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 statements.

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 this morning's press release and our SEC filings, including those under the caption Risk Factors contained in Lennar's Annual Report on Form 10-K, most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

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

Great. Good morning and thank you. This morning, I'm here with Rick Beckwitt, our Chief Executive Officer; Jon Jaffee, our President; Diane Bessette, Chief Financial Officer; and David Collins, who you just heard from. We're out in California today with our Board. We have our Board Meeting tomorrow, but we're touring our Board on some of our properties out in California, showing them what makes us the company that we are. I'm going to start today with a brief overview. Rick and Jon are going to give some additional operational remarks, and Diane will deliver further detail on our third quarter numbers as well as some additional guidance for the remainder of this year. As always, when we get to Q&A, we'd like to ask that you limit your questions to just one question and one follow-up so that we can accommodate as many participants as possible. So, let me go ahead and begin by saying that we're very pleased to report a very strong third quarter performance that reflects both the continued recovery in the housing market as well as continued focus on leveraging our size and scale and delivering greater cash flow and higher returns. Our results reflect the fact that the housing market continued to strengthen throughout the third quarter, confirming and continuing the trend that we reported in our earnings call last quarter. The market for new homes has been improving from last year's pause as lower interest rates have stimulated demand and improved affordability, while the overall fundamentals of the economy have remained strong. We clearly saw traffic and sales continue to strengthen in the third quarter, as a combination of lower interest rates together with slower price appreciation have positively impacted affordability. And that together with low unemployment, wage growth, consumer confidence, and economic…

Thanks, Stuart. We had a strong quarter, driven by solid execution of our operating strategy. Homebuilding revenues for the third quarter totaled $5.4 billion, representing a 3% increase from 2018. This was driven by a 7% increase in deliveries to 13,522 homes and a 5% decrease in average sales price. Deliveries for the quarter exceeded the high-end of our guidance as we were able to accelerate some fourth quarter closings into the third quarter as buyers took advantage of lower mortgage rates. Our gross margin for the quarter totaled 20.4%, which was just shy of the top side of our prior guidance and up 30 basis points sequentially from the second quarter. This sequential improvement benefited from direct cost savings and was slightly impacted by an increase in the number of closings coming from lower margin third party option contracts versus land we've developed. This is in line with our land lighter strategy that is focused on maximizing cash flow and internal rates of return. I will discuss this in greater detail in a bit. Our SG&A in the quarter was 8.3%. This marks an all-time third quarter low and highlights the power of our increased local market scale and operating leverage. Homebuilding operating earnings totaled $659 million, up 8% from the prior year, and net earnings for the quarter totaled $513 million, up 13% from 2018. New orders for the quarter increased 9% to 13,369 homes, exceeding the high-end of our Q3 guidance. New orders increased in each of our Homebuilding segments with August being the strongest month in the period. From a dollar value perspective, new orders totaled $5.2 billion, which was up 3% from the prior year. Our average new order sales price declined 5% year-over-year and 2% sequentially, reflecting our continued focus on the strong entry…

Thanks, Rick. Today I want to speak about our focus on cost reduction across our platform. First, I'll discuss our significant size and scale that led to Lennar becoming the builder of choice, resulting in reduced direct construction costs and advantageous cycle times. With respect to direct construction costs, I mentioned on our last earnings call that we looked forward at the next few quarters and saw that directionally our direct construction costs were decreasing. This bore out in our third quarter as we saw our direct costs were down sequentially from Q2 by $0.99 per square foot or 1.6%. From a year-over-year perspective, our direct costs were up just 3%. This represents the lowest rate of year-over-year increase in 11 quarters and compares favorably to a year-over-year rate of 7% just last quarter. We have visibility into the continuation of this trend over the next few quarters as we review the direct costs for homes delivered in Q3 by the quarterly cohort that the homes were started in. Looking at these sequential cohorts, it's very clear that our direct costs are trending down over each subsequent quarter and will contribute positively to our gross margins going forward. Sequentially, in Q3 our material costs were down 3.5% from Q2. Significantly, over 65% of our material cost line items were lower sequentially, with the biggest declines coming from lumber, drywall and exterior finishes. As I've previously discussed, lumber represent the largest single cost item at approximately 13% of total direct costs. Lumber reached its low in December 2018 and has since remained in a range averaging about $350 per 1,000 board feet. On the labor side of costs, the severity of the labor shortage in the construction industry has not abated, but our labor costs moved up just 1% sequentially in…

Thank you, Jon, and good morning to everyone. So, let me summarize and reemphasize a few points from our third quarter and starting with Homebuilding. So, looking at deliveries, you've heard that our deliveries increased 7% from the prior year and exceeded the upper range of June guidance by 2% as we benefited from a favorable interest rate environment. Our third quarter gross margin on home sales was 20.4%, which was at the higher end of our June guidance. The prior year's gross margin was 20.3%, including CalAtlantic's purchase accounting, and 21.9%, excluding purchase accounting. Q3 2019 gross margins were impacted by lower average sales prices as we strategically repositioned our product to target more first-time homebuyers and lower-priced homes. Gross margin was also impacted by an increase of 60 basis points in sales incentives year-over-year. So, incentives decreased sequentially by 30 basis points. Additionally, while construction costs were up 3% year-over-year, there was a decrease sequentially of 1.6% as we realized the benefits of our size and scale. Our third quarter SG&A was 8.3%, which is the lowest third quarter SG&A percent we have ever achieved, and was at the lower end of our June guidance. This compared to 8.5% in the prior year. The improvement, as Jon mentioned, was primarily a result of continued operating leverage due to size and scale in our markets and our focus on technology initiatives. Turning to new orders. New orders increased 9% from the prior year and exceeded the upper range of June guidance by 4%. Our cancellation rate for the quarter was 16%. And then looking at absorptions, absorption for the third quarter was 3.4 versus 3.1 in the prior year, and we ended the quarter with about 1,300 active communities. And finally, for Homebuilding joint venture land sales and the…

It is now time for the question-and-answer session for today's call. [Operator Instructions] First question comes from Stephen Kim from Evercore ISI. Your line is open, sir.

This is actually Trey on for Steve. So, first I wanted to ask little about on the orders front. The West, Central in your Texas region, all were pretty good, up 10% or more, but the East appeared to be lagging a bit. Is there something unique in that geography or is there something a little bit more comp related that was more difficult in the quarter? We’re just wondering what's kind of going on there.

In the year ago period, we had a lot of new communities open in the quarter, and we had a pretty strong sales period in the year ago. There is nothing going on that's abnormal or unusual. I feel that the Eastern markets are strong across the board.

Okay. And then you highlighted this quarter that your closings benefited from pull-forward deliveries due to lower rates, and it's also something you talked about last quarter as well. I'm just wondering, is that something that is included – or that dynamic, is that included in your fourth quarter guide or is that something that could again ultimately be a little bit of upside to your numbers?

Yes, I think with regard to the acceleration of people's desire to close, when rates move people lock, and they don't want to lose the opportunity, and we just saw some people do that in the third quarter. And if there is a similar phenomenon in Q4, then we'd expect something like that as well, but we haven't put that in our guidance.

Okay. Thanks very much.

Next question comes from Ivy Zelman from Zelman & Associates. Your line is open.

Thank you. Good afternoon, guys. Congrats on a great quarter. So, it's been almost two years – roughly two years since you initially announced the acquisition of CalAtlantic, and I thought it might be helpful maybe you can share with us with respect to the aspects of the integration where you've been most pleasantly surprised, and were there other areas that you still think there are untapped opportunities that you can capitalize on with the dominant scale that you have. And then I have a follow-up. Thank you.

Ivy, it's Jon. I'd say, most pleasantly surprised with how quickly and smoothly the integration went across the entire platform. So, to me, it's not one particular area that stands out, but everyone very quickly was on the same page. There was no confusion about do you turn left or right, and a very quick transition to everything's included out in the communities to have our consumer-facing front all on the same page. Same thing as you look across our internet, digital marketing platform, same thing as you look across our land acquisition discipline. Everybody really is in lockstep pulling in the same direction, and I'd say that's what we're most pleased about.

I guess I'd add to that, Ivy. We had always assumed and expected that given the increase in scale and size in our markets that that would be a significant advantage. And if anything, we underestimated the benefit of that. And it really comes from all aspects of the business, access to labor, our cost structure, and really on the land side.

I think that – look, I think that the most remarkable part of two years – just two years passing since that announcement, and no disrespect intended, we don't even talk about the acquisition anymore. We are one Lennar, we're one company, and the vestiges of integration, things like that are far behind us. I think that as one company, we are focused on using our size and scale to really leverage every aspect of our business. You hear about it a lot relative to land, you hear about it a lot relative to production costs, and you see a lot of leverage in SG&A, and all of those components are being driven by the fact that we've got size and scale and a fully integrated program as one company, unified program.

That's very helpful and sounds awesome, and hopefully there’s a lot more to come from the scale and your dominant position. Moving to one aspect of it with land, Rick, maybe this is for you, just to – with respect to the regional land developers that you've partnered with, I think you've talked publicly about three. Some of the clients I was chatting with at our Housing Summit, we’re talking about why is it any different than another builder who is optioning lots from a land developer. And I thought it'd be helpful, one, if you can talk about and expand it upon the three, and why is it an advantage, the relationship you have, because I think you own a portion of those companies, maybe elaborate on that, Rick, if you would.

Yes. I think the key differential is, people that we're working with are experts in going through the entitlements and really finding great pieces of properties that are a game-changer. And if you think about our core business, as a builder we don't want to really play in the entitlement space. So, these are regional folks that – this is what they do. They find opportunities before anybody else can, and we've worked with them to expand our land platform and we have expanded them into other geographies, and it's working effectively.

Ivy, it's Jon. I'd interject that the strategic relationships, the differential between what you hear from other builders, I believe is that these are long-term ongoing relationships that will continue to produce opportunities for us over time as compared to one-off auction transactions with a developer doing a single parcel.

Got it. Very helpful. Good luck, guys. Tanks for taking our questions.

Next question comes from Truman Patterson from Wells Fargo. Your line is open.

Hi. Good morning, everybody, and nice results. First, just wanted to touch on order incentives. Could you just discuss how they trended through the quarter? Possibly the magnitude of the improvement from 2Q to 3Q? And I realize it might be difficult to parse out numerically, but could you just discuss qualitatively how incentives trended by segment entry level and move up?

Yes. We didn't have too much variability among the months in the quarter. And as we've always said, we're really focused on net pricing and focused on maximizing the value of our inventory and turning inventory. Our key focus, as Stuart, Jon, and Diane and I have said is, we're very focused on return on investment. And so net margin is really what we're focused on.

Okay. Okay. Thank you for that. When I'm looking out a year or so, I'm really trying to hope to understand where your growth will likely come from community count absorptions. You're starting to replace your move-up communities with higher absorbing entry level communities. Will that just lead to very modest community count improvement – I believe you alluded to it on the call previously and growth will primarily come through increased absorptions? Or do you think you have enough owned land that you can really liquidate it and grow communities regardless kind of a decent rate in 2020, call it like a mid-single-digit clip?

Yes. We're expecting to see community count growth going into 2020 progressing through the year. And with our focus on the entry level and lower priced market, absorptions are going to be stronger given the fact that there is higher velocity in the entry level market.

Okay. Thank you, guys.

Next question comes from John Lovallo from Bank of America. Your line is open.

Hi, guys. Thank you for taking my question. First one. I believe last year you provided delivery margin and SG&A outlook for 2019 during the third quarter. Is there any reason why you guys decided not to do that today?

There is no specific reason. We just traditionally give guidance for the following year in the fourth quarter. Last year, we made a decision strategically to accelerate that, and we've just gone back to our normal practice. As I said in my comments, we are optimistic about 2020. It's just a little premature for us to do – to give specific guidance. And I think that as we have traditionally done in the fourth quarter, we will give the guidance that we normally give.

Okay. That sounds good. And then in terms of orders, are there any comments, maybe at least directionally, you can give us in terms of September and how that may have trended?

Yes. So, historically, we've not given additional guidance past the quarter's end. But as we said in our remarks, the market has been very strong, and it has continued to be improving and I think we'll go about that far. Don't want to set a new standard. But it's clear that the trend through the quarter was positive with August being our most robust month and continuing into the fourth quarter, we're seeing additional strength.

Thank you, guys.

Next question comes from Mike Dahl from RBC Capital Markets.

Hi. Thanks for taking my questions. Stuart, maybe just to pick up on that last comment. I think, clearly your business is seeing the strength in the numbers, and it's great to hear the positive commentary. One of the pushbacks we still get to the overall Group is just the broader macro concerns and whether or not these are really seeping into consumer behavior at this point. So, can you give us a little more color on what you're hearing from the field as buyers are balancing – affordability being restored versus maybe or maybe not being impacted at all by some of the headlines out there?

I think that we talk about this a lot. It's easy to get a little confused in today's market. There is a lot of noise in the political scene, and it certainly feels like it's creating crosscurrents. But as we look to the feedback that we're getting real-time from the customers coming to our Welcome Home Centers and talking to us about their thought process, their future, we're still seeing that underpinning the fundamentals of the economy are driving consumer sentiment. And perhaps we are more sensitive to the noise than the actual consumers. Low unemployment, generally positive job growth, a fairly strong economy, all of these things seem to be driving consumer sentiment more than some of the new stories that we see that seem to be politicized. And so, we're – as we've noted, we've seen growing strength as we went through our third quarter, and that seems to be the dominant direction. I know that there is a lot of question about upcoming potential recession and things like that. Our customers don't seem to be viewing it that way, and I think that the housing market in general seems solid and strong and continuing to improve.

Okay. That's helpful and good to hear. My second question then just specifically with respect to the fourth quarter orders guidance. If we heard it correctly, it sounds fairly robust in terms of the growth there, and there is an easier comp. But just on the question of absorption versus community count, maybe a little more detail – the comment was made growth in community count into 2020. How should we think about the balance of community count versus absorption within that fourth quarter orders guide specifically?

So, look, community count is a very complicated number. It's got a lot of moving parts. So, into the fourth quarter, we're kind of suspecting that our community count is going to be about where we are and we'll see a little bit more absorption. As I noted in my comments, our guidance for the fourth quarter has been moderated by the production slowdown that we saw relative to all the preparation work all the way up the Eastern seaboard that had to take place relative to the hurricane coming through, and that really shut down a few weeks of production. So, our guidance might have been higher had we not had that kind of blip along the way. In terms of community count, as we look into 2020, I think that what we've probably understated is the really strong relationships that are driving our land strategy overall, all the way from the way that we're migrating from owned to option programs to the access to new communities to the kind of regional and sometimes national relationships that will define the way that we own and hold land and are prepared for growth in the future, these are evolving stories that really come down to very, very strong long-term relationships that have been enhanced by our additional size and scale. And the two, relationship and size and scale, are working hand-in-hand to give us a great deal of confidence that as we think about community count going into 2020, we are on an upward trajectory, and that's going to define our growth prospects as we go forward.

Thanks for the details.

You bet.

Next question comes from Michael Rehaut from JPMorgan.

Hi. Thanks. Good morning, everyone, and congrats on the quarter. First question. Stuart, I just wanted to expand a little bit on what you just said before regarding the land relationships, the shift toward lot optioning, the ability in sourcing of land and communities going forward, and kind of how that's allowing you to, at least directionally, say you expect to grow community count next year. With the increase of the lot optioning target from 40% to 45%, I guess maybe just asking it perhaps a little bit more bluntly, but number one, I was hoping to get a little bit of a time frame of when you'd hope to achieve that 40% to 45% range? I think in the past the 40% number was a little bit more perhaps over the next couple of years, let's say, or maybe the next 18 months even. If we're still talking about that same time frame, let's say now through the end of next year or even 2021. And secondly, as part of this question, just on your community count comments and access to land, I believe you had also talked about – with the overall soft pivot that you've been doing over the last two or three years, most recently kind of a unit volume growth objective of perhaps low-to-mid single digits. I was curious if the enhanced access to land changes that type of growth dynamic that perhaps if you're opening yourselves up to a broader enhanced set of land developers and stronger relationships, if that changes that growth calculus at all?

Okay. So, that's a lot of questions embedded in one there, Mike. So, let me see how I can do. Let me start at the end and say that we're really not changing our growth trajectory. We are refining the way that we get there, and we're really using the expanded relationships that we've got and size and scale to moderate our growth. But the access to land that we are – that we're working on and working with right now really enables us to grow as much as we perhaps want to. But we're constraining that growth in order to do it in the most effective way possible. And by constraining growth what we're enabling of ourselves is the ability to make that migration from a land-heavier to a land-lighter strategy, which is going to generate very strong cash flows that enable us to manage our balance sheet, our debt levels and our return of capital strategically. So, we're really pretty enthusiastic about that. Again, the relationships that we have that are long-term relationships, together with the size and scale that we've amassed, gives us a lot of optionality. And we know that we've highlighted a fairly aggressive target in terms of migrating from what was 20% to 25% to 30% option versus owned land relationship to a 40% to 50% level over the next couple of years, and that's an aggressive standard. But when we look at what's in our hopper and the things that we're working on and understand that when this management team focuses on something, we have a lot of tools in our toolbox. We have people who have deep, rich relationships that we can activate that stuff and make these things happen, and that's what's happening behind the scene. What we have in the hopper right now gives us a pretty good sense and confidence about being able to set high standards and expectations and then deliver on them. That's what you've seen from us in the past. That's what you're going to see from us now.

Great. Thank you, Stuart. I appreciate that. I guess if I could just – I know this first question multifaceted, but I'll see if I can sneak another one in, if you allow. On the gross margin side, obviously, it's an encouraging guide for the fourth quarter, and you're kind of continuing to see that recovery throughout this year as many builders have, you know coming off of the first half of the year when the industry kind of processed some of the higher incentive levels off the back half of 2018, should we be thinking of kind of the 21% – the low 21% as kind of a new reset baseline at this point given how the housing market has normalized and incentives have kind of receded off of those higher levels 6 to 12 months ago as we go into 2020?

So, look, there are some moving parts in this, and I'm going to let Rick kind of directly answer the question, but I want to highlight one thing first, and that is – look, land prices generally are and have been moving up. And then the migration toward a land-lighter strategy generally means you're buying more of a retail priced land asset underneath each and every home. What is exciting to us and remarkable is, as Jon properly highlighted, our size and scale is helping us offset some of those natural increases in price with some reductions in our production cost, reductions in our SG&A, to get to a net margin that is really consistent and strong going forward. So, Rick, maybe you'd like to weigh in on the direct margin question.

Yes. So, Stuart is exactly right. There are a lot of moving pieces with regard to margin as we look at 2020 and 2021. Our focus on increasing returns has an impact on the gross margin. We will be taking land very much closer to the start of construction, and as a result, there is a trade-off between gross margin – and I've said in the past, it could be 100 basis points, 150 basis points but returns go up exponentially. And we believe that that's an important thing for us to focus on. In addition, as we move down the price curve, the entry level homes generally have a lower margin, but much, much higher IRRs associated with that. So, when we come to the fourth quarter, we'll give you guidance on where we think we'll be for 2020, but all in all, it will be a really strong profitable year.

And hi, Mike, this is Diane. Let me just take a minute why we're talking about the fourth quarter. My apologies. Deliveries for the fourth quarter should be 15,800 to 16,000 homes. So, just wanted to clarify that.

Great. Thanks so much, guys.

The next question comes from Buck Horne from Raymond James.

Hi, thanks. Good morning. I wanted to see if you could just go in a little bit more detail on the single-family rental community platform that you're developing. And is it something that you would envision – it sounds like you're going to do it without land investment or lease-up risk. But would you actually consider expanding it to buy some land specifically targeted for that type of project? And I guess I'm also curious what kind of addressable – total addressable market you think is out there for the built for rent product? [Technical Difficulty] Hello? Hello, operator? Operator, you still there? I'm not hearing anything on the line.

Are you there? Can anybody hear me?

Hello, operator? Hello? Hello, operator?

Yes.

Hi, this is Buck.

Hi, Buck. Okay. Good. Do you want to go through your question again? Somehow, we had an audio problem.

Yes. No worries. No worries. Sorry about that. The question was on the single-family rental community platform. And just curious, it sounds like you're doing this without land investment and without lease-up risk, but would you consider expanding to actually invest in land specifically geared to that type of community? And really just – the other question is, what kind of total addressable market you think is out there for the built for rent product? [Technical Difficulty] Operator?

Here we go. I don't know – still a little spotty. But, listen, I'd say this. I want to make clear that our single-family for rent program is an extension of our core business, and it really isn't asset sensitive extension of that business. That enables us to expand our core business. Without the risk, we're not be coming – it's not a version of our multifamily business. We're not building a new ancillary business. It's a production-oriented business as an extension of our core. And additionally, and I think we've highlighted it very well, and that is, one of the biggest problems that we have in the country right now is affordable and workforce housing, and the single-family for rent business is becoming one of the big solutions, and we are part of that solution. We have had intense inquiry from participants who want to build entire communities of single family for rent where we can do it effectively, efficiently and with high returns, and we can participate, though we're not taking either the land risk or the lease-up risk, and this is a really positive program for us. Rick, why don’t you…?

Yes. Directly to answer your question, our primary focus is doing it in communities that are owned by a third party. That's our highest return on investment. It allows us to leverage our overhead. It allows us to build a very efficient program and build that scale fast. In addition to that, we are looking at doing single-family rental as an additional product offering in some of our existing communities, having a section of the community increase the pace and return on investment in those communities. So, it's going to be a combination of things. But as Stuart said, this is our core business. We're building, selling and closing the homes and doing it fast.

Okay. This is Jon. I just would add one other point to this is – we have complete optionality since this is the same product as we're building for sale to go whatever direction makes the most sense in terms of meeting the market demand and producing the highest returns for us.

That's extremely helpful. Thank you, guys. I will drop – given the audio problems, I'll pass it on to the next one.

I don't think it was your fault, Buck. I think it was something on our end, but thanks for your questions.

Thank you very much.

Why don't we take one more? Why don’t we take one more?

Okay. Last question comes from Matt Bouley from Barclays. Your line is open, sir.

Hi. Good afternoon. Thank you for fitting me in here. Just back on the entry level mix and the sales pace implications. I think, Rick, you mentioned that you are at about 40% of the business today in terms of entry-level, which kind of looks like where legacy Lennar was pre-CalAtlantic. So just – and I'll leave it here. This is my only question. As we look at 2020, just, one, kind of any sense of where that entry level mix will be next year based on the communities you've got coming on? And, two, you mentioned the sales pace should improve as a result, but are you actually thinking that you can reach sales pace levels that are accordingly consistent with where legacy Lennar was? Thank you.

Well, with regard to the mix in 2020, I did say that we'll be – it'll be a higher percentage of entry-level, probably moves up 2% to 3%, 4%-ish, depending on when those communities come online. We've really targeted across the board a lower price point. You can see it in our sales orders in every geographic segment of the company. And it's primarily being led by Texas and some of the Florida markets. But there is a – we've really worked on a highly engineered efficient floor plans that we're just rolling out [everywhere].

And our single-family for rent program and strategy will add to the change and the migration in that mix. Look, as we come to conclusion here today, let me just say that there are a lot of moving parts in our business that are reflected in the third quarter as all moving in the right direction, and I think that that's what you're hearing from the management team right now is we're enthusiastic about the business, we're enthusiastic about the market, and how it's shaping up as we look toward 2020. And we think that the business is on a really good track to make the changes, to make the programs and position the pieces to really have an exciting year ahead. So, thank you for joining us. We look forward to reporting our fourth quarter.

That concludes today’s conference. You may disconnect at this time. Thank you, and have a great day.