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Lennar Corporation
9/19/2025
Welcome to Lennar's third 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 statement.
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.
I would like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.
Very good. Good morning, everybody, and thank you for joining us today. I'm in Miami today together with John Jaffe, our co-CEO and president, Diane Bissette, our chief financial officer, David Collins, who you just heard from, our controller and vice president. Catherine Martin is here. She's our new chief legal officer. Welcome, Catherine. And Bruce Gross, CEO of Lenar Financial Services, along with a few others as well. I do want to note that Mark Sistana, our 20-year general counsel, is not here today, and he sorely missed. I don't believe that Mark has missed an earnings call in his 20 years with the company, and his service to and with the company has been truly remarkable. While Mark recently retired, and we have Catherine here as our chief legal officer, Mark will remain a strategic advisor and consultant to the company and we're sure that Mark can't help but listen today. So, Mark, you're definitely here in spirit. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, John is going to give an operational overview, updating construction costs, cycle time, some of our land strategy and positions. As usual, Diane is going to give a detailed financial highlight along with some guidance for the fourth quarter. And then, of course, we'll have our question and answer period. And as usual, I'd like to ask that you please limit yourself to one question, one follow-up, so that we can accommodate as many as possible. So let me begin. We are pleased to review Lennar's third quarter 2025 results against the backdrop of what might be the beginnings of an improving economic landscape for the housing market. With that said, Our third quarter results reflect the continued softening of market conditions and affordability through our third quarter. Sales volume was difficult to maintain and required additional incentives in order to achieve our expected pace and to avoid building excess inventory. While our deliveries were just below our goal for the quarter, and while we sold more homes than expected during the quarter, These accomplishments came at the expense of further deterioration of margin, which came down to 17.5%. Accordingly, we're going to begin to ease back our delivery expectations for the fourth quarter and full year in order to relieve the pressure on sales and deliveries and help establish a floor on margin. We will reduce our delivery expectations for the fourth quarter to 22,000 to 23,000 homes and we will reduce our full year expectation to $81,500 to $82,500 for the full year. For Lennar, this is an opportune time to pause and let the market catch up a little bit. Even though mortgage rates began to trend downward towards the end of the quarter, Stronger sales have not yet followed. We have certainly begun to see early signs of greater customer interest and stronger traffic entering the market. With lower mortgage rates, purchasers are showing greater interest in considering their home purchase. And this is generally an early signal of stronger sales activity to follow, assuming rates remain lower. And if interest rates continue to fall, we're quite optimistic that this all will happen soon. The extended period of higher interest rates for longer than expected forced us, however, to adjust construction costs in order to enable sales in difficult market conditions. Our lower construction cost structure, together with reduced margins, enabled us to meet affordability and support the supply and demand balance. We drove sales pace to match production pace, and we fortified our market share and position in each of our strategic markets. We are now situated with a lower cost structure, efficient product offerings, and strong market positions to accommodate pent-up demand as rates moderate and confidence ultimately returns. As I said before, This is the right time, this is just the right time for us to pull back just a little bit. We believe that we've gotten ahead of the current market realities and we've built what we believe is a stronger long-term margin driving platform. We know that this has taken some time as the market has remained weaker for longer, but we also know that our strategy has helped build a healthier housing market and has positioned Lennar for strong cash flow and bottom line growth in the future. We are optimistic that if mortgage rates approach the 6% level, or even lower, we will soon see some firming in the market, and we will benefit from stronger affordability and therefore demand. Accordingly, we'll remain focused on volume and even flow production, although at just a little slower pace. We will maintain responsible volume to maintain an affordable cost structure, and we will find the floor and rebuild our margin as the overall housing market continues to remain short on supply. So, let me turn quickly to a quick macro overview of the housing market. Consistent with last quarter's earnings call, the macro economy remained challenging throughout our third quarter. Mortgage interest rates remained higher and consumer confidence remained challenged by a wide range of uncertainties, both domestic and global. Across the housing landscape, actionable demand remained diminished by both affordability and consumer confidence, and therefore the market continued to soften as we moved through the quarter. Nevertheless, as we came to the back half of the quarter, interest rates began to drift downward, And that drift began to accelerate as we came to the end of the quarter and into the fourth. Today, we are possibly getting closer to 6% mortgage rate. That's fluctuating a little bit. And we're just beginning to see consumers return to the market. Against that backdrop, supply remains constrained in most markets, driven by years of underproduction. New construction has slowed. as builders have pulled back on production due to slow sales and affordability concerns, therefore exacerbating the chronic supply shortage. Demand is still high as people want and need homes, but affordability and waning confidence around buying now have been constraining that demand. This has been a difficult cycle, as low supply fuels high prices, and high prices lock out many of our buyers. As I've said before, mayors and governors around the country continue to list the housing shortage as a priority concern and point to affordability or attainability as a priority. I do suggest that if you want to better understand the conundrum of the housing market, read the book Abundance by Ezra Klein to better understand that housing has a long-term future defined by both structurally short supply and not just growing demand but growing need for housing as well. The current environment is all about recognizing that short supply is keeping prices higher and that only lower prices enabled by lower cost structures will achieve affordability. Turning to our results, In our third quarter, we started approximately 21,500 homes. We delivered approximately 21,500 homes and sold just over 23,000 homes. While we were just short of delivery expectations, we exceeded our sales expectations, and we were able to grow our community count, positioning us better for the remainder of the year. As mortgage interest rates remained higher and consumer confidence declined, We continue to drive volume with our starts while we incentivize sales to enable affordability and limit inventory build. We have successfully focused on maintaining inventory within our two completed unsold homes per community level that has been reflected historically. As a result, during the third quarter, Sales incentives rose to 14.3%, reducing our gross margin to 17.5%, which was lower than expected on a lower-than-expected average sales price of $383,000. Our SG&A came in at 8.2%, which produced a net margin of 9.2%. As we look ahead to the fourth quarter, we expect that our margins will come in at approximately 17.5% consistent with our last quarter, of course, depending on market conditions. We expect to sell between 20,000 and 21,000 ohms and deliver between 22 and 23,000 ohms. We expect our average sales price to be between 380,000 and 390,000 as we expect to continue, as we expect to, to somewhat alleviate pricing pressure on homes that will be sold during the quarter as a result of taking some pressure off of our sales base. And as I noted earlier, we expect to deliver between 81,500 and 82,500 homes for the year 2025. We expect our overhead in the fourth quarter to continue to run between 7.8 and 8 percent as we continue to invest in and evolve various Lenore technology solutions that will define our future. These initiatives, as I've said before, have been and will continue to add to SG&A as well as corporate G&A for some time to come as they represent a significant investment in our differentiated future. So in conclusion, let me say that while this has been another difficult quarter in the housing market, it is another constructive quarter for Lenard. While the short-term road ahead might seem a little choppy, we are very optimistic about our future. We are well aware that our numbers aren't where we would like them to be, but neither are market conditions. We are well situated with a strong and growing national footprint, growing community count, and growing volumes. we have continued to drive production to meet the housing shortage that we all know persists across our markets. And as we have driven growth, production, and volumes, we have positioned our company to evolve and create efficiencies and technologies that will make us a better company built for the future. Perhaps most importantly, our strong balance sheet and even stronger land banking relations afford us flexibility and advantaged opportunity to consider and execute on strategic growth for the future as well. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow, and we will lean into reshaping our business by developing and using modern technologies with a focus on cash flow and high returns on capital in order to drive long-term shareholder value. So before I end, I can't help but note how inspired I am by the resurgence of a technology company that Lenar has supported for many years. We are quite confident that Opendoor, with its new CEO, Kaz, that's how he's referred to, will be a contributing force and partner in Lenar's technology journey and evolution. He has joined Opendoor after six years at Shopify, where he is mission-driven as he takes the helm of a company that has the ability and the ambition now to bring modern technology to change the home ownership market forever. I have always said that the Opendoor platform functioning properly will add significant bottom line to Lenar while creating convenience and joy for our customers. As Kaz took the CEO position, he sent out a note on why he joined Opendoor and left a flourishing career behind at Shopify. This is what he said in part. It is incredibly important that we use all of our energy and modern tools at our disposal to build products that make home ownership easier. We must make the process of buying and selling a home less frictionful so more people do it. Home ownership isn't about a house. It's about families and community. And that is why I am so incredibly proud that I get to support this team in our mission to use every tool at our disposal to make selling buying and owning a home easier. He goes on, AI gives us the chance to accelerate this work in ways never before thought possible. From simplifying the process of buying and selling to unlocking personalized pathways to ownership, AI can help millions of families access homes more efficiently, more affordably, and more transparently than ever before. This is a once-in-a-lifetime opportunity to redefine what's possible in real estate. That is the message from CAS. We can all do better. We can all be better. Our mission is worthy. Lennar is on that same mission, and we are connected to the success of Opendoor as well. We are extremely well positioned for our future, And we look forward to keeping you up to date on our progress. And with that, let me turn over to John.
Good morning, everyone. As Stuart described, we remain intensely focused on executing our core strategy, maintaining consistent, high-volume production, and leveraging advanced technology throughout our home building operations. This is all about driving efficiencies. Position us as the leading technology-enabled, low-cost home building manufacturer. Our ongoing strategy has resulted in greater efficiencies, evidenced by improvements in our cycle time, inventory churn, and overall costs. In this update, I will discuss our third quarter performance concerning sales pace, cost reduction, cycle time improvements, and the execution of our asset life 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 utilized the Lennar machine, beginning with attracting qualified leads through our digital funnel. We then focus on a rapid response with each customer, along with a 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. Reporting 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 Lenar machine has enabled us to sell the right homes at current market prices, keeping our inventory well-positioned with an average of under only two unsold homes per community, completed homes per community. Affordability continues to challenge customers throughout all of our markets in the quarter, as incentives increase 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've 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 costs 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 six-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. Proof 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 the 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 home sites decreased to 0.1 years from 1.1 years a year ago, and the percentage of controlled home sites 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. And now I'll turn it over to Diane.
Thank you, John, and good morning, everyone. Stuart and John have provided a great deal of color regarding our home building 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 home building teams with the goal of providing a great customer experience for each home buyer. 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 John noted, consistent with our land-light, lower-risk manufacturing model, our year's supply of owned home sites was 0.1 years, and our home sites controlled percentage was 98%. We ended the quarter owning 11,000 home sites and controlling 512,000 home sites. 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 1.9 times, 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 managed our inventory levels, ending the quarter with fewer than two 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 home building 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 pace. 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 300,000 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 home building, joint venture, land sales, and other categories, we expect earnings of approximately $50 million. We anticipate our financial services earnings to be approximately $130 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 Lenar 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. With that, let me turn it over to the moderator.
Thank you. We will now begin the question and answer session of today's conference. We ask that you limit your questions to one question and one follow-up question until all questions have been answered. If you would like to ask a question, please unmute your phone, press star 1, and record your name clearly when prompted. If you need to withdraw your question, you may use star 2. Again, that is star 1 to ask a question. Our first question comes from Alan Ratner from Zellman & Associates. Please go ahead.
Hey, good morning. Thanks for all the detail, as always. Appreciate it. 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 of pace or margin or any color you can give there?
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 in interest rates, we're 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 John 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.
Got it. That's helpful, Culler. The 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 Milrose 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 immediately 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 reaccelerate those starts in 26th?
Thanks, Alan. I've heard that question a number of times. The answer is we are not constrained in any way by our land relationships or the reconfiguration of land. To the contrary, we were very deliberate about injecting the ability to pause as market conditions change and adjust. And additionally, we have the ability, though it is expensive, to walk away from programs that we have in place. So it is not the constraint of our land relationships that define our strategy at all. To the contrary, it is much more about the recognition that we're going to have to find, frankly, as an industry, a way to build and deliver homes at a more affordable level, and that is all going to derive from cost structures. all the way from land to land finance costs, all the way through to vertical construction and horizontal construction and SG&A. It's why we're so focused on a differentiated way forward relative to modern technologies. We have to get more efficient and effective. And unfortunately, the road to get there is one of volume system and working with our trade partners to deal with logistics and cost structures, and also building new technologies that are expensive to do. The SG&A goes up before it goes down. But to bring this back to land would be a mistake, because land was carefully crafted to not be a factor in strategy, but instead to be a stepping stone of the strategy for going forward.
Appreciate it. Thanks very much. You bet.
Next, we'll go to the line of Stephen Kim from Evercore ISI. Please go ahead.
Yeah, thanks very much, guys. And yeah, thanks for that commentary, Stuart. I'm just going to follow on Alan's question there with respect to the duration of this pause. Could you give us a sense, or do you see this planned slowdown in your sales production as maybe like a one to two quarter pause, you know, several months kind of a thing ahead of what is hopefully a better spring selling season? Or do you see this as a more lasting recalibration of your Lennar machine to a lower level of volume? And I guess you could say, you know, address that both in terms of the housing production as well as the land.
So our strategy remains very focused on volume, and delivering supply to markets that need it. It is very focused on how do we, and we're working on it every day, Steve, how do we bring our cost structure down so that we can drive margin even in a slowing market? It's not an easy thing to do. It's not a linear kind of program. This is how you get there. It's a rocky road. So the answer to your direct question is, is this a change in strategy or a slowdown that's more permanent? We don't see it that way at all. The focus of our strategy is to maintain volume, to use volume, to enable us, our trade partners, even our land partners, to find ways to be more efficient and effective as we try to meet the growing need of our communities, of our population that needs more affordable housing.
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 three 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 – you know, measured in, you know, 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 three to four months ago, let's say?
So, look, I think we're living in the 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, 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.
Gotcha. Okay. That's helpful. And then I was wondering if you could help me with just – I wanted to run some math by you a little bit on the margin. I mean, just very simplistically – If we were to say that mortgage rates stay around 40 basis points or so lower than they were earlier in this year, then I'm guessing that the cost of a rate buy-down should basically go down or add 100 basis points or maybe even a little bit more to your gross margins, just given what I think the cost of a rate buy-down is. And then on top of that, if you're slowing your volume while rates drop, I would think that that would improve the supply and demand relationship and thus improve your pricing power. And so that would be additionally additive to your gross margin. So I'm wondering, is this a reasonable framework to think about the kind of or the magnitude of margin leverage that we might be able to see going forward? Or is there something that you think needs to be corrected in that?
I think that the pieces are correct. And the timing is not going to be directly translatable. It'll be somewhat of a rocky road to get there, too. But I think the pieces and the way that you're thinking about it are correct.
OK, excellent. Thanks so much, guys. OK, thank you.
Next, we'll go to the line of Michael Rehart from JP Morgan. Please go ahead.
Good morning, everyone. Thanks for taking my questions. I certainly don't want to beat a dead horse here, but I just wanted to try and put maybe perhaps a finer point on, you know, this kind of shorter-term adjustment in approach, you know, given the challenging market. And I'm wondering, you know, on kind of a bottom-line basis, if, you know, you guys just felt like you didn't want to go below 17.5% margin and, you know, that the cost was too high to drive that volume where you hoped it was where you wanted it three months ago? Or is there also, in your view, sort of an elasticity of demand issue where part of the problem here is that even if you were to drop margins or raise incentives to keep that, you really wouldn't ultimately even be successful in what you needed for, from a volume perspective. And so, you know, with that, uh, you know, maybe demand becoming more inelastic, just, you know, a lack of demand in the marketplace, it just didn't make sense to, to drop that, that gross margin below where you're looking, uh, in the back half of this year currently.
I, I'm not sure that we've gotten quite that philosophical, but, um, I think that we are responding real-time to what we see as market conditions. And we just felt, and I said it clearly, Michael, that we just felt it was a good time to take a little pressure off. You know, we have some tremendous athletes that are working on our marketing and sales programs across the company, and they've just done terrific work. to pull us through some really challenging times. We felt that this was a good moment for us to take a little pressure off of that part of our program and recalibrate as we go forward, think about what is our next step, but our base strategy remains the same. We're focused on building volume, supplying the market with affordable, attainable product. John, you want to weigh in on that?
Yeah, I would agree, Stuart, and it's It's really hard to answer your question, Michael, because it's market by market and even community by community. So it is just, as Stuart said, it's taking some of that edge off so we can better fine-tune exactly how we price in that market by market analysis and community by community analysis.
I appreciate that and understand it's probably a bottoms-up analysis to really fully answer that question, I suppose. But I think ultimately though, you know, this idea around elasticity is really important. And, you know, maybe just as a second question, follow up question, you know, we did see rates come down, you know, mortgage rates, that is maybe 20, 30 basis points in August. And so far in September, another 20 or 30 basis points. Um, I'm curious, you know, amid that type of, uh, You know, that's a net 50 basis points roughly, but kind of gradually seeping into the market. I'm curious if you could comment on, you know, if you did see any impact on demand trends across your markets, perhaps which ones, if that's the case. And, you know, all else equal, would this potentially reduce pressure on gross margins or, you know, incentives? Or are you just at a point right now where... you know, given what you've done during the quarter, you expect incentives that, you know, you've laid out to effectively remain in place, you know, throughout the fourth quarter.
I think, Michael, as Steve laid out, you know, it does help reduce the cost of those mortgage rate buy-downs, but as a service fund, it's not exactly linear. It's each market, it's each community, how they're used and what the buyer demand is and the affordability stressors that exist.
I think the way that I would think about it, Michael, is when we think about elasticity, I think that's more of a news report looking backwards. And when we think about what we're doing, it is, as you described, a bottoms-up approach. I think John has said, you know, it is community by community approach. And we're responding and pulling the levers as a company to be reflective of what we see our best and brightest doing in each market across the country. And I think that in terms of 30 basis points in August, 20 to 30 in September, there are fluctuations in the 10-year right now. Maybe it's migrating up a little bit. We'll have to see. I think the volatility in it impacts consumer confidence. So we're going to have to see how it plays out. At the end of the day, when we look back at our third quarter, and as I noted in my remarks, we did not yet see sales impact, but we did see a little bit of kick in the consumer's engagement. And as we've gone into the fourth quarter, we generally don't comment on sales. what we're seeing so far in this quarter, but I will, and say that as we've come into the fourth quarter, we've seen a little bit more interest, but we're pretty confident that if interest rates really do go down and stay down as you get to 6%, closer to 6%, as you go below 6%, we think you're going to see some real optimism in the marketplace and people who have need really activating because they can afford to.
Great.
Thank you. Appreciate it. You bet.
Next, we'll go to the line of Susan McCleary from Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone. 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 of those inventory turns in this kind of an environment and the ability to get to three times as you do think about the setup on the ground?
So I I will tell you that I you know.
So John and I at the end of each quarter we we go out and we do what we call operations reviews and we sit with our division management teams and really go through their operations and strategies. And what has been fascinating to me is to. is to sit and watch our divisions focus on their inventory turn, which to me, and I think to John as well, is really an indication of are we focusing on effectiveness and efficiencies and really working on using the things that we're doing to become more efficient and drive costs down to build affordability. The answer to your question is I was sitting in one of those ops reviews this week with a team that is actually getting closer to exactly that three times inventory turn. As a company, it will be adding together all the divisions, and you'll see averages, but at the local level, that kind of north star is very much a part of the discussion. As we get cycle times down, John talked about the fact that these are the lowest cycle times as an average, that we've seen as a company. That is directionally where we're headed, but don't measure us against three times because that's a pretty hard hurdle to get to. Go ahead, John.
I'll just add to what it is, as we've discussed and discussed in prior course 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, refinement of processes to do just that, to continue to drive that metric, which, as you've seen, we'll be making a progress on.
And every one of these programs, thinking processes, you know, John talks about land into the land bank, land out of the land bank, and those efficiencies, all of these tie 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.
Yeah, okay, that's very helpful, Collar. And then maybe taking that one step further, as we do think about the inventory turns and these efforts coming through, can you talk about the cash generation of the business and how you're thinking about the uses of that cash, especially in this sort of an environment that we're in and any updates on the M&A environment, those kinds of strategic efforts?
Well, as far as we're concerned, everything is on the table. We are certainly focused on total shareholder return. That is sometimes defined by how we grow and what kind of M&A strategy we might inject into our business as we go forward. We are looking at everything, and as I've said, The use of our land banking program is something that enables more of that focus. At the same time, we're focused on returning capital to shareholders. You've seen that we've had a pretty steady program of doing exactly that. And we are very, very focused on driving cash flow. Now, there's been an adjustment period in the wake of mill rows and, you know, Getting the pieces working exactly together takes a little bit of time, but our program is laser-focused on how do we get to that total shareholder return, how do we use cash effectively, how do we drive growth effectively. And look, at the end of the day, the focus of this company is how do we become something different in the future from what we've been in the past in a big capital allocation. Diane, do you want to say anything on that?
No, I was going to just, really, I agree with Stuart. I think that there's no change in our strategy from quarter to quarter, you know, given the incentives because of our push on volume. Cash moves around a little bit, and this was an unusual year with Milrose. But the trajectory is to really keep the focus on cash generation, which is definitely benefited by the efficiencies that we're focused on.
Yeah. Okay. Thank you all for the call and good luck with the quarter.
Thank you Susan. Thank you.
Next we'll go to the line of John Lovallo from UBS. Please go ahead.
Good morning guys. Thanks for taking my questions as well. The first question is orders were obviously very solid and, you know, 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?
It really is just timing and, you know, relative to when sales occur, getting through the mortgage approval process.
Nothing more than that.
Okay, understood. And, you know, I guess, you know, we've heard from several of your peers and from some other companies through the value chain that Florida inventory levels are beginning to stabilize, maybe even improve a bit. Obviously, there's a lot of markets in Florida, but, you know, in some of the key markets, maybe the I-4 corridor, if you could talk about, I mean, is this consistent with what you're seeing on the ground?
Yeah, that, you know, Tampa, Orlando markets along the I-4 corridor, As I commented, we have always been very laser-focused on inventory levels. It's part of our strategy, even flow, production, sales pace. With respect to other builders, we did see some build-up, but I would agree with that in general. So I did see some stabilization.
Yeah, and remember that the size of inventories across across the competitive landscape, meaning existing homes and new homes, is a big part of what defines the stress on the sales process. And in Florida, that has been a factor. Inventories have been high, both across existing and the new home market. They have been moderating, and that has started to build a more stable environment with these sales.
That's helpful. Thank you, guys.
Next, we'll go to the line of Matthew Boulay from Barclays. Please go ahead.
Good morning, everyone. Thank you for taking the questions. One on incentives. I guess sort of another philosophical question, but I mean, I guess going forward, you know, depending on where the rate environment goes, I mean, do you anticipate kind of maintaining some level of these buy downs as kind of a competitive advantage sort of structurally versus the resale market? Or, you know, as you do get to, if we do get to 6% or lower, I mean, is there some level where you really do foresee, you know, a kind of a more material pullback on those incentives? Thank you.
So, interesting question. You know, a number of people have asked why you focus on interest rates coming down, you're buying them down anyway. and so the market has access to the lower interest rate. The reality is it is the stall that's embedded in the existing home market that is relevant because as the existing home market starts to unlock a little bit, it enables people to activate the process of going from a first-time home to a move-up home and a move-up home to a second move-up home. It just unlocks an awful lot in and around the ability of people to engage in the housing market. So, yes, the home builders are generally providing that lower interest rate by buying down, and it is impactful to margin, but unlocking the rest of the housing market as a flywheel kind of approach or effect, and that effect unlocks a lot of activity for the entirety of the ecosystem.
Okay, fair enough. Thank you for the thoughts there, Stuart. Secondly, I guess sort of following on John's question, I think what he was alluding to around orders and deliveries into the next quarter, I'm just curious if you can update us on the cancellation environment a little bit and I guess whatever the trend was, kind of what you're reading into what you're seeing in cancellations today. Thank you.
I'd say it's really been pretty consistent from second quarter through third quarter in terms of order pace, cancellation pace. As we said, we really didn't see any effect in the third quarter relative to interest rates coming down at the end of the quarter. And it directly ties in on that community-by-community basis of what do we need to do to support our customers as they're challenged by affordability. So bottom line is it's remaining pretty consistent.
Okay. Thanks, John. Good luck, guys.
Okay. Why don't we take one more?
Perfect. Our final question comes from Jade Romani from KBW. Please go ahead.
Thank you very much. Can you say what quantity or percentage of year-to-date deliveries have come from Milros?
Yeah, I want to say it's been about 25%-ish in that zone.
And so in terms of the gross margin outlook, looking beyond the fourth quarter, should we still expect the remaining 75% you know, once you're at a steady cadence with Millrose to come through that interest cost on gross margins.
Yeah, staying the obvious with the low cost that Millrose offers us, the more that we have deliveries from that vehicle, it's benefiting our margins.
But realistically, you know, across our land banking environment, we're focused on managing the cost the option costs of those communities. One of the things that benefits, and this is an interesting flywheel within the land banking world, is our ability to build certainty within the land banking structures, and that is certainty of close, certainty of execution, enables us to maintain a more moderated cost structure within those systems and to actually bring down costs. Therefore, when we talk about does land banking drive our business, in one sense, we have the ability to walk away from deals if we need to, but the reality is we are highly, highly incentivized to keep each of our structures, whether it's vertical construction, horizontal construction, or whether it's land banking, operating in a smooth, effective way because that's how we get to the best cost structure and therefore produce affordability. And all of this kind of ties together as to why our strategy relative to volume.
I think that's well said, Stuart. For us, it's a manufacturing approach, meaning even flow from beginning to end. So it starts with land into our land banks, as I said, just in time, coming out predictably just in time from the land banks to a production team that's focused on bringing cycle time and cost down. And it's an ecosystem that's all the way through. So the more effective we are in doing that, as we've noted, we bring down our construction costs. But as Stuart is highlighting now, the more effective we are in creating stability and reliability in the land bank world, the more that that capital cost comes down. So they all have our laser focus on how do we become more efficient more durable and bring value to our partners.
So even while we might have the ability to, as a risk mitigator, to walk away or to do something else, our whole strategy is focused on building certainty and across our land banking system, bring down costs and option costs in each of our land banks to help with the affordability factor. I'm not sure if that's answered your question, But I think that's what you're getting at is when you talk about 25% for mill rows and advantage costs. The question is, can we get more advantage costs across the whole spectrum?
Okay. Thanks for that. I was trying to understand as the 25% grows toward 100%, shouldn't that – I think the market's assuming that would be a negative – an incremental headwind because that 560 million of annual interest costs is not yet fully reflected in gross margin?
You know, while I have tremendous affection for Milrose 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 Levant.
Thanks very much. All right.
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.
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.