The operator of Lennar's Third Quarter Earnings Conference Call welcomed all participants and informed them that the call would be recorded. David Collins then read the forward-looking statement and Stuart Miller, the Executive Chairman, began the call by thanking everyone for joining and informing them that he has a cold.

Rick Beckwitt retired from Lennar at the end of the third quarter. He had been with the company since the start of the Great Recession in 2006, and he worked with the team to fix what was broken and right the company. Lennar's team of Co-CEO and President Jon Jaffe, Chief Financial Officer Diane Bessette, Controller and Vice President David Collins, and CEO of Lennar Financial Services Bruce Gross are in Miami to give a macro and strategic overview of the company and its performance. Jon will comment on the land position and operational overview, Diane will provide financial highlights, and the team will answer questions. All of them appreciate Rick's service and partnership.

Rick, Jon, and the narrator worked together to position Lennar for leadership in the industry, and Rick has now retired as Co-CEO and President. The narrator then reports that Lennar has been successful in balancing and maintaining production and sales pace, reducing cycle time and increasing cash flow, and improving inventory turn, resulting in a strong and consistent result for the quarter. The macroeconomic environment is constructive for the housing market and has stabilized from last year's aggressive interest rate climb.

The Fed is working to reduce capital levels in the market, leading to more measured rate adjustments. This has allowed the consumer to adjust to "higher for longer" interest rates, and the housing market has responded with moderated prices and increased incentives. Demand for housing has returned within the limits of affordability, and the net average sales prices have stabilized at around $448,000.

Rental rates have moderated due to the excess supply of apartments. Prices and margins have stabilized due to cost reductions and value engineering. The housing market is leveling, and there is a shortage of available inventory due to the lack of developed land. Lennar is focusing on production efficiency and a closely matched sales pace to drive higher cash flow and strong margins. In the third quarter, they started 18,675 homes, sold 19,666, and delivered 18,559, an 8% increase from the previous year.

The company has seen increasing numbers in net sales, inventory, and margins, and is now guiding to increased volume for the year of almost 72,000 deliveries with strong margins and cash flow. The production team has been working to maintain a cost structure relative to the current sales price environment and driving cycle time to pre-supply chain crisis levels.

The company has made significant progress in reducing land held on balance sheet, creating a more efficient manufacturing platform, and managing operating costs. In the third quarter, they achieved a 7% SG&A, higher than the previous quarter's 6.7%, due to increased customer acquisition and engagement costs such as realtor and marketing expenses.

Lennar has achieved a strong net margin of 17.4%, up from 15.8% last quarter, due to streamlining their business and implementing systems that enable them to operate more efficiently. They have also maintained tight inventory control and achieved a 11.5% debt-to-total capitalization, with a negative net-debt to total capital due to their $3.9 billion cash position. This is managed through an every other day management meeting, where sales, starts and closings are reviewed and expectations are set.

Lennar reported excellent third quarter results, generating over $1.1 billion in earnings and repurchasing $366 million of stock and repaying $475 million in debt. The housing market remains strong with a shortage of housing and strong demand, allowing Lennar to execute its core strategies. Lennar is well-positioned for continued success in the coming year, with a 10% growth expectation, and is able to do so by focusing on maintaining volume, pricing homes to drive match pace, working with trade base to manage costs and efficiencies, and adjusting product offerings to meet the market.

In the third quarter of 2023, Lennar's balance sheet-first focus allowed them to maintain starts and sales, increase market share, generate cash flow, and keep their homebuilding machine going. Their pricing and mortgage rate programs were attractive to buyers, and they were able to achieve desired sales pace in all markets, even those with greater demand than supply. To help buyers purchase, Lennar Mortgage worked closely with the homebuilding teams to find the right solution for each buyer.

Lennar is utilizing a sales strategy of market clearing pricing to match the pace of homes under construction, which has enabled their third quarter starts to increase 17%. This has been achieved by growing their trade base, maintaining lower construction costs and reducing cycle time. Their third quarter cycle time decreased 32 days compared to the second quarter, and their construction costs fell by 5%. In order to continue reducing costs, Lennar is focusing on plan and SKU reductions, value engineering, and introducing additional workforce housing communities.

In the third quarter, Lennar's land acquisition was mostly finished homesites purchased from various land structures, and their years' supply of owned homesites improved and their controlled homesite percentage increased. Their community count increased by 5%, and they expect to increase their community count in the high-single digits by the end of fiscal 2023. Financial Services had operating earnings of $148 million.

In the quarter, mortgage operating earnings increased due to higher locked volume, lower cost per loan, and higher secondary margins, while title operating earnings increased due to higher volume and lower cost per transaction. Additionally, Lennar was able to maintain production and pricing of homes to generate cash, resulting in $3.9 billion of cash and no borrowings on the $2.6 billion revolving credit facility. As a result of their focus on balance sheet efficiency, the percentage of homesites they controlled increased to 73% and their years owned improved to 1.5 years, their highest and lowest respectively.

This quarter, Jon mentioned that the company spent $1.5 billion on land purchases, with 85% of them being finished homesites. They ended the quarter with 107,000 owned homesites and 284,000 controlled homesites, for a total of 391,000 homesites. They started 18,700 homes and ended with 43,600 in inventory, including 2,000 models. To reduce debt and strengthen the balance sheet, they retired $425 million of senior notes and repurchased $50 million of senior notes. They also repurchased 3 million shares for a total of $366 million and paid dividends totaling $107 million, for a total of almost $1 billion returned to investors this quarter.

Lennar Corporation expects Q4 new orders to be in the range of 16,200 to 17,200 homes, deliveries in the range of 21,500 to 22,500 homes, and a combined Homebuilding joint venture, land sales, and other categories to have earnings of $25 million. Financial Services earnings for Q4 are expected to be in the range of $130 million to $135 million, and a loss of about $20 million is expected for the Multifamily business and a loss of approximately $25 million for the Lennar Other category. The stockholders' equity increased to almost $26 billion and the book value per share increased to just over $90.

The company expects its Q4 corporate G&A to be 1.1% of total revenues, with a charitable foundation contribution of $1,000 per home delivery. The tax rate should be 24.5%, with a weighted average share count of 281 million. This should produce an EPS range of $4.40 to $4.75 per share. For 2024, the initial growth expectation is 10%. However, due to seasonality and increasing interest rates, the fourth quarter order guide is expected to be down 15% sequentially.

Jon Jaffe and Stuart Miller have been working together for 40 years and have been dividing responsibilities for the business. They have streamlined the business and regional presidents and operators have become more self-sufficient with the help of technology. They have a daily call and operations review meetings to level set their divisional focus. They are confident they can continue to share responsibility now that Rick has retired.

Lennar is positioned to have a strong 2024 year, as they have identified and secured land and have good visibility into their production schedules. They are focused on selling and building by process, and have visibility into their production for 2024 and beyond.

The company is pricing to market conditions and is targeting low-double digit growth for 2024. They are communicating with their trade partners to prepare for production and volume. The target of low-double digits is from a volume perspective, but other items will have to be taken into account. The company is also looking to increase their cash generation and agility in the business for the upcoming year.

Stuart Miller and Susan Maklari discuss the reconfiguration of the business to turn profitability into cash flow and generate a consistent level of cash. Stephen Kim then asks Miller about the closings number in 2024 and return on assets, to which Miller responds that the delivery schedule is tied to the current sales pace and return on assets is a difficult hurdle due to strong earnings and cash.

Steve and Diane are discussing the program's goal of achieving a return on assets of over 20%. Diane suggests that by focusing on reducing inventory and years of ownership, this goal can be achieved. Steve then asks about market conditions and the entry level of the market in light of the rate increase. Stuart explains that they are tapping incentives up or down to maintain pace, depending on the demand and rate fluctuations.

Jon Jaffe and Stuart Miller discussed the demand for homes across all segments of the market. They noted that affordability is an issue, but that they are able to meet buyers where their affordability exists. They also noted that they buy forward commitments and that the participation in those commitments remains steady from month-to-month and quarter-to-quarter, primarily for first-time buyers. They mentioned that they are able to lock-in buyers and manage their production pace closely, which helps to ensure that buyers are not at risk of not qualifying if rates move.

Jon Jaffe explains that dynamic pricing allows them to find market clearing prices quickly across their platform. He also states that they use closing costs, mortgage rate buy-downs, and pricing to hit the desired pace in each market. He also mentions that they use these levers to find the right monthly payment for buyers, to deal with mortgage qualification issues, and to hit their production levels. Carl Reichardt then asks about the company's long-term strategy of lowering buyers' brokers' commissions, and Jon states that they are still relying on them, but they are trying to disintermediate them.

Stuart Miller and Jon Jaffe discussed the relationship between Lennar and the realtor community, emphasizing that Lennar has done a good job of creating a constructive relationship without overspending. They also discussed the increasing focus on the new home market and how Lennar is striving to drive more customer engagement through their digital sales funnel and dynamic pricing. Lastly, they discussed the importance of their digital sales machine in creating a process around their sales program for the future.

Stuart Miller and Alan Ratner discuss the current housing market, with Miller noting that the spread between new home and resale prices has narrowed this year due to builders being more aggressive on pricing. Ratner questions if this progress can be maintained if resale prices don't rise, and Miller responds that the current market configuration is strange due to existing homeowners having two assets (their home and their low-interest mortgage) that are both valuable, leading them to not bring their homes to market as much.

Stuart Miller explains that the current market configuration has created an anomaly in the way that existing and new homes are priced, with existing homes remaining relatively strong due to a short supply. Miller also comments on the SpinCo plans, noting that capital markets are not currently advantageous for executing the plan, but it is still in the background and at the front of their minds.

Stuart Miller has stated that the company is focused on even flow and pace, and that the variance in seasonality is around 10% sequentially. Gross margins have been steady at 24%, and the company is unapologetic about their focus on pace.

Lennar is using an even flow production model to maintain production and sales pace, and anticipates some adjustments for seasonality. Ken Zener suggests that the company could potentially reduce its land requirements by a third, which would equate to a decapitalization of nearly $3 billion. This could lead to increased cashflow and earnings, which could necessitate a systematic buyback program.

Stuart Miller and Jon Jaffe discussed their focus on efficiency and lowering construction costs to improve margins. They are also focused on reducing their land owned and controlled relationship, and expect to be in a better position than they are currently at year-end. In addition, they are focused on their stock buyback program and using their capital strategically to maintain flexibility and liquidity. Finally, they are aiming to get to the point where net income equals cash flow.

Stuart Miller and Jon Jaffe of Lennar Corporation discussed their goal of achieving 10% growth in the coming year, with the expectation that this will come from a high-single digit community count growth and increased absorption of affordable workforce housing communities. They noted that community count is the most difficult part of the projection to get right, due to factors such as municipalities and litigation.

Stuart Miller and John Lovallo discussed the potential of Quarterra and whether or not it is something that could be put back in motion in the near future. Miller stated that they had been working on the configuration of Quarterra in the background and that they would make the right move at the right time. He also mentioned that spinning or moving off balance sheet assets could be beneficial for return on assets and other calculations. Miller concluded the discussion by thanking everyone for joining and looking forward to continued execution as they move into 2024.

This summary was generated with AI and may contain some inaccuracies.