Lennar Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 15, 2023

There are 10 speakers on the call.

Operator

Welcome to Lennar's Third Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. After the presentation, we will conduct a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Operator

I will now turn the call over to David Collins for the reading of the forward looking statement.

Speaker 1

Thank you, and good morning, everyone. Today's conference call may include forward looking statements, including 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 And are not intended to give any assurance as to actual future results. Because forward looking statements relate to matters that have not yet occurred, These statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar's Actual activities or results to differ materially from the activities and results anticipated in forward looking statements.

Speaker 1

These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's Annual Report on Form 10 ks most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward looking statements.

Operator

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

Speaker 1

Very good. Thank you and good morning everyone and thanks for joining us this morning. Pardon me, I've Got a bit of a cold, so you'll hear that in my voice, might cough a little. So today, I'm in Miami together with John Jaffe, our Co CEO and President Diane Bessette, our Chief Financial Officer Dave Collins, who you just heard from, our Controller Vice President and Bruce Gross, our CEO of Lennar Financial Services. We're all here in Miami together.

Speaker 1

As usual, I'm going to give a macro and strategic overview of the company and our performance. After my introductory remarks, John is going to give some color on overall market conditions. He's going to comment on our land position and then he's going to give an operational overview updating Supply chain, cycle time and construction costs. And as usual, Diane is going to give a detailed financial highlight along with some limited guidance For the Q4 year end 2023 to assist in forward thinking and modeling. We will answer as many questions as we can and please limit yourself to one question and one follow-up as usual.

Speaker 1

Now, as you all know, since our last earnings call, Rick Backwood retired effective the end of Q3. Rick began his 17 years with Lennar at the very beginning of the Great Recession as it's called In 2006, he rejoined an industry that was operating at the top of this game and was prepared to reach for even higher heights. Rick found himself, however, in an industry that was caught in a changing and devolving economic environment that altered expectations and Rick jumped in at Lennar and treated problems as his own side by side with the rest of And over the next years, he worked as part of the team, fixing what was broken and writing what was upside down. We became best partners with me and with John Jaffe, and together we navigated difficult times. We positioned Lennar for future success and began new to reach for new heights and we achieved the extraordinary.

Speaker 1

All of us at Lennar appreciate Rick's service and partnership. We all benefited from his experience in the But it is uncommon for that moment to coincide with the timing where the company is well prepared as well. This is that rare moment. As a team of 3, Rick, John and I work together and as partners with the rest of Lennar operating leaders To lift and position Lennar for leadership in the industry, Lennar today is both organized and position financially to move forward with a smaller organization structure and more efficient overhead. Rick completed 17 years of service and retired as Co CEO and President.

Speaker 1

Rick, I know you're out there. I know you're on the call and listening because I know you just can't help yourself. I hope you're preparing to sharpen your golf game We're building some wood cabinet in Maine. Rest assured that all is well and stable and we're executing as expected here at Lennar. So now let me turn to the business at hand and talk about the business of Lennar and how we are performing as well as how we are positioned for our future.

Speaker 1

So let me begin by saying that we're pleased to report that the Lennar team Excuse me, has remained focused on balancing and maintaining production And sales pace, reducing cycle time and increasing cash flow, improving inventory And driving strong bottom line and we have again produced a strong and consistent result for the quarter. Our Q3 results reflect consistent adherence to the core operating strategy that we have detailed in prior quarters against the backdrop of an evolving macroeconomic environment and a constructively configured housing landscape. As I noted in our press release, the macroeconomic environment is constructive relative to the housing homebuilding market, And it has certainly stabilized relative to the aggressive interest rate climb that defined the environment last year. It seems that we have entered a phase of more measured adjustments in order to curtail inflation, while the Fed shrinks its balance sheet by approximately $100,000,000,000 per month and engages other mechanisms to reduce capital in the market. Over time, these steps will hopefully bring inflation to desired levels.

Speaker 1

While persistent inflation remains in the system, Aggressive rate hikes have given way to moderated and measured rate movements, allowing the market to adjust in a more orderly fashion. And while the Fed is working to reduce overall capital levels, the elimination of sharp turns and aggressive moves is generally constructive to consumers Finding access to enough capital for their necessities and housing is a necessity. Against that backdrop, the current housing market is generally defined by very short supply Affordable products and strong demand for affordable products. The consumers have now adjusted to and accepted Higher for longer interest rates and are willing to purchase or rent what they can afford. The consumer is employed and is confident they will remain employed and likely with a higher wage, Higher rates with need driving demand and housing in short supply is the new normal and the consumer understands that the cost of housing will likely continue to be higher.

Speaker 1

Generally speaking, Strong demand for housing has returned within the limits of affordability. The market has attracted consumers by adjusting prices, Increasing incentives, including rate buy downs and driving down production costs in order to enable consumers to afford needed shelters Needed shelter and customers have responded. The net price of homes has moderated And the net average sales prices have stabilized. We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% from the peak of approximately $500,000 in 2022 to approximately $448,000 now and we expect that pricing to remain fairly constant. And currently, multifamily rental rates have also moderated.

Speaker 1

2 years of 500,000 apartment starts excess supply, which are moderating rental rates. While we expect a sharp drop off in new starts This year, we don't expect that rents will drop too significantly, but they are not likely to grow very much either in the foreseeable future. Rentals and rent equivalents make up a significant part of the CPI calculation. Overall, we believe that the housing market has leveled and while net average sales prices are lower, Cancellations have been normalizing and margins have stabilized as cost reductions and value engineering Provide an offset to the price reductions. Additionally, we believe that the new supply of homes And maintain supply demand imbalance.

Speaker 1

Bottom line, the economy is constructive, Housing supply is short and limited, demand returned to affordable offerings and builders will need to continue to produce more homes to fill the void. So in that backdrop, The Lennar team has remained focused on our core strategies that are driving our company forward. First, we've continued to remain production and volume focused with a primary focus on driving production Driving higher inventory churn, driving higher cash flow and strong margins and while focusing on return on assets. At the same time, we maintain a carefully matched sales pace using our digital marketing and dynamic pricing machine to keep production pace and sales pace closely matched. In our Q3, we started 18,675 Homes, while we sold 19,600 and 66 homes and we delivered 18,559 homes or an 8% increase over last year.

Speaker 1

Our starts pace for the quarter was 4.9 homes per community per month, while our sales pace was 5.2 homes per community per month. While these numbers don't fit perfectly together, they are getting closer every quarter And we're operating our platform more tightly than ever and by careful design. Our digital marketing and dynamic pricing machine Helps drive our net sales pace to exceed our available starts, enabling us to backfill cancellation, which ran last quarter at a 3.3% rate and we maintained a very controlled inventory level as a result And that is of just over one home per community. This has driven the confidence to continue a consistent start That enables operating efficiency. With this focus, we've continued to sell phones at current market prices, improving margin as conditions improve and reducing margins when necessary.

Speaker 1

Accordingly, Our margins bottomed in the Q1 of this year at 21.2% and as the market has improved, Margins have recovered to now 24.4% this quarter and we're expecting flat to modest improvement next quarter with a range of 24.4 percent to 24.6 percent. Of course, To all phases of the market cycle, we are consistently producing very strong cash flow. These elements of execution are working extremely well and improvement and accordingly we have gained confidence in our ability to now guide to increase volume for the year of almost 71,000 and almost 72,000 deliveries with strong merchants and strong cash Next strategy, we have continued to work with our trade partners to maintain our now properly configured Cost structure relative to the current sale price environment, while we continue to drive cycle time To pre supply chain crisis levels. John will cover these production components in more detail shortly, but John This team has been laser focused across the platform. We were quick to reduce costs as the market corrected and we have held costs down as the market has And considerable success in this area is reflected in our margin improvement and as well as And the number of homes we were construct that were construction ready and available for delivery this quarter.

Speaker 1

Our 3rd strategy has been to sharpen our attention on land and land acquisitions as well as land and land bank strategies. While John will give additional detail on land, this has been a specific concentrated focus across the platform in every division to refine our approach to reducing land exposure and continuing to become increasingly asset light. We've made some significant progress in reducing land held on balance sheet with now just 1.5 years owned and 73 percent of our land control. We have made exceptional progress in creating a materially more efficient Manufacturing platform. Accordingly, our land programs and partners have become strategic partners in maintaining volume and increasing market share while helping to rationalize costs.

Speaker 1

Our 4th core focus and strategy has been to manage our operating costs for our SG and A. So that even at lower gross margins, we will continue to drive a strong net margin. While we've been driving our SG and A down over the past years quarter by quarter to new record lows and many of those changes, although not all, Are hardwired into permanent efficiencies in operation, there are some components that have grown as we have seen this quarter And we've had to address interest rate movements as we have had to address interest rate movements and sometimes more difficult market conditions. Examples are realtor costs and marketing expenses, which have had to expand as customer acquisition and engagement have become sometimes more challenging. Both of these areas saw increases in our 3rd quarter numbers.

Speaker 1

Nevertheless, We were able to achieve a very respectable 7% SG and A this quarter, which is higher than last quarter's 6.7 But it did nevertheless result in a strong net margin of 17.4%, which is up from 15.8% last quarter. We've continued to streamline our Even as we grow, so that we can accomplish more with less. And as an example, many of that, If we'll need to replace Rick as he is now retired. And the answer simply is no, because we've built systems that are now in place that enable us to operate in ways today that would not have worked in past years. Our 5th playbook strategy was to maintain tight inventory control in order to control our asset base.

Speaker 1

The Lennar machine of digital marketing, sales management and dynamic pricing has materially improved inventory control by enabling a focus on selling homes and inventory, focusing maximum attention on underperforming communities and bringing attention to Products and plans that are not selling as expected. Clearing the homes that are complete and closable rather than selling homes that Our many quarters in the future is exactly what drives cash flow, higher inventory turns and higher returns on assets and we're focused on this part of the business every day. Both land and home inventory control This is the mission control of our overall business. And in our 3rd quarter numbers, you can see continuing quarterly improvement And our now 11.5 percent debt to total capitalization, down from 13.3% last quarter and down from 15% last year at this time. Additionally, with our $3,900,000,000 cash position, our net Total capital is actually negative and our balance sheet is being carefully managed to provide Extraordinary liquidity and flexibility.

Speaker 1

These elements of the business continues to be managed through an every other day management Good evening, where numbers are reviewed at the regional and divisional levels by the entire management team. Sales starts and closings are maintained And control balance, the thing with the end result of volume with defined expectations. The 6th playbook strategy was to continue to focus on cash flow and bottom line in order Protect and enhance our already extraordinary balance sheet. If we reflect on our 3rd quarter results, Not only did we accomplish excellent cash flow and bottom line results, bottom line results earning over 1 $1,100,000,000 or $3.87 per share, but we used cash to repurchase $366,000,000 of stock and we also repaid approximately $475,000,000 of senior debt. We expect to continue to generate considerable earnings and cash flow and accordingly, we'll continue to retire debt and purchase stock opportunistically.

Speaker 1

Let me say in conclusion that our Q3 of 2023 Has been another excellent quarter for Lennar. We saw overall market conditions remain constructive for our industry as aggressive interest rate moves subsided and the new normal defined expectation. Additionally, the housing market has continued to be defined By housing shortage and generally strong demand, let us prepare to transact. Accordingly, we executed on our core strategies against the economic and industry backdrop. Given consistent execution, we are extremely well positioned for continued success as strong demand for We expect to finish out this year strong And we also expect to enter 2024 with a 10% initial growth expectation and we're very well strategy that enables certainty of execution throughout our company.

Speaker 1

Our strategy is well known and understood throughout our division offices and we have a simple and consistent model of execution. We focus on maintaining volume while we price our homes to drive match pace. We work with our trade base to manage costs and efficiencies and adjust our product offering to meet the market. We manage both land and our production inventories to drive efficiency, cash flow and returns on our asset base. We focus our land like model in order to drive balance sheet efficiency.

Speaker 1

Finally, we fortify our balance sheet to have liquidity for strength and flexibility. Knowing what to do and executing per plan as driven this quarter's success and ensures consistent success for the foreseeable future. As we look ahead to a successful 4th We are confident that we'll continue to grow, perform and drive Lennar to new levels of performance. Thank you. And with that, let me turn it over to John.

Speaker 1

Thanks, Stuart. Good morning, everyone. As Stuart noted, the housing market is healthy overall, Supply remains tight, demand remains strong and buyers have become more comfortable with higher mortgage rates. In our Q3, we continue to offer a combination of Tractor pricing and compelling mortgage rate programs to capture that demand. Our price to market strategy reflects our balance sheet first focus where we can maintain starts and sales, increase market share, generate cash flow and keep our homebuilding machine going.

Speaker 1

The execution of our pricing strategy is based on the strength of the individual market, matched against the level of production we have in that market that is done on a community by community basis. In the current environment, all of our markets are benefiting from greater demand and supply. And while some markets like in Florida or the Carolinas are stronger than others, we were able to achieve our desired sales pace in all our markets. In our Q3, the majority of our markets had a higher sales pace in Q3 compared to Q2 and also used higher incentives in Q3 along with an increase in marketing and broker spend. In all markets, our homebuilding teams work closely within our mortgage to find the right solution for each buyer to help fulfill their desire to purchase.

Speaker 1

Our sales strategy of finding market clearing pricing is designed to match the pace of homes under construction, which in turn gives us confidence to maintain a consistent pace of starts. This consistent start pace is the foundation for our production first strategy. As we continuously improve the way we execute this game plan, we have grown our trade base, maintain lower construction costs and reduce cycle time. These improvements enabled our 3rd quarter starts to increase 17% from the prior year. Continued focus on our production first strategy has enhanced Lennar's position as the builder of choice for trades.

Speaker 1

Our existing trade partners are increasing their business with Lennar, while our approach is also attracting new trades. This increase in access to trades combined with a normalized supply chain led to a significant improvement in our 3rd quarter cycle time. For the quarter, cycle time decreased by 32 days sequentially from Q2. Progress is difficult to measure precisely as product mix changes, But we are clearly on a path to getting back to pre pandemic cycle times and expect to continue to see improvement in the Q4 and into 2024. Looking at our Q3, as expected, our construction costs fell sequentially from Q2 by about 5%.

Speaker 1

In addition, our Q3 costs were down about 4% on a year over year basis. This was down significantly from the 8% year over year increase we saw in Q2. Again, this is the trajectory of cost reduction we guided to last quarter. Looking forward, you can expect Lennar to be focused on plan and SKU reductions, value engineering to further reduce costs and introducing additional workforce housing communities in many markets across our platform. I would like to conclude with our landline strategy and community count.

Speaker 1

In our Q3, we continue to effectively work with our Strategic land and land bank partners where they purchased land on our behalf and then deliver just in time finished home sites to our homebuilding machine. In the Q3, about 85 percent of our $1,500,000,000 land acquisition was finished home sites purchased from the various land structures. We've made significant progress again in the Q3 as our year supply of owned home sites improved to 1.5 years from 2.2 years Our controlled home site percentage increased to 73% from 79% year over year respectively. The reduction in cycle time and the reduction in owned land will increase cash flow as well as help improve inventory churn, which which was up 5% from a year ago period and we expect to increase our community count in the high single digits by the end of fiscal 2023 from 2022. The strategies of our sales pace matching production pace, which leads to lower cycle times and construction costs, Combined with an asset light focus, which leads to the reduction of owned land, our reducing risk, improving returns and strengthening the balance sheet for Lennar.

Speaker 1

I I want to recognize and thank all of our associates for their hard work and dedication and focusing on these strategies and for delivering a solid Q3. I'd now like to turn it over to Diane.

Speaker 2

So therefore, I'm going to spend a few minutes on the results of our financial services operations and our balance sheet and then provide guidance for Q4 2026. So starting with financial services. For the Q3, our financial services team had operating earnings of 148,000,000 Looking at the details, mortgage operating earnings were $111,000,000 compared to $64,000,000 in the prior year. The increase in earnings was driven by higher lock volume as a result of higher orders and capture rate and higher Total operating earnings were $37,000,000 compared to earnings of $33,000,000 which excludes a $36,000,000 one time charge due to the litigation accrual in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per As the team continues to focus on using technology to increase productivity.

Speaker 2

These solid results were accomplished As a result of great synergies between our homebuilding and financial services teams, they truly operate under the banner of 1 Lennar. So now turning to the balance sheet. This quarter once again, we were steadfast in our determination to turn our inventory and generate cash by maintaining production and pricing homes to market to deliver as many homes as possible to meet housing demand. The drumbeat also continued with our determination to preserve cash and increase asset efficiency. The end result of these actions was that we ended the quarter with $3,900,000,000 of cash and had no borrowings on our $2,600,000,000 revolving credit facility.

Speaker 2

This provided a total liquidity $6,500,000 and great Financial flexibility for the future. As a result of our continued focus on balance sheet efficiency, we made significant progress on our goal of becoming landlighter. At quarter end, our home sites controlled increased to 73% from 69% in the prior year, And our years owned improved to 1.5 years from 2.2 years in the prior year, our highest controlled percentage and our lowest years owned in our history. John mentioned, we spent approximately $1,500,000,000 on land purchases this quarter. However, about 85% were finished home sites where vertical construction At quarter end, we owned 107,000 home sites and controlled 284,000 home sites for a total of 391,000 home sites.

Speaker 2

We believe this portfolio provides us with a strong competitive position to continue to grow market share in a capital efficient way. During the quarter, we started about 18,700 homes and ended the quarter with The model and that includes about 1400 homes that were completed unsold as we successfully manage the finished inventory our finished inventory levels. In our continued effort to further strengthen and de risk our balance sheet by reducing our debt balances, we retired $425,000,000 aggregate principal of our 5.7.8 percent senior notes due in November of 2024 And we purchased about $50,000,000 of senior notes also due in fiscal 2024, all at or below par. We've repaid about $6,100,000,000 of senior notes over the last few years, which equates to more than $330,000,000 of annual interest savings. As a result of our debt reduction initiatives, we ended the quarter with a total senior note balance just under $3,000,000,000 which was less Then our cash balance of almost $4,000,000,000 The next senior note maturity of $378,000,000 is due in December 2023.

Speaker 2

Combined with strong earnings, our homebuilding debt to total capital was 11.5% at quarter end, our lowest ever, which is an improvement from 15% in the Right here. Consistent with our commitment to strategic capital allocation, we repurchased 3,000,000 of our Shares totaling 366,000,000. Year to date, we've repurchased 7,000,000 shares totaling 763,000,000. Additionally, we paid dividends $107,000,000 during the quarter. So in total, we returned almost $1,000,000,000 to all our investors this quarter, our equity holders and our debt holders.

Speaker 2

And just a few final points on our balance sheet. Our stockholders' equity increased to almost $26,000,000 Our book value per share increased Just over $90 our return on inventory was 26% and our return on equity was 16%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant confidence and financial flexibility as we come to the end of 2023 and 3 and head into 2024. So with that brief overview, let's turn to guidance. Starting with new orders, we expect Q4 new orders In the range of 16,200 to 17,200 homes as we match sales with production.

Speaker 2

And as John mentioned, we expect our Q4 ending inventory count to increase in the mid single digit percentage range year over year. We Our Q4 deliveries should be in the range of 21,500 to 22,500 homes. This would bring our annual deliveries to be in the range of $70,800 to $71,800 which is an increase of 7% to 8 Our Q4 average sales price will be approximately flat with Q3 as we continue to price to market and offer We expect gross margins to be in the range of 24.4% to 24.6%, And for the combined homebuilding joint venture, land sales and other categories, we expect to have earnings of about 25,000,000 We anticipate our financial services earnings for Q4 to be in the range of $130,000,000 to $135,000,000 We expect a loss of about $20,000,000 for our multifamily business and a loss of approximately $25,000,000 for the Lennar Other The Lennar other estimate does not include any potential mark to market adjustments to our public technology investments, since that adjustment will be determined by their stock prices at the end of our quarter. We expect our Q4 corporate G and A to be about 1.1% of Total revenues and our charitable foundation contribution will be based on $1,000 per home delivered.

Speaker 2

We expect our tax rate to be about 24.5 percent and the weighted average share count should be approximately 281,000,000 shares. So when you pull all that together, these estimates should produce an EPS range of approximately 4.4 to $4.75 per share for the Q4. And finally, as Stuart mentioned, as we think about 2024, our initial growth is currently 10%. And so therefore, we look forward to another very successful year. And with that, let me turn it over to the operator.

Operator

Thank you. We will now begin the question and answer session of today's conference call. We ask that you limit your questions to one question and one follow-up Our first question comes from Truman Patterson from Wolfe Research. Please go ahead.

Speaker 3

Hey, good morning, everyone. Thanks for taking my questions. So Diane, thanks for clarifying that at the end, that 24% growth target of about 10%. But looking at your 4th quarter guide, you had very strong 3rd quarter orders. Just trying to understand that fiscal Q4 order guide down about 15% sequentially.

Speaker 3

Was that really due to the healthy third quarter Selling, where you reduce your spec availability and kind of internal inventory positioning going into the 4th Order, is it just normal seasonality? Does it imply a modest deceleration in the consumer given The recent rate move, just hoping you can help us unpack that.

Speaker 1

Sure. Thanks, Truman. Yes. You're right to tie those together. The fact is that as we ended the Q4, which is seasonally a more You know, a quieter time of the year.

Speaker 1

We did have very strong third quarter sales. We do expect to see strength in the 4th But seasonality has returned to some extent. And additionally, we've seen interest So we're just moderating our view of where the Q4 goes And making sure that as we come into the Q4, we're well positioned to achieve exactly what we said. We're just at Truman that It's all part of our process to have a design sales pace, so that matches the production coming out of our assembly line out in our communities.

Speaker 3

Okay. Okay. Perfect. And then, I thought Rick was going to be on this call To congratulate him on retirement, but since he can't defend himself, maybe we should just air our grievances against him. But No, look, just big picture, how are the 2 of you, John, Stuart, just kind of dividing responsibilities Given Rick's retirement.

Speaker 1

Well, listen, we have very comfortably streamlined the business. John is overseeing operations across the country at this point, and it has been doing that for some time now. And what has happened over the past years is our regional presidents and our operators had just Really stepped up and have become far more self sufficient, driven by some of the technology support that we've created across the platform. There's just a very orderly program of operations as we go forward that is guided by John on a regular basis in combination between what we call our daily call, it's actually every other day And additionally, our operations review meetings, which we're kind of in the middle of right now, we begin at the beginning of each quarter. John goes to some, I go to some, but we are present, we are engaged, we are involved in kind of level setting Our divisional focus across the platform and John and I have comfortably shared responsibility for about 40 years.

Speaker 1

I think we're kind of in step and in tune with doing that. We'll be able to comfortably do that right now. Yes, I think that can't be underestimated, the familiarity of working together for 40 years and managing the business across the country. But I think starting on the key point, which is we're a different company today. The efficiencies that we're driving in large part are because they become much simpler, particularly at The land acquisition standpoint, you remember we used to have a lot of complex joint ventures.

Speaker 1

We used to speculate more on land. Today, we're a very efficient buyer of finished home sites from some strategic land partnerships and strategic land banks. And that really fuels the front end of a machine that is very orderly and very focused in today's world for Lennar. Perfect. Thank you all.

Speaker 1

Okay. Thank you, Tumi.

Operator

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Speaker 4

Thank you. Good morning, everyone. My first question is, Stuart, you mentioned that You continue to expect to see growth next year, even with the meaningful strides that you've made over the last several quarters in there. When you think about the construction The production constraints in the industry though, can you talk to how you think you can add capacity in this kind of an environment? And any thoughts on how to think about

Speaker 1

So look, as we've looked at 2024, It's not so much about adding production at this point. We are positioned for a very strong 2024 right now. We have the land, we have it identified, it is under contract or in our pipeline, it is under development. 2024 at this point, except for the overall sales environment, is pretty much embedded in our system. So we have pretty good visibility at this point.

Speaker 1

We keep talking about Selling and building and programming by process and by process, we just have great visibility into what we're able to produce for 2024. And in fact, if you look at our kind of 5 year land planning and overall production schedules, We have pretty good visibility even beyond. Now the question is what the market going to do and how is the market going to react. We are going to continue to price to market conditions. We are an operating Manufacturing platform that is going to price to market and if the market moves a little bit, you're going to see our margins be, As I said before, the shock absorber.

Speaker 1

So when we talk about a projection of growth for 2024, we have Pretty good certainty that we can accomplish that and how the market unfolds in these kind of Uncertain times where interest rates are moving, the Fed is clearly trying to take liquidity out of the system. We're going to wait and see how it actually evolves, but our target right now is in that low double digit level of growth for 2024 and we think We know it's achievable. We'll see how the market performs. And Susan, you asked about production capacity, that visibility, Stuart, speaks to. We clearly communicate that with our trade partners today about what is coming in the future quarters.

Speaker 1

So they're prepared and we're prepared, as that production that's already in our system will be coming online to be able to manage that volume.

Speaker 2

And Susan, I guess I would just add that 10% low double digit, that's sort of from a volume perspective. We'll have to see how kind of margin and other items play out, but at least it gives you That's on the volume level. The target.

Speaker 1

Target. Target, yes.

Speaker 4

Okay. That's very helpful. And maybe building on that a bit, you've obviously talked a About thinking of the cash generation of the business and converting net income to cash flows. As you think about the go forward And the environment that we're in and the increased agility in the business, what could that mean for cash generation next year? Any thoughts there?

Speaker 1

Everything that we have done to reconfigure our business is focused on turning profitability into cash flow and making sure that we are generating a consistent level of cash coming in. And Everything that we're underwriting right now, even if margin moves up or down to some extent As a moderator for where sales or interest rates might go, our cash flow is still going to be very, very strong as we go forward.

Speaker 4

Okay, great. Thank you for the color and good luck.

Speaker 1

Okay. Thank you.

Operator

Next, we'll go to the line of Stephen Kim from Evercore ISI. Please go ahead.

Speaker 5

Yes. Thanks very I appreciate all the color and congrats on the results. I did want to touch on the some of your longer term comments. 1st of all, not to get too granular, but in 2024, the closings number, we've observed that as Cycle times have improved. You've been able to deliver more units or close more units than you've taken orders for.

Speaker 5

I was Curious as you look into 2024 Diane, is it reasonable to think that you could likely close as many units as you take orders for? And then secondarily, you talked about I think, Stuart, you talked about return on assets as being an important metric for you. Curious if you could give us a sense for longer term where you target your ROA as you think about the business Going forward.

Speaker 1

So, okay. So listen, we do think that as we sell, our delivery schedule is really tied pretty closely to Given the fact that we are not selling layout in front, it's pretty much tied to how we're selling and current sales pace. And so you can look at that today and see our operating machine really working, Sales and starts and closings are all working in close proximity to one another. In terms of return on assets, Steve, This is a great question. We have the difficulty of an asset base that just because of strong earnings and strong It becomes a tougher and tougher hurdle.

Speaker 1

Our focus is on return on assets closer to 20%, So it gets harder to achieve as we keep adding earnings and asset base to the program. And one could argue that we need to be buying back stock a little bit more aggressively. Diane and I talked about this all the time. And I'd say that we look at this opportunistically. It looks like today's stock price is getting even more attractive.

Speaker 1

So It's part of the program, but we are targeting in excess of a 20% return on assets.

Speaker 2

Yes, I think that's right, Steve. I mean, you have to kind of make it a little bit more granular, right? As we focus on turning our inventory, as We focus on reducing our years at home. Those are all real helpful components, of course, to return on assets. So and if we pair that with a consistent Buyback program, which we have been consistent.

Speaker 2

The amounts may vary quarter to quarter, but we have a pretty consistent program. I think that all bodes well in us achieving

Speaker 5

Yes, that's really helpful and that's kind of where I was going to go next. So I appreciate you anticipating that.

Speaker 1

We saw you coming.

Speaker 6

Next question I have relates

Speaker 5

to sort of market conditions and in particular the entry level of the market in line with the rate increase.

Speaker 1

So I would say

Speaker 5

my question is, In general, would you say that the move up segment right now is performing a little stronger than entry level? And at the entry level, When we think of rate buy downs, like what percent of your sales are using a rate buy down? And Are you going into the market buying making forward purchase commitments? And are you increasing the degree of rate buyout relative to The prevailing rate or are you continuing to buy down that rate by about the same spread?

Speaker 1

So listen, as we've said, as rates move around, as demand moves around, we are Tapping incentives up or down, we're maintaining pace. But the fact is that we haven't had to move dramatically Neither direction, as rates have moved currently. You asked whether it's the entry level buyer or move up buyer that is doing better. Frankly, there's strong demand across the platform. And in all segments, we are seeing strong demand out Affordability is kind of the question and meeting the buyer where the affordability exists It is kind of a trick of the market in getting it just right.

Speaker 1

And so these are tweaks right now up and down. And of course, depending on where interest rates Interest rates go, that is going to be the determinant of how much of an incentive has to be given or doesn't have to be given. And that's what you're kind of working your way through right now as you go through pricing. John, did you add to that? Yes.

Speaker 1

Steve, you asked a question. We do buy forward commitments, but we do see even as interest rates fluctuate, the participation And those commitments is very steady from month to month, quarter to quarter. And it's primarily used for our first time buyers. And as you know with our production model, it's very effective because we sell homes closer to being completed Versus selling homes before they're started. So we're able to lock in our buyers, which is really important because, those buyers want to lock in aren't at risk So it's suddenly not qualifying if rates move on them.

Speaker 1

We keep the spread pretty consistent on an average, but obviously We have to help our first time buyers more than our move up buyers. But because of our ability to do that and really manage it closely to a production pace, We don't really see a difference in the levels of demand, from quarter over quarter, month to month between those buyer segments.

Speaker 5

That's really helpful. Thanks very much guys.

Speaker 1

Okay. Thanks, Steve.

Operator

Next, we'll go to the line of Carl Reichardt from BTIG. Please go ahead.

Speaker 7

Thanks. Good morning, everybody. Stuart, I hope you feel better.

Speaker 8

Good morning, Carl.

Speaker 1

I have

Speaker 7

a question on dynamic pricing. I think it's fair to say if we remember the tape last year that using dynamic pricing allowed you to make find elasticity, make Find homes at market clearing prices really quickly and across the platform quickly. So if you look at the model today and look at sort of a histogram across Your geographies and markets, where do you see pricing power? Where are things still weak? And do you effectively say more markets are stable Then we have more markets where we're making a lot of adjustments up or down.

Speaker 1

Hey, Karl, it's John. In every market, we are using closing costs, mortgage rate buy downs, pricing to hit that desired pace. Clearly, we don't have to use it as much in say Florida, the Carolinas, parts of Texas, other markets around the country, Where there's in migration strong job growth in some markets where you've seen a shift in Austin and Boise, Parts of California, we have to use them a little bit more. But as I said earlier in my comments, we're able to achieve our desired pace By managing those levers with each individual buyer at each community home by home basis, define the right monthly payment for them to deal with their mortgage qualification issues, get them locked into a loan and to hit our production levels.

Speaker 7

Okay. Thanks, John. And then on SG and A, again, long term strategy for the company has been to lower buyers' brokers commissions Probably more aggressively than any other builder, at least that I cover. Market got weaker, buyers brokers have come back. So where does that strategy sit now In terms of your reliance on those brokers or your desire to continue to effectively disintermediate them or rely less on them?

Speaker 7

Thanks,

Speaker 1

We've pretty consistently said that the realtor community that supports the industry And that comes in and does the work of bringing customers to our sales center and actually engages the process He is a friend of 1 hour and we're always trying to work with the realtor community. But at the same time, what we've tried to do is eliminate Friends and family component that is basically just giving away. So we've done a pretty good job of Creating a constructive relationship with the broker community while not overspending. And It migrates up and down as traffic is represented more and more by Realtors. Now of course, As the existing market has been more constrained, the Realtors have been more focused on The new home market and that means that we're getting a lot more traffic from the realtor community than we were getting when the existing market was more normalized.

Speaker 1

And with that said, you'll see our brokerage spend go up and down a little bit, which affects our SG and A. That is all highlighted. It's at very low levels compared to our historical norms. And the way that we use The broker community is really just where we have completed inventory homes to move. We're very disciplined about what we make available to the broker community, so that we maintain that focus and control of our SG and A.

Speaker 1

And let me just say lastly, we've talked an awful lot about our digital sales funnel together with our dynamic pricing model And sales engagement. We are really striving to drive more and more of our Customer engagement, through our digital world where we access customers, Meet them where they want to find us and engage them very directly. That's where we think we can have the very best engagement with our customers. And so we talked about our digital sales machine. It's an important part of the way that we're Creating a process around our sales program for the future and it is evolving.

Speaker 7

I appreciate that. Thanks guys.

Speaker 1

Okay.

Operator

Next, we'll go to the line of Alan Ratner from Zelman and Associates. Please go ahead.

Speaker 8

Hey, guys. Good morning. Really strong results.

Speaker 6

Nice job.

Speaker 8

Stuart, first question, when you kind of talk about the net price Times in that kind of 10%, 11% range. Historically, the typical spread between a new home and a resale, I believe, has been around 15 I'm not sure you see it that way, but that's kind of what the data would show roughly. And we clearly haven't seen that level of price declines in Resale market, which it feels like to me when you compare the strength we're seeing in the new home market today versus the resale market, Yes, I think there's a thesis out there, it's all inventory driven, but it feels like some of that historical spread has definitely narrowed this year as you and other Builders have been more aggressive on pricing to market. So when you think about that and you think about some of your other comments with Your land cost is probably going to continue to rise. Construction cost, while there has been progress made there, Probably stable from this point forward.

Speaker 8

If you don't see resale prices Can you maintain that progress you've made this year as far as now closing that spread versus reseller? Do you See that spread returning just as a function of higher costs over time.

Speaker 1

Well, I'd say, Alan, that you're kind of Sitting in a very strange configuration in the housing market right now. The resale market is inventory very, very constrained. It's been well documented that interest rates rising as much as they Have left existing homeowners with 2 assets. They have a home that is valuable and they have equity. They also have a mortgage That is at a very low interest rate and that also has great value.

Speaker 1

So they're just not bringing Existing homes to market as much as or at the rate that you would traditionally see. And that short supply of existing homes has enabled that part of the market to stay A little bit more robust in pricing as the new home market has used incentives to meet the market where Affordability actually exists. So that configuration is creating an anomaly in the way that Existing homes and new homes are priced. I said in the past that I still think that The existing home market is kind of a zero sum game in terms of the supply and demand, because every time somebody sells an Existing home, they go up and they have to buy another home. So you add inventory, you subtract inventory.

Speaker 1

And I think that's kind of how that continues. But from a pricing standpoint, I'm not surprised to see a little bit more parity Between new and existing homes at this point. And yes, I think that we can continue on our trajectory Depending on the overall macro environment, the interest rate environment and where affordability is down, I think we can continue on our existing trajectory even as the existing home market remains relatively strong because of short

Speaker 8

Got it. No, that's helpful to hear your thoughts there. 2nd, I guess circling back To the ROA conversation, it has been a few quarters, I think, since you've talked Publicly about the SpinCo plans and recognizing that's seemingly on hold for the time being. You still have about 10% of your assets right now Not generating returns, which is clearly, I think, impacting the overall return calculation. So just curious if you care to provide any updated thoughts on ways to Monetize that more quickly recognizing the capital markets may not be most advantageous right now.

Speaker 1

Yes, I think that you've laid it out well, but it has been some time and the capital markets continue to be Not very constructive for executing a plan. It does sit in the background in the wings. And I think it's something that will come back into light at another point in time. It's very much at the front of our mind. We think about how we're going to configure some of those assets that can be positioned differently.

Speaker 1

And there will be a moment in time when we come forward with a plan. It's not something that we stop Thinking about it is something that we stopped talking about because we just don't think that the capital markets are constructive for a program right now.

Speaker 8

Understood. Appreciate the update, guys. Thanks a lot. Okay.

Operator

Thank you. Next, we'll go to the line of Ken Zener from Seaport Research Partners. Please go ahead.

Speaker 6

Good afternoon, everybody.

Speaker 1

Good afternoon.

Speaker 6

So I have two questions. They might have some sub parts to them, so bear with me. But first question is broadly speaking, The prioritization of returns versus growth, and I ask because this is basically a balance That you're striking between even flow and gross margins. So first item is it Seems like even flows in this 19,000 plus or minus range. The word even would suggest Less variance than seasonality.

Speaker 6

So quarterly, I mean, do you think variance is up, let's say, down 10% sequentially in that start number? How is your machine working? Because it's obviously not set to the larger variance of normal seasonality. And then Related to that, it doesn't appear that we're seeing your focus on pace Affecting gross margins, right, at 24%. So could you maybe kind of talk to that?

Speaker 6

I haven't heard you really talk about the dynamics of gross margins much, but the pace Relative to the margins and what you think your start pace can be on a variance basis?

Speaker 1

So Ken, we've been fairly unapologetic about saying that pace is our core focus. We're looking at even flow. We're using even flow to drive efficiencies, whether it's in SG and A or whether it's in Construction costs, you can expect, as we've said before, that consistent drumbeat of production It is going to prevail and we're going to use margin as Shock absorber, or the moderator to enable us to maintain production pace. Your numbers are by and large correct. There will be some adjustments for seasonality, which is anticipated.

Speaker 1

You see this in our 4th quarter projection or guidance. But with that said, you can expect that you're going to see an even flow production model that Within boundaries, we recognize that if the market really moves dramatically one way or another, we'll adjust those production But within Boundaries, you're going to see us focus on that constant Production pace defining a constant sales pace.

Speaker 6

Okay. And then the second question, I didn't hear the necessarily gross margin, which seems to be in a positive position versus your implied 20% Return on capital. But the second question, and I think this is the most important issue that investors are overlooking for Lennar. Evenflo tied to capital light, less capital intensity, 85% finished, Homesites acquired in the quarter, 1.5 years of land. If that were to fall to 1 year, which if you keep buying finished well, it doesn't seem crazy, Hypothetical, but 1.5 down to 1 year, that would be almost the 3rd Decline in land requirement on a land base of nearly $7,000,000,000 equivalent to nearly $3,000,000,000 of decapitalization.

Speaker 6

I ask is EPS, right, as you get smoother, your EPS is increasingly going to be a cash flow metric, which affects valuation. But it also, right, if you're going to be generating earnings plus this $3,000,000,000 or so in land and whatever comes through WIP, It seems as though you will be forced into a systematic buyback program, which is okay problem. I'm just thinking of some of your peers have got Deeply into a negative leverage position. Is that something that you're thinking about, avoiding and comment on the Cash flow from West owned land. Thank you.

Speaker 1

John, did you want to add something? Yes. Just on the gross margin question. Yes, everything we're doing, as Stuart mentioned, is really driving to efficiencies. A big part of that efficiency is all aimed around How do we bring construction costs down for the benefit of affordability and for margins?

Speaker 1

And so if we try to look at Direct construction costs as a percent of revenues, they are falling and that is helping support our margins even though we are aggressively managing the pace. Okay. And to your more recent question, we think about the Size of our stock buyback, we were very focused on continuing to drive cash flow. You are correct. Our land owned and controlled relationship It's an area of focus.

Speaker 1

The year supply, very much an area of focus. You've seen these numbers migrate from much higher To the point that they're at now and we're not finished, we recognize that there will be an additional level of cash that comes into the company. We don't think it puts us in a bad position to end up with Negative debt to total cap, negative net debt to total cap. And we recognize that we will continue to be cash generative. We fully expect that.

Speaker 1

We think that at year end, we'll probably be in a better position than we are right now. And so Without projecting, let me say that we are very focused on stock buyback And using our capital strategically to position the company well, to have flexibility, to have liquidity for the opportunities that might present themselves for us as markets kind of adjust. But at the same time, our stock buyback program is front and center in the way that we're thinking about our future.

Speaker 2

And I guess I'd ask, Ken, that just operationally, we are focused on getting to the point where net income equals cash We're not there yet, but it is a focus.

Speaker 1

And then what we do

Speaker 2

with that capital cash flow is to answer, but I think it is a real goal

Operator

Thank you. And our final question comes from John Lovallo from UBS. Please go ahead.

Speaker 9

Hi, guys. Thank you for fitting me in here. Maybe the first one, just going back to the 10% growth target for next year. Curious how you're thinking about community Count in the context of that 10%, I mean, are you expecting high single digits, maybe low double digits community

Speaker 6

count growth?

Speaker 9

Or is this really going to be driven more by absorptions?

Speaker 1

So let me preface this by saying that community count Is probably the most difficult part of the number in a projection to get right. So, whatever John is going to say about community count right now, I am saying this is not a projection, This is not guidance. This is just John answering your question. Thank you for that But it's very true, whether it's municipalities, litigation, it is the most challenging aspect to hit right on the time So with that said, we have in place, as Stuart said earlier, a land pipeline that makes us very comfortable to target that 10%, that's low double digit growth. That will come from probably like a high single digit community count and some increased absorption as we bring on more affordable Workforce housing communities across our platform.

Speaker 1

So you can expect that our community capital growth, it will grow somewhere around where our Growth expectations are generally, but it's not all about same store sales. Our business doesn't work perfectly that way. I'm not talking about Lennar's business, So I think that the new home business doesn't work perfectly that way. So we expect our community count to grow.

Speaker 9

Understood. Okay. And then maybe just going back quickly to Alan's question, if I can, on Cortera. There's clearly Economic uncertainty out there, but the capital markets do seem to be improving. I mean, there's even a homebuilder IPO out there in the market.

Speaker 9

I mean, have you guys dusted off the plans here at least on Quintera? Is this something that could get back in motion here in the near term? Maybe any incremental thoughts there?

Speaker 1

Well, the reality is we never really put it on the shelf. We've been working in the background on the way that we might or might not configure Capterra. And so it's not something to be dusted off. It's just at the right time, we will make the right move, something that works and dovetails with Where we're going and how our company is configured. But we have stopped talking about it because quarter by quarter, we don't want to feel like We're missing expectations.

Speaker 1

We don't want to put something out there that just isn't right or doesn't feel right. One thing that I will say is that the opportunity to spin or to move off balance sheet Some of our assets, we think is constructive for return on assets and some of the other calculations, We recognize that opportunity. It will happen at the right time. Understood. Thank you, guys.

Speaker 1

Thank you. And so let's leave it there. I want to thank everybody for joining us. We really look forward to continued Execution as we go forward, very happy with our Q3, looking forward to reporting year end and look into 2024. We'll talk next time.

Speaker 1

Thank you.

Operator

That concludes today's conference. Thank you all for participating. You may disconnect your lines and please enjoy the rest

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Earnings Conference Call
Lennar Q3 2023
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