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.

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

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

Very good. Good morning, everybody, and thank you for joining us today. I'm in Miami today, together with 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; Bruce Gross, our CEO of Lennar Financial Services and a few others are here with us as well. And as usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction cost, cycle time and some of our land strategy and position. As usual, Diane is going to give a detailed financial highlight along with some limited guidance for the second quarter and full year 2024. And then, of course, we'll have our Q&A session. As usual I'd like to ask that you please limit yourself to one question and one follow up, so that we can accommodate as many as possible. So let's go ahead and begin. We're very pleased to report another very solid and consistent quarter of operating results for Lennar. We've continued to execute our operating plan effectively into the first quarter driving excellent operating results, and we have simply never been better positioned from balance sheet to execution to operating strategy to address market conditions as they unfold for the remainder of 2024 and beyond. In the first quarter, we started 18,338 homes, we sold 18,176 homes, and we delivered 16,798 homes. While we expect deliveries for the year to be approximately 10% higher than last year at 80,000 homes. Next quarter, we expect to start approximately 21,000 homes, sell approximately 21,000 homes and deliver between 19,000 to 19,500 homes. Admittedly, we aren't quite there yet, but we are getting closer and closer to an even flow…

Good morning. As you heard from Stuart, our operational teams at Lennar continue the execution of our core operating strategies in our first quarter. The focus starts with Lennar marketing and sales machine every quarter, our divisions continuously learn from their engagement with Lennar Machine, gain knowledge in how to use this information for decision making, provide feedback for enhancements and improve the machine and execution of our strategies. This continuous loop of learnings and improvements drive the wide [ph] analytics, which enable us to improve our matching of sales to our production pace. You can see the evolution of this improvement in our operating results as sales were evenly matched with starts in the first quarter and are projected to be evenly matched again in the second quarter. While there’s more progress to be made, this matching of sales and production is leveling out our closings from quarter-to-quarter. The goal is even flow deliveries where by design starts gradually increase quarter-over-quarter to ultimately provide a consistent number of deliveries throughout the year. This operating model produces the most significant of all the efficiencies that benefit our trade partners. To optimize the pricing of each home, this strategy is more than just about selling about the pace of sales, but about selling the right homes at the right price. In every division, Mondays are now referred to as machine Mondays. Our operating teams gather to review dashboards informing them of the prior week’s results compared to the planned activity. This analysis of the prior week’s activity from digital marketing leads to sales pace and price of homes sold is evaluated to see if we sold the right homes. Thus informing our decision making and we plotted course of action for the current week. As the week unfolds, this is reevaluated…

Thank you, Jon. Good morning, everyone. So Stuart and Jon have provided a great deal of color regarding our home building performance. So therefore, I'm going to spend a few minutes on the results of our financial services operations, summarize again our balance sheet highlights and then provide high level estimates for Q2 2024. So starting with financial services. For the first quarter, our financial services team had operating earnings of $131 million. Mortgage operating earnings were $100 million compared to $59 million in the prior year. The increase in earnings was driven by an increase in lock volume, which was the result of higher homebuilding volume and a higher capture rate, as well as higher profit per locked loan, which resulted from higher secondary margins and lower cost per loan as the team continues to focus on efficiencies. Title operating earnings were $33 million compared to $23 million in the prior year. Title earnings increased primarily as a result of higher volume and greater productivity as the team continues to embrace technology to run a more efficient business. These solid results work – these solid results were accomplished as a result of great synergies between our homebuilding and financial services team, they truly represent the spirit of one Lennar. So now, turning to our balance sheet. This quarter, once again, we were steadfast in our determination to churn our inventory and generate cash by maintaining production and pricing homes to market with the goal of delivering as many homes as possible to meet housing demand. The results of these actions was that we ended the quarter with $5 billion of cash and no borrowings on our $2.6 billion lucid credit facility. This provided a total liquidity of $7.6 billion. As a result of our continued focus on balance sheet…

[Operator Instructions] One moment please for the first question. And that comes from Alan Ratner with Zelman & Associates. Your line is open.

Hey, guys, good morning. Nice quarter and thanks [Technical Difficulty] very helpful. Appreciate it. Stuart, first one I wanted to ask you. It sounds like you – and maybe I’m reading too much into this, but it sounds like you were – and maybe I’m reading too much into kind of mortgage qualification issues a little bit more than you have in recent quarters. And I’m curious if you’ve seen something specifically in the near-term that is kind of leading you to highlight that? Or if you’re just kind of commenting more broadly on the fact that affordability is stretched, which I don’t think is much of a surprise to anybody at this point.

So I think it starts with the fact that affordability is stretched, but we are definitely seeing a little bit more credit card debt and personal debt from the customer showing up in their applications. We have seen some delinquencies in some of that debt. Bruce, maybe you’d like to comment a little on that.

Sure. I think what we’re seeing is when you look at the Niles, in particular more of the Niles are having a higher percentage relating to debt to total income. So there’s more debt to pay off. And that’s something new that we noticed this quarter. We often work with the buyers and we’re able to work through a lot of the conditions, but that one point is something that we’ve seen different this last quarter.

Got you. Bruce, great to hear your voice and thank you for that info. And then second question. It seems like the market is generally tracking in line with what you expected three months ago, and I think the guidance reflects that. Stuart, I think three months ago probably really the main difference is I think we and you and probably everybody were probably expecting rates to be lower by now, and some of the inflation metrics might be a little bit stickier than people were hoping for. So when you think about the margin guide for the back half of the year, it does imply a pretty healthy ramp. And I think your comments last quarter suggested an expectation that as rates move down, you would be able to pull back a little bit on incentives and discounts. And I’m just curious if that thought process has changed at all or if you’re seeing enough on the demand side today that you’ve either already done the heavy lifting on pulling back on incentives or you’re confident that that’s going to transpire over the next few months?

So really interesting question, Alan, and let’s start with the fact that demand is strong, and I can’t emphasize that enough, that demand is strong. Now with that said, there’s limited supply and there’s also affordability factors that are playing into this. And yes, there was a bit of enthusiasm in the market that interest rates were going to be moving down a number of times as we went through 2024, some of that enthusiasm has subsided. What I love about our program is that our program cuts through the middle. What I don't see is another ramp up in interest rates, but anything can happen. But inflation hasn't yet revealed itself as fully under control. And I don't feel like the Fed has built up that confidence yet that says we're ready to start moving interest rates. And our program enables us to succeed quite well if interest rates move down. In fact, we're were really levered to the fact that if interest rates move down, our margins should do quite well. But to the extent that interest rates basically stay the same or migrate upward a little bit, we're still pushing volume, pushing focus on rationalizing expenses or the cost of building homes together with maximizing price and minimizing incentives that actually have to be used in order to generate strong margins. So our view today stands exactly as it was three months ago, even though there was more enthusiasm at that time for rates going down, we feel pretty strongly that we're going to be able to accomplish the margin levels that we've talked about in the environment regardless of how it moves forward. We have a lot of levers to pull. And I think that we're really connected to the market, and we're very focused on production. And I think that production needs leverage at costs, whether it's SG&A or cost of production. And I think we're going to be able to produce our margin. Jon, anything?

I think you covered it. As we said, we continue to refine our ability to focus on the right price per home, which we feel confident will allow become even better at those communities and markets where we can pull back our incentives even more, and we'll continue to find that. And I think that informs our confidence in what we see for the rest of the year.

Great. Thanks a lot guys. Appreciate it.

You bet.

The next question comes from Stephen Kim with Evercore. Your line is open.

Yes, thanks very much guys. I appreciate all the color. I had a little bit of difficulty catching all your comments. So apologies if I'm repeating in here. But I believe, Stuart, you were discussing maybe a new iteration of Quarterra. And maybe, I don't know if you're still calling it that. But this time, you talked about $4 billion worth of land, I think, being included in this entity. Just wanted to get some more color around that. So is that about a half a year's worth of land? How is that $4 billion different from what was initially conceived? I think you initially talked about $4 billion, but I believe most of those have now already been put into fund structures. So what is this $4 billion in land? And how is it different? And then is it including other maybe what not – we might consider non-core assets as well? Can you just give us some more color on this new Quarterra?

Okay. So first of all, I have PTSD going backwards and talking about the prior spin. So, I'm not going to use the Quarterra name right now. Is that okay with you, Steve?

Totally fine.

I'm going to this [ph]. Okay. Good. So I'm not going to talk about this as a reincarnation of Quarterra because it isn't. With the prior spend, we were focused number one on a tax-free spend. And number two, it was basically our multifamily, single-family for rent assets that we were splitting into a different kind of operation. This is specifically taxable spend, straight down the fairway land that is basically under production that is regular operating land, it is not excess or ancillary property or anything like that, it should be cash flowing immediately, and it is just a straightforward spin of a land program that dovetails extremely well with what we already have in place relative to other land banking programs. This enables us to build yet another vertical that will be complementary to the others that we have, but it gives us a broader range of feeders that enable us to fortify the durability of our land-light strategy. And that's been our focus is how do we make sure and ensure that the market conditions we have today are market conditions that we can depend on in the future? Yes, we have land developers. Yes, we have land sellers that the auction land from, but we also have the added benefit of land banking structures, and we're creating another unique land banking structure with a permanent capital vehicle attribute that enables us to create that durability, that confidence that as we go forward, just like with lumber, just like with appliances, land becomes more of a commodity that we take down just in time.

That's really helpful. Appreciate the distinction there. How about these other assets, which were initially conceived to be in this entity – the previously been called Quarterra. Are there any plans for that?

Well, I think it's widely known that relative to our first fund of multifamily where we do have some investment that is currently under discussion as to how it will – it has come to the end of its fund life, and we're considering either a sale or some kind of extension program or something. Those assets will, over time, burn off. The new focus on multifamily is to be building in a more distinctly private equity-based program where we become much more of a production engine for more affordable product. The products that we were building historically and probably kind of fallen out of favor given interest rate changes. And yet affordable rental product is very desirable and something that we can produce much more comfortably within the Lennar homebuilding divisions. And so it will be much more of a production merchant build kind of program spending regularly just like the rest of our product.

Okay. Got you. That's helpful. Thanks very much for that. The second question I had is, I think earlier you were discussing in your prepared remarks, the cash that you have on your balance sheet, $5 billion. And I think you acknowledged that there was some interest in seeing how you are going to deploy that. And I believe you talked about that. Your response to that was that talked about a strengthening of your relationship with your land partners, how that has evolved, how would it have been tested over the last 1.5 years? And you have come through that now to a – at a place where you have now a much more robust relationship battle tested with your partners. And so it seemed to me that you were suggesting that the excess cash as you were holding maybe no longer served the purpose that it once did. I want to make sure that I and paraphrasing what you were saying correctly. And if so, it sort of still leaves open the question of, is there anything else that you might be waiting for that you want to be patient about to see before maybe deploying that cash?

Look, we've been unapologetic about the patients. As we've migrated to a land-light strategy, we wanted to be patient about recognizing that we are developing new sources of land relationships. We want to make sure that as the market ebbs and flows, that what we depended on did we [ph] evaporate. And then all of a sudden, we needed to have capital to be able to grow, to be able to produce. I think we've gained a tremendous amount of confidence in the structures that we’ve built. We're continuing to gain that confidence. We're looking to build more of those structures in order to have that durability baked in. So that we're much – we’re very comfortable holding a stronger balance sheet to just make sure that as we go forward, we continue to grow forward and have the capacity to do that. I think as we've gained confidence, the need for holding that cash becomes less and less important. I think that our $5 billion share repurchase authorization is an indicator that we're leaning more into returning capital to shareholders along with our dividend. And it's all in stepping stones. We're not afraid to go slower rather than to go fast. But the fact of the matter is we don't have something else out there that we're looking at that we're anticipating using cash for. It is simply safety stock, so to speak, to make sure that the plumbing system we put in place is durable for the future. And we'll continue to make sure that we're positioned for the future. And as we get that confidence, you can expect that we'll be buying back more stock. And that's where the allocation of capital is going to go. It's not going to go to something else that's unanticipated right now.

Great. Thanks so much, guys.

Okay. Thanks, Steve.

Thank you. The next question comes from Mike Rehaut with JPMorgan. Your line is now open.

Thanks. Good morning, everyone, or just about this afternoon. I appreciate all the detail and color as always. Two questions. First, a little bit more obviously on the – on this proposed land spend. And I just want to make sure I'm thinking about it correctly because initially, I think to Steve's prior question, it kind of hit on different areas of your current land program or prior iterations of how you're thinking about moving different assets on or off the balance sheet. So it kind of sounds like this might be more of a – when you talk about a spin and a new or separate vehicle, my mind is kind of moving a little bit towards the four-star type of relationship of that they have with D.R. Horton. And the fact that there's a lot of land that is on the Forestar entity that is – has a lot of rights of first refusal, et cetera, to Horton. As opposed to something that I thought was more of the direction when you started talking about this, which was kind of more moving land towards your existing land banking or land bankers relationships, primarily thinking about the large facility that you have with Angelo Gordon. So just want to make sure that I'm thinking about it correctly in terms of it being more the former than the latter. And in thinking about that $4 billion number, I mean, right now in your press release, you have about $4.5 billion of – or $4.7 billion of land and land under development. So $4 billion would be a huge number, huge percentage of that amount. I just want to make sure that I'm understanding that that $4 billion is coming out of that bucket, and that would in effect represent over 80% of your lots owned that are on your balance sheet today.

So, Mike, I recognize your thirst for more detail, and we'll give you more detail as we refine our program. And I wouldn't be thinking about it through the lens of Forestar. We're probably not going to go in that direction. But we recognize that you would like to know more, and we'll give you greater detail as we refine the program.

Mike, the other thing I would add, because you might have been alluding to it, is that this will be structured. So there won't be any consolidation on our balance sheet. It would be true – a true spin of land that's in a separate entity. So we wouldn't have any of those complexities of consolidation.

Okay. So – but just on that point, if you're talking about a $4 billion type of number, it would appear that that represents the – again, over 80% of the land and land under development. So we're talking about, in effect, the majority of your land holdings. Is that the right way to think about it?

We have been moving to a land light strategy. That would be correct.

Okay. Secondly, on the gross margin front, was asked earlier about back half of the year? And it seems like to get to the guidance of roughly flat year-over-year for the full-year you're looking at back half gross margins of roughly 24% on average. We talked about maybe the mortgage market being perhaps less potentially a downward slope throughout the year than was initially anticipated. What is necessary to hit that 24% in the back half? Is it kind of already, I would assume on the books from a land cost basis, construction cost basis. Or are there – do you need to have less costly incentives or better pricing? Because at this point to the extent that that doesn't come through, it seemed like the only way to hit that 24% if it was much more of just a mix and what's coming through the pipe, so to speak.

So as we've detailed, our focus and programming has been really carefully crafted by design to focus on using our production programs to bring down costs and to use our machine to focus on right pricing, whether it's price increases as the market gives them or whether it's the very carefully crafted use of incentives. So the first thing is post reconciliations together with copper price, we feel comfortable that we're going to be able to migrate in that direction. The second part of it is leverage. As we go through the year we're generally producing and delivering more homes. So there are some embedded leverage in that and so there are a lot of moving parts that make up our view of where our margin is likely to go. Of course, market conditions can change. They can change to the positive and to the negative. And we've been very clear that that margin is somewhat of a springboard for maintaining the volume that we expect to maintain. So there will be elements of the economic environment that factor into it as well. Can I detail specifically what the relationships are in those numbers? I don't think so right now but it's a combination of all of those pieces that will drive our margins to where we expect them to be for the year. We do have some visibility in some of the sales that have come through, and we continue to have confidence that we're going to be able to get to that number – to those numbers by the end of the year.

And I think as we said earlier, some interest rates stay relatively flat with where they are. We think we can continue to improve our operational view of how to increase margins in that same interest rate environment.

Great. Thanks so much.

Okay. You bet.

Thank you. The next question comes from Kenneth Zener with Seaport Research Partners. Your line is open.

Good morning everybody or afternoon now. Want to start kind of high level here to understand or for you to clarify perhaps even flow, where starts lead orders, which is less cyclical. So first high-level question, what is your start capacity based on kind of your land partners, right? There's some type of guardrails we have there and one of the big focuses of the industry are you going to grow or return in general? And on the land spin, why are you guys choosing to introduce this vehicle versus building out the homes or see knowing it as you have been doing back already, I guess.?

Yes. So first question first. Production is clearly derived from how many home sites we have available. I think that we have mapped out what we think the production can be given the home sites that we have coming through the system. And we would expect that what you are seeing as a production schedule is very well baked into both the land availability and each cycle of becoming developed home sites. So think about the way that you're seeing production put in place to get to that, let's call it, 80,000 delivery number plus some overage for what falls into the next year, that's already baked into what the start space will be, as I day-lighted, 21,000 starts this quarter. We have, of course, excellent visibility as to the home sites that are coming through the system for that and likewise into the next quarters as well. Jon, did you want to add anything to that?

Yes. Relative to this first question, the land goes into our land banking relationships; it goes into it with a takedown schedule that not just what Stuart just described. So there are no guardrails that limit our ability to execute on the planned volume.

So then as it relates to your second question we've been very focused on building multiple sources of capital for our optioning and land banking programs. Actually building a permanent capital vehicle rather than being completely reliant on private equity capital constantly coming into a program, we felt was a greater good and a big benefit. So when you ask a question why go in a different direction when some of the tried and true direction so far are viable as well? They are viable, and we continue to lean into those programs. This is an and rather than an or, this to us, a building, the durability, that confidence that the capital will be there even as the market ebbs and flows going forward. And so that’s why we’re choosing to build this way rather than just drive as we have by putting – taking land from balance sheet, building machine [ph] and all of that, this is a cleaner way to build a permanent capital vehicle that’s doable for the future.

Okay. Appreciate that. That’s good. My second question is about margin communication, which is one of the factors affecting investors today. So margins in your forecast for second half, nobody knows the future, right? And you’re trying to help us. But I think everything you’ve been talking about even before was much more important to your capital allocation and the true returns of your company as you go asset light. So do you see – and I think we all can model what that free cash flow will be within a range. Do you see – when you get to that comfort level, where land is neutralized? Therefore, net income equals cash flow. Do you guys see yourself systematically buying back stock in line with net income? Or do you – when we get to that point, or are you guys going to try to time it, obviously, with NVR we see that they’ve run up a lot of cash. So do you guys – are you hoping to have essentially buybacks match net income systemically when you’re there? Or is there something else we should know about your thinking when that time arrives? Thank you.

No. I think that, generally speaking, I think we’re migrating to a more orderly buyback program. We’ve been conservative in our buyback program. As I’ve noted, to make sure that the systems that we put in place are durable for our future. So that conservatism should be confused. As we look ahead, we don’t have a thought process around the different use of cash. In fact, we’re growing into the cash flow model that we’ve created. And as we find that it is more durable, sustainable and we test kind of the edges, we can kind of expect that the cash we’re generating is basically going to go right back into stock buyback.

Yes, Jon, I think what I would add is, as you know, previously, we prioritized debt repayment over that. But after we make this April payment, we’ll only have $2 billion of notes outstanding and it’s one in 2025, one in 2026 and I think the other is in 2027. So we don’t have that priority to focus on anymore. So I think Stuart’s point is an important one that stock buyback really does become the priority, because I think, we’ve done a nice job of deleveraging the balance sheet from a debt standpoint.

Agree, and thank you very much.

Very good. And why don’t we go to our last question now.

Thank you. That last question is from John Lovallo with UBS. Your line is open.

Hi, guys. Thank you for taking my questions as well. I mean, I guess the first one, just going back to the spin for a moment. I mean if the purpose here is to sort of guarantee capital for Lennar to grow and sort of guarantee land banking, even if private equity pulls back, I mean, it would seem that the spin would need to be very well financed, a strong balance sheet how much cash do you envision to spin meeting?

Probably not very much. I think that the assets, as they’re configured or as we’re thinking about it, should be cash flowing pretty readily. And therefore, the stream will actually spend cash and bring in the cash and redeploy and should work well on some.

Okay. Understood. And then maybe just zeroing in on the second quarter gross margin outlook, which is up about 70 basis points sequentially at the midpoint. Can you just walk us through some of the moving pieces there? Net price cost inflation, incremental cost inflation things of that nature.

Yes. John, I think that we can walk through it more in detail, but I think that if you look at the second quarter of last year, it’s very comparable. So you can see the leverage pickup, particularly in field expenses. Just in order of magnitude, you kind of get a lot of pickup just from that perspective. So that’s certainly helpful. And I don’t know if there’s anything more to say on that. I think we’ve talked about controlling incentives showing the right homes, but part of the credibility should be just the operating leverage that we’re going to get in addition to the other things that we spoke about.

Okay. Thank you.

Okay. Well, that wraps it up for this quarter. I thank everybody for joining us out of the quarter that we put forth. We look forward to reporting more progress as we go forward. Thanks for your time, and we’ll get to next quarter.

That concludes today’s conference. Thank you for participating. Have a wonderful day, and you may disconnect.