Lennar reports third quarter results reflecting market challenges; reduces delivery expectations while anticipating improved demand with lower mortgage rates.

OPERATOR - (00:01:06)

Please stand by. The conference will begin shortly. Again, please stand by. The conference will begin shortly. Thank you. 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.

David Collins - Controller and Vice President - (00:03:00)

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 - (00:04:01)

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

Stuart Miller - Executive Chairman and Co-CEO - (00:04:08)

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 Martin is here. She's our new Chief Legal Officer. Welcome Kathryn. And Bruce Gross, CEO of Lennar Financial Services, along with a few others as well. I do want to note that mark Cistana, 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 had Kathryn 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's 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 to 23,000 homes and we will reduce our full year expectation to 18,500 to 18,580. I'm sorry, 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 macroeconomy 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 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 also a 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 continued 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 SGA 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 continue. It 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 homes and deliver between 22 and 23,000 homes. We expect our average sales price to be between 380,000 and 390,000 as we expect to continue as we expect 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%. As we continue to invest in and evolve various Lennar technology solutions that will define our future. These initiatives, as I've said before, have been and will continue to add to SGA as well as corporate GNA 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 Lennar. 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 volume. 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 volume, 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 revenue, 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 Lennar 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 Lennar's technology journey and evolution. Kaz 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 homeownership market forever. I have always said that the Open Door platform functioning properly will add significant bottom line to Lennar 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 and owning a home easier. AI gives us. 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 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 Open Door 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.

John Jaffe - Co-CEO and President - (00:20:20)

To John Good morning everyone. As Stuart described, we remain intensely focused on executing our core strategy maintaining consistent high volume production while 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 cost. 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 utilize the Lennar Machine, beginning with attracting qualified leads to 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 supporting 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 Lennar Machine has enabled us to sell the right homes at current market prices, keeping our inventory well-positioned with an average of under two unsold homes per community. Affordability continued to challenge customers throughout all of our markets in the quarter as incentives increased 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 a 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 cost. Over the last 11 quarters, we have 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 locust or 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. Improved 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 phase 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.

Diane Bissette - Chief Financial Officer - (00:25:24)

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 homebuilding 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 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 home sites. We believe this portfolio of home sites provides us with a strong competitive position to continue to grow market share and scale and in a capital efficient way. With a 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 manage our inventory levels, ending the quarter with fewer than two completed unsold homes year per 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 SGA percentage should be in the range of 7.8 to 8%. All these metrics of course are dependent on market conditions. For the combined homebuilding, 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 Lennar 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 oper.

OPERATOR - (00:30:36)

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 one 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 Zelman and Associates. Please go ahead.

Alan Ratner - Analyst at Zelman and Associates - (00:31:02)

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, pace or margin or any color you can give there?

Stuart Miller - Executive Chairman and Co-CEO - (00:31:35)

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 and interest rates were trending 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.

Alan Ratner - Analyst at Zelman and Associates - (00:32:55)

Got it. That's helpful. Color. 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 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 meaningfully 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 26.

Stuart Miller - Executive Chairman and Co-CEO - (00:33:53)

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. On the contrary, we were very deliberate about in 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 structure all the way from land to land finance costs, all the way through to vertical construction and horizontal restructuring and sga. 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. It 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.

Alan Ratner - Analyst at Zelman and Associates - (00:35:48)

Appreciate it. Thanks very much.

Stuart Miller - Executive Chairman and Co-CEO - (00:35:50)

You bet.

OPERATOR - (00:35:53)

Next we'll go to the line of Stephen Kim from Evercore. Isi, please go ahead.

Stephen Kim - Analyst at Evercore - (00:35:58)

Yeah, thanks very much, guys. And yeah, thanks for that commentary. Stuart, I was 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, several-month kind of 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.

Stuart Miller - Executive Chairman and Co-CEO - (00:36:38)

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.

Stephen Kim - Analyst at Evercore - (00:37:47)

Okay, but you have indicated that you are looking to slow your volume versus let's say maybe what you had thought, you know, 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 a few months and then you're on the other side of that, there's going to be sort of a re acceleration. 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?

Stuart Miller - Executive Chairman and Co-CEO - (00:38:29)

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 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.

Stephen Kim - Analyst at Evercore - (00:38:57)

Gotcha. Okay, that's helpful. And then I was wondering if you could help me with. 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 buydown 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 addition 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 would, you think needs to be corrected in that?

Stuart Miller - Executive Chairman and Co-CEO - (00:39:56)

I think that the pieces are correct and the timing is not going to be, you know, 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.

Stephen Kim - Analyst at Evercore - (00:40:12)

Okay, excellent. Thanks so much, guys.

Stuart Miller - Executive Chairman and Co-CEO - (00:40:15)

Okay, thank you.

OPERATOR - (00:40:18)

Next we'll go to the line of Michael Reheart from JPMorgan. Please go ahead.

Michael Reheart - Analyst at JPMorgan - (00:40:24)

Good morning everyone. Thanks for taking my questions. I don't certainly don't want to beat a dead horse here, but I just wanted to try and put a maybe perhaps a finer point on, you know, this kind of shorter term adjustment in approach given the challenging market. And I'm wondering, you know, on kind of a bottom line basis if you guys just felt like 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 from a volume perspective. And so with that maybe demand becoming more inelastic, just a lack of demand in the marketplace. It just didn't make sense to drop that gross margin below where you're looking in the back half of this year. Currently.

Stuart Miller - Executive Chairman and Co-CEO - (00:41:52)

I'm not sure that we've gotten quite that philosophical, but 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?

John Jaffe - Co-CEO and President - (00:42:54)

Yeah, I would agree, Stuart. 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.

Michael Reheart - Analyst at JPMorgan - (00:43:17)

Now, 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. I'm curious, you know, amid that type of, 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 if you did see any impact on demand trends across your markets, perhaps which ones? If that's the case, and all else equal, would this potentially reduce pressure on gross margins or incentives? Or are you just at a point right now where, given what you've done during the quarter, you expect incentives that you've laid out to effectively remain in place throughout the fourth quarter?

John Jaffe - Co-CEO and President - (00:44:37)

I think, Michael, as Steve laid out, it does help reduce the cost of those mortgage rate buy downs. But as Stuart responded, 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.

Stuart Miller - Executive Chairman and Co-CEO - (00:45:00)

I think, 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 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. You know, and I think that, you know, in terms of 30 basis points, in August, 20 to 30 in September, there are fluctuations in the 10 year right now it's, you know, maybe it's migrating up a little bit. We'll have to see, I think the volatility in it, you know, 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 consumers engagement. And as we've gone into the fourth quarter, we generally don't comment on, you know, 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, you know, 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.

Michael Reheart - Analyst at JPMorgan - (00:46:50)

Great, thank you. Appreciate it.

Stuart Miller - Executive Chairman and Co-CEO - (00:46:52)

You bet.

OPERATOR - (00:46:55)

Next we'll go to the line of Susan McClary from Goldman Sachs. Please go ahead.

Susan McClary - Analyst at Goldman Sachs - (00:47:00)

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 or even as you moderate or adjust the strategy and how we should think about the upside to those inventory turns in this kind of an environment and long term the ability to get to three times as you do think about the setup on the ground.

Stuart Miller - Executive Chairman and Co-CEO - (00:47:28)

So I will tell you that I, you know, so John and I, at the end of each quarter we go out, 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, and 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 as a company. It will be. We'll 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 again three times because that's a pretty hard hurdle to get to. Go ahead, John.

John Jaffe - Co-CEO and President - (00:49:04)

I would just add Stuart is, as we discussed and discussed in prior quarters 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 and continue to drive that metric, which, as you've seen, we've been making good progress on.

Stuart Miller - Executive Chairman and Co-CEO - (00:49:28)

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.

Susan McClary - Analyst at Goldman Sachs - (00:49:51)

Yeah, okay, that's very helpful. Color. 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 and A environment, those kinds of strategic efforts?

Stuart Miller - Executive Chairman and Co-CEO - (00:50:15)

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 and A strategy we might inject into our business as we go forward. We are looking at everything. And as I 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 waits of no rows. And 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 and a big capital allocation. Diane, do you want to say anything on that?

Diane Bissette - Chief Financial Officer - (00:51:45)

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 incentive because of our push on volume. Cash flows are out a little bit. And this was an unusual year with Melrose. But the trajectory is to really keep the focus on cash generation, which is definitely benefited by the efficiencies that we're focused on.

Susan McClary - Analyst at Goldman Sachs - (00:52:09)

Yeah. Okay, thank you all for the color and good luck with the quarter.

Stuart Miller - Executive Chairman and Co-CEO - (00:52:13)

Thank you, Susan.

OPERATOR - (00:52:14)

Thank you.

John Lavalo - Analyst at UBS - (00:52:16)

Next we'll go to the line of John Lavalo from ubs. Please go ahead.

John Jaffe - Co-CEO and President - (00:52:21)

Good morning, guys. Thanks for taking my questions as well. The first question is orders were obviously very solid and 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?

John Lavalo - Analyst at UBS - (00:52:44)

It really is just timing and relative to when sales occur, getting through the mortgage approval process, nothing more than that.

John Jaffe - Co-CEO and President - (00:52:58)

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 i4 corridor, if you could talk about, I mean, is this consistent with what you're seeing on the ground.

Stuart Miller - Executive Chairman and Co-CEO - (00:53:25)

And that, you know, Tampa, Orlando markets along the i4, as I comment, you know, we have always remained very laser focused on inventory levels. It's part of our strategy. Even flow, production, sales pace. You know, with respect to other builders, we, you know, we did see some build up, but I would agree with that in general, starting to see some stabilization.

John Lavalo - Analyst at UBS - (00:53:48)

Yeah. And remember that the size of inventories across the competitive landscape, meaning existing homes and new homes, is a big part of what defines, you know, the stress on the sales process. And in Florida, that has been, you know, 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, would you sell?

OPERATOR - (00:54:28)

That's helpful, thank you. Yes.

Matthew Boulay - Analyst at Barclays - (00:54:33)

Next we'll go to the line of Matthew Boulay from Barclays. Please go ahead.

Stuart Miller - Executive Chairman and Co-CEO - (00:54:37)

Good morning everyone. Thank you for taking the questions. One on incentives, I guess sort of another philosophical question. But I guess going forward, depending on where the rate environment goes, do you anticipate maintaining some level of these buy downs as a competitive advantage structurally versus the resale market? Or if we do get to 6% or lower, is there some level where you really do foresee, you know, a kind of a more material pullback on those incentives?

Matthew Boulay - Analyst at Barclays - (00:55:14)

Thank you, Chair Powell. 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, 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. That just unlocks an awful lot in and around the ability of people to engage in the housing market. So you know that migration, 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.

John Jaffe - Co-CEO and President - (00:56:31)

Okay, fair enough. Thank you for the thoughts there, Stuart. Yeah, 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 cancellations environment a little bit. And I guess what, whatever the trend was, kind of what you're reading into what you're seeing in cancellations today. Thank you.

Matthew Boulay - Analyst at Barclays - (00:57:01)

I'd say it's really remained 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 customer as they're challenged by affordability. So bottom line is it's remaining pretty consistent.

John Jaffe - Co-CEO and President - (00:57:34)

Okay, thanks John. Good luck guys.

OPERATOR - (00:57:38)

Okay, why don't we take one more?

Jade Rahmani - Analyst at KBW - (00:57:41)

Perfect. Our final question comes from Jade Rahmani from kbw. Please go ahead.

Stuart Miller - Executive Chairman and Co-CEO - (00:57:49)

Thank you very much.

Jade Rahmani - Analyst at KBW - (00:57:49)

Can you Say what quantity or percentage.

Stuart Miller - Executive Chairman and Co-CEO - (00:57:53)

Of year to date deliveries have come from Melrose?

Jade Rahmani - Analyst at KBW - (00:58:00)

Yeah, I want to say it's been about. Dave, correct me, from what, 25% ish in that zone.

Stuart Miller - Executive Chairman and Co-CEO - (00:58:08)

And so in terms of the gross.

Jade Rahmani - Analyst at KBW - (00:58:09)

Margin outlook, looking beyond the fourth quarter.

Stuart Miller - Executive Chairman and Co-CEO - (00:58:13)

Should we still expect the remaining 75%.

Jade Rahmani - Analyst at KBW - (00:58:17)

You know, once you're at a steady cadence with Melrose, to come through that interest cost on gross margins?

Stuart Miller - Executive Chairman and Co-CEO - (00:58:26)

Yeah, staying the obvious, with the low cost that Melrose offers us, the more that we have deliveries from that vehicle, it's benefiting our margins.

Jade Rahmani - Analyst at KBW - (00:58:37)

But realistically, you know, across our land banking environment, where we're focused on managing the option costs of those communities and you know, one of the things that benefits, you know, 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. And therefore, you know, 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.

Stuart Miller - Executive Chairman and Co-CEO - (01:00:06)

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 Jordan is highlighting now, the more effective we are in creating stability and reliability in the land bank world, the more that that capital costs come down. So they all have our laser focus on how do we become more efficient, more durable, and bring value to our partners.

Jade Rahmani - Analyst at KBW - (01:00:48)

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 cost 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 Milrose and advantage cost, 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.

Stuart Miller - Executive Chairman and Co-CEO - (01:01:37)

Be a negative, an incremental headwind, because.

Jade Rahmani - Analyst at KBW - (01:01:40)

That 560 million of annual interest costs.

Stuart Miller - Executive Chairman and Co-CEO - (01:01:43)

Is not yet fully reflected in gross margin.

Jade Rahmani - Analyst at KBW - (01:01:49)

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 Lennon, 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.

OPERATOR - (01:02:49)

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.