Earnings Call Transcript - LEN Q4 2025

Operator, Operator

Welcome to Lennar's Fourth 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 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 and Co-CEO. Sir, you may begin.

Stuart Miller, Executive Chairman and Co-CEO

Very good, and good morning, everybody, and thanks for joining today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; and Katherine Lee Martin, our new Chief Legal Officer, and Bruce Gross, CEO of Lennar Financial Services, along with 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 give an operational overview, updating construction cost, cycle time and some of our other metrics. As usual, Diane is going to give a detailed financial highlights along with some limited guidance for our first quarter of 2026 and for the year. And then, of course, we'll have a question-and-answer period. Before we begin, however, let me note that this will be Jon's last earnings call as he has decided to retire and will officially step down on January 1. Jon has been a partner and a leader at our company for well over 40 years, and his leadership will certainly be missed. Affectionately, Jon has been known as our company's plow horse, driving Lennar's operations with relentless dedication and commitment. Over the years, we have tried new things. Some have been successful, others not so much. Through it all, Jon's partnership has been a joy and a privilege. And with that, let's get started. We are very pleased to present Lennar's fourth quarter and year-end 2025 results against the backdrop of a stubbornly difficult housing market. While our margin is under pressure, we can see that underlying demand is still strong, while supply is short. During the past 3 years of difficult market conditions, we have maintained volume, grown market share, and reengineered our operating platform for a better future when the market bottoms and normalizes. We are extremely well positioned with very strong market share in strategic markets, and our margin is leveraged to the upside. As you may recall, last quarter, I noted that declining interest rates could signal the start of a market recovery. Unfortunately, that turnaround has not yet materialized. As rates slowly moderated in September, eased more in October, and remained flat in November, the customer response remained fairly tepid suggesting that a combination of affordability and consumer confidence issues were continuing to limit demand. Of course, the coincident threat of government shutdown in September and the actual shutdown from October 1 through mid-November further eroded already weak consumer confidence. While traffic was consistent, customers were both hesitant and limited by what they could afford to purchase. Our fourth quarter results reflect a continued softening of market conditions and affordability. Sales volume has been difficult to maintain and required additional incentives to achieve our expected pace and to avoid an unintended buildup of excess inventory. While we exceeded our delivery goal for the quarter and sold in line with the low end guidance during the quarter, these accomplishments came at the expense of further deterioration of margin which came down to 17%, even though we eased back the pressure on sales and pulled back our delivery goals for 2025. We know that margin will remain under pressure and sales and closings will be seasonally light. Nevertheless, we're well positioned to provide the affordable supply that the market needs when demand is activated by either lower interest rates or government-sponsored programs. We are situated with a lower cost structure, efficient product offerings and strong market positions to accommodate pent-up demand. We believe that we've gotten ahead of current market realities, and we've built a stronger, long-term, margin-driving platform. We know the market has remained weaker for longer, but our strategy has helped build a healthier housing market and has positioned Lennar for strong cash flow, higher returns on equity and capital, and stronger bottom line growth in the future. Accordingly, we will remain focused on volume and even flow production. We will maintain responsible volume to maintain an affordable cost structure, and we will find our floor and rebuild our margins as the overall housing market continues to remain short on supply. Let me turn to a quick macro view of the housing market. The macro economy remained challenging through our fourth quarter. While mortgage rates drifted marginally lower in the fourth quarter, consumer confidence became even more challenged by economic uncertainties and the government shutdown. Clearly, inflation-driven affordability concerns rose to the center of the national conversation. Cost inflation has had a significant impact on the lifestyle of the average American family. The current housing market is entrenched in an affordability crisis, leaving many families feeling excluded from the traditional promise of upward mobility and home ownership. Some advocate for sweeping solutions offering broad promises of free resources as an answer to the affordability dilemma. This narrative gains traction when there is a lack of clear actionable alternative. As I've noted on prior calls, mayors and governors across the country understand this and continue to list the housing shortage as a priority concern, pointing to affordability or attainability as a real crisis. They also understand low supply has fueled high prices and high prices, especially with higher for longer interest rates, have locked out many buyers. Inflation and short supply have kept home prices higher. Supply remains constrained, driven by years of underproduction, and new construction has slowed recently, exacerbating the chronic supply shortage as builders have pulled back on production due to slow sales and affordability concerns. But short supply can't be fixed by simply adding supply. It's important to recognize the downside of artificially lowering home prices, or boosting inventory solely to drive prices down. Such actions could negatively affect existing homeowners by diminishing their property values, weakening overall consumer confidence. If builders are unable to achieve sufficient returns, they may be forced to slow or halt construction, disrupting the production levels needed to address ongoing supply shortages. On a positive note, the federal government has intensified its focus on national housing prices with a strong likelihood of taking decisive actions to enhance affordability. Federal officials have initiated discussions with builders and industry associations to gain a comprehensive understanding of the challenges and work towards practical solutions. Although the specifics of potential programs remain to be seen, significant attention is being paid to developing impactful initiatives while thoughtfully considering possible unintended negative consequences. Despite the public scrutiny surrounding various proposed programs, it is encouraging to see that many bold ideas are being carefully elevated with the goal of improving affordability. Increasing affordability has the potential to spark new demand in the housing market, which can drive an increase in construction activity and help address ongoing supply shortages. It is significant that for the first time in decades, the federal government is actively recognizing the vital role that housing plays in the broader national economy. I am confident housing will emerge as a central element in addressing the affordability crisis and providing meaningful solutions for the future. As we noted in our press release, in our fourth quarter, we started 18,443 homes. We delivered 23,034 homes, and sold just over 20,000 homes. We ended the quarter with an average of just under 3 unsold completed homes per community. This process and the easing of pressure on our sales targets resulted in new order incentives decreasing. Our average sales price was $386,000 and we expect our margins to be lower in the first quarter of 2026, between 15% and 16%, depending on market conditions. We anticipate our average sales price to be between $365,000 and $375,000. We expect to deliver approximately 85,000 homes in 2026. We are positioned for improved efficiency and execution as we go forward. We have reduced our vertical construction costs by approximately 10% and improved our cycle time from 138 days a year ago to 127 days today. Our inventory turn improved to 2.2x from 1.6x last year, and we believe we are now built for materially improved efficiency in executing our business. We will remain focused on volume and the position of our strong balance sheet will afford us flexibility and opportunity for strategic growth for our future as well. Lennar is extremely well positioned for the future, and we look forward to keeping you up-to-date on our progress.

Jonathan Jaffe, Co-CEO and President

Good morning, everyone, and thank you, Stuart, for a wonderful partnership, and to Lennar team for an amazing journey. As Stuart described, we remain steadfast in executing our strategy. Every day, we work on driving homebuilding efficiencies in our operations. This execution is reflected in achieving our targeted sales pace, record low cycle times, overall cost reductions and increased inventory turns. In the fourth quarter, we achieved a sales pace of 4 homes per community per month, meeting our sales plan. Our average response time for customers submitting RFIs dropped to 42 seconds in the fourth quarter, a 12.5% improvement over the third quarter. This responsiveness now extends after hours with digital agents available to assist customers at any time. We analyze customer interactions and our RFI responses to drive improvement in the quality of engagement. Our pricing strategy focuses on continuous evaluation of demand patterns, inventory levels and price discovery data designed to set the price and incentives for each community. This maximizes sales efficiency and maintains appropriate inventory levels. In conclusion, our team is united and focused on executing strategies that drive improving customer acquisition results, reduced costs, and enhanced operational efficiencies.

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 first quarter of fiscal 2026. For the fourth quarter, our Financial Services team produced operating earnings of $133 million, within our guidance range of $130 million to $135 million, generating $610 million for the year. Our Financial Services team contributed great profitability, and worked in partnership with our homebuilding teams to provide a great customer experience for each home buyer. This quarter, we continued to generate cash by pricing homes to market. We ended the quarter with $3.4 billion of cash and total liquidity of $6.5 billion. Our homesites controlled percentage was 98%. We ended the quarter owning just under 10,000 homesites and controlling 496,000 homesites for a total count of 506,000 homesites. Our stockholders' equity was just under $22 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.

Operator, Operator

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

Alan Ratner, Analyst

Thanks for all the details so far. I think gross margin is obviously on the top of everybody's minds. It's encouraging to hear that incentives actually ticked lower in the quarter. Can you walk through what's contributing to the continued pressure on margin? If we don't see any material improvement in demand, is that an environment where you think you can potentially dial back those incentives further?

Jonathan Jaffe, Co-CEO and President

During the quarter, we faced some unexpected headwinds, particularly with the government shutdown that definitely had an impact on consumer confidence. This challenged our ability to stabilize pricing. If you're asking which markets are strongest or weakest, it really ebbs and flows across our markets with an overhang of what's going on in the economy. We definitely hit a headwind across the country, which brought our incentive expectations lower than what we actually ended up with.

Stuart Miller, Executive Chairman and Co-CEO

I think as we started the quarter, we expected that with interest rates moving down a little, the incentive structures would come down. The government shutdown had a material effect on consumer psychology and impacted expectations. While we believe incentives will come down through the year, the government is focused on concepts in affordability, and we anticipate this will play positively for us.

John Lovallo, Analyst

Stuart, given your strategy of maintaining volume and focusing on cost and efficiency, how do you envision the upside in your ability to recapture margin as the market improves?

Stuart Miller, Executive Chairman and Co-CEO

If you buy into the notion that there is a supply shortage, we're going to figure out how to rerationalize our cost structure. Our focus on building efficiencies is key, and we think that there's a clear path to margin improvement as the incentives will migrate from today’s levels to a traditional range of 4% to 6%, which defines our opportunity.

Stephen Kim, Analyst

Are you saying that in 2026, your expectation is that you've got the volume, and therefore, the platform to harness margin improvement without necessarily needing to increase your volume?

Stuart Miller, Executive Chairman and Co-CEO

That's exactly what we're laying out. The reality is we don't have to restart the machine. The machine is running very efficiently. We don't have to run out and buy new community count. We are maintaining volume and pushing forward, recognizing the inventory shortage.

Diane Bessette, Chief Financial Officer

In terms of how much we hold on the balance sheet, it generally depends on market conditions and our upcoming maturities. As conditions stabilize and uncertainty becomes less of a focus, we’ll hold less on our balance sheet at each quarter end.

Operator, Operator

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