Lennar (NYSE:LEN) released third-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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Summary
Lennar Corporation ended the quarter with $1.2 billion in cash and total liquidity of $3.6 billion, focusing on generating cash through affordability-driven home pricing.
The company improved construction cycle time to 116 days and maintained a low homebuilding debt to total capital ratio of 16.6%.
Lennar controlled 98% of its land through third parties, reducing balance sheet risk, and ended the quarter with 11,800 owned and 476,000 controlled homesites.
Guidance for Q4 includes new orders of 19,500 to 20,500 homes, deliveries of 22,000 to 23,000, gross margins of 15.5% to 16%, and an EPS range of $1.30 to $1.65.
Strategic focus on inventory management and capital efficiency, with ongoing shareholder returns through share repurchases and dividends.
Management highlighted challenges in labor availability and the impact of market conditions on incentives and margins.
Despite market volatility, Lennar maintains a cautiously optimistic outlook, supported by strong partnerships and strategic land management.
Full Transcript
Diane Bessette, Chief Financial Officer
We were highly focused on generating cash by pricing homes to meet affordability. As such, we ended the quarter with $1.2 billion of cash and total liquidity of $3.6 billion. During the quarter we started approximately 21,000 homes and ended the quarter with approximately 38,800 homes in inventory, which included about 3,100 completed unsold homes, or 1.8 homes per community. This is a reduction from approximately 3,500 homes, or 2.1 homes per community, in Q2.
As we continue to carefully monitor our inventory levels, our construction cycle time improved to 116 days, our lowest cycle time in history, reflecting the continued impact of our production efficiencies. Turning to land, we owned 2% and controlled 98% through third parties. This configuration significantly lowers our balance sheet risk, especially in challenging markets. We ended the quarter owning 11,800 homesites and controlling 476,000 homesites.
We believe our land portfolio of primarily optioned homesites provides us with a strong competitive position to continue to grow market share in a capital efficient way. The total balance of deposits in ACOR, which are pre-acquisition costs on real estate, was $7.3 billion at quarter end, an increase of $265 million sequentially. The deposit component of this balance remained flat with Q2, which is consistent with a relatively flat number of homesites controlled.
The ACOR balance increase was primarily driven by an increase in reimbursements to be received from municipalities for completed land development, as well as a smaller net increase in capitalized option maintenance fees. Our inventory turn was 2.4 times and our return on inventory was just under 13%. We maintain our focus on increasing asset returns, which will enable us to capture more return upside when margins normalize in the future. And then turning to our debt capital, homebuilding debt to total capital was 16.6% at quarter end.
We ended the quarter with $650 million outstanding borrowings under our revolving credit facility and $1.7 billion outstanding under our term loan. Note that during the quarter we used cash to redeem $400 million of senior notes that matured on June 1st. Our next maturity is in June of 2027. Consistent with our commitment to increasing total shareholder returns, we repurchased 3 million shares for $256 million and paid dividends totaling $119 million.
Our stockholders' equity was approximately $22 billion and our book value per share was approximately $91. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the end of the year. And so with that brief overview, I'd like to provide guidance estimates for Q4. Starting with new orders, we expect Q4 new orders to be in the range of 19,500 to 20,500 homes. With continued focus on matching start and sales pace, we anticipate our Q4 deliveries to be in the range of 22,000 to 23,000.
As we maintain even-flow production and turn inventory into cash, our Q4 average sales price on those deliveries should be between $370,000 and $380,000. Our gross margins should be in the range of 15.5% to 16% and our SG&A percentage should be in the range of 8.7% to 9%. As we continue to navigate this uncertain environment, all of these metrics, of course, are dependent on market conditions. We anticipate our Financial Services earnings to be in the range of $90 to $95 million.
And for our Multifamily business, we expect a loss of approximately $25 million. For our Lennar Other segment, we expect a loss of approximately $20 million, excluding the impact of any potential mark-to-market adjustments. For the combined homebuilding, joint venture, land sales and other categories, we expect earnings of approximately $10 million. We expect our Corporate G&A to be approximately 1.7% of total revenues, our tax rate to be approximately 25%, and the weighted average share count should be approximately 235 million.
And so on a combined basis, these estimates should produce an EPS range of approximately $1.30 to $1.65 for the fourth quarter. With that, let me turn it over to the operator.
OPERATOR (Operator)
Thank you. We will now begin the question and answer session of today's conference call. 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, 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. And our first question comes from Susan McClary from Goldman Sachs.
Please go ahead.
Susan McClary, Analyst at Goldman Sachs
Thank you. Good morning, everyone, and thanks for taking the questions. I want to start by talking about the inventory turns. It's impressive to see how they're continuing to improve in spite of the environment and the headwinds that you talked through. Can you talk about where that can go over time, especially given the world we're in, and how that's contributing to your efforts to better balance the land bank and to gradually rebuild that pipeline?
Stuart Miller, Chief Executive Officer and President
So I think in terms of inventory turn, I think that if you look over the past few quarters, we've been hovering around basically the same general range. And I think that we're probably going to maintain at about that range for the time being. I think it can go higher, but it's going to take significantly better market conditions to enable us to really stretch, you know, stretch our legs and be able to run. You know, if you think about just our volume, we had anticipated that our volume would grow through the past few years, and instead our volume has kind of maintained kind of a stable trajectory. And I think that's a limiting factor in that regard.
But in terms of maintaining volume and maintaining the volume that we've had and at least maintaining that and perhaps growing it as we go forward, that's what enables us to really keep the machine relative to land turning and spinning. And that's just as important as the vertical construction component and being able to maximize efficiency around our scale.
Susan McClary, Analyst at Goldman Sachs
Okay, that's helpful. And then maybe turning to the balance sheet and the cash generation side of the business, you're obviously still, you know, very strong capital position in there, given the world that we're in. Can you talk about the level of cash that you feel comfortable holding and how you're thinking about the uses of cash and maybe especially thinking about shareholder returns and buybacks just given the valuation versus the longer-term outlook for the business?
Stuart Miller, Chief Executive Officer and President
So, you know, as Diane, I'm sure, would tell you, that as we go through quarters, our cash vacillates, you know, through the quarter. So you're getting a snapshot at the end of each quarter. We maintain a healthy cash position in order to even out the peaks and valleys in terms of how we will use capital. If you look at this past quarter that's split between debt reduction, stock buyback and dividend payment, you're going to continue to see a balance between those as we go forward.
We think that as we go, as we move ahead into next year and beyond, we're going to be able to generate more cash. And as we do, we'll make that evaluation as we go. I really don't want to make a prediction at this point, given the volatility of the market. Yeah.
Diane Bessette, Chief Financial Officer
The only other thing I'd add is, if you think about cash balances, you know, so much of the cash that we generate comes in at the end of the quarter, but we have a $3.1 billion credit facility. So, you know, we try to manage to a lower cash balance when possible because we've got availability, you know, at a moment's notice. It's really the cash generation that's the focus. But as far as a balance goes, you know, we'd rather keep that cash invested and earning even small dollars of interest income because we've got a large revolver available immediately.
Stuart Miller, Chief Executive Officer and President
But don't think that it hasn't escaped our attention that our stock price is on sale.
Diane Bessette, Chief Financial Officer
No, that's right. That's right. And, you know, as we've mentioned, you know, we are opportunistic through the quarters, and we continued to buy this quarter as our stock price continued to decline. So always focused on that, of course.
Susan McClary, Analyst at Goldman Sachs
Okay. Well, thank you both for the color. Good luck with the quarter.
OPERATOR (Operator)
Next we'll go to the line of Trevor Allanson from Wolfe Research. Please go ahead.
Trevor Allanson, Analyst at Wolfe Research
Hi, good morning. Thank you for taking my questions. I want to ask about your comments around labor availability. Your cycle times continue to make really good progress, but as you guys alluded to, there's been reports of labor becoming more constrained. But with that in mind, what is your expectation for your ability to continue seeing sequential cost savings via concessions from your trades moving forward, and then any markets to call out where you're seeing specific pressure on labor availability?
Stuart Miller, Chief Executive Officer and President
So the question of labor is definitely one of geography. I'm going to let David and Jim weigh in on this a little bit, but let me just say that, you know, labor is an evolving story. It is data centers. It is also, you know, immigration crackdowns that are happening sporadically in different locations. And, you know, I don't think we want to be too specific on those geographies, but it is very geography specific. And I say they want to be specific because it moves around.
You know, the other thing is tariffs are having their impact. And your base question is, what does that mean in terms of bringing down costs and bringing down cycle time as we look ahead next quarter and next year? And the fact is we're going to be a participant in a broader market. If the overall market is going up in price or in availability of labor going down, we're going to do better than the rest of the market given our scale and our focus on consistency.
And if it basically remains steady, then we'll be able to continue to reduce costs and reduce our cycle time. Jim?
Jim
Yeah, I think our purchasing teams, they've done a great job working with our trade partners. This is when that partnership really pays off. Not only are we able to keep our costs under control, but we have tremendous visibility with our partners with labor, and they're able to really step up to the plate and allocate their crews to where we need them, so we really can get ahead of it. And we lay this out three, four months out at a time.
Stuart Miller, Chief Executive Officer and President
David, I should say we've got great visibility.
David
The pressure on immigration and labor is definitely market specific. I'd say roughly 20% of our divisions right now are seeing greater pressure than the vast majority. In some cases, we have little to no impact. But for us, our foundation that's keeping these pressures at bay is our favored position with our trade partners. And our ability to maintain our strategy brings stability. They have a decision to make on the labor and they send it to us.
And they're also working with us to absorb some of the cost pressure.
Stuart Miller, Chief Executive Officer and President
Yeah. And as David was speaking, it does occur to me that, you know, especially with labor, the pressure on immigration is sporadic and happening kind of on an ad hoc basis, or at least as far as we're concerned. The relationship that we have in the marketplace is enabling us to keep the wheels on the tracks and to keep going forward because we see, particularly in certain trades, landscaping being an example, others being good examples, all of a sudden we've got trade partners that have no crews.
And so being able to source additional labor from other places enables us to keep mitigating as we have with efficiency.
UNKNOWN Analyst
Thank you for all that color. Very helpful. Second one's on SG&A. You guys have made a lot of investment in various technological initiatives. Some of those require some heavier upfront spending. I think in the past you've talked about a potential for some of that upfront costs to roll off. Where are you in the stage of that investment and how should we think about the timeline until we start to see the benefits of that start to come through in your financials? Thank you.
Diane Bessette, Chief Financial Officer
So we've definitely made exactly that statement and we have made significant investments. Some of those investments have been false starts and some of those investments have been core to where we're going over the next year. We expect to see some of those costs. Some of those costs are already getting reduced in real time. It's not immediately visible. It will happen slowly and over time. And I think that we'll see some normalization as we go through 2027.
UNKNOWN Analyst
Thank you for all the color and good luck moving forward.
Diane Bessette, Chief Financial Officer
Thank you.
OPERATOR (Operator)
Next we'll go to John Lavallo from UBS. Please go ahead.
John Lavallo, Analyst at UBS
Good morning, guys. First question is just on the gross margin bridge from 3Q15.8 to 4Q15.5 to 16, given what at the midpoint is about an 8% quarter over quarter increase in deliveries. So I guess the question is what level of incentives, kind of land cost and stick and brick are contemplated sequentially.
Jim
I think when you look at it right now, I don't see a big difference right now with what we're having to do in the market. I think we're doing a great job actually at making sure we're right priced in certain communities and in some cases our incentives actually go down because we get the pricing right and we're able to hold our line more with what we actually get for the home. So I think moving forward I feel good about where we're at. I think our teams are spending a lot of time being strategic on how to price, how to differentiate different homes.
I see nothing but enthusiasm out there to really work the pricing.
Stuart Miller, Chief Executive Officer and President
So let me just add to that and say that we started this quarter, the third quarter, with a lot of enthusiasm and a lot of certainty, but the market has the ability to throw us a curveball. And I just want to caveat that the way that we feel today is we feel a great deal of confidence given the landscape that exists. But that landscape is shifting and we recognize that it is. And therefore we're, you know, we're reluctant to get over our skis. We don't like missing. We missed this quarter, it didn't feel good. The landscape shifted. We're going to keep focusing on the same program of adjusting to the market as it is. David, anything you'd add?
David
No, I'd just say we have to pay attention to, you know, as rates increase. So I think some pressure on incentives for your question might come in the form of the cost of our rate buy-down. We continue to, you know, make sure that we meet the affordability demand and we're certainly seeing some of that movement in the 10-year come down a little bit today, but it was up a little bit yesterday. And the Fed decision, you know, while it doesn't directly affect, it definitely sends some vibration.
So we're injecting a little bit of conservatism, but that's what we see right now.
John Lavallo, Analyst at UBS
Understood. And then, Stuart, I wanted to dig in on one of your comments and that was also in the press release on just further deterioration in the housing market. I mean, I get the fact that, you know, that rates have gone up quite a bit over the past few weeks, consumer confidence is challenged, Iran is out there. But I can tell you in all of our checks across the housing complex and as recently as yesterday with a very large builder the feeling we're getting is that the market has moved from a state of correction to maybe early signs of stabilization. And I'm curious what you're seeing that might be different than that.
Stuart Miller, Chief Executive Officer and President
Yeah, I think that you have differentiation around or delineated by product type and price point. You know, certainly at the higher end, there's a lot less impact from what the affordable end is feeling right now. And so what we've seen is that where we're operating more at the affordable end of the market, that customer is far more sensitive to what's happening both in terms of cost of living and the signal that is sent by interest rates. And recognize that interest rates might go up, but we're buying them down.
The cost of our buy down is becoming more expensive. So, you know, it might be that you're living in a world of A Tale of Two Cities where you're seeing different builders with different product mix, even different geographies, having a very different experience. We can only tell you what we're seeing from our perch. Any thoughts, guys? No. Good.
OPERATOR (Operator)
Okay, welcome. Thank you. Our next question comes from Steven Kim from Evercore ISI. Please go ahead.
Steven Kim, Analyst at Evercore ISI
Yeah, thanks a lot, guys. Appreciate all the color so far. I had a couple of questions here on the inventory. If I look at your finished homes and construction in progress on a per unit basis, the value per unit appears to have risen pretty significantly again this quarter, you know, to the tune. I'm looking as a percentage of ASP, like kind of 74%, up from almost like maybe 60% last year. And I'm wondering what's behind that, that rise? Is that primarily due to land costs per lot which are included in this inventory line? And when we think about the. The whole finished homes and construction and process line, should we expect that to at least seasonally drop meaningfully in 4Q and be a driver to cash flow like it often is?
Stuart Miller, Chief Executive Officer and President
So in terms of land and land costs, as I said earlier, a lot of our land and land deals were negotiated at a different time to a different price range. And that is flowing through and you're seeing some of that move up. You also have a duration question, and that is our option maintenance fees are accumulating for longer periods of time because we have moderated our growth, we've actually eliminated our growth, which was part of the underwriting of the land deals that we had.
And so that's being injected in some of those land costs. Steve, could you repeat the second part of that question?
Steven Kim, Analyst at Evercore ISI
Yeah, the second half of that question was that just I'm trying to get a sense for how free cash flow may show up in the fourth quarter. Obviously, we know that's usually a very strong cash flow quarter for you. And I'm wondering should we be expecting a drop in your finished homes and construction in progress inventory line that would drive that in 4Q or is there something that might moderate that this year?
Stuart Miller, Chief Executive Officer and President
So we do think that there's going to be a drop in our inventory level. Again, we're managing our business very carefully and in terms of cash flow, that is going to depend on the volume. And again, you know, we were a little bit surprised at the volatility in the market through the third quarter. That didn't work to our benefit. We're a little bit skeptical as to what the fourth quarter might or might not look like, but we think that the cash flow will be better in the fourth quarter as it normally is.
Diane Bessette, Chief Financial Officer
Yeah, I think that's right. I think that just given the volume, the volume will be what really determines that number. Steve I mean, it's obvious it's always our largest delivery quarter, but with so much uncertainty out there, you know, it's going to make a big swing.
Steven Kim, Analyst at Evercore ISI
I appreciate all that. And Stuart, you actually led directly into my second question, which was related to your pausing of maybe some land bank takedowns or extending the terms, if you will. Am I right in thinking that in a typical land bank deal, if you extend it six months, it drives a roughly 100 to 150 basis point hit at the project level. And roughly what percent of deals would you say that you have paused? Land bank takedowns? Yeah, that's basically a second question.
Stuart Miller, Chief Executive Officer and President
Okay, so I don't have an answer on the percentage where we have paused your math. I haven't looked at it on a six month basis what the impact is. But let's assume you're approximately right. And you know, the way we think about this is what we've done is we've basically taken the cost of capital attribution to equity and we've made it a real time, you know, right in front of us calculation with option maintenance fee. And, and so as we pause an underwritten duration, that underwritten duration has a real time impact on margin and cost of the land that we're actually engaging. It is a real view of what our capital is actually doing.
So, so we're still kind of going through the numbers around this, but it is creating a really interesting focus for the company as we look at every land deal that we do, brand new and we think about the risk associated with pauses, duration and fluctuation in market conditions. And all of that risk profile is being better injected in every new deal that we negotiate. And this is the topic of discussion every day in the company. And it's in large part because the highlight that we brought to bear on the cost of capital, both debt capital and equity capital.
Steven Kim, Analyst at Evercore ISI
Yeah, thanks very much. I appreciate that. And I think the key word that you use is also negotiating because I don't think that this stuff is necessarily just a one way conversation. Right. I mean, there is definitely negotiation room and some leverage that you bring to the table as well, I would think, in the relationship. Thanks very much, guys. I appreciate it.
Stuart Miller, Chief Executive Officer and President
That is way understated, Steve, because if you look at what we're turning this into, it is a we are renegotiating and negotiating every piece of the programming that we've got and we're getting better every day. Why don't we take one more question?
OPERATOR (Operator)
And our final question comes from Jay McCainless from Citizens Bank. Please go ahead.
Jay McCainless, Analyst at Citizens Bank
Hey, thanks for taking my questions. Morning. Y' all talked a little bit about the cost of mortgage rate buy downs moving up. Is there any way to quantify that? And maybe what are you seeing so far in September?
Stuart Miller, Chief Executive Officer and President
You know what, it is a hard question to answer and I'll tell you why. It depends on whether it's a fixed loan or an ARM. It depends on whether it's government or conventional. It depends on whether it's an ARM that's three years, five years, seven years. So it's a mix. It really does. And it, of course, saying the obvious. It also depends on where you're beginning with rate is and how much you have to buy it down. So I don't mean to, you know, not really give you an answer, but it's a combination of so many variables that it is very difficult to give you a range on that.
Jay McCainless, Analyst at Citizens Bank
Okay, the second question I had, Stuart, your comments about resale supply in Texas and Florida, I think that's some new commentary that you put in the script, I guess. What have you seen? Is it across all the markets in Texas and Florida or is it more concentrated where you guys are seeing this competition enough to where you felt like it was important to call it out in the earnings script.
Stuart Miller, Chief Executive Officer and President
You know, it's interesting. It's part of a broader narrative and it's something that we kind of fight every day. We have customers coming in, visiting with us. Some of them can't qualify, some of them can. The resale market is becoming more and more of a competition, competitive component in the game. It just makes it more difficult to hit the volumes that we expect. David, what are you seeing in Texas?
David
Yeah, I'd say you're starting to see the resale market as the days on market increases, be willing to compromise their sales price more. And as they're willing to compromise that, it feels more activity from the resale buyer.
Jim
Just add. I don't think it's always necessarily a negative. I think that as you see more activity in the resales, we see a whole lot more prospects that are ready to step up and buy a new home. So sometimes this actually turns into a positive because it unlocks the market and really gets people out there and lets us have more targets.
Stuart Miller, Chief Executive Officer and President
Yeah, it's a flywheel. When the resale market starts to ignite. Every person that is selling a home needs to buy a home and that's the flywheel that starts to move forward. So it isn't necessarily a negative, but at least for the time being, we are seeing more competition than we've seen in a long time from the resale market. And remember over the past years, the resale market had been on the sidelines. It had just been disengaged because the differential in interest rates were so big.
But the need to move up, to move on, to move out, to make change has been postponed for long enough to where that resale market is starting to negotiate more. All right, want to thank everyone for joining us. We look forward to sharing our progress as we go forward quarter by quarter. And we'll see you at the end of the fourth. Thank you.
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.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.
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