Lennar Corp /New/ (LEN) Q1 2022 Earnings Call Transcript

Welcome to Lennar’s First 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. I will now turn the call over to Alexandra Lumpkin for the reading of the forward-looking statement.

Thank you, and good morning. 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 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 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. These factors include those described in yesterday’s press release and our SEC filings, including those 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.

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

Great. Good morning, thank you. And thank you all for joining this morning. I’m here in Miami, joined by Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Bruce Gross, CEO of Lennar Financial Services; and of course, Alex, who you just heard from; and we also have Rick Beckwitt, Co-CEO and President on the line with us, and he's joining us from Colorado. As usual, I'm going to give a macro and strategic Lennar overview. After my introductory remarks, Rick's going to talk about market strength and land and community count. Jon will update on supply chain, production, and construction costs. And then as usual, Diane will give a detailed financial highlights and additional guidance, and then we'll answer as many questions as we can, and we'll limit to one question and one follow-up, please. So let me begin and start by saying that we're quite pleased to announce another hard-fought and well-executed quarterly performance by the associates of Lennar. Our operating results reflect both the extraordinary focus and determination of Lennar's management and operating teams, as well as the general strength in the housing market. As questions abound given geopolitical turmoil, inflationary pressures building both around the globe and domestically, and interest rates are rising, the housing market remains very strong in all of our major markets. Demand trends remain strong, as family formation continues to rise. As our team from around the country reviewed our weekly sales starts and closings on Monday for our regions and our divisions, the unanimous view was that our sales pace ranges in each market from strong to very strong. Buyers are seeking shelter and they are seeking shelter from inflationary pressures as scarce rentals see rents escalating and escalating housing costs can be controlled with an owned home with a fixed-rate mortgage, while wages are going up, so too are housing costs. So with employment strong and home prices rising, it is best to fix these costs. Additionally, the home is ever more the control center or hub of our customer’s lives and frankly, geopolitical stress makes the security of home all that much more comforting. While demand is strong, supply is short and constrained, the ability to actually build and deliver homes has been slowed by the supply chain that is all but broken, by the workforce that is short in supply and the intense competition for scarce and titled land assets. Therefore, the supply of homes has remained quite limited and is not prone to overbuilding. Accordingly, we're pleased to report operating performance that reflects the general strength in the housing market. Setting aside for the moment, our noncash mark-to-market gains last year and losses this year, our operating performance is consistent and very strong. While deliveries increased 2% year-over-year to 12,538 homes, our gross margin improved 190 basis points to 26.9%, and our SG&A improved 90 basis points to 7.5%, which drove net margin to 19.4% and drove net earnings from operations to just over $800 million and almost 20% bottom line improvement from operations. Although deliveries have been constrained by the supply chain disruption, efficiency in our operations continues to drive strong bottom-line improvement and very strong cash flow. Additionally, our financial services group continues to perform exceptionally for the company, adding $90 million of earnings, while supporting the closings of every possible home and making the closing process as joyful as possible in the current, very difficult environment. Our strong cash flow has been constructively deployed, as our operations have been our primary focus. First, with the lengthening of our cycle times by 6 to 8 weeks over the past year, driven by supply chain disruption, we have more capital invested in our inventory, as we are increasing starts and taking longer to deliver homes, even as we are significantly reducing the amount of land held on our books. We are deploying more cash into shorter-term assets, while generating cash from longer-term assets. Next, we're continuing to pay down debt as it comes due, with the next tranche available for paydown in August, and that's $575 million that we expect to pay down from cash flow. And of course, we have continued to repurchase stock, with another 5.3 million shares purchased in the past quarter and another $2 billion authorized by our board just yesterday. With strong performance and cash flow, we have fortified our balance sheet with $1.4 billion of cash on book, nothing drawn on our revolver, and an 18.3% debt-to-total cap ratio as compared to 24% last year. We expect our results to continue to strengthen throughout the year, as our already increased start pace results in more deliveries and as we use our size and scale and our builder of choice relationships to alleviate and resolve some of the supply chain friction. To that end, last quarter I noted that Jon and Rick, our co-CEOs have not chosen to sit idly in difficult times, but instead, they went to the problem and visited each of our 38 divisions over a six-week period. Well, that was last quarter. Monitoring Jon and Rick came this quarter, I noted that on top of regular in-the-field operations reviews at division offices, they have jointly with Kemp Gillis, our esteemed Head of Alfen Supply Chain, gone to the problem and visited approximately 10 of our most strategic manufacturers at their offices to engage directly in the problem-solving process. This is just the beginning, as many more trips are planned, and the supply chain problem will find its way to becoming a supply chain opportunity. I'm betting on them time, focus and attention; problems are being solved and that is simply the Lennar way - leadership matters. So let me quickly turn back to the mark-to-market volatility that I mentioned earlier. Our total first quarter earnings in the first quarter were $503.6 million or $1.69 per diluted share compared to first quarter 2021 earnings of $1 billion or $3.20 per diluted share. These numbers include our mark-to-market loss this quarter and gain last year at this time. Let's avoid confusion. We have made significant strategic investments in various new technology companies that are working to reshape various parts of our company and our industry. Some are disruptors and some are enhancers. All of them are core to the future of, as well as the present of our core operating platform. They have informed change in the core that have reduced SG&A and production costs. These cost reductions have made the investment in the company and the LenX strategy extremely valuable in creating long-term shareholder value. These investments are also the tip of the spear in identifying and engaging our substantial industry-leading sustainability initiatives from solar on the rooftop to microgrid technology across the community, from water conservation to sustainable cement. Our LenX strategy is setting the course for Lennar's sustainable future. A number of our LenX investments have matured and become public companies, and their short-term market price movements are volatile. And that volatility runs through our earnings. On the one hand, this causes some confusion on both the upside and the downside. For example, in Q1 2021, we reported a $470 million mark-to-market profit, and in Q1 of 2022, this quarter, we reported a $395 million mark-to-market loss. On the other hand, these investments have been stepping stones to our higher gross margins, as well as our never been lower SG&A at 7.5% in the first quarter, which is now the lowest we have ever seen in the first quarter. These are non-monetary and non-operational profits and losses, and they really do not reflect the state of the housing market, or the operating performance of the company within that market. With that said, we choose not to sell the ownership in these companies just because they go public. Instead, we are strategically engaged in the businesses because we are very enthusiastic about the future of these businesses and our LENX strategy. And of course, you can expect to hear a lot more about this part of our business in the future. Now, finally, let me talk briefly and update our progress on SpinCo and are focused on becoming a pure-play homebuilding company. As noted last quarter, we filed our private letter ruling with the IRS. Since then, we've taken the next step with SpinCo and filed our confidential Form 10 filing in February, so we can control the timing of the spin. We have received, since then, our first round of comments from the SEC. We have also initiated the process with the NYSE to have the shares of SpinCo listed. Nevertheless, given the choppiness of the capital markets and the work that is still being completed, we're pushing our expectations for the actual execution to the third or fourth quarter of this year. We have noted before that the spin company will be an asset-light asset management business that will have a limited balance sheet. Many of the assets targeted for SpinCo will be either part of the limited balance sheet of SpinCo or are currently being monetized in the form of assets under management that will be housed within the private equity verticals of SpinCo, or they're being resolved and monetized in other ways. Additionally, while we are taking more time to execute the spin, we continue to migrate assets from the Lennar balance sheet into the assets under management that will comprise SpinCo. Therefore, we are growing the management fees and returns that will define the value of the spun company. This monetization has been and will be completed over the next year or so, and the cash proceeds will be deployed in Lennar to fortify the balance sheet and/or to continue to buy back stock on an opportunistic basis. As a reminder, our three core verticals of SpinCo have been identified in business plan and are already growing AUM and fee generation. They are multifamily, single-family for rent, and land strategies. Each of these verticals already have raised and are continuing to grow third-party capital and our active asset managers. LMC, our multifamily platform, had almost $10 billion of AUM at the end of 2021. And as of the end of our first quarter, had approximately $10.7 billion of gross capital under management and is very close to our first closing for our third fund. LSFR, our single-family for rent platform, has grown from approximately $1.2 billion of assets deployed at the end of 2021 to approximately $1.9 billion deployed as of the end of our first quarter. And our land strategies platform, which is still being refined for SpinCo, expects to have $4 billion to $5 billion of assets under management at the time of the spin. As I've noted in the past, the remaining Lennar Corporation will drive higher returns on our assets and equity base, and the spin will not result in a material reduction of either our bottom line or our earnings per share. So let me wrap up and conclude by saying that we're extremely well-positioned financially, organizationally, and technologically to thrive and grow in this evolving housing market. As I said earlier, we expect our results to strengthen throughout 2022. We are picking up steam, and we are picking up confidence. We recognize that interest rates are rising and inflation is a legitimate threat. We also know that difficulties in the supply chain present challenges for Lennar and for the industry, and that land and labor are in short supply. But we also recognize that the economy remains strong with wages rising and the housing is in short supply across the country. Strategically, we remain focused on orderly targeted growth, with our sales pace tightly matched with our pace of production. We focus on gross margin by selling in step with production while controlling costs and reducing our SG&A, and therefore maximizing our net margins. As we look to the remainder of 2022, we expect continued strength in the market and double-digit growth for the company. As noted in our press release, we are projecting 16,000 to 16,300 deliveries in the second quarter at a 28% to 28.25% margin. And we are now projecting 68,000 deliveries for a year-end at a 27.25% to 28% margin for the year. At this pace, we will have a very strong bottom line and a very strong cash flow with a projected spin-off in the second half of the year. And Lennar will have another record year. So with that, let me turn it over to Rick.

Thanks Stuart. As you can tell from Stuart's opening comments, the housing market is very strong. Our team is extremely well-coordinated, and our financial results continue to benefit from a solid execution of our core operating strategies. Key to that has been rent running and finely tuned home building machine where we carefully match homebuilding production with sales on a community-by-community basis. We have continued to strategically sell our homes later in the construction cycle to maximize sales prices and offset potential cost increases. To that end, we have slowed sales; rather than writing sales contracts when customers visit our website or welcome home centers, we are putting people on a waiting list to contact them later when we release the homes for sale. This shift in the sales process is driving higher sales prices and stronger margins. Our first-quarter results prove out the success of this strategy as we achieve gross margin increases of 190 basis points year-over-year. During the first quarter, we started 4.7 homes per community, sold 4.3 homes per community, and we ended the quarter with less than 180 completed unsold homes across our entire footprint. This production, margin-driven and sales-focused program will continue to improve margin and lead to increased deliveries and profits in fiscal 2022. In the first quarter, new orders, deliveries, gross margins were solid in each of our operating regions. We continue to achieve price increases and saw strength in all product categories from entry-level to move-up and in our active adult communities. Let me give you some color on our markets. As Stuart said in his opening remarks, all of our markets are strong right now, but here's some color. Florida continues to benefit from core local demand as well as in-migration from the Northeast, Midwest, and West Coast, which is driving both sales pace and price. Inventory is extremely limited. The state is experiencing tremendous job growth, with employment exceeding pre-pandemic levels. The hottest markets in Florida are Naples and Sarasota in the Southwest, Miami, Dayton, Broward in the Southeast, and Tampa, Orlando is also a robust market benefiting from a significant rebound in tourism. In all of these markets, we are the leading builder with the best land positions. Atlanta continues to see strong and steady growth, driven by limited inventory, relative affordability, and strong job creation. During the first quarter, we entered the Huntsville, Alabama and Florida, Alabama coast markets. Both markets are experiencing strong demand, driven by limited inventory and quality of life. Huntsville is especially thriving due to significant employment growth fueled by an influx of many diverse industries attracted by a world-class airport, a supply of educated workers, and a relatively affordable home price. The Gulf Coast is also experiencing outsized employment growth, while providing a healthy outdoor lifestyle, a favorable weather, and the beauty of the Gulf of Mexico. In the Carolinas, Raleigh, Charlotte, and Charleston are extremely strong markets. Inventory is very limited, and the combination of core local demand and in-migration continues to push both sales pace and price. We are the top builder in all of these markets. Texas continues to be the strongest state in the country, with in-migration from the East and West. The state's pro-business, employer-friendly economy is driving corporate relocations and exceptional job growth, especially in the technology sector. The state is also benefiting from a surge in oil and gas prices. The strongest market in the country continues to be Austin. The Colorado market continues to gain momentum, benefiting from strong in-migration and solid job growth. Inventory is very limited, and we are seeing great pricing power. Phoenix and Las Vegas continue to be two of the hottest markets in the country. Both are benefiting from business-friendly environments, real job growth, and immigration from California. Nevada continues to lead the nation in new jobs, with employment significantly exceeding pre-pandemic levels. Phoenix is driven due to real affordability, inventory is extremely limited, and demand continues to accelerate. The Pacific Northwest continues to be a strong market, as significant land use and development restrictions limit production to meet growing demand. Notwithstanding these restrictions, we have an excellent land position with great growth opportunities. Portland and Seattle are experiencing outstanding job growth, with both markets ranking in the top 10 in the country. With strong demand and limited supply, we continue to see strong price increases. The California market remains very strong, driven by the state's severe housing shortage; there was more demand than supply even with much of the out migration from the state. The Inland Empire, Sacramento, and East Bay Area have remained some of the strongest markets, with homebuyers looking for affordability. During the quarter, we also saw a resurgence in the core markets of the Bay Area, as employees are returning to work. As such, both our core and inland markets are firing on all cylinders. As I said, as Stuart said, these are some of the strongest markets, but there is broad strength across the country. Now, I'd like to spend a few moments talking about growth in community count. During the first quarter, our community count increased 4% year-over-year as we focused on growth in our existing and new markets. We expect our community count to build throughout the year, and are still projecting to end 2022 with a low double-digit increase in community count year-over-year. While supply chain issues and inspection delays are impacting the timing of some of our community openings, we are in an excellent position for strong growth in 2022 and 2023. Our land pipeline remains robust, with plenty of land in the queue to meet our growth goals over the next several years. We continue to see great buying opportunities in all of our markets and are confident this pipeline will produce strong community count growth for the next several years, as we pursue deals to backfill beyond the near-term deals that are already owned or controlled. We are also pleased with the excellent progress we are making on our land-light strategy, as evidenced by our controlled home site percentage increasing to 58% at the end of the first quarter from 45% last year. We believe we can increase this to 65% by the end of the fiscal year. Our extreme focus on a land-light model saved us a significant amount of cash spent on land acquisitions during the quarter. We ended the quarter with $1.4 billion in cash, no borrowings on our $2.5 billion revolver, and a homebuilding debt to capital of 18.3%. As Stuart said, we repurchased 5.3 million shares of our common stock for $526 million. These repurchases, combined with our significant earnings contributed to a return on equity of 19.5%, which was a 180 basis point improvement from the first quarter of last year. Now, I'd like to turn it over to Jon.

Thank you, Rick. This morning, I'll explain how our first quarter was influenced by supply chain disruptions, inflation in construction costs, and increases in cycle times, along with our team's ability to navigate these difficulties. At Lennar, we continue to face various disruptions. Some of the supply chain issues mirrored those we encountered in our fourth quarter, creating intermittent disruptions across different trades, at different times, and in various locations. The first quarter was notably affected by the Omicron spike in January, which had a significant impact on operations. A large portion of the workforce in manufacturing, supply, local trades, and even our associates was unavailable during this period, especially in January. At times, it appeared that up to half of the industry workforce was quarantined. This situation compelled our management, purchasing, and construction teams to be highly adaptive in finding solutions to the unique challenges presented by the Omicron spike. Labor returned in February, and manufacturers and trades are now working hard to recover lost time. Many manufacturers have managed to stabilize their lead times, resulting in fewer late delivery situations, although some still face significant challenges. Categories still facing constraints include electrical equipment, garage doors, HVAC condensers, flex duct, and cabinets. In light of ongoing disruptions and the potential for future ones, our divisions are closely managing local trade inventories and bringing on additional labor by onboarding new trade partners. Our regional and national teams are in constant communication with manufacturers and suppliers to support our divisions. The supply chain issues in the first quarter led to increased cycle times and higher direct construction costs. Our average cycle time rose by about two weeks from Q4 and approximately two months year-over-year. Recognizing the severity of the challenges due to the Omicron spike, I want to express my gratitude to our associates for their leadership, creativity, and determination in overcoming these situations. Their extraordinary efforts allowed Lennar to deliver over 12,500 homes to eager homeowners in our first quarter. Looking forward in the year, with guidance to deliver 68,000 homes, we are strategically focused on accelerating starts to increase our inventory under construction, which will help mitigate expanding cycle times and provide our management teams with more chances to complete homes as planned. Now regarding costs, our direct construction costs rose by 3% sequentially from Q4 and 23% year-over-year. Lumber prices remained relatively flat sequentially but contributed significantly to the year-over-year increase, accounting for about 60%. Lumber prices have surged by nearly 100% since December 1, reaching $1,400 per thousand board feet, leading to an expected increase of about $5 per square foot by August this year. Further price increases are foreseen as lumber futures project short-term inflation through the spring cycle and into early summer, followed by a potential deflation of lumber prices according to our analysis and feedback from key industry participants. This trend seems to echo last year's dramatic fluctuations in lumber prices. Despite operating in this inflationary environment, our first quarter direct construction costs as a percentage of revenue remained stable at 43%, consistent with 42% both sequentially and year-over-year. This indicates that our pricing power is effectively countering these cost increases. As Rick mentioned, we are achieving this through a disciplined alignment of sales pace with construction pace. Our divisions have been and will continue to focus intensely on prioritizing production. We are constantly refining our dynamic pricing and FIFO sales approach, allowing effective management of which homes are sold and at what price. In closing, I want to reiterate our commitment to our everything's included strategy and to being the builder of choice for our trade partners, a program now entering its seventh year. This initiative has fostered strong relationships with our strategic building partners, enabling adjustments in these unprecedented times. These partnerships enhance our ability to solve problems in 2022 more effectively than before. Furthermore, as Stuart rightly pointed out, Kemp Gillis, Rick, and I are actively traveling across the country to meet with senior management of key supply chain partners, discussing immediate solutions and innovative approaches to the supply chain moving forward. We are engaged in meaningful dialogues about how to adjust the current supply chain structure to minimize future disruptions. We believe that the outcomes of these efforts will provide the quickest path to stabilizing our supply chain at Lennar while improving efficiencies across the board, allowing for better control of both costs and cycle times. Thank you, and now I’ll hand it over to Diane.

Thank you, Jon, and good morning, everyone. So Stuart, Rick, and Jon have provided a great deal of color regarding our homebuilding performance. Therefore, I'm going to spend a few minutes on the results of our other business segments and our balance sheet and then provide detailed guidance for Q2 2022 and updated high-level guidance for fiscal year 2022. So starting with Financial Services. For the first quarter, our Financial Services team produced $91 million of operating earnings, slightly above the high end of our guidance. When you look at the details between mortgage and title, our mortgage operating earnings were $67 million compared to $100 million in the prior year. As we've indicated for several quarters, the mortgage market has become increasingly competitive for purchase business, as refinance volumes and resale inventory have declined. As a result, secondary margins have been decreasing. This was the primary driver of our first-quarter, lower secondary margins as compared to the prior year. Title operating earnings were $21 million compared to $30 million in the prior year. The prior year included a one-time $11 million gain related to the early paydown of a note receivable. Excluding this gain, earnings increased this year, primarily as a result of higher premiums driven by an increase in the average sales price per transaction. And then looking at our Lennar Other segment, as Stuart indicated, for the first quarter, our Lennar Other segment had an operating loss of $403 million. This loss was primarily the result of our non-cash mark-to-market losses in our strategic technology investments which, as we indicated, totaled $395 million. As we've mentioned before, we are required to mark-to-market many of our technology investments that are publicly traded, and that valuation will fluctuate from quarter-to-quarter. And then turning to our balance sheet. We ended the quarter with $1.4 billion of cash and no borrowings on our $2.5 billion revolving credit facility, for a total of $3.9 billion of homebuilding liquidity. During the quarter, we continued to focus on becoming land lighter. As a result, at quarter end, we owned 202,000 homesites and controlled 279,000 homesites for a total of 481,000 homesites. This portfolio of homesites provides us with a strong competitive position for continued growth. As Rick mentioned, our homesites controlled increased to 58% from 45% in the prior year, while our years owned stayed flat from the prior year at 3.4 years. Land transactions may fluctuate quarter-to-quarter, but progress is made year-over-year. We are still on track to reach our goal of 2.75 years owned and 65% homesites controlled by year-end. We remain committed to our focus on increasing shareholder returns. During the quarter, we repurchased 5.3 million shares, totaling $526 million. Additionally, we paid dividends totaling $110 million during the quarter, which was the result of a 50% increase of our annual dividend to $1.50 per share that took place in January of this year. Our next senior note maturity is $575 million, which we will pay in August of this year, and we have no maturities due in fiscal 2023. The result of all these transactions with homebuilding debt to total capital of 8.3%, which improved from 24% in the prior year. Just a few final points on our balance sheet: Our stockholders' equity increased to $21 billion. Our book value per share increased to $69.98 and our return on inventory was 27.5%. In summary, we have a solid balance sheet that positions us well for the future. With that brief overview, I'd like to provide some guidance details. As we look forward to the second quarter, we're assuming that market conditions remain similar to what we see today - strong demand and limited inventory driven by continued supply chain challenges. With that backdrop, we expect Q2 new orders to be in the range of 17,800 to 18,200 homes, as we continue to moderate sales pace to match production cycle changing. Community count is always challenging to estimate as it's difficult to precisely predict when communities will open and when they will close out. However, we do expect our Q2 ending community count to be slightly up compared to Q2 of last year. Taking into consideration the continued supply chain challenges, we anticipate our Q2 deliveries will be in the range of 16,000 to 16,300, and our Q2 average sales price should be about 470,000. We expect to continue to produce strong gross margins in the range of 28% to 28.25%, and we expect our SG&A to be between 6.8% and 7%, as we continue to focus on simplification, efficiencies and leveraging our overhead. For the combined homebuilding joint venture, land sale, and other categories, we expect a loss of about $10 million. Looking at our other businesses, we anticipate that Financial Services earnings for Q2 will be in the range of $90 million to $100 million as market competition for purchased business continues to increase. We expect a loss of about $10 million to $15 million for our multifamily business. For the Lennar Other category, we expect a loss of about $10 million. This guidance does not include any potential mark-to-market adjustments to our technology investments. That adjustment will be determined by their stock prices at the end of our quarter. We expect our Q2 corporate G&A to be about 1.5% of total revenue and our charitable foundation contributions will be based on $1,000 per home delivered. We expect our tax rate to be approximately 25%. The weighted average share count for the quarter should be approximately 292 million shares. When you pull all this together, this guidance should produce an EPS range of $3.80 to $4 per share for the second quarter. Turning to full-year guidance, we are increasing as mentioned our guidance for the year. We now expect to deliver approximately 68,000 homes more or less, which is an increase from our previous guidance of 67,000 homes. We believe our average sales price for the year will be in the range of $470,000 to $475,000. This would result in about $32 billion of homebuilding revenue, which would be an increase of more than 25% from fiscal 2021. We are also increasing our gross margin guidance for the year, as we mentioned. We now expect our margins to be in the range of 27.25% to 28%, which is an increase from our previous guidance of 27% to 27.5%. We've provided somewhat of a wide range to take into consideration some of the potential uncertainties as we look ahead. With our continued focus on technology and efficiency and an increase in volume, we expect our full-year SG&A to be in the range of 6.6% to 6.8%. For Financial Services, we're affirming our annual guidance of $440 million to $450 million. Our tax rate should be approximately 25%. As we continue to execute our core operating strategies, maintain a strong balance sheet, and remain focused on cash flow generation and returns, we are in an excellent position to have a strong fiscal year 2022. With that, let me turn it over to the operator.

Thank you. Truman Patterson with Wolfe Research, you may go ahead.

Hey, good morning everyone. Thanks for taking my questions. So, first you mentioned that cycle times extended a couple of weeks, but you increased your closings guidance and starts to remain relatively healthy. So, two-part question for me on the supply chain. Just first, you all mentioned visiting manufacturers. I'm hoping you can elaborate on some of your internal initiatives that might be giving you better access to materials, labor. And whether some of the materials that you mentioned, if there's any kind of relief in sight going forward? And then the second part, you made an interesting comment about enhancing your market position. You all gained quite a bit of share last quarter. I'm hoping you can give us kind of the lay of the land in 2022 for smaller private peers in a pretty constrained environment and your ability to continue taking share.

Let me start by saying that we are not only gaining momentum but also building confidence, largely due to our focus on starts. The supply chain issues are still present, but we are managing to put more homes into production. We understand that the cycle time is extended, but with more homes progressing further along, we have a larger base to draw from when it comes to closings. This gives us both momentum and confidence, and we are gaining visibility into what we can deliver in the current environment. It's important to note that this transition is challenging and requires significant focus, time, and effort. We are discovering that size and scale are crucial. The way we collaborate with our building partners and our commitment to being the builder of choice are vital, and daily engagement with supply chain participants is increasingly important. When we combine these elements, we can see greater clarity on how our business is advancing. Jon, would you like to share more on this?

Yes, I think you hit a lot of the key points, Stuart. Starting with size and scale, as you mentioned, really gives us a seat at the table and the prioritization. But Truman, as you can imagine, if you sit down with CEOs and key executives of manufacturers, distributors for 4 to 6 hours, really opening up the thought process, how do we have a different approach to the products we buy, to the way that they're distributed, to joining together manufacturers and distributors to think through from the origin of the supply chain, all the way to the installation of our home. You're going to come up with a lot of interesting thoughts and ideas. We're in the process right now of really vetting those, we'll be beta testing them and are very confident that we already see opportunities for significant improvement. As I mentioned, it's going to give us better cost control for both us and for our trade partners and give us much more clarity as to the delivery process. It begins a lot with our technology and our ability to give forecasting information with real clarity to our vendors, which is critically important for them as they plan how to strategically supply us.

And Rick, why don't you weigh in on market share and where we think the current supply chain programming brings us on our ability to capture even greater market share.

Yes. So, there's no question we continue to gain market share on the private builders and many of the larger or mid-market public builders. This is going to continue to happen. A lot of this is driven by really access to land. Because when we have 20% to 40% market shares, the land market needs to work with us. So those land relationships are driving a lot of the gain. And then just the efficiency of our product, our Everything's Included program allows us to work much more efficiently with the supply chain, and as a result of that, we're capturing more product.

Okay. Thanks for that. And you all are acknowledging the risks, but you mentioned that demand should remain strong for the foreseeable future. My question is more on the land side and higher rates outlook, etcetera. Have you seen any shifts in landowners’ willingness to option or changes in land banking terms that might push out your ability to hit that 65% option target by the end of 2022?

The short answer to that is no, there haven't been shifts in appetite or ability to option. Remember that we are focused on building a structured approach to that option program and have been working through land structures to do that. I think we will be able to migrate in that direction with a greater portion of our land asset being options rather than owned, and I believe it will continue in that direction.

Thank you. Our next caller is Mike Rehaut from JPMorgan. You may go ahead, sir.

Thanks. Good morning, everyone. Thanks for taking my question. First, I just wanted to kind of go back to some of the comments you made on demand, and you very much appreciate the fact that you kind of stated in a couple of different instances in the prepared remarks about how demand remains so strong. I think, obviously, everyone is very, very much focused on any type of graduated difference. In other words, maybe, still remaining very, very strong, very robust. But any kind of changes on the edges? And what I'm referring to is, obviously, yesterday, we had an AHP survey where future sales component was down 10 points. Obviously, that's a national number and might be just truly more sentiment-driven. We also had a private builder call yesterday that we hosted where, on the margin, very, very minor and still, characterizing the market as strong as you did. The builder kind of pointed to maybe the first-time or entry-level buyer taking a little bit longer to make a decision, maybe, a very slight pickup in cancellations and even taking a slightly smaller home or a home further out to adjust to the new interest rate backdrop. So in that context, I was just curious again, on the margin, if you've seen anything across that entry-level, lower price point, if any markets stand out in that regard as well.

So Mike, I aimed to be clear in my comments. Earlier this week, during our management call, we asked nearly the same question across our geographic footprint. The feedback indicated that sales are generally strong to very strong. That has been the consistent response from our divisions and regional presidents. However, I also wanted to point out that there are economic factors that raise questions, and I know some may look for signs of a changing environment. So far, we haven't observed any shifts, but we are mindful of inflation and the upward trend in interest rates, which seem to be rising. We recognize there could be conflicting influences at play. These influences can support both the sustainability of market strength and potential weaknesses. Currently, wages are increasing, but housing costs are also rising, along with inflationary pressures on rental rates. This is crucial as we consider first-time buyers visiting our welcome home centers, who are facing significant increases in their rental rates and are looking for a stable financial component to manage their costs. While they may struggle with gas prices and food, they can stabilize their housing costs with a 30-year fixed-rate mortgage. There are conflicting factors in the market, but we have not seen any changes in demand patterns, except for strength, and we are monitoring the situation closely. We're sharing this information transparently. Overall, the market across the country has remained strong.

And the only thing I'd add to that, Stuart, is sequentially, our cancellation rates actually went down. What we're finding is that if something cancels, that home is gobbled up very quickly at a higher price than what it was put under contract. So the markets are strong and continue to feel healthy.

And Mike, I would also add that, as we mentioned, we're very carefully controlling what we released for sale. There's clearly demand across all our markets where if we released more homes that they would sell. People are waiting for us to release more homes. And I’d also point out one data point, which I think just supports the current state of what we're seeing, is that our web sessions online are over 20% year-over-year and the conversion of those to leads is up almost 50%. I'm just indicating the significant interest that's out there in homeownership.

Those comments are really helpful, and I appreciate the additional insights from Rick and Jon. It's very beneficial. For my second question, shifting to SpinCo, there's a lot of focus there. You mentioned the land strategies component of SpinCo that would manage $4 billion to $5 billion in assets. I want to confirm how we should view the total amount of assets being removed from Lennar's balance sheet in relation to SpinCo. I assume that the $4 billion to $5 billion is part of the total, but are there additional components as well? Additionally, regarding the fees, since there will effectively be an asset management business, how should we consider the fees from multifamily, single-family rentals, and land strategies as a percentage of assets under management in terms of income stream?

Mike, we haven't provided enough detail for you to make those translations, and we're not ready to share that information. Regarding the assets moving from Lennar to SpinCo, it's reasonable to estimate them at around $5 billion to $6 billion. Some of these assets have already transitioned into those under management that will eventually be part of SpinCo. However, we don’t have a precise breakdown for you at this moment. In terms of the assets that will be transferred on the spin-off day versus those being allocated to SpinCo, we're still in that range. For instance, when we look at the multifamily component, from the end of the fourth quarter to the end of this quarter, we've increased our assets under management from approximately $10 billion to about $10.7 billion. I can't provide an exact percentage, but a significant portion of that increase has entered into our asset management program. As for the land, some of the land in land strategies is sourced from our book, while some comes from acquisitions that won't be placed on the book. Therefore, there isn't a direct comparison available. Still, I believe we're looking at that $5 billion to $6 billion range for the assets that will have shifted to that ownership format, and you're seeing cash flow into Lennar reflecting some of this as we progress toward the spin-off date. Regarding the fee streams, we have not yet outlined how those will function, and we haven't developed a model for them. However, we will provide clarity on this as we approach the spin-off date.

Great. Thank you.

Thank you.

Thank you. Stephen Kim with Evercore ISI. You may go ahead.

Thank you, everyone. I have a couple of questions about the land situation. I noticed that your owned lots increased significantly this quarter, which was surprising since that number had been stable for a while. Could you explain that increase in the context of your overall outlook, which appears to indicate a decline from the 202 lots you own currently? Additionally, we analyzed the amount of land you owned or controlled just before the pandemic and assumed you maintained most of your options. If we account for that along with your closings since then, it results in a substantial number of lots that likely still reflect pre-pandemic pricing—around 180,000 lots prior to this quarter, with only about 12,000 delivered this quarter. A significant portion of your land still appears to have pre-pandemic pricing. Can you share your thoughts on whether this assessment is accurate?

Okay. I'm going to ask Diane to start with an answer on this because she spends all her time focusing and assessing this, and then Rick will follow up. Go ahead.

I would say you're correct. Our land purchases do vary from quarter to quarter. Typically, we see an increase in the first quarter as land sellers are often eager to complete transactions before the year ends. However, I wouldn’t take that trend too far; it can be inconsistent, and our main priority is to make year-over-year progress. So, while this quarter was a bit stronger, it's just a matter of variability and it tends to fluctuate.

Yeah. Diane is exactly right. A lot of that was just timing. Some of it was driven - a lot of it was driven by potential fear of tax rate changes, given some of the talk that was going on earlier in the election cycle. People wanted to avoid paying a higher tax and transacting in 2022. It's really just timing. We're very focused on bringing that down. With regard to your question about pre-pandemic pricing and land opportunities, you're right, and I think that's why you're seeing our margins continue to improve. The level of land embedded on a cost percentage to be very attractive. So we're really pleased with what our land teams have done.

Yes, it would seem to suggest quite a bit of hang time here in terms of the margin opportunity, particularly with the fact that home prices are still going up. And that sort of segues to my next question. We know that when you look at your average price and backlog, for instance, that can be influenced by more shorter cycle-times for cheaper homes and longer cycle times for more expensive homes and that sort of thing. But if I look at your order price, the average price you took in orders this quarter, I would generally think that those mix shift effects should be very muted. And we noticed that your average order price was something on the order of $495,000, which was, I think it was up like 6% or something like that sequentially, which is a very, very strong number. I was curious as to whether or not you believe that, that's a reasonable level that we could expect your closings in some quarter in the not-too-distant future could reach. I know that your guidance for closings was $472,000. It seems like it's baking in a fair amount of conservatism when you contrast it with the $495,000 you did this quarter. So, I was hoping you could comment on that.

Rick, why don’t you take it?

Well, so we're not guiding for a $495,000 ASP for the 2022. A lot of this is just mix and timing of sale and which communities we've released product from. There's no question we are seeing a very healthy sales price. We'll continue to execute on a strategy of leasing sales and small releases to maximize that price. There is tremendous pricing power out there. But given the overall mix of communities that we have for the balance of the year going in and the product that we've started, some of those are smaller homes that we just haven't released for sale yet that are going to blend that price.

And Steve, just to add some color to what Rick said. We are very focused on accelerated growth in Texas. So, let me refer into that community-driven mix, it's not a timing thing. It's strategic and it's going to be ongoing as compared to the growth rate in California. The California is still growing and has a higher ASP, but Texas is growing about twice as fast, strategically, for us at a lower ASP.

Thank you. Our next caller is John Lovallo with UBS. You may go ahead, sir.

Good afternoon guys. Thanks for taking my questions. The first one is on the delivery outlook being raised, which is obviously encouraging. Just curious, though, what the impact from the Breland acquisition any sort of back-half gross margin, negative impact from purchase accounting that we should consider? And maybe, that's why there's not that second-half kind of move up in margins that some would have expected.

Yes, John, very, very small. Happy to have positioned ourselves into a new market, as Rick indicated, but it's very small. The Breland add only about 1% to our delivery count for the year. So, pleased to have a new market that's very small relative to total delivery.

Got it. And then so the purchase accounting would also be very small, I'd imagine that.

Yes, that's right. Very little gross margin, as you can imagine, but again, not very impactful to total gross margin, given the small volume.

Got it. Okay. And then on the SpinCo, the land strategy, it seems like you guys are leaning towards spinning it and optioning back rather than, I think, at one time, there was some talk about possibly selling it and optioning the land back. Is that sort of the final decision, do you think? And what's driving that decision to sort of spin it?

I'm not sure I'm following the question. It's spinning versus selling and optioning back? Help me out with that.

Yes, sure. So I'll try to be more clear. I thought, and correct me if I'm wrong, that there was talk at some time of potentially not spinning the land, but actually selling it where there would be cash proceeds that would be received and they could be used for various things like funding working capital, buying back stock, things of that nature. Maybe, I'm misunderstanding, but that was my impression.

We are actively establishing asset management verticals in various areas, and these will eventually come together as SpinCo. Currently, these verticals are utilizing third-party capital to acquire various assets, some of which are already on our books, while others are being purchased from third parties. The assets that originate from our portfolio are generating cash for Lennar, which is being reinvested into the business for stock buybacks, debt reduction, or other strategies. The SpinCo process is already underway, and we are migrating assets to the asset management verticals for Lennar's multifamily, single-family rental, and land strategies. As we consolidate this, it will become clearer that some assets are generating cash for our core operations, while others help avoid cash expenditures. This migration is currently in progress as we prepare for the spin-off.

And maybe, John, I'll just jump in because you and I have talked about this. You're absolutely right, there was going to be a contribution of land. But as Stuart mentioned, as we refined the thinking, we determined that having a lighter balance sheet or asset-light balance sheet for SpinCo is the better approach. That was the transition into assets under management for all components, not just the multifamily and single-family rental, which were always going to be assets under management. You might remember that we made that transition in the best interest of SpinCo.

Yes. And not only in the best interest of amount of time that has been taking to get SpinCo stood up, not to simply wait and then contribute and then reconfigure, we've just been doing it as we're going. Matt Zames as we've noted, has been working with us on this and has been an advocate for, let's not waste time. Let's get this going right now. If you know Matt, he's that kind of person. So we have energized the program of converting assets into cash, turning cash into stock, buyback into debt retirement into increased inventory and increased certainty in deliveries and that's exactly what's been happening as we prepare to spend.

Got it. Thank you guys.

Okay. Why don't we do our last question?

Thank you. Alan Ratner with Zelman & Associates. You may go ahead, sir.

Hey, guys. Thanks for squeezing me in. Appreciate it.

Hey, Alan.

So there's been some data points that suggest maybe, more in a global kind of a housing market scale that recently, the strength in sales, at least on a year-over-year basis, has been driven primarily by non-primary buyers. So that would kind of be a catch-all for second home buyers, SFR investors and funds, build-to-rent, et cetera. And the actual primary buyer activity has kind of stalled a little bit, and there are probably a lot of reasons for that, and maybe, that's not representative of the new home market, specifically. But I was wondering if you could talk a little bit about the mix of your business right now that is non-primary to the extent you can quantify it? I know it's often challenging to identify all investors that might come in through the MLS, et cetera, but are you seeing any differences in trends among the primary, non-primary buyers, maybe, over the last 60, 90 days, especially since rates have started to move?

Let me start by asking Rick if he can find some specific statistics, but there hasn't been a significant shift from primary buyers to institutional buyers. It appears to me that it's essentially a zero-sum situation. If we examine both rental properties in the multifamily sector and single-family rentals, as well as properties for sale where primary buyers are active, all of them are fully occupied. Rental rates are increasing rapidly, which indicates that these transactions are not primarily institutional purchases or speculative inventory. They are fundamentally primary, though it may involve primary buyers owning their homes or institutional buyers facilitating access to single-family living or multifamily rentals. Across the board, we are observing a notable rise in prices due to strong demand and limited supply. Rick, do you have any specific details or insights?

Yes, I would say that probably, less than 5% of the homes in the last quarter were sold to folks that either are institutional renters of the product. We sold some homes to our Upward America venture that we have with our other investors that Stuart talked about that has about $2 billion of committed funds for that vehicle. But it's a very small percentage, and most of what we're seeing out there are primary buyers.

Thank you for your insights, Stuart. To wrap up the call, regarding the acquisition of Breland, I understand it has a relatively minor impact on our overall business. However, I'm curious about your continued perspective on gaining market share from smaller private builders. It seems you hold a competitive advantage in the current challenging market. Are you noticing an increase in interest from private builders who might be looking to sell or collaborate due to market pressures? Additionally, what is your current demand for mergers and acquisitions in this context?

Let me clarify that I wouldn’t characterize what we’re seeing as capitulation. The market remains strong, and demand is robust across the board. Capitulation implies a level of surrender and declining prices, but I believe pricing is solid. Our focus is on identifying markets where we would like to engage and participate, particularly where we can collaborate with a top-tier management team and make an organic entry into those markets. This is a distinctive opportunity. Breland certainly stands out as the best in this region, and we are genuinely excited about the operators and the assets. We believe we have a unique opportunity here. Such opportunities will be rare because we are committed to maintaining high standards, not only concerning the assets but also the people as we enter new and promising markets. Rick, would you like to add anything?

Yes. I think Stuart is exactly right. We're laser-focused on quality and professionalism, and that's exactly what the Breland opportunity brought to us. They're a great company. They are laser-focused on a product that is simple to build. One of the better parts of that opportunity was having the opportunity to create a land relationship on a go-forward basis with Louis Breland, who is an expert in finding land, entitling land, and it's just a continuation of our land strategies, business where we have that done, not on our balance sheet, but off-balance sheet and controlling that pipeline. So it's very consistent with what our focus is.

Got it. And I appreciate that. And Stuart, just to clarify, I wasn't referring to capitulation on the demand side, more just the frustrations with the supply chain and how difficult that is for smaller builders in today's environment?

So I appreciate that, Alan. I don't think we've seen that yet, but earlier, the question was asked about picking up market share. This is kind of one of those markets where it kind of seems inevitable. Size and scale is working to our benefit in reconciling the supply chain. It's getting frustrating out there. We'll see what happens. We're not going to be engaging in a lot of M&A as we grow our business at the large-scale side, but as we enter new markets, certainly on the table. Alright. Very good. Thank you, everyone, for joining today, and we look forward to reporting back with our second quarter. Have a nice day.

Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.