Lennar Corporation Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Macro Environment: The economic environment is constructive for homebuilders with strong demand. Lower interest rates enhance affordability, but a chronic housing shortage persists due to underproduction, restrictive land permitting, and higher construction costs. Immigration impacts both labor supply and demand.
• Operational Strategy: Focus on volume while migrating to an asset-light model. Key metrics include reducing land owned from three years' supply to 1.1 years expected by year-end 2024, increasing controlled homesites to 81%, and inventory turn from under 1 time to approximately 1.6 times. The company has paid down ~$4.9 billion of debt, repurchased ~50 million shares, has $4 billion in cash, and a debt to total capital ratio of 7.6%.
• Land-Light Strategy: In the third quarter, 82% of land purchases were finished homesites from third-party structures. The company continued to work with strategic land developers and partners, reducing owned homesites and increasing controlled ones.
• Spin-off (Millrose): Forming Millrose Properties Inc., a REIT, to acquire, develop, and deliver homesites. Lennar will contribute land and cash, receive Millrose stock as a dividend, reducing inventory. Millrose will have option contracts for Lennar to repurchase homesites, providing permanent capital for land acquisition and development.

Segment Performance

• Homebuilding: In the third quarter, starts increased 8% year-over-year to nearly 20,250, new orders rose 5% to almost 20,600, and deliveries grew 16% to just over 21,500. Sales incentives climbed to just over 10% due to high interest rates. For 2024, the company expects to deliver 80,500 to 81,000 homes, a more than 10% increase from 2023. In the fourth quarter, guidance includes new orders ranging from 19,000 to 19,300, deliveries from 22,500 to 23,000, an average sales price of approximately $425,000, flat gross margin compared to the third quarter, and SG&A in the range of 6.7% to 6.8%.
• Financial Services: Had operating earnings of $144 million in the third quarter, consistent with the prior year. Lower lock volume and net secondary margins in the mortgage business were offset by higher delivery volume and lower costs in the title business.
• Multifamily: Registered operating earnings of $79 million in the quarter. The primary driver was the gain on the sale of assets in the LMV Fund I, with about 70% of anticipated sales closed in the third quarter and the remainder expected to sell in the fourth quarter. There was also a $90 million write-down of non-core assets.

Guidance

• 2024: Expect to deliver 80,500 to 81,000 homes. Fourth quarter guidance includes new orders of 19,000 to 19,300, deliveries of 22,500 to 23,000, flat gross margin with the third quarter, SG&A in the range of 6.7% to 6.8%, and EPS ranging from $4.10 to $4.25 per share. The company targets over $2 billion in stock repurchases in 2024.
• Long-Term: Aiming for ~10% volume growth, aligned with the supply-constrained housing market and asset-light strategy enabling organic and new market growth as interest rates decline.

Risks

• Market and Economic: Affordability challenges due to inflation and interest rates, housing shortage, and restrictive local land policies can constrain demand and supply.
• Execution: Delays in community starts, entitlement issues, and challenges in executing the asset-light strategy and spin-off successfully.
• Regulatory: Changes in housing, land development, or financing regulations could impact operations and margins.

Question and Answer

• Q: About Millrose's margin impact and structure A: Millrose is a REIT with permanent capital, similar to other land structures. The impact on Lennar's margin is expected to be small, offset by efficiencies and option costs.
• Q: Gross margin flattening A: Sticky interest rates, consumer confidence issues, and community count lags led to margin flattening, expected to correct in future quarters as market conditions improve.
• Q: Long-term volume growth A: Aiming for ~10% steady growth, aligned with the need for increased housing supply to meet demand as interest rates decline.
• Q: Cash holdings and Millrose A: Cash held as safety stock for Millrose spin-off configuration, details to be clarified upon S-11 filing.
• Q: SG&A and broker costs A: Focus on reducing unnecessary broker costs to lower home prices, maintaining traffic while balancing costs and pricing to improve margin.
• Q: Downpayment assistance and housing demand A: Downpayment is a hurdle, but need to balance stimulus with avoiding risks of past recessions; positive national narrative on housing supply is beneficial.