Stuart Miller
Executive Chairman and Co-Chief Executive Officer at Lennar
Very good, and thank you. Good morning, everyone. Thanks for joining today. I'm in Miami today together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; and David Collins, who you just heard from, our Controller and Vice President; Fred Rothman is here, our Chief Operating Officer; and Marshall Ames as well, Chairman of the Lennar Charitable Foundation, along with a few others.
As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating some construction costs, cycle time and some of our land strategy and position. As usual, Diane is going to give a detailed financial highlight along with some limited guidance for the first quarter of 2025. And then of course, we'll have our question-and-answer period. And as usual, I'd like to ask that you please limit to one question, one follow-up so that we can accommodate as many as possible.
So let me begin. Our fourth quarter was a challenging quarter at Lennar as interest rates climbed approximately 100 basis points through the quarter and further challenged affordability. Starting early in the quarter, we saw sales stall at then existing price and incentive levels. That necessitated increased incentives, interest rate buydowns and price adjustments to activate sales and avoid increased inventory buildup. Accordingly, our fourth quarter results missed expectations as new orders were 16,895, short of the 19,000 we expected, and our gross margin was 22.1%, short of the 22.5% that we expected. The shortfall in margin resulted from increased incentives on homes sold and delivered within the quarter. Accordingly, we are moderating our expectations for margins and sales in the first quarter of 2025 as the market adjusts and stabilizes.
Overall, the economic environment, which we believed last quarter was constructive for the homebuilding industry has certainly turned more challenging as longer-term interest rates along with mortgage rates have climbed steadily since our last earnings call. While underlying demand for new homes remains very strong and the supply of available dwellings remains chronically short, a combination of wavering consumer confidence and elevated cost of acquisition have challenged the customers' desire and ability to transact. While there continues to be considerable traffic of customers looking for homes, the urgency to actually transact has quieted as customers adjust to a new normal. Of course, affordability has been a limiting factor for demand and access to home ownership for some time now. Inflation and interest rates have hindered the ability of the average family to accumulate a down payment or to qualify for a mortgage. Higher interest rates have also locked households in lower interest-rate mortgages and curtailed the natural move-up as families expand and need more space.
Rate buydowns and incentives have enabled demand to access the market. While consumers remain employed and are generally confident that they will remain employed and their compensation will rise, higher interest rates and inflation have outstripped their ability or desire to act. While strong employment often goes hand-in-hand with a strong housing market, interest rates have put many with need on the sidelines. As strong demand enabled by incentives and mortgage rate buydowns has driven the new home market over the past years, we expect the broad-based demand cycle to reestablish as rates stabilize or even moderate and as pent-up demand continues to build against short supply.
While demand has been constrained by affordability, the supply of homes remains constrained. The well-documented chronic housing shortage is the result of years of underproduction. This shortage is exacerbated by continuing shortfalls in production driven by now muted demand, together with already existing restricted land permitting and higher impact fees at local levels and higher construction costs across the housing landscape. Mayors and governors across the country are acutely aware of the housing shortage and shortfall in their respective geographies. Many have been pounding the table about the need for affordable housing, attainable housing and workforce housing in their respective markets.
On a final note, immigration and tariffs have recently been added to the list of questions and potential concerns confronting the industry. We recognize that the landscape is still being shaped around these issues and cannot be addressed with certainty. Nevertheless, our early evaluations suggest limited impact to us and to the industry, and Jon will discuss this in further detail shortly. Against this macro backdrop, we continue to have conviction around the two core parts of our operating strategy. First, we are focused on volume and matching our production with the sales pace. While our execution in the fourth quarter was challenged by the rapid and unexpected change in the direction of interest rates, we did adjust and adapt to new market conditions and we adjusted incentives and pricing and we did not -- and we did not enable our inventory levels to spike. We are currently focused on keeping sales volume up as we accelerate in order to catch-up pace and correct the sales miss that we had in the fourth quarter.
Of course, the catch-up in sales pace comes at a cost and that cost is additional pressure on margin. Accordingly, as we have looked ahead to the deliveries in the first quarter of 2025, we expect to sell between 17,500 homes and 18,000 homes and deliver between 17,000 and 17,500 homes. We expect our margin to be 19% to 19.25% as we expect approximately 50% of the deliveries in the quarter will be sold during the quarter and this will dilute the 20% margin that is already embedded in our backlog. Nevertheless, we are focused on driving sales and closings, driving strong current cash flow even at reduced profitability and maintaining carefully managed inventory levels so that as market conditions stabilize or improve, we will benefit from normalized margins across our growing volume.
Secondly and simultaneously, we continue to migrate our operating platform to an asset-light configuration. We are much closer to the completion of the strategic rework of our operating platform from being a land company that happens to build homes to becoming a pure-play land-light asset-light manufacturing model homebuilder that benefits from just-in-time finished home site delivery. Again, we have conviction that our structured asset-light land-light model enables far more predictable volume and growth with a much lower asset-base and lower-risk profile that has been and will continue to be at the core of our operating model. The value of this structure will be seen in the execution of our Rausch Coleman combination in conjunction with the Millrose spin, and I'll discuss this in more detail shortly.
Consistent volume and growth enables improving operating efficiencies in-construction costs, cycle time, customer acquisition costs and SG&A. Additionally, it has driven consistent and dependable cash flow even with variable bottom-line results. And finally, it has enabled the consistent and predictable takedown of just-in-time delivered fully developed home sites and that has attracted capital to the structured land banking partnerships that have driven the nearly $20 billion of transaction that has enabled our land-light transformation to date. We are confident that our operating strategy of consistent volume and growth with a just-in-time delivery of developed home sites will continue to enable our company to be best-positioned to rationalize our cost structure and be best-positioned with strong volume as margins normalize.
Let me turn back briefly to our fourth quarter operating results. As I noted earlier, while we are disappointed with our first quarter -- with our fourth quarter actual results, they do represent a consistent and strategic quarter of operating results in the context of a difficult affordability environment. As mortgage interest rates migrated higher to around 7% through the quarter, we drove volume with starts, while we incentivized sales to enable affordability. In our fourth quarter, we started almost 18,500 homes, sold almost 17,000 homes and closed approximately 22,200 homes. While I've already talked about market conditions, later starts and sales were also attributable to a lighter community count at the beginning of the quarter, which has now been corrected. We have been able to solve the community count shortfall that we described last quarter and we brought our community count up from 1,283 communities at the end of the third quarter to 1,447 communities, which is now 13% higher than last quarter and 15% higher than the prior year. Our community count positions us materially better to drive the volume we expect at lower absorption rates as we enter 2025. We expect lower absorption rates to put less stress on our margin over time as we deliver between 86,000 and 88,000 homes in 2025, reflecting an 8% to 10% increase over 2024.
During the fourth quarter, sales incentives rose to 10.8% as we addressed affordability and the community count lag. As an offset, we were able to maintain construction costs and reduce cycle time, as Jon will detail shortly. And we have maintained our customer acquisition costs, while our SG&A rose to 7.2%, reflecting our lower volume and lower average sales price leverage. On the positive side, excuse me -- on the positive side, we have driven production pace in sync with sales pace and have used our margin as a point of adjustment to enable consistent cash flow. Our strategy has enabled us to repurchase another 3 million shares of stock for $521 million in the fourth quarter, bringing our total stock repurchase for the year to 13.6 million shares for over $2 billion in cash.
We ended the quarter with $4.7 billion of cash on book and a 7.5% debt-to-total capital ratio. We are extremely well positioned to spin Millrose and to be able to continue to repurchase shares and reduce debt as we have driven strong overall operating results to date. We continue to be exceptionally positioned as a company from a -- from our balance sheet to our operating strategy to be able to adjust and address the -- as the -- to adjust and address the market as it unfolds as we enter 2025.
With that said, we're very optimistic about our future. On the one hand, we remain confident that the current volatility driven by affordability and interest rates will subside. Demand will adapt to a new normal and the supply shortage will remain the dominant theme. Volume will continue to help reduce our cost structure and incentives will normalize and margins will normalize and our increased volume will multiply bottom-line. On the other hand, we are equally enthusiastic about the Millrose spin and the Rausch Coleman acquisition and the way both will work together.
As most of you know from yesterday's press release, Millrose Properties, the subsidiary reformed to carry-out the spin that we announced some time ago has now filed a public SEC registration statement and it is available on the SEC website. In the very near-future, the spin-off will be public and will come -- and that will complete our now almost five-year migration to an asset-light operating model. Millrose will be the first publicly-listed land banking REIT and will use our home site option purchase platform that we call The Hopper to provide just-in-time fully developed home site inventory for Lennar for Lennar related ventures and subsequently to other homebuilders across the U.S. as well. The Hopper is a comprehensive suite of systems and procedures used to operate and manage the acquisition, financing and development of land assets at scale designed and refined by Lennar over the past 20 years.
Millrose will be externally managed by a subsidiary of Kennedy Lewis Investments, an institutional alternative investment firm, then with approximately $17 billion in AUM and extensive experience with both Lennar and with the land and land development business for homebuilders. All of Millrose's operating costs will be paid by Kennedy Lewis through its management fee and Millrose will have no employees of its own. Millrose will receive consistent cash flows pursuant to option contracts. It will receive recurring monthly option payments, which will be used to pay predictable dividends to shareholders and will additionally receive initial deposits and proceeds from the sale of fully developed home sites. Millrose will recycle proceeds from the sale of fully developed home sites into new acquisition and development land deals without needing to raise new investor funds.
Accordingly, Millrose is an added source of more permanent capital for Lennar and as an addition to organically negotiated option agreements with developers and other professionally managed programs that are currently private-equity based. As such, Millrose is an important evolution of our land-light strategy as it enables growth through attractive organic and inorganic opportunities, improved cash flow generation and strong return-on-equity and inventory to Lennar. Lennar will contribute to Millrose approximately $5.2 billion of undeveloped and partially developed land and approximately $1 billion of cash. Additionally, Millrose will acquire approximately $900 million of land assets as part of our Rausch Coleman acquisition, while Lennar will acquire the WIP inventory and the homebuilding operations. We believe that the ongoing relationship with Millrose can facilitate other transactions in an asset-light manner as well.
Millrose will be positioned with adequate capital to operate its core business and will have a balance sheet that enables additional debt or equity as needed for strategic engagement or for growth. Lennar will distribute 80% of the stock of Millrose to Lennar shareholders. There will be one share of Millrose stock for every two shares of Lennar. Lennar will shortly thereafter dispose of the remaining 20%, which by the way is non-voting in a distribution of Millrose shares or a potential exchange for Lennar shares, which would basically effectuate a cashless buyback of Lennar shares.
Let me say this one more time as it might be a little confusing, the additional 20% interest, which is non-voting shares will be retained by Lennar for a very brief period of time and will quickly either be distributed or exchanged for Lennar shares to effectuate a cashless stock buyback. Needless to say, we are very excited to bring Millrose public in the very near future.
Now let me turn briefly to the Rausch Coleman acquisition. As I have noted, the Millrose spin will work hand-in-hand with our previously-announced purchase of Rausch Coleman Homes, which is based in Fayetteville, Arkansas. Rausch Coleman is led by John Rausch, a fourth-generation builder who built his company into the 21st largest homebuilder in the country. We look forward to welcoming John and his extraordinary team to the Lennar family as John will continue to work alongside Lennar as a partner and many of the Rausch Coleman associates will actually join the company. This acquisition fits squarely into our strategic growth plan of acquiring companies in concert with our Millrose property spin-off, where Lennar acquires the operating assets, including land and Millrose acquires the land holdings. This enables Lennar to acquire with a limited investment and producing a high-return enabled by the Millrose platform.
Rausch Coleman builds in 12 primary markets across seven states and is the number one builder by market share in six of these markets. This acquisition will result in our expanding into new and desirable markets in Arkansas, Kansas and Missouri, while growing our existing operations in Texas, Alabama, Oklahoma and Florida. Rausch Coleman is a very strong cultural fit for Lennar, sharing a common operational philosophy focused on building -- on the building of reasonably priced homes with strong basic home designs. Like LenNar, Rausch Coleman offers few optional changes in proven markets and has an overall commitment to delivering high-quality homes within budget and on-schedule. We expect that the acquisition will add approximately 100 communities, 4,000 deliveries and 4,000 new orders in 2025, assuming that this acquisition closes by the end of the first quarter.
After the 2025 activity, there will be more than 37,000 home sites controlled through Millrose for Lennar's operations in 2026 and beyond. The 2025 activity is concentrated 30% in markets where LeNnar has existing operations and 70% in new markets where LenNar will take advantage of Rausch Coleman's exceptional reputation and well-run operations as we integrate into one Lennar. We are very excited about the Rausch Coleman conditions to the Lennar footprint.
So we've covered a lot. And in conclusion, let me say that while this has been a difficult quarter and year-end for Lennar, while the short-term road ahead might look a little choppy, we are very optimistic about the longer-term road ahead. In spite of bumps in the road, this is an exciting time for Lennar. At LenNar, we are upgrading the financial and operating platform as we drive production and sales. We have continued to drive production to meet the housing shortage that we know persists across our markets. With that said, as interest rates normalize, we believe that pent-up demand will be activated and margin will recover and we are well-prepared with a strong and growing national footprint, growing community count, and growing volume.
Perhaps most importantly, our strong balance sheet and even stronger land banking relations afford us flexibility and opportunity to consider and execute upon thoughtful growth for our future. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high returns on capital and equity. We will also continue to focus on our pure-play business model and reduce exposure to non-core assets. We will continue to drive just-in-time home site delivery and an asset-light balance sheet. And as we complete our asset-light transformation, we will continue to generate strong cash flow and return capital to our shareholders through dividends and stock buyback while we also pursue strategic growth. For now, we are guiding to 17,000 to 17,500 closings in the first quarter of '25 with a margin of 19% to 19.25%. We -- and we expect to deliver approximately 86,000 to 88,000 homes in 2025. We also expect to continue to repurchase stock in 2025, and we will determine the amount as we watch the evolution of our Millrose spin and our land-light operating model perform. We look forward to 2025. And for that, I want -- I want to thank the extraordinary associates of Lennar for their tremendous focus, effort and talent. And with that, let me turn over to Jon.
