Earnings Call Transcript - LEN Q3 2025

Operator, Operator

Welcome to Lennar's Third Quarter Earnings Conference Call. 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 like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.

Stuart Miller, Executive Chairman and Co-CEO

Good morning, everyone, and thank you for joining us 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; Katherine Martin, our new Chief Legal Officer; and Bruce Gross, CEO of Lennar Financial Services, along with some others. I want to mention that Mark Sustana, our General Counsel for 20 years, is not here today and is greatly missed. Mark has been with us for every earnings call and has provided exceptional service to the company. Although he has recently retired, he will continue as a strategic adviser and consultant, and we are sure he’s listening today in spirit. As usual, I’ll provide a macro and strategic overview of the company. Following my opening remarks, Jon will give an operational update, covering construction costs, cycle times, and our land strategy. Diane will then present detailed financial highlights and guidance for the fourth quarter, after which we’ll open the floor for questions. Please limit yourselves to one follow-up question to allow us to accommodate as many inquiries as possible. Let me begin by reviewing Lennar's third quarter results in the context of what may be an improving economic landscape for the housing market. Our results show a continued softening of market conditions and affordability issues. Sales volume proved difficult to sustain and required additional incentives to achieve our targets and avoid excess inventory. Although our deliveries fell slightly below our expectations for the quarter, we sold more homes than anticipated. However, these accomplishments came at the cost of further margin deterioration, which settled at 17.5%. Consequently, we are easing back our delivery expectations for the fourth quarter and the full year to help relieve pressure on sales and deliveries and stabilize margins. We now expect to deliver between 22,000 and 23,000 homes in the fourth quarter, revising our full-year expectations to 81,500 to 82,500 homes. This is a moment for Lennar to pause and let the market catch up. Despite mortgage rates trending downward towards the end of the quarter, sales have not yet picked up. Nevertheless, we're beginning to see early signs of increased customer interest and stronger market traffic. With lower mortgage rates, potential buyers are showing more interest in home purchases, which typically signals pending sales activity, assuming rates remain favorable. If interest rates continue to decline, we are optimistic about a positive market response. The extended period of elevated interest rates has forced us to adjust our construction costs to facilitate sales in challenging market conditions. Our lower construction cost structure, combined with reduced margins, allowed us to meet affordability demands and balance supply and demand. We aligned our sales pace with our production pace and strengthened our market share in our key strategic markets. We are now prepared with a lower cost structure, efficient product offerings, and strong market positions to address pent-up demand as interest rates ease and consumer confidence returns. We believe we have gone ahead of the current market realities, building what we see as a stronger long-term margin-driving platform. Although the market has remained weak longer than we anticipated, our strategy has contributed to a healthier housing market and positioned Lennar for robust cash flow and profitability moving forward. We expect that if mortgage rates approach or fall below 6%, we will soon see stabilization in the market, benefiting from improved affordability and increased demand. We will maintain focus on volume and steady production, albeit at a slightly slower pace, ensuring responsible volume to support an affordable cost structure while we seek to stabilize and rebuild our margins as the housing market continues to experience supply shortages. Turning to the macroeconomic environment, the economy remained challenging throughout our third quarter. Mortgage interest rates were high, and consumer confidence was impacted by various domestic and global uncertainties. Actionable demand continued to be restrained by affordability issues and consumer confidence, resulting in further market softness through the quarter. However, towards the end of the quarter, interest rates began to decline, and this trend accelerated into the fourth quarter. We may now be approaching a 6% mortgage rate, and we are witnessing early signs of consumers returning to the market. In terms of supply, it remains constrained across most markets because of years of underproduction. New construction has slowed as builders scaled back due to slow sales and affordability concerns, worsening the existing supply shortfall. Demand for homes persists, but affordability challenges have been a barrier. This has created a tough cycle where low supply drives high prices, which in turn limits buyer access. Local and state officials continue to prioritize the housing shortage and emphasize the need for affordable options. For a deeper understanding of the housing market's challenges, I recommend reading "Abundance" by Ezra Klein, which highlights the long-term outlook characterized by structural supply shortages alongside escalating demand. In our third quarter, we started approximately 21,500 homes, delivered around 21,500 homes, and sold just over 23,000 homes. While we fell short of our delivery targets, we surpassed our sales goals and increased our community count, positioning us better for the upcoming year. Despite high mortgage rates and declining consumer confidence, we maintained volume through our starts while offering incentives for sales to ensure affordability. Sales incentives increased to 14.3% during the third quarter, which resulted in a gross margin of 17.5%, lower than expected due to a reduced average sales price of $383,000. Our SG&A came in at 8.2%, resulting in a net margin of 9.2%. Looking into the fourth quarter, we anticipate margins to remain around 17.5%, depending on market conditions, and we expect to sell between 20,000 and 21,000 homes, delivering between 22,000 and 23,000 homes. Our expected average sales price should range between $380,000 and $390,000, reflecting our efforts to relieve pricing pressure on homes during the quarter. For 2025, we foresee delivering between 81,500 and 82,500 homes. We expect our overhead in the fourth quarter to remain between 7.8% and 8% as we continue investing in various technology solutions that will shape our future. These initiatives will add to SG&A and corporate G&A expenses for some time as they represent a significant investment in our future differentiation. In conclusion, while the housing market presents challenges, Lennar is navigating constructively through these times. Although our performance metrics aren't where we would prefer them to be, neither are the market conditions. We are well-positioned with a strong national footprint, increasing community count, and rising volume. We are committed to meeting the ongoing housing shortage while driving growth and operational efficiency. Our robust balance sheet and land banking relationships give us the flexibility to pursue strategic growth opportunities. We will focus on enhancing our manufacturing model and leverage our land partnerships to foster growth while developing modern technologies aimed at generating high returns on capital and long-term shareholder value. Finally, I’m inspired by the resurgence of a technology company we've supported for years. We are confident that Opendoor, under CEO Kaz, will play a vital role in Lennar's technological evolution. Kaz has joined Opendoor after a successful tenure at Shopify, bringing a mission-driven approach that aims to leverage modern technology to transform the homeownership market. His vision emphasizes using AI and modern tools to streamline home buying and selling processes, making homeownership more accessible and practically achievable. This collaboration holds significant promise for enhancing Lennar's bottom line while improving customer experiences. We're positioned well for future opportunities, and we look forward to keeping you informed about our progress. Now, I'll turn it over to Jon.

Jonathan Jaffe, Co-CEO and President

Good morning, everyone. As Stuart described, we remain intensely focused on executing our core strategy, maintaining consistent high-volume production by leveraging advanced technology throughout our homebuilding operations. This is all about driving efficiencies to position us as the leading technology-enabled, low-cost homebuilding manufacturer. Our ongoing strategy has resulted in greater efficiencies, evidenced by improvements in our cycle time, inventory turn, and overall cost. In this update, I will discuss our third quarter performance concerning sales pace, cost reduction, cycle time improvements and the execution of our asset-light plan strategy. For the third quarter, we achieved a sales pace of 4.7 homes per community per month, which aligns with our sales plan. To reach this goal, we utilize the Lennar machine, beginning with attracting qualified leads through our digital funnel. We then focus on a rapid response with each customer along with quality engagement. Notably, our average response time to leads improved by 53% from our second quarter, reducing it to just 46 seconds. This means that when a lead submits a request for information, they typically receive a call or text within 46 seconds. Supporting our sales process, our Internet sales consultants benefit from real-time analytics for coaching immediately after each interaction, thanks to proprietary software. This technology-driven approach results in an 8% quarter-over-quarter increase in appointments. Additionally, we utilize our dynamic pricing tool that matches home prices to real-time supply and demand inputs, helping us reach our targeted sales goals. Our pricing technology continues to evolve using the feedback and data from our results. The successful execution of the Lennar machine has enabled us to sell the right homes at current market prices, keeping our inventory well-positioned with an average of under only 2 completed homes per community. Affordability continued to challenge customers throughout all of our markets in the quarter as incentives increased by approximately 100 basis points to achieve our sales targets. It is this ongoing affordability challenge that drives our focus on a production-first strategy. As the foundation to this strategy, we delivered a consistent start pace of 4.4 homes per community per month in the quarter. This sustained volume benefits the supply chain, allowing us to leverage volume to reduce both cost and cycle times. Consistent volume supports ongoing negotiations with our trade partners, resulting in lower costs. Over the last 11 quarters, we have achieved cost reductions in 10 of them. The average decrease for each of the 11 quarters is $1.50 per square foot. Direct construction costs for the third quarter were down approximately 1% from the second quarter and about 3% year-over-year, reaching the lowest construction cost for our company since the third quarter of 2021. This trend of decreasing direct construction costs will continue into our fourth quarter. We have now achieved cycle time reductions for 11 consecutive quarters with a 6-day sequential decrease from Q2, bringing the average cycle time for single-family detached homes down to 126 calendar days. This represents a 14-day or 10% year-over-year reduction and marks the lowest cycle time in our company's history. Technology continues to drive these improvements by providing our construction teams with real-time information displayed in user-friendly dashboards, facilitating better scheduling and field problem-solving. Improved cycle times and technology-driven quality assurance processes have also contributed to higher home quality, evidenced by fewer work orders and a reduced warranty spend, down about 35% year-over-year. Our focus on efficiency and cost reduction extends to land development, where we apply similar volume-based strategies to negotiate lower costs with trade partners in a slowing land market. In the third quarter, we began to see meaningful progress in these efforts and expect further improvements in the coming quarters. Land acquisitions are strategically structured to be just in time, utilizing our land bank relationships and phased takedowns to minimize carrying costs. Regarding our asset-light strategy, we concluded the quarter with improved metrics. Our supply of owned homesites decreased to 0.1 years from 1.1 years a year ago, and the percentage of controlled homesites increased to 98% from 81% a year ago. Together, these operational improvements have led to an increased inventory churn in the third quarter, now at 1.9 versus 1.6 last year, representing a 19% improvement. In the fourth quarter, our team will continue to focus on executing the strategy of maximizing efficiencies to drive down costs across our operating platform.

Diane Bessette, Chief Financial Officer

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our homebuilding operations. So therefore, I'm going to provide a quick summary of our financial services operations, summarize our balance sheet highlights and then provide guidance for the fourth quarter. So starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $177 million. The strong earnings were primarily driven from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins. Once again, our financial services team worked in partnership with our homebuilding teams with the goal of providing a great customer experience for each homebuyer. Turning to our balance sheet. This quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.4 billion of cash and total liquidity of $5.1 billion. As Jon noted, consistent with our land-light lower-risk manufacturing model, our year supply of owned homesites was 0.1 years and our homesites controlled percentage was 98%. We ended the quarter owning 11,000 homesites and controlling 512,000 homesites for a total of 523,000 homesites. We believe this portfolio of homesites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way. With our focus on turning inventory, our inventory turn increased to 1.9x, and our return on inventory was 24%. During the quarter, we started about 21,500 homes and ended the quarter with approximately 42,500 homes in inventory. As Stuart mentioned, we carefully manage our inventory levels, ending the quarter with fewer than 2 completed unsold homes per community, which is within our historical range. And then turning to our debt position. We ended the quarter with $1.1 billion outstanding on our revolving credit facility, and our homebuilding debt to total cap was 13.5%. We had no redemption or repurchases of senior notes this quarter. Our next debt maturity of $400 million is not due until June of 2026. Consistent with our commitment to increasing total shareholder returns, we repurchased 4.1 million of our outstanding shares for $507 million, and we paid dividends totaling $129 million. Our stockholders' equity was just under $23 billion, and our book value per share was about $89. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the remainder of 2025. So with that brief overview, I'd like to turn to Q4 and provide some guidance estimates, starting with new orders. We expect Q4 new orders to be in the range of 20,000 to 21,000 homes as we match production and sales paces. We anticipate our Q4 deliveries to be in the range of 22,000 to 23,000 homes with a continued focus on turning inventory into cash. Our Q4 average sales price on those deliveries should be about $380,000 to $390,000, and gross margin should be approximately 17.5%, consistent with the prior year. And our SG&A percentage should be in the range of 7.8% to 8%. All these metrics, of course, are dependent on market conditions. For the combined homebuilding joint venture, land sales and other categories, we expect earnings of approximately $50 million. We anticipate our Financial Services earnings to be approximately $130 million to $135 million. For our multifamily business, we expect a loss of about $30 million as we continue to strategically monetize assets to generate higher returns. Turning to Lennar Other. We expect a loss of $35 million, excluding the impact of any potential mark-to-market adjustments to our public technology investments. Our Q4 corporate G&A should be about 1.9% of total revenues, and our foundation contribution will be based on $1,000 per home delivered. We expect our Q4 tax rate to be approximately 23.5%, and the weighted average share count should be approximately 253 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $2.10 to $2.30 per share for the quarter.

Operator, Operator

Our first question comes from Alan Ratner from Zelman & Associates.

Alan Ratner, Analyst

Stuart, obviously, I think a lot of people want to dig into the pivot here on strategy a little bit and understand whether this is a little bit more short-term in nature or just a change in the way maybe you're thinking about the longer term. I guess from an incentive standpoint, I'm just curious, have you already started to dial back some of the incentives? And if so, what has the response been in terms of order pace or margin or any color you can give there?

Stuart Miller, Executive Chairman and Co-CEO

So I wouldn't really look at it as a change in strategy. I would look at it more that we are making adjustments as we go forward. We're still very focused on volume. We're maintaining a very, very strong volume. I think we're taking the edge off as the market has continued to become a little bit more stressed. And I think that as we went through our third quarter and interest rates were trending more towards the 7% range than what ultimately took place at the end of the quarter and into the fourth. We just felt that it was an opportune time to take a step back, particularly as perhaps interest rates are starting to moderate a little bit. They're a little up and down still. We thought it was a good time to let the market catch up a little bit. In terms of have we already started, the answer is no. That is something that Jon will be directing and focusing on over the next few weeks. But we're just recalibrating to make sure that we're not pushing too hard on a market that really doesn't want to be pushed.

Alan Ratner, Analyst

Got it. That's helpful color. Second question relates to the land strategy in relation to this. This isn't my view, but it's one I hear from investors that given the spin to Millrose and given the fact that now you're 100% off balance sheet with option contracts that are tied to some certain takedown schedule. I know there's been some concern that maybe you don't have the flexibility to meaningfully change the start pace or the takedown pace. So I'm curious, I know this is a fairly modest pullback in start activity, so it probably doesn't affect things too much. But is there any adjustment that's also going on, on the land side to account for this slower start pace, meaning have you adjusted the takedown schedules or paused in any cases? Or on the flip side, would land begin to then accumulate on the balance sheet potentially if you don't accelerate those starts in '26?

Stuart Miller, Executive Chairman and Co-CEO

Thanks, Alan. I've received that question multiple times. The answer is that we are not limited in any way by our land relationships or land reconfiguration. In fact, we intentionally built in the flexibility to pause as market conditions evolve. We also have the option, although it comes at a cost, to withdraw from existing programs. Therefore, our land relationships do not define our strategy at all. Instead, our focus is on recognizing the need to find ways as an industry to construct and deliver homes more affordably, which relates to costs from land to land financing, vertical construction, horizontal restructuring, and SG&A. This is why we are concentrated on a unique path forward with modern technologies. We need to enhance efficiency and effectiveness. Unfortunately, achieving this requires volume, adjusting our systems, collaborating with trade partners on logistics and cost structures, and developing new technologies that can be costly. SG&A tends to increase before it decreases. However, regarding land, it would be a mistake to consider it a constraint, as it was strategically designed to serve as a steppingstone for our future strategy.

Operator, Operator

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

Stephen Kim, Analyst

Thank you for your comments, Stuart. I wanted to follow up on Alan's question regarding the duration of this pause. Could you provide insight on whether you anticipate this planned slowdown in sales production to last around one to two quarters, perhaps a few months, in anticipation of a stronger spring selling season? Or do you view this as a more permanent adjustment of your Lennar operations to a lower volume level? Please address this in terms of both housing production and land.

Stuart Miller, Executive Chairman and Co-CEO

Our strategy continues to prioritize volume and ensuring we supply markets that require it. We are diligently working on reducing our cost structure to enhance margins, even in a slowing market. Achieving this is complex and not straightforward. To directly address your question about whether this indicates a strategic shift or a longer-term slowdown, we do not view it that way. Our strategy emphasizes maintaining volume, which in turn allows us and our trade and land partners to operate more efficiently as we strive to meet the increasing demand for affordable housing in our communities.

Stephen Kim, Analyst

Okay. But you have indicated that you are looking to slow your volume versus, let's say, maybe what you had thought or thought about 3 months ago. And I guess the nature of my question is, is this slowdown, however you characterize it or this adjustment, is it something that you see as a measured in a few months? And then you're on the other side of that, there's going to be sort of a reacceleration? Are you sort of like pushing things off? Or is this something where you are sort of just lowering your overall or recalibrating to an overall lower level of volume than what you may have thought 3 to 4 months ago, let's say?

Stuart Miller, Executive Chairman and Co-CEO

So look, I think we're living in a fluid world right now. We're going to have to see how the market evolves. But the way that I would think about what we're doing is we're running a marathon and partway through, we're just taking a moment to take a breath, let our body catch up to where we are, and we're on a mission to move forward and to keep pursuing the strategy that we have in place.

Michael Rehaut, Analyst

I don’t want to dwell on this too much, but I wanted to emphasize the shorter-term adjustment in our approach due to the challenging market. I’m curious if you feel that you didn’t want to go below a 17.5% margin because the costs were too high to achieve the volume you expected three months ago. Alternatively, do you see a demand elasticity issue where reducing margins or increasing incentives wouldn’t effectively help you achieve the volume you need?

Stuart Miller, Executive Chairman and Co-CEO

I'm not entirely sure we've taken that deep of a philosophical approach, but we are actively responding to current market conditions. I believe it’s a good time to ease some pressure. Our talented team working on marketing and sales has done an excellent job navigating through challenging times. We thought this was an opportune moment to lighten the load on this aspect of our program and reassess our next steps. However, our fundamental strategy remains unchanged; we continue to focus on increasing volume and providing the market with an affordable and accessible product.

Operator, Operator

Next, we'll go to the line of Susan Maklari from Goldman Sachs.

Susan Maklari, Analyst

My first question is on the inventory turns. Can you talk through how some of these company-specific efforts are continuing to come through even as you moderate or adjust the strategy? And how we should think about the upside to those inventory turns in this kind of an environment and long term, the ability to get to 3x as you do think about the setup on the ground?

Stuart Miller, Executive Chairman and Co-CEO

At the end of each quarter, Jon and I conduct operations reviews with our division management teams to thoroughly examine their operations and strategies. I've found it intriguing to observe our divisions concentrating on improving their inventory turnover. This focus, which Jon and I believe reflects our commitment to effectiveness and efficiency, is aimed at reducing costs to enhance affordability. I attended one of those operations reviews recently, where a team is nearing the goal of a 3x inventory turnover. While the overall company will reflect the averages of all divisions, achieving that kind of target is a key part of our discussions as we aim to reduce cycle times. Jon mentioned that we are experiencing the lowest average cycle times as a company. That's the direction we're heading in, but it’s important to note that 3x is a challenging benchmark to achieve.

Jonathan Jaffe, Co-CEO and President

I would just add, Stuart, is as we've discussed and discussed in prior quarters as well, this ongoing focus on efficiency. So just in time into our land banks, just in time out of our land banks where we're ready to start production, all of this is a constant tweaking and refinement of processes to do just that is to continue to drive that metric, which, as you've seen, is that we're making good progress on.

Stuart Miller, Executive Chairman and Co-CEO

And every one of these programs, thinking processes, now Jon talks about land into the land bank, land out of the land bank and those efficiencies, all of these tied to modern technologies that are partners of what we're trying to do. And as we get those technologies working, those efficiencies are going to amp up.

John Lovallo, Analyst

The first question is orders were obviously very solid and a little bit ahead of expectations. You guys are working at the lowest cycle times in a very long time, if not in history. What caused sort of the slight miss in the third quarter deliveries given those factors?

Jonathan Jaffe, Co-CEO and President

It really is just timing and relative to when sales occur getting through the mortgage approval process, nothing more than that.

Matthew Bouley, Analyst

One on incentives. This brings up a philosophical question. Looking ahead, depending on the direction of interest rates, do you foresee maintaining some level of these buydowns as a structural competitive advantage compared to the resale market? Or if we reach a rate of 6% or lower, do you think there will be a significant reduction in those incentives?

Stuart Miller, Executive Chairman and Co-CEO

That's an interesting question. Many people have wondered why we are focused on interest rates coming down since we are already buying them down. The truth is that the stagnation in the current home market is significant because as that market begins to open up, it allows individuals to transition from a first-time home to a move-up home, and then from a move-up home to a larger home. This process facilitates a lot of activity in the housing market. While homebuilders are generally helping by lowering interest rates through buy-downs, which impacts margins, unlocking the broader housing market acts as a flywheel effect. This effect generates a lot of activity for the entire ecosystem.

Diane Bessette, Chief Financial Officer

Can you say what quantity or percentage of year-to-date deliveries have come from Millrose?

Jonathan Jaffe, Co-CEO and President

Yes, I want to say it's been about 25% in that zone.

Jade Rahmani, Analyst

And so in terms of the gross margin outlook, looking beyond the fourth quarter, should we still expect the remaining 75% once you're at a steady cadence with Millrose to come through that interest cost on gross margins?

Diane Bessette, Chief Financial Officer

Yes, staying the obvious with the low cost that Millrose offers us, the more that we have deliveries from that vehicle, it benefits our margins.

Stuart Miller, Executive Chairman and Co-CEO

While I have tremendous affection for Millrose and Darren and the group there, and we want to do a lot of business with them. We think that our business is best configured with a range of participants that are providing low-cost capital to enable us to be the best version of ourselves. With that diversity of engagement, I think we get the best out of everybody, and we really have been migrating towards building, enabling, participating in an industry solution, not just a myopic one for Lennar. Thank you. With that said, I want to thank everybody for joining us, and we look forward to reporting back on consistent and focused progress as we go forward. Thanks, everybody.

Operator, Operator

That concludes Lennar's third-quarter earnings conference call. Thank you all for participating. You may disconnect your line, and please enjoy the rest of your day.