Earnings Call Transcript - LEN Q3 2023

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

David Collins, Controller and Vice President

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 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 our earnings 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.

Operator, Operator

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

Stuart Miller, Executive Chairman

Thank you, and good morning, everyone. I appreciate you joining us today. Please excuse my voice as I have a bit of a cold. Today, I'm in Miami with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and Bruce Gross, the CEO of Lennar Financial Services. We'll provide an overview of the company and our performance today. After my opening remarks, Jon will discuss overall market conditions, our land position, and provide an operational update regarding supply chain, cycle time, and construction costs. Diane will then provide financial highlights along with guidance for the fourth quarter and year-end 2023 to assist in your modeling. We'll also answer your questions, so please limit yourself to one question and a follow-up, as usual. Since our last earnings call, Rick Beckwitt has retired effective at the end of the third quarter. Rick joined Lennar 17 years ago during the onset of the Great Recession. He faced a challenging economic landscape and worked closely with the team to solve problems and guide the company through difficult times. Together, we positioned Lennar for success and achieved remarkable results. We are grateful for Rick's contributions and the partnership we all shared. Retirement is a natural progression, but it's rare for it to come at such a well-prepared moment for the company. As a three-person team, Rick, Jon, and I collaborated on positioning Lennar for industry leadership. Today, Lennar is organized and financially positioned to move forward with a leaner structure and more efficient overhead. Rick completed 17 years as Co-CEO and President, and I trust he is enjoying his retirement. Rest assured everything is on track at Lennar. Now let’s discuss our business performance and future positioning. We are pleased to report that the Lennar team has remained focused on maintaining production and sales pace, reducing cycle times, and improving cash flow. Our third quarter results reflect our adherence to core operating strategies within a changing macroeconomic environment. The macroeconomic outlook is constructive for the housing market, stabilizing after last year's aggressive interest rate increases. We are now experiencing more measured adjustments to combat inflation, which will hopefully yield desired results over time. While inflation persists, rate hikes have moderated, allowing consumers to find access to necessary capital. Currently, the housing market demonstrates a tight supply of affordable products with strong demand. Consumers have adapted to higher interest rates and are seeking housing within their means. The market has adjusted prices, increased incentives, and focused on production cost reductions to attract buyers, leading to stabilized average sale prices. In terms of numbers, we have observed a drop in net average sales prices from around $500,000 last year to approximately $448,000 this quarter. Concurrently, multi-family rental rates have also moderated, though we don't expect significant decreases in the near future. Overall, the housing market has leveled, and while average sales prices may be lower, cancellations have normalized, and margins have stabilized due to effective cost management strategies. The supply of new homes expected to hit the market remains limited due to the scarcity and rising costs of developable land. In summary, the economy is stable, housing supply remains constrained, and builders need to increase home production to meet demand. To meet these challenges, our team continues to focus on core strategies driving us forward. We maintain a focus on production efficiency and are careful to balance our sales pace with our production. In the third quarter, we started 18,675 homes and sold 19,666, reflecting a strong operational performance. The pricing and sales strategies we're implementing have allowed us to exceed available starts and minimize cancellations, while maintaining controlled inventory levels. Our margins improved this quarter to 24.4%, up from a low of 21.2% in the first quarter of this year, and we expect to maintain this stability moving forward. We have also successfully managed our costs in line with market conditions, further contributing to our profit margins. We are focused on cash flow and bottom-line results to protect our strong balance sheet. This quarter, we generated over $1.1 billion in earnings, repurchased $366 million in stock, and repaid approximately $475 million in debt. In conclusion, our third-quarter results demonstrate strong execution against a supportive market backdrop, and we are well-positioned for future growth as demand for affordable housing continues. We anticipate finishing the year strongly and entering 2024 with an optimistic growth expectation. Our consistent strategy has fostered execution confidence throughout the organization, enabling us to meet market needs effectively. Thank you, and I will now hand over to Jon.

Jon Jaffe, Co-CEO and President

Thanks, Stuart. Good morning, everyone. As Stuart noted, the housing market is healthy overall, as supply remains tight, demand remains strong and buyers have become more comfortable with higher mortgage rates. In our third quarter, we continued to offer a combination of attractive pricing and compelling mortgage rate programs to capture that demand. Our price-to-market strategy reflects our balance sheet-first focus so we can maintain starts and sales, increase market share, generate cash flow and keep our homebuilding machine going. The execution of our pricing strategy is based on the strength of the market matched against the level of production we have in that market, which is done on a community-by-community basis. In the current environment, all of our markets are benefiting from greater demand than 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 third quarter, 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 worked closely with Lennar Mortgage to find the right solution for each buyer to help fulfill their desire to purchase. 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, maintained lower construction costs and reduced cycle time. These improvements enabled our third 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. Our existing trade partners are increasing their business with Lennar, while our approach is also attracting new trades. This increase in access to trade, combined with a normalized supply chain, led to a significant improvement in our third quarter cycle time. For the quarter, cycle time decreased by 32 days sequentially from Q2. Progress is difficult to measure precisely as the product mix changes, but we are clearly on a path to getting back to pre-pandemic cycle times, and we expect to continue to see improvement in the fourth quarter and into 2024. Looking at our third quarter, as expected, our construction costs fell sequentially from Q2 by about 5%. 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 land-light strategy and community count. In our third quarter, we continued to effectively work with our strategic land and land bank partners where they purchase land on our behalf and then deliver just-in-time finished homesites to our homebuilding machine. In the third quarter, about 85% of our $1.5 billion land acquisition was finished homesites purchased from various land structures. We have made significant progress again in the third quarter, as our years' supply of owned homesites improved to 1.5 years from 2.2 years and our controlled homesite percentage increased to 73% from 79% year-over-year, respectively. The reduction in cycle time and reduction in owned land will increase cash flow as well as help improve inventory turn, which now stands at 1.3 versus 1.1 last year, an 18% increase. Our community count at the end of the third quarter was 1,253, which is up 5% from the 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 the asset-light focus, which leads to the reduction of owned land, are reducing risk, improving returns and strengthening the balance sheet for Lennar. I want to recognize and thank all of our associates for their hard work and dedication in focusing on these strategies and for delivering a solid third quarter. I'd now like to turn it over to Diane.

Diane Bessette, Chief Financial Officer

Thank you, Jon, and good morning, everyone. So, Stuart 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 financial services operations and our balance sheet and then provide guidance for Q4 2023. So starting with financial services. For the third quarter, our financial services team had operating earnings of $148 million. Looking at the details, mortgage operating earnings were $111 million compared to $64 million in the prior year. The increase in earnings was driven by higher locked volume as a result of higher orders and capture rates and higher profit per locked loan as a result of lower cost per loan, as the team continues to focus on efficiencies, and additionally, higher secondary margins. Title operating earnings were $37 million compared to earnings of $33 million, which excludes a $36 million one-time charge due to a litigation accrual in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction, as the team continues to focus on using technology to increase productivity. 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 One 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 $3.9 billion of cash and had no borrowings on our $2.6 billion revolving credit facility. This provided a total liquidity of $6.5 billion 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 land-lighter. At quarter-end, our homesites 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. Jon mentioned we spent approximately $1.5 billion on land purchases this quarter, however, about 85% were finished homesites where vertical construction will soon begin. At quarter-end, we owned 107,000 homesites and controlled 284,000 homesites for a total of 391,000 homesites. 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 approximately 43,600 total homes in inventory. This inventory number includes about 2,000 models and also includes about 1,400 homes that were completed unsold as we successfully managed our finished inventory level. In our continued effort to further strengthen and de-risk our balance sheet by reducing our debt balances, we retired $425 million aggregate principal of our 5.875% senior notes due in November 2024 and repurchased about $50 million of senior notes also due in fiscal 2024, all at or below par. We repaid about $6.1 billion of senior notes over the last two years, which equates to more than $330 million 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 billion, which was less than our cash balance of almost $4 billion. The net senior note maturity of $378 million is due in December 2023. 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 prior year. Consistent with our commitment to strategic capital allocation, we repurchased 3 million of our shares totaling $366 million. Year-to-date, we've repurchased 7 million shares totaling $763 million. Additionally, we paid dividends totaling $107 million during the quarter. So, in total, we returned almost $1 billion to all our investors this quarter, our equity holders and our debt holders. And just a few final points on our balance sheet. Our stockholders' equity increased to almost $26 billion. Our book value per share increased to 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 provide us with significant confidence and financial flexibility as we come to the end of 2023 and head into 2024. So with that brief overview, let's turn to guidance, starting with new orders. We expect Q4 new orders to be in the range of 16,200 to 17,200 homes as we match sales with production. And as Jon mentioned, we expect our Q4 ending inventory count to increase in the mid-single digit percentage range year-over-year. We anticipate our Q4 deliveries to be in the range of 21,500 to 22,500 homes. This would bring our annual delivery to be in the range of 70,800 to 71,800, which is an increase of 7% to 8% year-over-year. Our Q4 average sales price will be approximately flat with Q3, as we continue to price to market and offer incentives to match affordability. We expect gross margins to be in the range of 24.4% to 24.6%, and we expect our SG&A to be in the range of 6.7% to 6.9%, as we continue to focus on maintaining sales and production paces. And for the combined homebuilding joint venture, land sales and other categories, we expect to have earnings of about $25 million. We anticipate our financial services earnings for Q4 to be in the range of $130 million to $135 million. And we expect a loss of about $20 million for our multifamily business and a loss of approximately $25 million for the Lennar Other category. The Lennar Other estimate does not include any potential mark-to-market adjustment 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&A to be about 1.1% of total revenues, and our charitable foundation contribution will be based on $1,000 per home delivery. We expect our tax rate to be about 24.5% and the weighted average share count should be approximately 281 million shares. So, when you pull all that together, these estimates should produce an EPS range of approximately $4.40 to $4.75 per share for the fourth quarter. And finally, as Stuart mentioned, as we think about 2024, our initial growth expectation 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, Operator

Thank you. We will now begin the question-and-answer session of today's conference call. Our first question comes from Truman Patterson from Wolfe Research. Please go ahead.

Truman Patterson, Analyst

Hey. Good morning, everyone. Thanks for taking my question. So, Diane, thanks for clarifying that at the end, the '24 growth target of about 10%. But looking at your fourth quarter guide, you had very strong third quarter orders. Just trying to understand that fiscal fourth quarter order guide down about 15% sequentially. Was that really due to the healthy third quarter selling, where you reduced your spec availability and kind of internal inventory positioning going into the fourth quarter? 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.

Stuart Miller, Executive Chairman

Sure. Thanks, Truman. Yes, you're right to tie those together. The fact is that as we enter the fourth quarter, which is seasonally a quieter time of the year. We did have very strong third quarter sales. We do expect to see strength in the fourth quarter. But seasonality has returned to some extent. Additionally, we've seen interest rates pick up again. So, we're just moderating our view of where the fourth quarter goes and making sure that as we come into the fourth quarter, we're well-positioned to achieve exactly what we said.

Jon Jaffe, Co-CEO and President

And I'll just add, 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.

Truman Patterson, Analyst

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 look, just big picture, how are the two of you, Jon, Stuart, just kind of dividing responsibilities given Rick's retirement?

Stuart Miller, Executive Chairman

Well, listen, we have very comfortably streamlined the business. Jon is overseeing operations across the country at this point, and he has been doing that for some time now. And what has happened over the past years is, our regional presidents and our operators have 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 Jon 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. Jon 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 Jon and I have comfortably shared responsibility for about 40 years. I think we've kind of been stepping in tune with doing that. We'll be able to comfortably do that right now.

Jon Jaffe, Co-CEO and President

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 we've become much simpler, particularly at the land acquisition standpoint. You remember, we used to have a lot of complex joint ventures. We used to speculate more on land. Today, we're a very efficient buyer of finished homesites 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.

Truman Patterson, Analyst

Perfect. Thank you, all.

Operator, Operator

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

Susan Maklari, Analyst

Thank you. Good morning, everyone. My first question is for Stuart. You mentioned that you expect to see growth next year despite the significant progress made in recent quarters. Considering the production constraints in the industry, could you discuss how you plan to increase capacity in this environment? Additionally, what are your thoughts on volume projections for 2024?

Stuart Miller, Executive Chairman

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. 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 five-year land planning and overall production schedules, we have pretty good visibility even beyond. Now, the question is, what's 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. 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 kinds 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 it's achievable. We know it's achievable. We'll see how the market performs.

Jon Jaffe, Co-CEO and President

And Susan, you asked about our production capacity. That visibility Stuart speaks to, we clearly communicate that with our trade partners today about what is coming in the future quarters. So they're prepared and we're prepared as that production, as already in our system, will be coming online to be able to manage that volume.

Diane Bessette, Chief Financial Officer

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

Susan Maklari, Analyst

Okay. That's very helpful. And maybe building on that a bit, you've obviously talked a lot 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?

Stuart Miller, Executive Chairman

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.

Susan Maklari, Analyst

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

Operator, Operator

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

Stephen Kim, Analyst

Thank you very much, everyone. I appreciate the insights and congratulations on the results. I wanted to discuss some of your long-term comments. Firstly, regarding the closings in 2024, we have noticed that as cycle times have improved, you have been able to close more units than you have taken orders for. As you look ahead to 2024, Diane, do you think it’s reasonable to expect that you could close as many units as you receive orders for? Secondly, Stuart mentioned that return on assets is an important metric for you. Could you share your long-term target for ROA as you consider the future of the business?

Stuart Miller, Executive Chairman

We believe that our delivery schedule is closely linked to our sales pace since we are not selling far in advance. You can see our operations working well together, with sales, starts, and closings happening in close succession. Regarding return on assets, we face challenges with an asset base that has increased due to strong earnings and cash flow, making it harder to achieve our target of around 20%. As we continue to grow our earnings and asset base, it becomes increasingly challenging. We also discuss the idea of potentially being more aggressive in repurchasing stock, especially as our stock price becomes more appealing. Therefore, we aim for a return on assets that exceeds 20%.

Diane Bessette, Chief Financial Officer

Yes, I think that's right, Steve. 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 of owned. Those are all helpful components, of course, to return on assets. And if we pair that with a consistent buyback program, which we have been consistent, the amounts may vary quarter-to-quarter, but we have a pretty consistent program. And I think that all bodes well in us achieving something over 20% as time goes on.

Stephen Kim, Analyst

Yes, that's really helpful, and that's kind of where I was going to go next. So I appreciate you anticipating that. My next question relates to market conditions, specifically regarding the entry-level segment in light of the recent rate increase. Would you say that the move-up segment is currently performing slightly better than the entry level? Additionally, at the entry level, what percentage of your sales are utilizing rate buy-downs? Are you making forward purchase commitments in the market? Are you increasing the extent of the rate buy-down compared to the current rate, or is your rate buy-down continuing at roughly the same spread?

Stuart Miller, Executive Chairman

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 in either direction as rates have moved currently. You asked whether it's the entry-level buyer or the 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 there. Affordability is kind of a question, and meeting the buyer where the affordability exists is kind of the trick of the market and getting it just right. And so, these are tweaks right now up and down. And of course, depending on where 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 we're kind of working our way through right now as you go through pricing. Jon, could you add to that?

Jon Jaffe, Co-CEO and President

Yeah. Steve, you asked the question. We do buy forward commitments, but we do see even as interest rates fluctuate, the participation and those commitments stays 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 once they're locked-in aren't at risk to suddenly not qualifying if rates move on them. 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 our 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.

Stephen Kim, Analyst

That's really helpful. Thanks very much, guys.

Stuart Miller, Executive Chairman

Okay. Thanks, Steve.

Operator, Operator

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

Carl Reichardt, Analyst

Thanks. Good morning, everyone. Stuart, I hope you're feeling better. I have a question about dynamic pricing. Last year, it seemed that using dynamic pricing allowed you to quickly identify elasticity and find homes at market-clearing prices across the platform. Looking at your current model and analyzing the data across different geographies and markets, where do you see pricing power? Which areas are still struggling? Would you say that more markets are stable, or do you have more markets where you're making significant adjustments up or down?

Jon Jaffe, Co-CEO and President

Hey, Carl, it's Jon. 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 immigration, strong job growth. In some markets, where you've seen a shift, in Austin, in 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, to find 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.

Carl Reichardt, Analyst

Okay, thanks, Jon. And then, on SG&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? Thanks, all.

Stuart Miller, Executive Chairman

We 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 is a friend of Lennar. And we're always trying to work with the realtor community. But at the same time, what we've tried to do is eliminate the 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. And with that said, you'll see our brokerage spend go up and down a little bit, which affects our SG&A.

Jon Jaffe, Co-CEO and President

But it's 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&A.

Stuart Miller, Executive Chairman

And let me just say lastly, we've talked an awful lot about our digital sales funnel together with our dynamic pricing level 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've 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.

Carl Reichardt, Analyst

I appreciate that. Thanks, guys.

Stuart Miller, Executive Chairman

Okay.

Operator, Operator

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

Alan Ratner, Analyst

Hey, guys. Good morning. Really strong results. Nice job. Stuart, first question. When you kind of talked about the net price declines 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 the resale market, which it feels like to me when you compare the strengths we're seeing in the new home market today versus the resale market, I think there's a thesis out there, it's all inventory driven, but it feels like some of that historical spread is 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 costs probably going to continue to rise, construction costs, while there's been progress made there, it's probably stable from this point forward. If you don't see resale prices rising, can you maintain that progress you've made this year as far as now closing that spread versus resale? Or do you see that spread returning just as a function of higher costs over time?

Stuart Miller, Executive Chairman

Well, I'll tell you, Alan, that you're kind of sitting in a very strange configuration of 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 two 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. 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've 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 out and they have to buy another home. So, you add inventory, you subtract inventory. And I think that's kind of how that's configured. 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 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 supply.

Alan Ratner, Analyst

Got it. That's helpful to hear your thoughts there. Second, 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.

Stuart Miller, Executive Chairman

Yeah, I think that you've laid it out well, that 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 ring, 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 and there will be a moment in time when we come forward with a plan. It's not something that we've stopped thinking about. It is something that we've stopped talking about because we just don't think that the capital markets are constructive for a program right now.

Alan Ratner, Analyst

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

Stuart Miller, Executive Chairman

Okay, next.

Operator, Operator

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

Ken Zener, Analyst

Good afternoon, everybody.

Stuart Miller, Executive Chairman

Good afternoon.

Ken Zener, Analyst

So, I have two questions. They might have some subparts 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 flow is in this 19,000 plus or minus range. The word even would suggest less variance in seasonality. So quarterly, I mean, do you think variance is, let's say, about 10% sequentially in that start number? Or 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? 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?

Stuart Miller, Executive Chairman

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&A or whether it's in construction costs. You can expect, as we've said before, that, that consistent drumbeat of production is going to prevail and we're going to use margin as a shock absorber or 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. You see this in our fourth quarter projections 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 levels. But within boundaries, you're going to see us focus on that constant production pace, defining a constant sales pace.

Ken Zener, Analyst

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. Even flow tied to capital light, less capital intensities, 85% finished. Homesites acquired in the quarter, one-and-a-half years of land. If that were to fall to one year, which if you keep buying finished lots, it doesn't seem crazy, it's hypothetical, but one-and-a-half down to one year, that would be almost a third decline in land requirement on a land base of nearly $7 billion, equivalent to nearly $3 billion of decapitalization. I ask as 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 billion or so in land and whatever comes through WIP, it seems as though you will be forced into a systematic buyback program, which is an okay problem. I'm just thinking of some of your peers have gotten deeply into a negative leverage position. Is that something that you're thinking about avoiding and comment on the cash flow from less owned land? Thank you.

Stuart Miller, Executive Chairman

Jon, did you want to add something?

Jon Jaffe, Co-CEO and President

Yeah, just on the gross margin question, 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. And so, if we try to look at direct construction costs as percent of revenues, they are falling and that is helping support our margins even though we are aggressively managing the pace.

Stuart Miller, Executive Chairman

We are considering the size of our stock buyback with a strong emphasis on generating cash flow. Our land ownership and supply are key areas of focus, and we have seen improvements in these areas. We expect to bring in additional cash to the company, and we do not believe this will negatively impact our net debt situation. We anticipate that we will continue to generate cash and be in a stronger position by year-end. We are committed to strategically using our capital for stock buybacks, while also maintaining flexibility and liquidity for potential opportunities as the market evolves. Our stock buyback program remains a central part of our future strategy.

Diane Bessette, Chief Financial Officer

I would add that operationally we are focused on achieving a point where net income matches cash flow. We are not there yet, but it is a priority. The way we utilize that capital and cash flow will vary, but we aim to have those two align. We are not there yet, but it is definitely a goal.

Ken Zener, Analyst

Thank you so much.

Stuart Miller, Executive Chairman

Why don't we now take one last question.

Operator, Operator

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

John Lovallo, Analyst

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%. Are you expecting high-single digits, maybe low-double digits community count growth? Is this really going to be driven more by absorptions?

Stuart Miller, Executive Chairman

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 Jon is going to say about community count right now, I am saying this is not a projection, this is not guidance, this is just Jon answering your question.

Jon Jaffe, Co-CEO and President

Thank you for that caveat. But it's very true, whether it's municipalities, litigation, it is the most challenging aspect to hit right on the timeline. But with that said, we have in place, as Stuart said earlier, a land pipeline that makes us very comfortable to target that 10%, that 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.

Stuart Miller, Executive Chairman

So, you can expect that our community count will grow. 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, I'm talking about the new home business, it doesn't work perfectly that way. So, we expect our community count to grow.

John Lovallo, Analyst

Understood. Okay. And then, maybe just going back quickly to Alan's question, if I can, on Quarterra. 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. I mean, have you guys dusted off the plans here at least on Quarterra? Is this something that could get back in motion here in the near term? Maybe any incremental thoughts there?

Stuart Miller, Executive Chairman

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 Quarterra. 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 to stop talking about it, because quarter-by-quarter we don't want to feel like we're missing expectations. 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'll happen at the right time.

John Lovallo, Analyst

Understood. Thank you, guys.

Stuart Miller, Executive Chairman

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. I'm very happy with our third quarter. Looking forward to reporting year-end and look into 2024. We'll talk next time. Thank you.

Operator, Operator

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