Lennar : Quarterly Results (q1 2025 len earnings call transcript)

Published: 2025-03-27 16:02:05 ET LEN

LENNAR CORP

March 21, 2025 11:00 a.m. ET

Operator:

Welcome to Lennar's First 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.

David Collins:

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies, and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption risk factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

Operator:

I'd now like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.

Stuart Miller:

Very good. Good morning, everybody, and thanks for joining us today. I'm in Miami today together with Jon Jaffe, our co-CEO and President, Diane Bessette, our Chief Financial Officer, David Collins, who you just heard from, our Controller and Vice President, and Fred Rothman, our Chief Operating Officer.

As usual, today I'm going to give a brief macro and strategic overview of the company. After my introductory remarks, Jon's going to give an operational overview, updating construction costs, cycle time, some of our other operating positions. As usual, Diane's going to give a detailed financial highlight, along with some limited guidance for the second quarter of 2025. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask you to please limit to one question and one follow-up so we can accommodate as many as possible.

So, let me begin. As we noted in our press release last night, we're very pleased to review our 2025 first quarter results against the backdrop of a challenging economic environment for the housing market. We adhered to our strategy and focus on driving consistent volume and growth by matching sales and production pace and using our margin as a circuit breaker.

We completed our Millrose spin-off, distributing shares to our shareholders and supporting our transition to an asset-light, land-light model, and we completed our Rausch Coleman acquisition using our asset-light model as we expand into new markets. While margin and earnings have been adjusting to movements of the overall housing market, we are confident that our focus on volume and even flow will position us very well for resilience, durability, and growth in the future.

Let me briefly discuss the overall housing market. Consistent with last quarter's earnings call, the macroeconomy remains challenging as mortgage interest rates have remained higher for longer, which has left the overall housing market weaker for longer. Across the housing landscape, actionable demand has slowed materially.

On a bad-news-is-good-news basis, all of this has led to the long-awaited environment where the costs of both homes, new and existing, and apartments, start to come down. As we noted in our press release, our average sales price this quarter, net of incentives, declined to $408,000, 1% lower than last year. Evidence suggests that the time is now, and the sticky and large housing component of inflation might soon contribute to curtail the last mile to the 2% target.

While underlying demand for homes remains strong, actionable demand is limited by affordability and credit, which remain challenged by limited funds for down payments as well as income qualification for a mortgage. Most recently, even where household income indicates an approvable mortgage qualification, elevated personal debt levels have often presented as an additional impediment to already strained mortgage access.

Additionally, until recently, consumers have been generally confident that they will remain employed and that their compensation is safe. But more recently, even that safety has been called into question. A somewhat confused consumer and wavering consumer confidence have challenged the consumer's desire and ability to transact. While there continues to be considerable traffic of customers looking for homes, the urgency to actually transact remains tepid.

The overall supply of homes has also remained constrained by years of underproduction. Additional shortfalls in production will likely be triggered by now-muted demand, together with already existing restrictive land permitting and higher impact fees at local levels, and higher construction costs across the housing landscape. Additionally, new approaches to both immigration and tariffs have potential limiting impacts, and Jon will discuss this further in just a few minutes.

In summary, the housing market has softened as affordability and consumer confidence have limited actionable demand. Incentives have been increasing, and net housing prices seem to be moderating. At very least, housing will not be contributing to inflationary pressures, and while demand is constrained, supply is equally limited.

Against this backdrop, let me turn to Lennar's operating strategy. Our strategy is and has remained very clear. That is, simplify our business by focusing on the two core tenets of our operating strategy. Operationally, build and deliver consistent volume to maximize efficiencies. And financially, drive asset-light, land-light focus to build cash flow. Now that we have completed our Millrose spin-off, we have intensified our focus on each.

First, we focus on consistent volume by matching our production pace with our sales pace. This means that as market conditions change to the positive or to the negative, we focus on driving and delivering consistent volume at the division level and at the community level, in order to maximize efficiencies in construction costs, in cycle time, in SG&A, and in all elements of marketing and sales.

We also strive to deliver consistent and even flow volume to our trade partners so they can be more efficient and deliver cost savings to us. While we are not there yet, we're getting better each quarter and will accelerate progress now that the spin is behind us. Our execution in the first quarter was materially better than in the fourth quarter last year when we missed our expectation on sales volume.

This quarter, we did adjust and adapt to market conditions in real time, as we adjusted incentives and pricing. We achieved expected sales volume, and we did not enable our inventory levels to spike. We are laser-focused on keeping sales volume up in order to catch up pace and find even flow in each division and each community. By maintaining this discipline, we will not build up inventory in either built homes or in developed home sites, and we will efficiently convert production to cash.

As I noted last quarter, the catching up comes at a cost, and that cost is additional pressure on margins. Accordingly, as we've looked ahead to the second quarter of 2025, we expect to sell between 22,500 and 23,500 homes and deliver between 19,500 and 20,500 homes. We expect our margin to be approximately 18%, depending on market conditions, as we expect to continue to see margin pressure on deliveries that will be sold during the quarter. Nevertheless, we are focused on driving sales and closings and driving strong current cash flow, even at reduced profitability, while maintaining properly sized inventory levels so that as market conditions stabilize or improve, we will benefit from normalized margins across our growing volume.

On a side note, our margins are actually quite strong, except for the approximately 13% incentive we are using to enable affordability. These are outsized for the moment, and normalized incentives should be around 5% to 6%, and that would track for our normalized margin to be in the mid-20s percent. We remain focused on consistent volume in current market conditions, and we will be very well positioned as the market normalizes.

The second focus of our operating strategy is to refine our asset-light configuration. We are much closer to the completion of the strategic rework of our operating platform from being a traditional homebuilder with sizable land assets to becoming a pure-play, land-light, asset-light, manufacturing-model homebuilder that benefits from just-in-time finished homesite delivery.

The Millrose spin completed the backbone structure of that rework. Now we are, and have the time to, focus on refinement of that platform. With Millrose operational, we now have a strong complement of land bank partners that enable the land and land development activity that enables the just-in-time delivery of fully developed homesites as a manufacturer.

Of course, each of these valued partners operates a little differently and has a different cost structure. But with the diverse land trade partners, we will refine cost and execution over time. As with all of our trade partners, our land partners will benefit from our consistent and predictable volume, and our cost structure will benefit as a direct result.

As we've noted before, once refined, we have conviction that our structured asset-light, land-light model enables far more predictable volume and growth with a much lower asset base and lower risk profile. We are confident that our operating strategies of consistent volume and an asset-light, land-light just-in-time delivery system of developed homesites, will continue to enable our company to be best positioned to rationalize our cost structure and be best positioned with strong volume as margins normalize.

Let me turn back briefly to our first quarter 2025 results. As I noted earlier, we're quite pleased with the successes embedded in our first quarter results and accomplishments. In our first quarter, we started 17,651 homes, delivered 17,834 homes, and sold 18,355 homes. As mortgage interest rates remained higher for longer and consumer confidence searched for footing, we drove volume with starts while we incentivized sales to enable affordability.

As a result, during the first quarter, sales incentives rose to approximately 13%, reducing our gross margin to 18.7%. Our SG&A came in at 8.5%, which produced a net margin of 10.2%, although we were able to maintain construction costs and reduce cycle time, as Jon will detail shortly. We exceeded our sales and delivery expectations, while we were able to grow our community count from 1,447 last quarter to 1,584 communities this quarter, including our Rausch Coleman acquisition, and we're now better prepared for the remainder of the year. We continue to expect to deliver between 86,000 and 88,000 homes in 2025.

Our results represent a consistent and strategic quarter of operating results in the context of a very difficult economic environment, all while completing a time-intensive Millrose spin and growing into new markets with the Rausch Coleman acquisition. We clearly were able to walk and chew gum at the same time.

Additionally, on the positive side, we've driven our operating strategy to enable consistent cash flow, which has enabled us to strategically allocate capital. Our strategy has enabled us to repurchase another 5.2 million shares of stock for $703 million in the first quarter while we continue to deliver a strong dividend.

Additionally, we distributed, as a dividend, to Lennar shareholders 80% of the shares of Millrose Properties, and through that Millrose ownership, they will receive a regular dividend while providing the permanent capital which will drive the future success of Lennar. As for the remaining 20% of the Millrose shares, Lennar will shortly dispose of that remaining 20% in either a further distribution of Millrose shares or, at Lennar's option, may execute a potential exchange for Lennar shares, which would basically effectuate a cashless buyback of Lennar shares. Just to say this again, the additional 20% interest will be retained for a relatively brief period of time, and will either be distributed or exchanged for Lennar shares to effectuate a cashless stock buyback.

After our stock repurchases and dividends, we ended the quarter with $2.3 billion of cash on book and an 8.9% debt-to-total capital ratio. We are well-positioned after the Millrose spin to be able to continue to return capital to shareholders as we continue to grow our business. We are very well-positioned from balance sheet to operating strategy to be able to adjust and address as the market unfolds as we execute through the year.

So, let me conclude and say that while this has been a constructive quarter for Lennar, and while the short-term road ahead might still seem a little choppy, we're very optimistic about the longer-term road ahead. This has been a very exciting quarter for Lennar, and we couldn't be prouder of the work and dedication of our extraordinary associates who've worked together to make it all happen.

Let me also take a minute to welcome to the team the talented new members of Lennar who have joined from our Rausch Coleman combination. We couldn't be prouder to now have us all working together as one. Together, we've expanded our platform as we have upgraded the financial and operating platforms of Lennar, and as we will continue to drive production and sales.

We've continued to drive production to meet the housing shortage that we know persists across the market. As and when interest rates normalize, we believe that pent-up demand will be activated, and our margin will quickly recover. As a company, we are well-prepared with a strong and growing national footprint, growing community count, and growing volume.

Perhaps most importantly, our strong balance sheet and even stronger land banking relations afford us flexibility and opportunity to consider and execute upon thoughtful growth for our future. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high returns on capital and on equity.

We will also continue to focus our pure play business model and reduce exposure to non-core assets. We will continue to drive to just-in-time homesite delivery and an asset-light balance sheet. And as we complete our asset-light transformation, we will continue to refine our platform and generate strong cash flow and return new capital to shareholders through dividends and stock buyback, while we also pursue strategic growth. With that, let me turn it over to Jon.

Jon Jaffe:

Thank you, and good morning, everyone. Stuart has highlighted for you our strategy of being a consistent, high-volume homebuilding manufacturer. I'll further review this as I discuss our performance on sales pace, cost reduction, and cycle time reduction, along with the execution of our asset-light land strategy for the first quarter.

As noted, our overall first quarter sales pace of 4.1 homes per community per month was right in line with our start pace of 4.0. This was accomplished with consistent starts and accurate cycle times, which determine the sales pace needed at each community. Knowing the output of this production, our marketing and sales teams engage the Lennar machine to turn digital leads into appointments and then convert appointments into sales.

Throughout each week, we evaluate leads, appointments, and sales activity to measure if we are on track to achieve the needed pace. We continuously adjust to ensure we end the week not only with a targeted number of sales, but with sales of the right homes. If a community falls short on pace in any given week, there's clear focus on taking action to course-correct and get back on pace.

To drive the needed level of quality appointments, we focus on improving the experience for our customers to achieve higher conversion rates versus the alternative of chasing more top-of-funnel leads, which increases marketing spend. We believe our approach produces more qualified and motivated customer appointments, which we can convert into sales at higher conversion rates.

During the quarter, as we moved past the beginning of February, we did not see the seasonal pickup typically associated with the beginning of the spring selling season. So, we continue to lean into our machine, focusing on converting leads and appointments, and adjusting incentives as needed to maintain sales pace. These adjustments came in the form of mortgage rate buydowns, price reductions, and closing cost assistance.

In general, homebuyers in Florida and Texas, our two highest volume states, needed more help than most other markets around the country. We needed more incentives in the Florida and Texas markets to assist buyers to achieve mortgage payments they can afford, as well as to offset both a slowing in-migration environment and increased inventory. All markets around the country require incentives to assist buyers in the current homebuying

Disclaimer

Lennar Corporation published this content on March 27, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on March 27, 2025 at 20:01:09.117.