and interest income and from gains upon foreclosure of REO assets.

The $4.9 million of income generated from the non-FDIC portfolios is derived from both accretable interest income and the sale of REO and gains from foreclosure. The $4.6 million of earnings during the quarter from our investment in PPIP is reported as equity in earnings from unconsolidated entities.

$2.8 million of this income is interest income, and $1.8 million is due to unrealized gains. G&A expenses were $7.8 million.

However, we earned approximately $4.1 million in gross management fees that were in the performance of the aforementioned investments. We had a $2.4 million tax benefit during the quarter due to favorable resolution of certain tax issues, and we continue to reduce our deferred tax asset and increase shareholders equity as we generate profits.

The deferred tax asset reserve at the end of the first quarter was now reduced to $601 million. Our diluted share count for the EPS calculation was 195 million shares and the convertible interest add back for the first quarter was $871,000.

In the first quarter, we continued to maintain balance sheet strength while investing in new strategic opportunities. Our liquidity remained strong.

Our leverage remained low. Homebuilding debt-to-total capital net of the $1 billion of cash on the balance sheet at quarter end was 44.5%.

We reduced the number of unconsolidated joint ventures to 38%, of which only 14% have recourse debt and that totals a maximum recourse debt of $179 million at the end of the first quarter. We invested $158 million in new well located communities across the country, totaling approximately 2,400 homesites.

Inventory increased approximately $145 million sequentially to $3.9 billion, and this excludes consolidated inventory not owned. There were 91,000 homesites owned and 17,000 controlled at quarter end, totaling 108,000.

And we ended the quarter with approximately two completed unsold homes per community. We added approximately 56 new communities during the quarter and closed out 44 for a net increase of 12 from the fourth quarter.

We now have 452 active communities at the end of the quarter. In conclusion, our team of associates are working hard in all areas of the company, and we remain confident that 2011 will be another profitable year.

With that, we'll open it up for questions.

I appreciate the color on Rialto. I just wanted to ask, the loan portfolios that you mentioned you acquired recently, they're in the $100 million to $200 million range, is this the size of typical deals that you're looking at, or are there as many large portfolios hitting the market?

No. They are of various sizes.

It just so happens that we've had some smaller portfolios that we've been able to nail down a little bit earlier. We are actually working on some larger portfolios at the same time.

And it will be interesting to see, but we think that there will be some large ones out there that do trade.

Great, and then can you just broadly characterize the investment pipeline and competitive landscapes? Have you seen pricing become more difficult?

And also if you could just comment on the increase in underlying operating expenses, which I think you indicated related to underwriting fees.

Yes. I think that the pipeline is very active right now.

I don't think that prices are out of control at all. I don't think that prices are being bid up.

There are actually fewer competitors today than there were a year ago for portfolios. And we think that there's going to be a lot more out there as banks and the FDIC continue to sell off assets that need to be resolved.

In terms of the underlying operating expenses, we're seeing very strong operating leverage. The most expensive part of building an organization is what happens in the beginning.

As we add new portfolios, the SG&A associated with new portfolios is materially lower than it was in the beginning, and we think we'll continue to see strong profitability derived from that in the future.

This is actually Jason Marcus in for Mike. I was wondering if you could talk a little bit about the month-to-month trends during the quarter regarding pricing and pace, and perhaps if maybe you can give us an early read on what March looked like.

Okay. Rick?

Yes, I guess talking about March first versus the quarter, we generally don't like to give intra-quarter guidance. But given that that’s what everybody focuses, I can say that pretty much across the board, the March to date numbers are better than what we recorded with regard to orders growth for last quarter.

We saw a pickup in activity sequentially from December, January, February and that was pretty much across all markets.

Okay. And then on the next question is just of the land purchases you did during the quarter, did any of that come to Rialto and if so, how much?

There were few communities that came in sourced by Rialto that were then closed on the Homebuilding side. I would tell you that of the 56 new gross communities that we did during the quarter, probably about 15% where sourced by Rialto.

First question, Stuart, in your speech, you talked about reigniting Everything's Included, and I wonder if you could give us more details about what kind of things you’re putting in the house? Or when you can [ph], what kind of things you're putting in the house now that you weren't before?

Has there been some sort of shift in what buyers are paying for or is that maybe you're decontenting the house a little bit? Can you give us some more color on it?

Well, David, at the core of Everything's Included is market research and understanding exactly what people are looking for. And by necessity, the answer to that question is it's going to be different for every market and every submarket.

So our operating teams go out, research in each market what the appetites are in that local market and what people are looking for. What we try to do is include in the home the things that people would choose if they had the right -- if they were making choices on their own.

And in doing so, by having those things included, we're pricing them into the home, pricing them into all of the homes and making the construction process a lot easier. But the specific answer to your question is that it varies from market to market.

And the appetites of local customers are going to determine which specific items go into the home.

This is Jon. I would add to that, sort of specifically, some items we're seeing across all markets are items that focus on technology and on energy efficiency.

And in that regard, we work with some of our larger vendors to -- once we identify through our market research what our consumers are interested in, work on packaging and on cost efficiency in delivering the products that they want at a great value.

Great, and then my follow-up question was you guys give incentives as a percent of home price. And I guess it’s a little bit back when looking with new month deliveries, when you look at what’s in the backlog now and kind of as you're selling through, as you were selling through the quarter, were you finding that you were offering more incentives or is that firming up pretty nicely?

Actually the trendline on incentives has been going down into the month. And it really has followed that path sequentially through last quarter as well.

I wonder, Stuart, if you could comment on the sustainably of gross margins at 21% x charges, that are already running above your historic average similar to 1998 and 2000, which is very impressive obviously, given all the known headwinds that exist as well as kind of the outlook or sequential outlook for the year, given your comments perhaps around improving absorption pace.

Let me let Rick and Jon take that one.

This is Jon. It's what we focus on everyday in the field, Rick and I, with the Regional Presidents and Division Presidents, and as you know, constant balance between maintaining margin and achieving an absorption that allows us to manage to a profitable level given our G&A.

As you know, there's clearly some headwinds in terms of that velocity as well as cost pressures. And what we do is we battle everyday on the cost side, both in terms of land acquisition, land development and direct cost to maintain that margin.

And there’s just going to continue to be that kind of day-to-day battle as we move forward until we have some pricing power.

Right, so it sounds as though you've -- I mean, it’s a day-to-day battle but does it strike you as odd that given all these headwinds, you're at such a high level? Obviously, Bruce commented on new communities and new lots contributing to that and some builders think that, that land is of a limited supply.

Just to get a better clarity around that as well as your units under construction.

Look, that land is at limited supply, but I think that we've been able to source new land opportunities that have enabled us to continue to maintain our margin and have really given us an advantage. Will it be sustainable going forward with the headwinds surrounding volume and pricing?

Look, there's clearly some pressure out there. But as Jon said, it's what we do everyday.

We focus on maintaining that gross margin by buying the next community at the right price, by managing our cost structure and making sure that we're driving our gross margin to the highest level possible.

This is Rob Hansen on for Nishu. I wanted to see if you could clarify your comments about March.

Did you say that it was up month-over-month on a kind of normal basis, a little better than planned? How does that compare to previous years?

The level of decline year-over-year is less than the last quarter.

Okay, and then your order rate during the quarter, how did that compare to your internal budget expectations at the outset, were they above plan, below? In general, just how would you say the spring selling season is shaping up compared to your original expectations?

We were relatively close to plan for the quarter. We had some divisions that exceeded plan.

We had some that met plan and some that fell short.

I think as Rick said, the quarter was sort of sequential. December as I think you all know from what's been reported in the news was an extremely difficult month and that was the beginning of our quarter.

And so as we move through January and February, we did see some stabilization improvement compared to the beginning of the quarter.

Just wondering if you can talk about Texas to start [ph]. Was there any theme in terms of some of the volumes there, whether it's on tougher FHA lending that's been more difficult for volume, competition from others who have been aiming for volume?

Anything you can comment on that would be great.

Texas continues to be a tough market to operate in. Competition there is fierce.

Credit challenged buyers are an issue. And we're working hand-in-hand with the mortgage company to get people qualified.

It was sort of a mixed bag throughout Texas. There were parts of Texas that actually showed some year-over-year growth.

But our largest market, Houston, was off. What we can say is that we've seen some pricing stabilization in the market, and we've had some recent success in working with credit-challenged buyers.

Great. And then second question, wondering about costs.

You talked about introducing new product and about using that to go back and lower costs and talked about seeing down 25%? I imagine that’s sort of from some time ago.

So thinking about costs in 2011 versus 2010, where would you say we are in that right now?

On the cost side, the biggest drivers right now are lumber pricing increases and a little bit of pressure on copper. We've seen some downward revisions or downward adjustments in some of the other materials.

Net-net, we're probably running $200, $300, $400 a home higher in material costs than where we were last quarter. The unknown is are there going to be any increases in delivery costs with the rise in gasoline prices.

But on a net basis, we've done such a tremendous job in working with the trades on efficiency of process and cycle time to eliminate their downtime at the site that we think that we’ll be able to really offset those things, and they should be modest.

Jon, just to elaborate on your comment on December, recognizing that you closed your year-end 2010 with a very strong surprising order trend for the quarter, is it possible that December fell off because you pulled forward some demand? Because it sounds like from commentary that January and February kind of bounced back and you continue to see that and you also -- I think Bruce commented that your incentives declined sequentially fourth quarter to first quarter as a percent of average selling price.

So I guess I'm feeling like you guys are more bearish than what your numbers are telling us, and maybe you can help clarify.

It may have been a little bit pulled forward, but I think that's pretty consistent with what you saw other builders report and market research companies report. December was pretty flat, Ivy, and it just felt a little bit better as we moved past the new year.

But I think Stuart said in his general comments, it remains very soft out there. And from market to market we see different things happening.

Some markets feel a little bit better, and you can definitely see some stabilization. Other markets remain very choppy.

Can you, just to follow-up, go through sort of the best performers within the larger markets like within Florida versus California, we already hit Texas or where really the weakest links are versus your strongest top markets, please?

I'd say the weakest links are sort of the southwest if you look at the Phoenix, Vegas markets, very soft demand and very competitive. As Rick mentioned, Texas, particularly because of the big focus on first-time buyers, is very difficult.

If you look in California, I would say Orange County, San Diego is the strongest performer. But that's just a stable market as compared to say Central Valley and Sacramento, which remain extremely weak.

And then on the East Coast, if you look at the mid-Atlantic area up to D.C., probably some of the strongest markets in the country.

Florida was up in the quarter for us. I think some of that, Ivy, is due to more to the communities that we've got, the submarkets within markets.

And we're benefiting from some of those strategic deals that we put together. But net up in the quarter...

Rick, can you just stay within Florida, break down Florida a little bit further?

Within Florida, probably that central area is the softest part of Florida, sort of Tampa, Orlando. And southwest, if you're in the right location in that Naples, Sarasota, part of that curve of the communities that we've got, the big master plan, those are doing fine.

Southeast Florida is fine if you're in the right place.

It’s interesting, Ivy, if you look at the Mid-West, Colorado remains soft and Minnesota seems pretty healthy.

Just a question for Bruce. I want to make sure I understand some of the Rialto earnings correctly.

The $13 million in REO gains that you mentioned, is that simply you acquiring REO and then adjusting what you think it's worth, or are there actual realized gains in there?

So the $13 million that you see in our press release, that's primarily gains on foreclosure of assets. So we have loans that as they go to foreclosure and they become REO, we have the fair value of the assets on our books.

And because we purchase these portfolios wholesale, big discounts, when we fair value, we've so far been recognizing income as we fair value those assets, as they’re foreclosed. Now keep in mind, that $13 million, because we consolidate the FDIC portfolio, that's 100% of FDIC number, then we back out 60% in noncontrollable interest, so the real number is really 40% of that $13 million.

Stuart, during your prepared remarks, I think you said that there was a pressure on pricing, but then you guys have also been talking about incentives getting better month-over-month. So if can you help reconcile the two comments?

Jon or Rick, why don't you go ahead.

Well, pressure on pricing is the pressure of the competition out there. We're subject to what other homebuilders are selling their homes for.

And we're trying to maximize the value for the homes and working to get appraisal values up because that's the thing -- that's the headwind in us being able to nudge prices up month-to-month to month-to-month because you're dealing with some stale comps out there. As far as incentives, what we found through some marketing and some strategic things that we're doing in our sales centers that through the packaging that we've done with our Everything's Included product, we've been able to decrease the incentives that we've had to do in order to get people to sign the contract.

So it's really not an inconsistent statement. We're dealing with pricing pressure in the market, but I think that our product is positioned well in the market to maximize value.

Okay, and one more question, you sort of suggested that spring has been of a disappointment in terms of sales but how has traffic been relative to your expectations?

Traffic's been mixed. We have gained an increase in the number of people coming through the communities clearly since the December, January time frame.

You'd expect that with that being the time of the year. And the number of people coming through are not just looking.

They want to buy a home. As Stuart said in his remarks earlier, that the biggest issue we have is getting them qualified.

But traffic is up. We'd like to see more people.

So if anyone's looking for a home, come to our sites.

First question is just on specs. Bruce, I don't know if you have handy the total number of unsold homes under construction.

I know you gave the finished spec number. And then the second part of that question is, if my math's correct, your finished specs pretty much remained flat over the last few quarters.

Just given that your commentary regarding the choppiness you've seen thus far, I might have thought that the finished spec count would have been worked down, you wouldn't be having as many new specs coming online and given that vis-à-vis your cancellation rate came down, so it doesn't look like cancellations really drove a lot of incremental spec, finished spec, in the quarter. So maybe just help us understand what your sort of spec strategy is in the coming quarters.

I'm going to give you the number, and then Rick will add on to this. So the unsold homes under construction are just under 2,000 for the quarter.

As far as spec strategy, I wouldn't be alarmed by the flat level of specs versus prior quarters. Given the fact that we’ve started up operations in a lot of new communities over the last couple of quarters, we want to get some product on the ground in order to deliver.

And if you look at just the last quarter, we had about, I don't know, 10%, 12% of our total community universe where new communities that were added during the quarter on a gross basis. So it's really just product placement within new operations to get them going.

That's helpful, thank you. And then my second question is just on the land side.

Again, if my numbers are correct, the average price per homesite this quarter was somewhat higher than what you've been paying over the last year or so. Is that just a function of geographic mix, or are there any other factors you should consider in the types of lots that were buying quarter?

And then just broadly speaking, if you could talk about lot availability, willingness of banks to bring supply to market?

Let me take the first part of that question. You're right, $158 million and that got us 2,400 homesites.

It also got us a couple of hundred acres, which I didn't mention. But the location was different.

There was less in Texas and there were more in some of the coastal markets. We feel really good about the acquisitions that we made during the quarter.

And we think as those communities open up, we will continue to see higher than company average margins as we work through those communities. So that's purely a function of geography.

And on the deal flow side, we continue to see -- actually not see, go find and seek out decent opportunities, given the hand-in-hand relationship that we have with Rialto, we've got doors open at places where not a lot of other folks are shopping. Some of the low hanging fruit in the brokerage deals has been chewed through.

But we still see a pipeline of opportunity out there that we're pursuing.

If we could look at the cash, Bruce, you talked a little bit about land spend, $158 million. It looks like you used about $200 million in total.

Could you explain the big buckets of where that's going, because I assume it looks like some of it went to Rialto.

Sure, only about $11 million went to Rialto this quarter, and that would have been our contribution or actual cash payment into the fund during the quarter. Most of it is land acquisition and development.

And additionally, in our fourth quarter, as we went through the downturn and we tendered for some debt and we issued some new debt, it turns out that the December 1 payment that we make on our interest tends to be the highest of the year. So the interest payments during the quarter were higher than you'll see in our first and third quarters.

So second and fourth quarters have higher interest payments than the first and third. And that's pretty much all of the difference.

Okay, how much did you -- when you said the land, $158 million, did that include the development costs as well, then?

No, it did not.

Roughly how much was that?

I could circle back with you. I have to look up that number, Steve.

Sure, no problem. And then the other question I had is if you look forward based on what Stuart was saying, a lot of gives and takes in the market on the pricing pressure and the costs, et cetera, your gross margin that you have in backlog and as you're looking out, is it comparable to what we're seeing now?

And then the SG&A, do you think that's -- you're at the right level that you need right now or does more costs have to come out of it?

On the gross margin side, I believe that’s close to that 20% number whether it's up 1% or down 1%, that's the zip code that we're operating in right now. And if we get a little bit of back wind or tailwind, we'll be able to push that number.

And I think that's probably too big a range for you. But it's right around that 20% number is I think a decent number.

On SG&A, Stephen, we're running pretty lean. We wanted to deliver more homes in the quarter than we did.

I think sequentially through the year that, that percentage should go down. And I think that we're comfortable.

If we need to make more cuts, we'll make more cuts.

My first one is around your commentary from the prepared comments. You talked about the second half being better.

My question is whether you expect the second half to be better from a sales perspective because the comps get easier year-on-year, or do you expect an acceleration in growth relative to what you guys are seeing so far in this first half?

Well, Josh, we keep our view pretty tight to where the market is right now. We don't try to look out too far and make predictions about where the market is going to be and how it might reconcile.

The comment that I was really making is that comps in the first half of the year are going to be pretty tough because you're comparing to the accelerated sales, the pull forward of sales, that related to the tax credit that was in place last year. And that will probably be, I would say, through April, May.

And then as you go to the back half of the year, the sales that were pulled forward resulted in a later sales pace at the back end of the year. So the comparisons should be better.

And as soft as a data point as this is, I think it is relevant that people start to see comparisons that are favorable and they start to get a little bit of confidence about the housing market in general. And that reflects positively on the market overall.

So my comment was really more about the comparisons and the fact that we'll probably get some more positive data points as we get to the second half of the year. It was less a comment about sales pace picking up in the back half of the year.

Got it, and I guess my final question is one around your backlog burn rate. I'm trying to understand if $120 million or above $100 is where you guys plan to run your business long term.

And ultimately I'd love to know what your cycle times are in order for you guys to get there. And I'm wondering whether or not you guys are concerned at all about what your backlog may look like, keeping up at 120 or 100%-plus type of pace as we continue through a rather sluggish sales environment.

On the percentage of backlog in a perfect world, we'd like to presell everything, Josh, but that's not this market today. People want to see what home they're getting so they can feel like they're negotiating for value and that -- so as the market shifts to a normalized market where you get a higher level of pre-sales, you'll see that backlog conversion rate come down on a percentage basis just by definition.

So are you guys pre-building a certain number of these homes up to some point, and that's what's allowing you to be able to convert so quickly? Is there something different about the way you're running your building operation that's allowing you to get this high level of backlog conversion rate?

Or are you guys just building homes in 60 days?

Well, a lot of it is by definition is the results of the EI business model that we've got. We don't have to tinker around with trying to backfill an option request for a customer coming in the door.

So from an efficiency standpoint, we can build them pretty quick. As Bruce noted earlier, we do have one to two finished homes in each community that when they sell, they close quick.

So you're seeing a backlog that is extremely fresh. And by definition of that, we can deliver it pretty quick.

All right. And just to that point, let me say the benefits of our EI program are really, really strong in a lot of different areas.

It's not only a value proposition and an ability to get our costs down, it also enables us to really enhance our cycle time and run an efficient business. With that said, let me just conclude by saying that we are really pleased with our overall operating strategy as we sit right now in current market conditions.

The market is soft, and these are tough times. From an operating strategy standpoint, our Homebuilding operations are lean, well positioned to remain profitable, as we go through these tough times.

And our performance is augmented by our Rialto program, which is really hitting stride right now. On the Rialto side, we are seeing numerous opportunities to make distress purchases.

We think that those opportunities will get bigger and more plentiful as we go forward. We think that both the Homebuilding and the Rialto purchases will be benefited when the market turns around and starts to recover.

So overall, we like the position that we're in right now with strong Homebuilding operations and a complementary Rialto program. We look forward to reporting to you on our progress as we go forward.

Thanks for listening.