Thank you for standing by, and 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.

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

Very good, and good morning, everybody, and thank you for joining 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 -- and Bruce Gross, our CEO of Lennar Financial Services, and a few others are here as well. 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, update in construction costs, 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 our fourth quarter and full year year-end 2024. And then, of course, we'll have question and answer. 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 go ahead and begin. Overall, the economic environment remains very constructive for homebuilders. Demand remains very strong and the migration to lower interest rates will further activate that demand. Lower interest rates will enhance affordability, which will enable many more families to access and attain homeownership at the entry level, while growing families will be able to unlock value from existing homes, enabling them to move up to more bedrooms and more living space. More listings for existing homes will provide supply of entry-level homes, while driving more demand for move-up product. The dynamic of lower interest rates is likely to accelerate demand for both new and existing homes, while expanding access to homeownership. Of course, affordability has been a limiting factor for demand and access to homeownership to-date. Inflation and interest rates have hindered…

Good morning. As you heard from Stuart, our operational teams at Lennar continue to focus on executing our operating strategies, while responding in real time to market fluctuations throughout the quarter. This intense focus creates a continuous learning and refinement loop, which in turn continuously improves the execution of these strategies. I will discuss our third quarter performance and cost reduction, cycle time reduction and improved asset-light land position. Our focus on improvement in these areas begins with sales pace. Knowing we can produce a rate of sales by design creates a confidence for the production side of the business. We work on improving the Lennar Machine to produce the needed volume of high-quality leads. This starts at the top of the funnel with testing the effectiveness of targeting through various sources such as SEM or social media and messaging such as rate and payment or lifestyle, all the way through to the ultimate result of a purchase and sale agreement. Every day our divisions learn from their engagement with Lennar Machine constantly adjusting and testing new tactics. This by-design approach drives efficiency and customer acquisition costs, while also improving the customer experience. We utilize incentives and interest rate buydowns as needed to enable us to address affordability and consumer confidence challenges in order to achieve the desired sales pace. This process, against the backdrop of higher interest rates and the impact on consumer from inflation, informed us as to where we needed the buydown of interest rates and/or other incentives to achieve the desired pace. As noted, our third quarter sales pace of 5.5 homes per community per month matched our start pace of 5.4. Achieving the sales pace also resulted in ending the quarter with an average of just more than 1 unsold completed home per community. The…

Thank you, Jon, and good morning, everyone. So, Stuart and Jon have provided a great deal of color regarding our homebuilding performance. So, therefore, I'm going to spend a few minutes on the results of our other business segments, pull together again our balance sheet highlights and then provide guidance for Q4. So, starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $144 million. These earnings were fairly consistent with the prior year. While we had lower lock volume and net secondary margins in our mortgage business, this was partially offset by higher delivery volume and lower cost in our title business. Our Financial Services team is intensely dedicated to providing a great customer experience for each homebuyer and has created true partnerships with our homebuilding teams to accomplish that goal. That partnership is reflected in their solid results. Moving into Multifamily, for the quarter, our Multifamily segment had operating earnings of $79 million. The primary driver of earnings was the gain on sale of assets in our LMV Fund I. As we noted last quarter, we are under contract to sell the assets to multiple buyers. In the third quarter, we closed about 70% of the anticipated sales. We recorded a net gain of $179 million and received about $140 million of cash. We expect most of the remaining assets to be sold in the fourth quarter. A second component for the quarter was a $90 million write-down of non-core assets that are held on book as we focus on immediately monetizing these assets. This is consistent with our pure-play asset-light strategy and with the ultimate goal of increasing returns. So, turning to the balance sheet, this quarter, once again, we adhered to our strategy of maximizing return on inventory by turning…

Thank you. At this time, we will begin our question-and-answer session. [Operator Instructions] Our first question comes from Alan Ratner with Zelman & Associates. Your line is open.

Hey, guys. Good morning. Wow, thank you for all of that detail. Still digesting everything, Stuart, but sounds like you guys have definitely been busy and...

It's a lot to take in, no questions.

Yeah. So, I guess, recognizing you might be limited on what you could say on Millrose, just because you gave some color there, I'll start on that front. I'm curious as you kind of went through this process or are going through the process and maybe comparing and contrasting the various structures you've had over the years on the land side and kind of come up with how you envision Millrose is going forward, I think one of the things you mentioned that sounds a little bit different is just kind of like the fees that the business or the company will earn on these option deals. And I'm curious from your perspective as the manufacturer and as the builder, what margin impact would you expect that to have relative to the current land banking structures you currently have? Is it going to be materially different? It sounds like it might be more beneficial to Millrose or at least more predictable to them, if you will, but I might be misinterpreting that.

So, within the boundaries of what I can and can't say, let me say it this way, Alan. It's a good question. So, what I tried to detail in my comments is that think about Millrose as being a mirror image of our other structures. The single biggest differential is the capital component, which is a permanent capital structure versus one where the capital has to be raised repeatedly. So, we structured this as a REIT, as I said, and it's structured through it being a public company as permanent capital that does where the capital itself does not get returned. But aside from that, as we look at what we have done with our -- with the first half, let's say, it's more or less half, of our developed homesites that have been used in production as we've migrated over the past years, we expect that the impact will be basically similar. And it's been a relatively small impact on our margin as we have absorbed option costs, which exist in all of those relationships. And we have included or benefited from efficiencies that have come from the way that we've managed land and the way that we're managing our overall business. Now, can I point to specifics as how the offsets actually happen? It's not quite that linear, but we think that the impact is going to be relatively small.

Got it. I appreciate that, and that's helpful. So, looking forward to seeing it all unfold. Second, just on the gross margin, I'm sure you're expecting lots of questions on this, but relative to where you were three months ago, six months ago, kind of expecting more of a ramp this year as opposed to now more of kind of flattish through the year on gross margin, just curious what, I guess, surprised you relative to what you would have expected three months ago. Because it doesn't seem -- if anything, rates have come down about 100 basis points since June. It seems like August was a pretty decent month based on some of the macro data and commentary from other builders. Yet, you are expecting a lower margin in Q4 than you maybe articulated three months ago. So, what was the main driver for that revised outlook?

Well, first of all, let's say, let's start by recognizing that really rates did not start coming down until later into our quarter. For the first half or more of the quarter, rates were kind of sticky up at a 7% kind of range. And that cast a pretty tough affordability cloud on what was happening in the market. And consumer confidence has been slow to kind of kick in as rates have kind of fallen over the second part of the quarter. So, I think that stickiness has kind of been a differentiating factor and that's market driven. I think that there is the confluence within our environment of managing the relationship between our reduced cycle times and the fall off of community and community count and some communities not coming on as quickly as we had hoped. And that driving, in our world, a need -- given our drive to volume and growth, our need and desire to keep the volume up at a time when interest rates are high, consumer confidence hasn't really kicked in and our community count kind of falls, increasing our absorption rates. So, that's what's kind of come as a differentiating fact as we have continued to migrate towards our restructuring. And maybe that's what's different between us and others is that we're focused on keeping that volume up, so that we can facilitate where we're headed and to a program that we think is going to put us in much better stead for the future and that's driven us forward to drive volume at a time when interest rates are high, consumer confidence has been waning a little bit and our community count dropped a little bit. We think that's self-correcting over the next quarters, and we think it's solving to a greater good.

Appreciate it. Thanks for all the info.

Thank you. Our next question comes from Stephen Kim with Evercore ISI. Your line is open.

Yeah, thanks a lot guys. It's obvious you've been busy this summer. So, I appreciate all the information you've given so far. I wanted to piggyback a little bit on your most recent answer to Alan. With respect to volume growth, I know you're guiding to 10% volume growth next year, but I think you just sort of indicated that some of this is in an effort to make sure that you progress towards your restructuring in as helpful a manner or in a smooth a manner as you can. So, maintaining volume maybe when others tweak to down their volume can be explained in a way near term and in this past quarter by the fact that you're progressing towards this Millrose REIT, the launching of that REIT. So, my question relates to the longer term. If we move beyond, when you've -- let's say, you've accomplished your goals with Millrose, longer-term, others in the industry have seemingly been moderating their long-term targets to more of a 5% to 10% volume range. And I'm curious, can you talk about what you think is the proper long-term rate of growth for Lennar, longer term that is. And is that dependent upon a certain rate of national housing starts growth or mortgage rates staying below a certain level or something like that? Just kind of give us a sense for long term where you think volume growth should be.

So, right now, we're kind of solving to a 10% steady state growth rate. And part of that, Steve, relates to our view of what our land strategy has become. The more we are focused on our asset-light model, the more we are seeing that we can dovetail a combination of organic growth and strategic new market growth that is facilitated by the structure of the way that our operations will be configured as we go forward. So, we're kind of looking at more of a steady state 10%. Now, this kind of dovetails with what we think has to happen in terms of building a healthier housing market. Remember that, nationally, we're supply constrained. At local markets, there's supply constrained. And the market is going to need additional supply of homes, particularly as interest rates drift down, particularly as at the local and at the national level, the world focuses on greater volume and greater supply to accommodate the population as it sits right now. Now, we're seeing and hearing that narrative come across pretty loudly even at the national level. And we think that we're positioned to dovetail with what has to be a growth in production levels. And I don't know what new normal is. The print more recently was 1.36 million. That seems light, and it doesn't seem like we're catching up on the supply side. So, we're building a model that we think facilitates our ability to participate in growing a healthier housing market, which means greater supply, accommodating the demand that is pent-up and limited by affordability.

Okay. Yeah, that's fair enough. Appreciate that. The second half of my question relates to operating margins. I think that maybe the story for some investors this quarter was that you made a -- you brought the trade-off between volume and margin a little bit more into sharper relief. And so, with respect to the operating margin, and I'm talking about your operating margin after corporate expense, it seems based on your guidance that you're going to be coming in somewhere a little north of 13% this year, which is quite a bit below some of your bigger cap peers. And I'm curious if you could share why you think this is the case and whether this level is in-line with where you think your operating profitability is going to be over the long term. Yeah, I guess, we'll stop there.

So, I think you started by saying it sounds like we had a busy summer. In actual fact, the biggest part of the busy summer has been focused on the operations and efficiencies that we inject as we migrate our business to asset-light, but more importantly, as we grow volume using that volume to build efficiencies in the way that we execute and drive a net margin, an operating margin that can -- that starts to grow into where we're headed as an operating model. So, I can't lay out the pathway to where we're going in specificity, but I think that we believe, I know that we believe that our operating margins are going to grow as we go forward. And as we settle into what becomes a normalized full-bodied asset-light approach rather than the building of the approach actually executing it will enable us to get more and more efficient.

Okay. Well, great. We'll be waiting for that, but appreciate all the color in the meantime. Thanks, guys.

Very good. Thanks.

Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Your line is open.

Yes. Thank you, everyone. Thanks for taking the questions. My first question is, Stuart, given the commentary that you gave around the strategic shift that's coming through as well as Jon's comments on the operational improvements that you're focused on, can you talk a bit about the upside to those inventory turns, which obviously moved really nicely this quarter already, and what that means for the cash generation of the business as we think about the next year?

Well, we've seen this kick in over these past few years. And that is as we improve our inventory turn, it just accelerates our cash flow and enables us to be far more efficient in the way that we run our business. Now, creating these efficiencies and embedding them in 40 divisions across the country right now, it takes a little bit of time to get all of these things operating in a consistent flow through all the divisions, but division by division, that's exactly what we're doing, focusing on that inventory turn. And we think, over time, it will trend significantly higher than it is right now. Part of the time that it takes to get there is that we've only affected about half of our delivery system at this point. And as we get more proficient with a full-bodied approach to an asset-light approach, we think that that inventory turn is going to continue to climb.

And, Susan, I would just add just to think about it simplistically, as we've said, the goal really is to have our cash flow generation equal our net earnings. And as you think about the usage of that cash, our debt maturity ladder, that definitely been reducing with our paydowns and not refinancing, so that leaves a fair amount of cash to be deployed back into shareholders.

Yes. Okay. And building on that, perhaps, you did end the quarter, you had $4 billion of cash on the balance sheet, how are you thinking about the amount of cash that you need to hold going forward given the strategy that you'll be operating under and the uses of that extra cash?

So, as I've said in past calls, one of the big questions from many of our investors and analysts has been, aren't you carrying a little bit more cash or maybe even materially more cash than you need? And we've said that we are carrying that as we evolve our business program and think about exactly what the configuration of Millrose is going to look like. I know it seems like we've been taking a lot of time on this. This is hard work and harder than some might think getting this configuration right actually is. So, the cash that we're holding is what I would call safety stock relative to cash in terms of defining exactly what we're spinning off, because it is a moving target, exactly what we're spinning off and what component of cash actually goes into Millrose as well. And that is a matter of strategy that we'll discuss further as we file our S-11 in a public format in the near future and as we have further conversations. So, I just have to say, it's kind of trust me right now. We're holding the cash right now as safety stock. It's not needed for the operations of the business, but it is needed for consideration as to how we move forward.

Yeah. Okay. I appreciate that color. Thank you, and good luck with everything.

Okay. Thank you.

Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.

Good morning, Mike.

Good afternoon, Stuart.

Right. Did it switch over? Yeah.

So, wanted to delve in a little bit more on the land spin. I know, obviously, you remain a little limited on fully what you can say, but I think there's a lot of devil in the details here that we will be interested in trying to gauge. You talked about, I think, last quarter $6 billion to $8 billion of land. I think the language this quarter was $6 billion to $8 billion of land and cash. Was hoping to get any kind of rough sense of how much of the cash portion of that would -- the cash portion would represent. Also roughly the stock received in exchange, if there's any kind of, again, range or degree of magnitude that we should think about? And lastly, if it would affect your cost structure at all by spinning off all of these assets, I don't know, if there's also any associated personnel that might result in a reduction of corporate G&A or your SG&A?

Okay. So, let me start by saying that the words that we would spend $6 billion to $8 billion of land versus $6 billion to $8 billion of land and cash might have been a foot fault on my part. It really hasn't changed. The notion has not changed from quarter-to-quarter. It was always that there would be a cash component, and exactly what that is -- as I said, it's moving around. Remember that we're contributing to Millrose, a moving set of assets that are constantly some coming in, some going out on a rotating basis. And that's where -- until we kind of get to the end, we won't know exactly what the numbers are. There's also a strategic component of how we're configuring Millrose, but again, that falls into the category of what I can't talk about. You might have noticed that our discussion has been almost exclusively on impacts to Lennar rather than too much information on the configuration of Millrose. So, I can't quite go there yet, but this is going to come to market pretty soon. So, I just would say be patient on that. And I think that a lot of the rest of your question falls into that category as well. There will be very limited personnel movement relative to Millrose. So, the impact to Lennar on SG&A will only be in the context of efficiencies in how we run our business, not in terms of personnel migrating outside of the Lennar environment.

And, Mike, just one clarification, it sounded like there might be a little confusion. As we contribute our assets to Millrose, that will be in exchange for Millrose stock, but Lennar will not be holding that Millrose stock, that will be stock dividend that is distributed to our shareholders. So, it sounds like there might be a little confusion on that, just wanted to clarify.

Okay. No, that's very helpful. I appreciate that. Secondly, again, I just wasn't fully, I guess, kind of appreciate maybe the answer earlier on the gross margin question around -- last quarter, kind of the arrows were pointing closer to 25% or so. Now, you're looking at closer to 22.5%. And just wanted to better appreciate, again, kind of what's changed in the last 90 days. And you kind of alluded to a couple of different factors. I don't want to put words in your mouth, but seemingly a pretty different degree of magnitude shift here. And if this is also something that is more temporary given some of the factors perhaps around Millrose relative to kind of initially at least how we should think about fiscal '25 on the ongoing business?

Yeah. I think as I've said, all of this kind of melts into one kind of articulation, and that is our margin story derives from, number one, interest rates staying higher for a little bit longer through this quarter. Consumer confidence kind of waning. We've heard this in a lot of conference calls. Even as interest rates have come down, the consumer has been a little sticky in terms of -- they're jumping back into the housing market. And the changes in community count driving at a time when demand has been limited by affordability. And then, pushing volume by increasing absorption rates within communities has kind of pushed our margin. And we said clearly in our last earnings call that, look, we're going to focus on volume, generating a consistent volume and growth trajectory. And we are going to use our margin as that shock absorber. And the confluence of these pieces together with the spin-off and the asset-light approach that we've taken has reflected exactly that way. And we've been irreverent about using our margin to make sure that we're maintaining the volume and projecting to where we think the long-term benefit is for the company.

Okay. Appreciate it. Thank you.

Okay. You bet.

Thank you. Our next question comes from Trevor Allinson with Wolfe Research. Your line is open.

Good morning.

Hey, good afternoon. Thank you for taking my questions. I want to follow up on SG&A. You had really good SG&A control in the quarter. It sounds like some of your internal efficiencies are driving tangible results. You called out the technology benefits. You also mentioned in your press release lower broker costs driving the SG&A. The NAR settlement just went into effect not long ago. So, I was hoping you could talk about maybe some of the changes you're making with brokers, if any, whether that's moving more to a flat fee, adjusting the rate you're paying, any net impact from those, and then perhaps maybe your views more generally on broker usage.

Yeah. A number of people have asked us about our strategy relative to realtors. I put this under the heading of building a healthier housing market. Our focus has been on trying to take out as many unnecessary costs from the housing transaction in order to build affordability for our customers. Realtors, we have a great respect for the realtors. They bring us business. And we cooperate and work with realtors, but at the same time, we've been focused on bringing down that realtor cost where it is not necessary because, conceptually, it just adds to the cost of the home. And to the extent that we can repurpose that where a realtor really isn't involved, to bring down the cost of the home for customers, we think we're building a better housing market. If you look at our production, our volume, we are able -- with a more robust marketing program -- digital marketing program, we are able to maintain our volumes and accommodate a lower-priced home for our customer. So, we've been working with realtors to come up with plans that actually worked for their clients, where they are engaged, and at the same time, trying to maintain and bring down the cost of the home for the customer.

Okay. Makes a lot of sense. And then, just given where we are in the election cycle, housing has clearly gotten a lot of attention politically recently. Stuart, I think you alluded to some of the proposals on the supply side, but there's also a proposal for buyers in terms of downpayment assistance. I was hoping just to get your thoughts on the down assistance proposal. Are you still seeing down payments as a key headwind to homeownership or is it primarily DTIs? And then, what are your views on potential demand impact if that were to eventually go into place? Thanks.

Great question. Inflation has been a difficult component in enabling our customer base to accumulate a downpayment. And there's no question that the downpayment is a hurdle and has been and continues to be a hurdle for customers looking to acquire specifically a first home. Whether it's attainable housing or affordable housing, the downpayment is definitely a hurdle. I think that the -- there are a lot of thoughts and programs out there. We'll see where they shake out. I think there's a tightrope that has to be walked. Number one, we've got to remember back to the Great Recession, we certainly don't want to get to that "no downpayment" kind of programming. It might feel good for a short period of time, but we want a durable housing market. I think we also have to think about inflationary pressures, to the balance between additional supply and additional demand is something that's going to have to be walked through. What has me most invigorated is the fact that what we've been hearing from mayors and governors, and talking to mayors and governors for a very long time, is now starting to reflect in the national narrative. And the fact that the nuanced programs are not perfected yet, but the discussion is starting to activate thinking as to how do we get better and build a healthier housing market is going to inure to the benefit of our housing business.

All right. Thank you. I appreciate your views. Good luck moving forward.

Okay. And why don't we take one more question?

Okay. And our last question comes from John Lovallo with UBS. Your line is open.

Hey, guys. Thanks for fitting me in here. I wanted to actually dovetail off of Trevor's question to start. SG&A as a percentage of sales was 70 basis points below the midpoint of your outlook, on a slight revenue beat versus your expectations. You talked about pulling back on brokers, but was that pullback on brokers incremental? Is that what the driver was? And the lack of broker use for -- I guess, one way to say it is, the lack of broker use relative to some of your competitors, does that mean that fewer folks are coming through your communities, and because of that, you need more incentives to drive that volume that you're looking to keep? I mean, are you taking costs out of one bucket and put it into another, is the simple way of putting it.

So, good question, and one that we think about a lot. It is counterintuitive to us that -- first of all, we have not seen a reduction in our traffic. And what we're doing is not something that's new. This is basically a program that we've had in place for a very long time relative to what we call the Machine, the digital marketing programming, and the way that we're executing our marketing and sales program. So, our realtor costs have been migrating downward. It has not been a reduction in traffic or people coming through our offices. It's counterintuitive to us that, by adding a cost, we would also be adding a pricing power. And it's probably just not the way that we think about building a healthier housing market. To the extent that a realtor is actively involved in becoming a procuring cause and finding a customer and bringing them to us, we want to pay appropriately and participate with the realtor community. On the other hand, there's an awful lot of realtor engagement that is kind of ancillary to the active engagement. We try to bleed that out of the system because we are trying to reduce cost. Are we taking it from a more active realtor engagement and putting it into incentives? I guess, I'd like to say that I think -- I hope the answer is kind of yes, but I don't think it's greater incentives outsized relative to the realtor costs that we're saving. And I'd like to think that if we're taking cost out, we're actually able to sell at a lower price and still produce a better margin. So, we're still working with that. It's a tough balance, it's a complicated balance, and it's something that we focus on, frankly, every day. And most definitely, as Jon and I go out to our operations reviews, it's something that we're very close to and watch regularly.

Okay. That's helpful color. And then, the last one is, as you mentioned, REITs have to distribute the vast majority of their income to shareholders. So, I'm curious sort of what the pros and cons of a REIT structure for the spin would be. And the reason I ask is, why don't private landbank structure themselves like REITs? I mean, is this going to limit the ability to grow with Lennar if it has to distribute the earnings?

Well, as I noted, we've had to focus our discussion on -- around Millrose as it relates to the impacts on Lennar rather than the explicit discussion of how the Millrose structure will actually work. We're going to have to wait on that one, for the filing of the S-11. I think it is a unique structure. And every good book is worth waiting until the next chapter, so you're just going to have to wait for the next chapter. And I appreciate the question.

All right. Thank you, guys. Good luck.

Okay. Thanks very much. And as always, we appreciate everyone's attention. Thanks for joining our earnings call, and we look forward to continuing to describe, detail our progress as we move forward. We'll see you at the end of the year.

Thank you. And that concludes today's conference. You may all disconnect at this time.