Earnings Call Transcript - LEN Q4 2023

Operator, Operator

Welcome to Lennar's Fourth 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 statements.

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

Very good. Good morning, everybody, and thank you for joining today. I am in Miami today together with Jon Jaffee, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice-President; Bruce Gross, our CEO of Lennar Financial Services, and a few others as well. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to provide an operational overview updating construction costs, cycle time, and some of our land strategy and position. As usual, Diane will give a detailed financial highlight, along with some limited guidance for the fourth quarter and full year of 2024. And then, of course, we'll have our question-and-answer period. As usual, I would like to ask that you please limit yourself to one question and one follow-up, so that we can accommodate as many as possible. So, let's begin. We are very pleased to report another very strong quarter and year-end operating results for Lennar. We've executed our operating plan effectively over the past year and are simply better-positioned than ever, from balance sheet to operating strategy, to address market conditions in the New Year 2024. Throughout 2023, the dominant theme at the macro level has been the impact of higher interest rates on the homebuilding consumer as affordability has been tested, and demand has been constrained. But the ability to purchase, i.e., affordability and the ability to qualify, remain generally in place. Generally speaking, consumers are employed and confident that they will remain employed with rising compensation. Overall, consumer confidence has been reasonably strong, and buyers that can transact have transacted. Underlying this environment is a chronic supply shortage of homes, especially affordable homes across the country, alongside a growing pent-up demand for housing that has been held back by materially higher interest rates. There has been a very short supply of affordable products and strong demand for them. New homebuilders have implemented a variety of strategies, including interest rate buy-downs, closing cost pickups, and price reductions, to meet buyers at the intersection of need and affordability. The existing home market has remained quiet as existing homeowners have retained their low-interest rate mortgages and stayed on the sidelines. Homebuilders have been uniquely positioned to activate demand through various incentives that help remove affordability constraints and enable purchasers to transact. Over the past quarter, this narrative has been particularly challenging as interest rates spiked through the first two months before beginning to ease in November. As mortgage rates began to approach 8%, the market felt like it was nearing a real inflection point, and the overall market conditions softened materially. Recently, Chair Powell and the Fed have suggested that we might be closer to the end of the tightening cycle and could see lower rates as we enter 2024, but we will have to wait and see. Against this backdrop, Lennar's consistent strategy throughout the year has focused on driving volume, finding affordability to meet demand using our dynamic pricing model, and providing supply to the market. Over the past year, we have emphasized our operating strategy with the expectation that we would reduce our land assets while growing our business, drive strong and consistent bottom-line earnings, generate consistent net cash flow, reduce construction cycle times, and enhance the quality of our returns on equity and return on assets by focusing on the allocation of liquid assets, i.e., cash. 2023 was a year of strategic planning and successful execution for Lennar, setting us up extremely well for another year of success in 2024. We began the year with a clear operating strategy in a higher interest-rate environment and focused on execution throughout the year. Even as the macroeconomic environment shifted due to inflation and higher interest rates, we adhered to our strategy and drove volume and production. We believe that demand was strong, though constrained by affordability, and supply was very limited. While others pulled back, we leaned in and maintained our pace. Our operating strategy defined driving production and sales pace while using price, incentives, and margin reduction to enable affordability. Rather than further constraining supply, we drove production and utilized our formidable size and scale to enable cost and operating efficiencies to drive affordability. As shown in our press release, while driving higher volume, we achieved strong operating results. We delivered over 73,000 homes in 2023, representing a 10% year-over-year volume increase over 2022, alongside a strong bottom line of $3.9 billion or $4.82 a share. We also generated significantly more than the $3.5 billion of homebuilding cash flow that we saw in '22, and we are well-positioned with land and community counts to expect to deliver 80,000 homes in 2024, again reflecting a 10% year-over-year increase. Given the current interest-rate signal from the Fed, we expect that margins will be at least consistent with our 2023 levels. Although we have embedded lower margins that will flow through in the first quarter, these margins will clear in the next quarter. Utilizing our dynamic pricing tool, we will recover margin quickly and efficiently as lower interest rates allow us to reduce incentives. The strategic benefits of driving volume have immediate value as well as durable advantages for the company going forward. First, by driving volume, we gained market share in most core markets as we leaned in when others pulled back. Our trade partners observed a reliable partner in us, allowing us to establish ourselves as the builder of choice. We collaborated closely with our traditional trade partners, and also created additional relationships with other participants who benefited from a steady and dependable work environment. Expanding our market share in local markets allowed us to better manage costs, enhance operational efficiencies, reduce cycle times with effective production templates, and improve inventory turnover. Diane will elaborate on this further. Next, and perhaps most importantly, by driving volume we positioned ourselves with land and communities conducive to strong volume across all operating markets. As we increased our volume and delivered homes, we acquired new land in communities for next year's delivery. We are extremely well-positioned to sell at pace as prices begin to recover and incentives diminish alongside lower interest rates. This aligns into driving even stronger bottom-line results and cash flow as market conditions normalize. By driving volume, we gained market share in land acquisition. In simple terms, we continue to sell land by selling homes and subsequently purchase land to replace communities, particularly when others walked away. Our advancements in market share have given us a critical position, rendering us attractive buyers of choice to landowners and developers. They witnessed a dependable market participant remaining consistent even as market conditions turned more challenging, allowing us to experiment with innovative land structures. Noteworthy in this regard is our variable land pricing tool, which enables home site values to fluctuate as a percentage of the sale price of the home, dynamically responding to market changes. Additionally, by maintaining consistent volume—even at lower margins—we generated steady cash flow amid challenging times, enhancing our balance sheet and cash liquidity even after redeeming or repurchasing $1.1 billion of senior notes throughout the year and repurchasing 10 million shares of Lennar's stock. Today we stand with a 9.6% homebuilding debt-to-total capital ratio, $6.3 billion in cash and no draws on our revolver, combined with an expected cash flow of approximately $3.5 billion over the next year. This positions us strategically to invest capital and grow while retiring debt as it matures and repurchasing Lennar's stock—where we anticipate repurchasing at least $2 billion of stock over the next year. Moreover, by driving volume, we developed insights and refined the functionality of our strategic land banks. The steady flow of volume through our land banking partnerships has been invaluable. Questions have been addressed regarding the durability of our capital partners that shape our homebuilding machine. Our continued volume fostered trust and reliability, elevating these partnerships as neither party wavered despite market challenges. While adjustments and lessons have emerged, these relationships have grown stronger and more resilient. Fifth, by maintaining volume—particularly in the arduous interest-rate environment of the past year—we enhanced and optimized the workings of the Lennar machine. Our sales, marketing, and dynamic pricing strategies have evolved into a highly effective digital engine, significantly benefitting through aggressive engagement during market challenges. We anchored our focus on required actions to drive volume, even while market conditions tested affordability, pushing data through our digital tooling and eliciting feedback frequently. Today, the result is that Lennar's machine is becoming an invaluable asset as we foster volume by identifying markets at affordable prices and balancing sales with production rates. Overall, our commitment to driving volume in both production and sales has positioned us as a stronger and well-prepared company, capable of navigating cyclical housing market fluctuations. Our balance sheet has never been stronger, and our operating platform has never aligned better. The fourth quarter and year-end of 2023 have been marked by strategic and operational success for our company. While faced with challenging market conditions, we have steadily adapted and found ways to address specific market needs. Demand remains robust, and a chronic housing supply shortage needs to be addressed. We will continue to boost production to meet this persistent housing shortage across our markets. With that said, as interest rates lessen and normalize, and as the Fed considers beginning to cut rates, we believe pent-up demand will be activated, and we will be ready. Thus far, we've seen market conditions sustain a generally constructive outlook for our industry. Higher interest rates have tapered pent-up demand, allowing access to the housing market. Most recently signaled movements in interest rates suggest a more positive trend ahead. Accordingly, we executed our core strategy against a challenging economic backdrop. Due to our successful execution, we believe we are exceptionally well-positioned for continued success, given strong demand for affordable housing amidst a limited supply. We expect to kick off the new year with robust starts, sales, and closings, estimating between 16,500 to 17,000 deliveries in the first quarter, with margins projected at 21% to 21.25% as lower-margin sales flow through. We addressed the changing conditions of the past year with a consistent strategy facilitating reliable execution throughout our company. Our strategy is well-known and understood across our divisions, characterized by a simple, consistent execution model. We prioritize maintaining volume, adjusting home prices to drive sales velocity, collaborating with our trade base to manage costs and efficiencies, and tailoring product offerings to match market demands. We oversee our land and production inventories to drive efficiency, cash flow, and returns on our asset base. We focus on optimizing our balance sheet by maintaining a land-light model. Lastly, we reinforce our balance sheet to possess liquidity for both strength and flexibility. Knowing what to do and executing it according to plan have driven this quarter's and this year's success, ensuring continued and consistent achievement in the near future. Looking ahead to 2024, we are optimistic about positioning ourselves for and anticipating greater performance.

Jon Jaffee, Co-CEO and President

Good morning. As Stuart discussed, our operational teams at Lennar remained focused on executing our operational strategies in the fourth quarter. As our divisions consistently learned through their engagement with the Lennar machine, they provided feedback for enhancements, improving the execution of our strategies. You can see the evolution of this improvement in our even flow operating strategy through the year, as starts and sales for the second half of 2023 were closely matched at 37,053 and 37,032, respectively. In the fourth quarter, our production pace averaged five starts per community per month and a sales pace of 4.7 sales per community per month. Importantly, this strategy is not solely about the pace of sales but is also about selling the right homes at the right pace. Our machine aligns unsold production as homes near completion with pricing data from our dynamic pricing model, evaluated on both a community and home basis. In the fourth quarter, with interest rates peaking, this process informed how much we needed to buy-down interest rates and/or provide other incentives to sustain desired sales pace. We maintained a consistent starts and sales rate, generating increased market share in nearly all markets we build in. This is evidenced by our overall growth of 10% from last year, as our steady starts outpaced other builders that had to pull back. Some examples of markets where we have led and increased our market share in 2023 over 2022 are as follows: In South Florida, we are the number one builder with a market share of 74%, up from 63% last year in Dade County and 33% in Broward County, an increase from 28%. Across the state in Southwest Florida, our market share is at 38%, double that of the number two builder. In the Carolinas, we are ranked number one in Charlotte, Raleigh, and Charleston, with market shares of 10.5%, 16%, and 22.5%, respectively, reflecting average increases of about 150 basis points. In the Midwest, we are number one in Indianapolis and Minnesota, both with over 25% market share, also reflecting an increase exceeding 400 basis points. In Texas, we raised our market share in Austin and Dallas-Fort Worth by 200 basis points, reaching 11.5% and 10%, respectively. In Houston, we increased three hundred basis points to 11.5%, and in San Antonio, we grew by 700 basis points to 22.5%. In Colorado, we rank first with nearly a 10% market share, which is double that of the previous leading builder. Out West in Phoenix and Las Vegas, we possess the number one market share at 12% and 18%, respectively. In California, we are the number one builder in all markets, growing selected market share across the state from 25% in the Inland Empire and Central Valley to over 35% in San Diego and Sacramento. Lastly, in the Pacific Northwest, we lead in Seattle and Portland with 14% and 17% shares respectively, both representing increases around 250 basis points. Our pricing strategy execution is grounded in the strength of each individual market matched against production levels by community. As Stuart noted, market conditions in our fourth quarter were characterized by the chronic housing supply shortage and a more volatile interest-rate environment than the previous quarters. In the context of our current margins, all markets are benefitting to varied degrees from increased demand and supply. Our sales pace of 4.7 homes per community in Q4 is an improvement from the 3.7 pace in Q4 2022, reflecting an increase in the execution of our pacing strategy, which aligns with our overall pace for fiscal 2023. As interest rates rose sharply during the quarter, our homebuilding teams collaborated closely with Lennar Mortgage to find the best mortgage solutions for buyers on an individual basis. This focused execution allowed us to close the quarter with less than one unsold inventory home per community. Our strategy of identifying the right market-clearing pricing to align sales with homes under construction supports both a high volume and a consistent flow of homes in our production pipeline, which is fundamental to our builder-of-choice program with trade partners. Our ongoing improvements in executing this game plan deepened our partnerships with our trade base. Working collaboratively with trade partners, we consistently eliminated and prevented supply-chain constraints and reduced cycle times. These efficiencies benefit our trade partners and contribute to decreased construction costs. By regularly commencing homes, even amid shifting interest rates during the quarter, we achieved a 43% increase in starts in the fourth quarter compared to the prior year, with starts remaining flat sequentially from Q3. This surge in starts attracted a larger trade base to Lennar, and the normalized supply-chain environment led to a significant improvement in our cycle time, which decreased by 22 days sequentially from Q3, averaging 161 days for single-family homes in Q4—a rate that approaches pre-pandemic levels. For the fourth quarter, construction costs fell about 4% sequentially from Q3, with Q4 costs down approximately 13% year-over-year. We are maintaining guidance on construction costs to remain stable over the next few quarters. To further enhance our production efficiency, we continue to work with trade partners on value engineering, co-planning series, and production sequencing across markets to lower costs and construction time while delivering maximum value to homebuying customers. Next, I'm going to address our land-light strategy execution. In the fourth quarter, we effectively continued partnerships with our strategic land and land-bank partners, who acquired land on our behalf and delivered just-in-time finished home sites to our homebuilding operations. Consistent with the third quarter, about 84% of our $1.5 billion land acquisition for the quarter consisted of finished homesites purchased from various land structures. We made significant strides in the fourth quarter, improving our year's supply of owned homesites to 1.4 years compared to 1.9 years previously, while our controlled homesite percentage rose to 76% from 69% year-over-year. In summary, focusing on our operational strategies fosters reductions in cycle time, while limiting our ownership in land enhances inventory churn, which now stands at 1.5, compared to 1.2 last year, marking a 25% improvement. At the end of Q4, our community count reached 1,260, a 4% increase from the previous year, and we expect to increase our community count in the mid to high single digits by the conclusion of fiscal 2024. I want to acknowledge and sincerely thank all our associates for their hard work and dedication in executing our strategies and successfully managing necessary change processes while achieving strong performance in Q4 and fiscal 2023. I'd now like to turn it over to Diane.

Diane Bessette, Chief Financial Officer

Thank you, Jon, and good morning everyone. Stuart and Jon have provided an extensive overview of our homebuilding performance. Therefore, I will take a few minutes to discuss our Financial Services operations results, the balance sheet, and provide some commentary on the first quarter. For the fourth quarter, the Financial Services team reported operating earnings of $168 million. Mortgage operating earnings totaled $119 million, compared to $80 million in the prior year. The increase in earnings was driven by higher locked volume due to increased orders and capture rates, alongside improved profit per locked loan resulting from higher secondary margins and lower costs per loan, as we maintained focus on efficiencies. Title operating earnings came in at $50 million, a rise from $44 million in the preceding year, primarily due to higher volume and greater productivity, as our team embraced technology to enhance operational efficiency. These solid results reflect great synergies between our Homebuilding and Financial Services teams, who truly operate under the banner of 'One Lennar.' Shifting to our balance sheet, we remain steadfast in our determination to maintain inventory turnover and generate cash flow while keeping productions on pace and pricing homes to market, aiming to deliver as many homes as possible to meet housing demand. As a result of these efforts, we ended the quarter with $6.3 billion in cash and no borrowings on our $2.6 billion revolving credit facility, providing total liquidity for homebuilding of $8.9 billion. Thanks to continued focus on balance sheet efficiency, we've made significant progress towards our goal of becoming asset-light. At quarter-end, our years owned increased to 1.4 years from 1.9 years last year, and our controlled homesite count rose to 76% from 69%, marking our lowest years owned and highest control percentage in our history. At the end of the quarter, we owned nearly 100,000 homesites and controlled 310,000 homesites for a cumulative total of 410,000 homesites. We believe this portfolio equips us with a strong competitive position to continue growing market share in a capital-efficient manner. During this quarter, we spent $1.5 billion on land purchases, with 84% targeted towards finished homesites where vertical construction will soon commence. This approach aligns with our manufacturing model of land buying on an adjusted basis, which is less capital-intensive. Concerning our returns, our inventory turn recorded at 1.5 times and our return on inventory was 29%. I will add a note about our inventory balance: in this quarter, we re-classified deposits on future land purchases and inventory into a separate line in our balance sheet. This re-classification, approximately $2 billion at year-end, was aimed at aligning ourselves more closely with industry peers and providing greater comparability and clarity to investors and analysts. Consistent with our production focus, we initiated around 18,400 homes and concluded the quarter with nearly 38,200 total homes in inventory, including approximately 2,200 models and around 1,200 completed and sold homes, translating to slightly fewer than one home per community as we effectively managed our finished inventory levels. Our commitment to strengthening and de-risking our balance sheet has led to debt reduction measures, which I mentioned in the fourth quarter. We redeemed the remaining balance of $378 million of our 4.875% senior notes in December 2023, and repurchased $110 million of senior notes maturing in fiscal 2024 and 2027, totaling $488 million for the quarter. For the full year, we repaid or redeemed $1.1 billion of senior notes. Consequently, we ended the quarter with a total senior note balance of approximately $2.5 billion; only one note is due in 2024, totaling $454 million in April. Combined with solid earnings, our homebuilding debt-to-total capital was 9.6% at quarter-end, the lowest ever, down from 14.4% the previous year. In line with our commitment to strategically allocating capital, we repurchased $337 million worth of outstanding shares in the fourth quarter, totaling nearly $1.1 billion for the year with 10 million shares repurchased. Additionally, we distributed $105 million in dividends during this quarter and $431 million over the year. Overall, we returned nearly $1 billion to our equity and debt holders in Q4 and about $2.7 billion for the entire fiscal year. To conclude, our balance sheet's strength and solid liquidity position afford us significant confidence and financial flexibility as we approach 2024. I'll now move on to Q1 guidance. Given the fluctuating interest-rate environment, we would like to provide some guidelines for Q1 to assist with your modeling. For new orders, we expect figures to fall in the range of 17,500 to 18,000 homes as we maintain closely aligned production and sales paces. We anticipate Q1 deliveries to land between 16,500 to 17,000 homes while persisting in our focus on efficiently turning inventory into cash. The average sales price for Q1 should be around $420,000, while gross margins are projected between 21% to 21.25%, reflecting potential impacts from higher interest rates in Q4. Additionally, remember that our Q1 margins are always negatively influenced by current-period fuel cost expensing. As we aim for a more uniform process of starting and constructing homes consistently throughout the year, revenues in Q1 typically mark the lowest of the year due to seasonality, which translates to approximately 150 basis points of negative gross margin impact when viewed sequentially from Q4. Also, be aware that similar to last year, Q1 typically embodies a low point for margins during 2024. Moving on to SG&A, we expect to remain in the range of 8% to 8.2% for Q1. For combined Homebuilding joint-venture land sales and other categories, we anticipate earnings of about $20 million. We project Financial Services earnings for Q1 to be between $85 million to $90 million and a loss of about $25 million for our Multifamily business, in addition to a loss of roughly $15 million from the Lennar Other category. Take into account that the Lennar Other estimate excludes any potential mark-to-market adjustments to our public technology investments, as this depends on their stock prices at the quarter's end. We expect our Q1 corporate G&A to hover around 2.2% of total revenues. These expenses may see a slight uptick as we continue investing in robust cyber security and technology development to support our future growth. Our charitable foundation contribution will be based on $1,000 per home delivered. We predict the tax rate to settle around 24.5%, and the weighted-average share count is expected to be approximately 279 million shares. In sum, these projections should yield an EPS range of about $2.15 to $2.20 for the first quarter. To summarize, we affirm our target of 10% growth for 2024, equating to around 80,000 deliveries for the year. Gross margin expectations remain similar to those in 2023. We are optimistic about cash flow generation, which leads us to commit to reallocating capital to our stakeholders. We aim for total capital allocation of at least $2.5 billion in 2024, keeping in mind that $454 million will be earmarked for our April 2024 debt maturity, with the remaining balance of roughly $2 billion allocated for share repurchases. Lastly, I want to extend my heartfelt thanks to the Lennar financial team’s accounting, planning, and IR departments for their tremendous efforts that allow us to host this year-end earnings call just two weeks after year-end. You all are amazing. With that brief overview, I will now turn it over to the operator.

Operator, Operator

Thank you. We will now begin the question-and-answer session of today's conference. Our first question will come from Stephen Kim from Evercore ISI. Please go ahead.

Stephen Kim, Analyst

Great. Thanks very much, guys. Yeah, so much great information you provided. So thanks a lot. I imagine folks will be asking you about a little more detail on the gross margin. So what I actually wanted to focus on was your balance sheet. And in particular, you ended the year with a very heavy level of cash, over $6 billion, I think, on the homebuilding cash. I was curious what you feel would be a normal level once all the dust settles and you get to a level of cash where you feel sustainable and appropriate to maintain over the long term. What that level roughly would be—how we should think about that? And related to that, you mentioned that $6 billion is probably more than that number, I'm guessing by maybe a couple of billion or something like that, your $2 billion in share repurchases that you set as the baseline seems frankly a little low, given that we expect you guys to generate cash flow and so forth this year. So I was wondering if you could help us understand how we should be thinking about your cash balance going forward? And what it would take for you to apply more of that to repurchases and, I guess I should have specified, I'm curious if you could articulate why you're willing to hold more cash than you need at this time?

Stuart Miller, Executive Chairman

Well, Steve, let me start by saying you know the old adage, rich or poor, it's good to have cash, right? So just starting there, I would say that we're really rolling into the new us and developing a by-design approach to the way that we operate our business. And as is the case with evolution in general, you kind of grow into with some stops and starts, the new version of how you kind of look at the way you've configured. So I would say this: we're starting to look at our cash flow numbers, cash flow generation. We're starting to see kind of a consistent year-over-year baseline around the $3 billion to $3.5 billion range. You'll probably see in our Q or in our K that, that number will be higher for 2023, but the amount of consistent annual cash flow is something that we're watching develop over time. And so when you ask your question, that fits into the context of how do we think about the certainties of the programming that we have in place. As I noted in my comments, one of the interesting things of this past year was looking at the durability of our land banking relationships, the capital providers, and the execution in and around land bank as markets become stressed. There's been a tremendous amount of learning around that and evolution. So the answer to the question is we kind of see our steady state cash flow developing around $3.5 billion a year. How much cash we feel comfortable holding is something that we recognize maybe $6 billion or $5 billion or $7 billion. Some might say that's too much. As we gain confidence and start looking at the by-design approaches to the components of what’s developing into the Lennar machine, we will increase the amount returned to shareholders through stock buybacks and other mechanisms. We might be a bit behind the curve that people perceive—right now, we're going slower rather than faster as we develop new core components to our strategy that are becoming etched in stone as we build confidence. So again, it might be a little slower than some might think it should be, but we are hitting our stride with our comfort zone in buying back stock and thinking about the deployment of liquid assets.

Stephen Kim, Analyst

Really helpful because, obviously, you're undergoing a very significant transformation, and I think I'm hearing a lot of steady state. I'm hearing a lot of predictability in what you're laying out. And obviously, that's something that we think is critically important to an eventual revaluation. It just seems like when you had initially—when you started off your comments, you said it's good to have cash, but I think when you're arguing for a revaluation, some of the investors that we speak with would argue that holding too much cash actually hinders a revaluation because it effectively seems like the company may be holding on to cash with the hope they could deploy it in some sort of traditional way, i.e., land or something like that, which maybe isn't aligned with a lot of the rhetoric around being asset-light. So your commentary about this is a period of time where you are gradually developing the systems to the point where you have that predictability is helpful. So if I’m interpreting your comments right, should we expect the level of cash to decrease to maybe a lower threshold once you have established those systems to your satisfaction, but you're not there yet? Is that a proper way of paraphrasing what you're saying?

Stuart Miller, Executive Chairman

Thank you for the commentary. I think that helps me answer a little bit better. Let me say that we are decidedly not holding on to cash to execute the next large-scale M&A program or some out-of-the-box growth initiative. So, I wanted to clarify that thought process. It simply is—and this past year has been an incredible year for our company in terms of developing confidence around durable systems that are working effectively. It's been a proving ground. So I would say, don’t read too much into the holding of cash. It simply demonstrates the development of confidence and rhythm in the way that we deploy liquid assets.

Stephen Kim, Analyst

Okay. That's helpful. Really appreciate it. There was some news very recently regarding the marketing of your rental portfolio. I was wondering if you could provide some context around that for us, as we received a lot of questions around whether this could yield a cash infusion beyond what operations are expected to generate.

Stuart Miller, Executive Chairman

So look, I think the base answer to that question is, we'll see. The determination to market the portfolio was driven by limited partners. The timing is somewhat suboptimal for a sale, but depending on interest rates, that could change quickly. So we'll see what happens. There may or may not be an infusion; this is an episodic approach that will happen or not—it won't materially influence either the balance sheet or the income statement. Any profit, if it materializes, would likely be discounted. In terms of cash infusion, this would merely add to our cash position and may encourage more stock buybacks. We will just have to wait and see on that; I'm afraid there's no additional guidance at this point.

Stephen Kim, Analyst

Appreciate that. Thanks so much, Stuart.

Stuart Miller, Executive Chairman

Thank you, Steve.

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. Thanks for all the detail, and congrats on the great performance this year. Stuart, I’d love to hear your thoughts because I heard a lot in your commentary about the tailwinds you experienced throughout the year related to tight inventory, and the interest rate movement witnessed over these past few days or weeks has been quite significant. However, I think one of the great unknowns and uncertainties is the potential impact this could have on the resale market, as it might free up inventory and incentivize movement among individuals. Obviously, there are pros and cons to that regarding your business. But what do you anticipate happening in that case, assuming rates settle near current levels with respect to how that could influence the resale market and affect the new home market amid heightened inventory levels in 2024?

Stuart Miller, Executive Chairman

Really interesting question, Alan. I've thought a lot about this in the past year, as the resale market has adapted well to retaining mortgages with very favorable interest rates, thereby not adding to traditional supply. However, the more I contemplate it, the more it appears to be a zero-sum game. If the resale market activates due to a slight decrease in interest rates, which it may, traditionally, first-time buyers will often seek to upgrade their homes and transition to a more substantial move-up position. While it seems that should interest rate reductions invigorate the resale market, leading to more supply, that extra supply would, in turn, attract additional demand. The first-time buyer segment has been eager for new home offerings, as the traditional resale products have not been available. Therefore, I suspect that if interest rates trigger activity in the existing home market, we will see both increased supply for the first-time buyer and heightened demand for those moving up. We're prepared for that possibility.

Alan Ratner, Analyst

Great. Appreciate your thoughts on that topic. On margins, it's interesting. You're not issuing formal full-year guidance, but given your commentary about expecting full-year margins to be relatively stable with those from '23, it implies a reasonably healthy ramp through the year. I would like to know what type of trajectory on incentives that implies. I would assume land costs will increase, impacting what flows through the P&L. Should we interpret this as expecting an incentive reduction of 200 to 300-plus basis points over the course of the year from current levels?

Stuart Miller, Executive Chairman

Historically, seasonal patterns primarily dictated our margin trajectory, usually beginning lower in the first quarter and accelerating as we moved through the year. I think that will hold true this time as well. However, in our case, the fourth quarter was particularly harsh regarding interest rates, especially in the first couple of months. Thus, we did observe a rather anomalous push down in our margins during Q1. I guess you could expect a functional recovery of margin as we progress through the year. The more pronounced incentives during the fourth quarter were likely a thing of the past at this stage. As we view the projected margins, we possess good visibility following our experience in both November and early December, witnessing buyer re-engagement in the market thanks to easing interest rates.

Jon Jaffee, Co-CEO and President

I would concur with what you said, Stuart. Moreover, towards the end of the quarter, we noticed less of a recovery than expected due to the impacts of holiday seasonality, which is commonplace. It's also noteworthy to anticipate our focus on utilizing adjustable-rate products more efficiently to help lower the costs associated with mortgage buy-downs. Buyers will still need a more effective interest rate to qualify and afford homes at current prices.

Alan Ratner, Analyst

Great. Thanks again, guys. I appreciate it.

Stuart Miller, Executive Chairman

Thank you, Alan.

Operator, Operator

Next, we’ll go to the line of Kenneth Zener from Seaport Research Partners. Please go ahead.

Kenneth Zener, Analyst

Good morning, everybody.

Stuart Miller, Executive Chairman

Good morning.

Kenneth Zener, Analyst

A key part of even flow cadence is structuring land as a variable cost, which I think is a significant innovation for your organization. Can you quantify the percentage of your closings that stemmed from finished homesites, which made up an average of 85% to 90% of your purchases this year? Also, could you provide context in terms of what percentage of closings came from those finished homesites in the quarter compared to last year or earlier in the year? Lastly, could you quantify the margin impact versus the asset efficiency you’re achieving? I believe the latter point is often misinterpreted.

Diane Bessette, Chief Financial Officer

Sure, can I just jump in? So in the fourth quarter, around 48% of our deliveries came from finished homesites purchased from third parties. I'm not certain what that percentage was at the beginning of the year, but I'm sure it has increased each quarter. We expect to see that trend continue upward in 2024 as we further pursue our strategy of becoming land lighter, reducing land on our balance sheet to gain more control.

Kenneth Zener, Analyst

Right. The margin impact versus the asset efficiency.

Diane Bessette, Chief Financial Officer

Yes, overall, I think you can view it as a growing metric, but I would estimate the increment to be around 20 or 30 basis points, which is a reasonable estimate, and it will likely grow as we increase that percentage.

Kenneth Zener, Analyst

Excellent. As a secondary topic, which I believe pertains to messaging, investors are seeking clarity regarding net income in relation to cash flow and buybacks. I understand that your company is evolving as it decreases land exposure. However, could you specify if the balance of cash flow will be allocated predominantly to share repurchases excluding debt payments? Is that a straightforward rule of thumb guiding your company? Stuart, I gather you are emphasizing that you're not pursuing large land deals. A simple guideline would likely increase investor confidence regarding cash flow applications.

Stuart Miller, Executive Chairman

Yes, that's a fair characterization for now. What I am trying to convey is that we are evolving our thought process on this topic. I wish to express that we are not seeking out large land acquisitions or M&A transactions currently. At the moment, our generated cash flow allocation is being conservatively distributed between debt repayment as it comes due, with the remainder set aside for stock buyback programs.

Diane Bessette, Chief Financial Officer

Additionally, Kenneth, I'd like to clarify that in previous quarters and years, we engaged in considerable early repayments of senior notes, as I’ve mentioned. Since we are targeting a decrease in nominal dollars on our balance sheet, we made significant efforts to reduce these nominal amounts. We now possess $2.5 billion in senior notes and feel there is no longer a pressing need to keep pushing debt maturity forward. We can manage our debt repayment in a structured manner as it becomes due.

Kenneth Zener, Analyst

Thank you very much.

Stuart Miller, Executive Chairman

Thank you.

Operator, Operator

Thank you. Next, we'll go to the line of Michael Rehaut from JPMorgan. Please go ahead.

Michael Rehaut, Analyst

Thanks. Good morning, everyone. Or I guess, almost good afternoon. Thanks for all the comments so far, and also, congrats on the fast turnaround after year-end. That's very impressive. I would agree with Diane's prior comments. I wanted to zero in a bit on SG&A and corporate G&A for the first quarter. Your revenue growth outlook seems to reflect the faster growth in closings, but it appears you might have adverse leverage on both metrics by a significant margin, given the double-digit revenue growth expectations. Could you clarify the drivers behind this? I know you mentioned corporate G&A investments, so could you provide more context regarding SG&A? If there are increased commissions or other relevant factors we should be aware of? Moreover, should we anticipate leveraging SG&A and corporate G&A beyond this first quarter?

Diane Bessette, Chief Financial Officer

I think, Mike, as we've been articulating, we have observed increased broker participation due to varying sales challenges, judiciously utilizing brokers where necessary to ensure sales capture while managing expenditure. Additionally, as you’ve heard us mention, our machine-related investment—particularly in lead generation on the digital front—is aimed at enhancing lead influx, which will likely yield higher conversion rates. Thus, while we’re selectively allocating funds to that area, the expectation is that it will ultimately produce a more profitable outcome for us as it is typically less costly than relying on brokers or other avenues. So those factors are the primary drivers affecting our SG&A in the last few quarters.

Stuart Miller, Executive Chairman

Yes, that’s an excellent description of the operational facet. However, what I would like to emphasize is that through the past year's fluctuations, our digital platform has compelled us to enhance our efficiency. While we value our collaborations with the realtor community, we remain cautious about incurring unnecessary costs. So, we're strenuously managing the balance between essential realtor engagement and what we can achieve organically through our digital platform—and this is reflecting in our SG&A figures. We’ve seen realtor-related expenses and some marketing costs rise as we endeavored to maintain sales pace, which will be a continuous story of evolution throughout 2024.

Jon Jaffee, Co-CEO and President

Indeed, that's the right articulation. We're actively refining our execution machine. So as we adjust various parameters, such as interest rate buy-downs, incentives, and our utilization of the digital funnel or selecting brokers, we're in a phase of continuous change—learning, experimenting, and providing feedback to improve how efficient we can be across all these variables to uphold steady production and sales pace.

Michael Rehaut, Analyst

Great. Thank you for that input. I have one additional question regarding gross margins. I recognize that it's a fluid situation, but against the backdrop of low 24% gross margins in the latter half of '23—now you're saying 21% for Q1, but perhaps a return to approximately 23% to 24% over the full year—given what I'm hearing, it seems you've taken steps to ensure robust volume and orders coming in, though perhaps a bit more extreme than in the past, which is justified to maintain volumes during a challenging period. Can we consider the 200 basis point deviation in Q1 margins as more of an anomaly? I’m curious how this would lead us back to 23% to 24% gross margins rather quickly, aside from the extraordinary measures taken, especially as you seem to be in tune with the latest interest rate movement.

Stuart Miller, Executive Chairman

That's an excellent inquiry, Mike, and one that we’ve reflected upon considerably. The answer here is that, as you suggest, we anticipate seeing that 200-300 basis points fluctuation in margins could be stabilized as we transition through the year based on market adjustments. However, the fourth quarter pushed our margins lower significantly due to escalated interest rates. As we navigate this high-interest rate phase, we've responded actively to market conditions; notably, demand has been steady, making pricing adjustments necessary for buyers to maintain affordability, which affects how margins move up and down. Given these dynamics, we have expectations for recovery as the demand metrics show positive signs and we refine our strategies.

Jon Jaffee, Co-CEO and President

Stuart, you hit on the core of the situation. We don’t possess the ability to predict the future—the shifts in interest rates and buyer interest. The developments experienced in Q4 were precisely as they were. In navigating that landscape, we employed considerable incentives to sustain a sales pace. Presently, there's improved visibility regarding buyer engagement as we’re witnessing conditions improve, which should enable us to adapt and utilize lower-cost mortgage options to help provide positive momentum moving forward.

Stuart Miller, Executive Chairman

One last point to mention is that while we witnessed an unexpected hesitance regarding ARM products during the prior spikes in interest rates, the recent subtle shift towards more favorable rates could tilt buyer preferences towards ARMs, which consequently lowers the incentive burden to the system. We'll continue to monitor this closely as we move forward. Why don’t we take one more question?

Operator, Operator

Thank you. Our final question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Susan Maklari, Analyst

Thank you for squeezing me in. Good afternoon. My first question builds on your comments in response to the last question, which is, as you contemplate entering the year with less than one finished spec per community—which is low, especially relative to some peers in similar price points—how do you envision leveraging your improvements in the Lennar machine to flex the business towards the targeted 80,000 closings that you've guided to? Are you adaptable enough to flex up or down based on market dynamics?

Stuart Miller, Executive Chairman

To that extent, we are proactively managing everything we do, especially in terms of expanding the number of deliveries in a deliberate fashion through community efforts. We have specific community metrics overseen by Jon down to a very detailed level through daily calls managing production pace, starting pace, cycle times, and aligning with sales rates across divisions and communities. The ongoing focus has resulted in being able to manage the whole process actively. Jon, would you like to add to that?

Jon Jaffee, Co-CEO and President

Exactly as you mentioned, Stuart. We're adopting a design-oriented approach that minimizes completed inventory. Continuous inventory movement through our production apparatus is essential for reaching our target delivery of around 80,000 homes this year. While market conditions fluctuate, our machine's consistency will effectively drive our intended outcomes, ensuring we achieve our goals.

Susan Maklari, Analyst

Okay. In your previous comments, you highlighted impressive market share gains throughout the year. As you look ahead, can you clarify where you believe these share gains primarily came from? Additionally, how do you plan to sustain that growth while driving these company-specific initiatives?

Stuart Miller, Executive Chairman

We likely won't specify individual competitors—each market presents unique challenges—and areas of strategy for various competitors can diverge. Some might face capital access constraints while others adopt distinct business methods. Our approach has consistently been clear and steadfast; wherever competitors have retreated, we have stepped in, filling voids and enhancing market share, whether through land acquisitions or fostering relationships with new trade partners while managing costs and producing efficiencies. We've found a way to navigate these dynamics effectively.

Jon Jaffee, Co-CEO and President

The market share gains reflect our strategy to become the preferred partner for both Lennar sellers and trade partners, focusing on operational effectiveness and price execution. By doing so, we not only drive consistent growth but also position our company to thrive as competitors retract or expand, leading to greater volume and sustainability.

Susan Maklari, Analyst

Okay. Thank you.

Stuart Miller, Executive Chairman

Thank you very much. We will conclude our session here. I want to express my gratitude to everyone for participating today. It’s been an exciting year of evolution and execution for our company, and we look forward to updating you on our progress in 2024. Thank you.

Operator, Operator

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