Welcome to Lennar's Third Quarter Earnings Conference Call. [Operator Instructions] 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 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; Katherine Martin is here. She's our new Chief Legal Officer. Welcome, Katherine; and Bruce Gross, CEO of Lennar Financial Services, along with a few others as well. I do want to note that Mark Sustana, our 20-year General Counsel, is not here today, and he's sorely missed. I don't believe that Mark has missed an earnings call in his 20 years with the company and his service to and with the company has been truly remarkable. While Mark recently retired, and we have Katherine here as our Chief Legal Officer, Mark will remain a strategic adviser and consultant to the company, and we're sure that Mark can't help but listen today. So Mark, you're definitely here in spirit. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction costs, cycle time, some of our land strategy and positions. As usual, Diane is going to give a detailed financial highlight along with some guidance for the fourth quarter. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask that you please limit yourself to 1 question, 1 follow-up, so that we can accommodate as many as possible. So let me begin. We are pleased to review Lennar's third quarter 2025 results against the backdrop of what might be the beginnings of an improving economic landscape for the housing market. With that said, our third quarter results reflect the continued softening of market conditions and affordability…

Good morning, everyone. As Stuart described, we remain intensely focused on executing our core strategy, maintaining consistent high-volume production by leveraging advanced technology throughout our homebuilding operations. This is all about driving efficiencies to position us as the leading technology-enabled, low-cost homebuilding manufacturer. Our ongoing strategy has resulted in greater efficiencies, evidenced by improvements in our cycle time, inventory turn and overall cost. In this update, I will discuss our third quarter performance concerning sales pace, cost reduction, cycle time improvements and the execution of our asset-light plan strategy. For the third quarter, we achieved a sales pace of 4.7 homes per community per month, which aligns with our sales plan. To reach this goal, we utilize the Lennar machine, beginning with attracting qualified leads through our digital funnel. We then focus on a rapid response with each customer along with the quality engagement. Notably, our average response time to leads improved by 53% from our second quarter, reducing it to just 46 seconds. This means that when a lead submits a request for information, they typically receive a call or text within 46 seconds. Supporting our sales process, our Internet sales consultants benefit from real-time analytics for coaching immediately after each interaction, thanks to proprietary software. This technology-driven approach results in a 8% quarter-over-quarter increase in appointments. Additionally, we utilize our dynamic pricing tool that matches home prices to real-time supply and demand inputs, helping us reach our targeted sales goals. Our pricing technology continues to evolve using the feedback and data from our results. The successful execution of the Lennar machine has enabled us to sell the right homes at current market prices, keeping our inventory well-positioned with an average of under only 2 unsold homes per community -- completed homes per community. Affordability continued to challenge customers…

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our homebuilding operations. So therefore, I'm going to provide a quick summary around financial services operations, summarize our balance sheet highlights and then provide guidance for the fourth quarter. So starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $177 million. The strong earnings were primarily driven from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins. Once again, our Financial Services team worked in partnership with our Homebuilding teams with the goal of providing a great customer experience for each homebuyer. Turning to our balance sheet. This quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.4 billion of cash and total liquidity of $5.1 billion. As Jon noted, consistent with our land-light lower-risk manufacturing model, our year's supply of owned homesites was 0.1 years and our homesites controlled percentage was 98%. We ended the quarter owning 11,000 homesites and controlling 512,000 homesites for a total of 523,000 homesites. We believe this portfolio of homesites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way. With our focus on turning inventory, our inventory turn increased to 1.9x, and our return on inventory was 24%. During the quarter, we started about 21,500 homes and ended the quarter with approximately 42,500 homes in inventory. As Stuart mentioned, we carefully manage our inventory levels, ending the quarter with fewer than 2 completed unsold homes per community, which is within our historical range. And then turning to our debt position.…

[Operator Instructions] Our first question comes from Alan Ratner from Zelman & Associates.

Stuart, obviously, I think a lot of people want to dig into the pivot here on strategy a little bit and understand whether this is a little bit more short term in nature or just a change in the way maybe you're thinking about the longer term. I guess from a incentive standpoint, I'm just curious, have you already started to dial back some of the incentives? And if so, what has the response been in terms of order pace or margin or any color you can give there?

So I wouldn't really look at it as a change in strategy. I would look at it more that we are making adjustments as we go forward. We're still very focused on volume. We're maintaining a very, very strong volume. I think we're taking the edge off as the market has continued to become a little bit more stressed. And I think that as we went through our third quarter and interest rates were trending more towards the 7% range than what ultimately took place at the end of the quarter and into the fourth. We just felt that it was an opportune time to take a step back, particularly as perhaps interest rates are starting to moderate a little bit. They're a little up and down still. We thought it was a good time to let the market catch up a little bit. In terms of have we already started, the answer is no. That is something that Jon will be directing and focusing on over the next few weeks. But we're just recalibrating to make sure that we're not pushing too hard on a market that really doesn't want to be pushed.

Got it. That's helpful color. Second question relates to the land strategy, in relation to this. This isn't my view, but it's one I hear from investors that given the spin to Millrose and given the fact that now you're 100% off balance sheet with option contracts that are tied to some certain takedown schedule. I know there's been some concern that maybe you don't have the flexibility to meaningfully change the start pace or the takedown pace. So I'm curious, I know this is a fairly modest pullback in start activity, so it probably doesn't affect things too much. But is there any adjustment that's also going on, on the land side to account for this slower start pace, meaning have you adjusted the takedown schedules or paused in any cases? Or on the flip side, would land begin to then accumulate on the balance sheet potentially if you don't reaccelerate those starts in '26?

Thanks, Alan. I've heard that question a number of times. The answer is we are not constrained in any way by our land relationships or the reconfiguration of land. To the contrary, we were very deliberate about injecting the ability to pause as market conditions change and adjust. And additionally, we have the ability, though it is expensive, to walk away from programs that we have in place. So it is not the constraint of our land relationships that define our strategy at all. To the contrary, it is much more about the recognition that we're going to have to find, frankly, as an industry, a way to build and deliver homes at a more affordable level, and that is all going to derive from cost structure, all the way from land to -- land finance costs, all the way through to vertical construction and horizontal restructuring and SG&A. It's why we are so focused on a differentiated way forward relative to modern technologies. We have to get more efficient and effective. And unfortunately, the road to get there is one of volume [Technical Difficulty] system and working with our trade partners to deal with logistics and cost structures and also building new technologies that are expensive to do. The SG&A goes up before it goes down. But to bring this back to land would be -- it would be a mistake. Because land was carefully crafted to not be a factor in strategy, but instead to be a steppingstone of the strategy for going forward.

Next, we'll go to the line of Stephen Kim from Evercore ISI.

Thanks for that commentary, Stuart. I was going to follow on Alan's question there. With respect to the duration of this pause, could you give us a sense or do you see this planned slowdown in your sales production as maybe like a 1- to 2-quarter pause, several months kind of thing ahead of what is hopefully a better spring selling season? Or do you see this as a more lasting recalibration of your Lennar machine to a lower level of volume? And I guess you could say, address that both in terms of the housing production as well as the land.

So our strategy remains very focused on volume and delivering supply to markets that need it. It is very focused on how do we -- and we're working on it every day, Steve, how do we bring our cost structure down so that we can drive margin even in a slowing market. It's not an easy thing to do. It's not a linear kind of program. This is how you get there. It's a rocky road. So the answer to your direct question is, is this a change in strategy or a slowdown that's more permanent? We don't see it that way at all. The focus of our strategy is to maintain volume, to use volume, to enable us, our trade partners, even our land partners to find ways to be more efficient and effective as we try to meet the growing need of our communities, of our population that needs more affordable housing.

Okay. But you have indicated that you are looking to slow your volume versus, let's say, maybe what you had thought or thought about 3 months ago. And I guess the nature of my question is, is this slowdown, however you characterize it or this adjustment, is it something that you see as a -- measured in a few months? And then you're -- on the other side of that, there's going to be sort of a reacceleration. Are you sort of like pushing things off? Or is this something where you are sort of just lowering your overall or recalibrating to an overall lower level of volume than what you may have thought 3 to 4 months ago, let's say?

So look, I think we're living in a fluid world right now. We're going to have to see how the market evolves. But the way that I would think about what we're doing is we're running a marathon and partway through, we're just taking a moment to take a breath, let our body catch up to where we are, and we're on a mission to move forward and to keep pursuing the strategy that we have in place.

Got you. Okay. That's helpful. And then I was wondering if you could help me with -- just -- I wanted to run some math by you a little bit on the margin. I mean, just very simplistically, if we were to say that mortgage rates stay around 40 basis points or so lower than they were earlier in this year, then I'm guessing that the cost of a rate buydown should basically go down by or add a 100 basis points or maybe even a little bit more to your gross margins, just given what I think the cost of a rate buydown is. And then on top of that, if you're slowing your volume while rates drop, I would think that, that would improve the supply and demand relationship and thus improve your pricing power. And so that would be additionally additive to your gross margin. So I'm wondering, is this a reasonable framework to think about the kind of or the magnitude of margin leverage that we might be able to see going forward? Or is there something that you would -- you think needs to be corrected in that?

I think that the pieces are correct and the timing is not going to be directly translatable. It will be somewhat of a rocky road to get there, too. But I think the pieces and the way that you're thinking about it are correct.

Next, we'll go to the line of Michael Rehaut from JPMorgan.

I don't -- certainly don't want to beat a dead horse here, but I just wanted to try and put maybe perhaps a finer point on this kind of shorter-term adjustment in approach given the challenging market. And I'm wondering, on kind of a bottom-line basis, if you guys just felt like you didn't want to go below 17.5% margin and the cost was too high to drive that volume where you hoped it was where you wanted it 3 months ago? Or is there also, in your view, sort of an elasticity of demand issue where part of the problem here is that even if you were to drop margins or raise incentives to keep that, you really wouldn't ultimately even be successful in what you needed from a volume perspective. And so with that maybe demand becoming more inelastic, just a lack of demand in the marketplace, it just didn't make sense to drop that gross margin below where you're looking in the back half of this year currently.

I'm not sure that we've gotten quite that philosophical, but I think that we are responding real time to what we see as market conditions. And we just felt, and I said it clearly, Michael, that we just felt it was a good time to take a little pressure off. We have some tremendous athletes that are working on our marketing and sales programs across the company, and they've just done terrific work to pull us through some really challenging times. We felt that this was a good moment for us to take a little pressure off of that part of our program and recalibrate as we go forward, think about what is our next step. But our base strategy remains the same. We're focused on building volume, supplying the market with an affordable, attainable product. Jon, do you want to weigh in on that?

Yes, I would agree, Stuart. And I think it's really hard to answer your question, Michael, because it's market by market and even community by community. So it is just, as Stuart said, it's taking some of that hedge off so we can better fine-tune exactly how we price in that market-by-market analysis and community-by-community analysis.

I appreciate that. And I understand it's probably a bottoms-up analysis to really fully answer that question, I suppose. But I think ultimately, though, this idea around elasticity is really important. And maybe just as a second question, follow-up question, we did see rates come down, mortgage rates that is maybe 20, 30 basis points in August and so far in September, another 20 or 30 basis points. I'm curious, amid that type of -- that's a net 50 basis points roughly, but kind of gradually seeping into the market. I'm curious if you could comment on if you did see any impact on demand trends across your markets, perhaps which ones, if that's the case? And all else equal, would this potentially reduce pressure on gross margins or incentives? Or are you just at a point right now where, given what you've done during the quarter, you expect the incentives that you've laid out to effectively remain in place throughout the fourth quarter?

I think, Michael, as Steve laid out, it does help reduce the cost of those mortgage rate buydowns. But as Stuart responded, it's not exactly linear. It's each market, it's each community, how they're used and what the buyer demand is and the affordability stressors that exist.

I think the way that I would think about it, Michael, is when we think about elasticity, I think that's more of a news report looking backwards. And when we think about what we're doing, it is, as you described, a bottoms-up approach. I think Jon has said, it is community by community, and we're responding and pulling the levers as a company to be reflective of what we see our best and brightest doing in each market across the country. And I think that in terms of 30 basis points in August, 20 to 30 in September, there are fluctuations in the 10-year right now, maybe it's migrating up a little bit. We'll have to see. I think the volatility in it impacts consumer confidence. So we're going to have to see how it plays out. At the end of the day, when we look back at our third quarter, and as I noted in my remarks, we did not yet see sales impact, but we did see some -- a little bit of pick in the consumers' engagement. And as we've gone into the fourth quarter, we generally don't comment on what we're seeing so far in this quarter, but I will and say that as we've come into the fourth quarter, we've seen a little bit more interest, but we're pretty confident that if interest rates really do go down and stay down as you get to 6%, closer to 6%, as you go below 6%, we think you're going to see some real optimism in the marketplace and people who have need really activating because they can afford to.

Next, we'll go to the line of Susan Maklari from Goldman Sachs.

My first question is on the inventory turns. Can you talk through how some of these company-specific efforts are continuing to come through even as you moderate or adjust the strategy? And how we should think about the upside to those inventory turns in this kind of an environment and long term, the ability to get to 3x as you do think about the setup on the ground?

So I will tell you that I -- so Jon and I, at the end of each quarter, we go out and we do what we call operations reviews, and we sit with our division management teams and really go through their operations and strategies. And what has been fascinating to me is to sit and watch our divisions focus on their inventory turn, which to me, and I think -- and to Jon as well, is really an indication of are we're focusing on effectiveness and efficiencies and really working on using the things that we're doing to become more efficient and drive costs down to build affordability. The answer to your question is, I was sitting in one of those ops reviews this week with a team that is actually getting closer to exactly that 3x inventory turn. As a company, it will be -- we'll be adding together all the divisions, and you'll see averages. But at the local level, that kind of North Star is very much a part of the discussion as we get cycle times down. Jon talked about the fact that these are the lowest cycle times as an average that we've seen as a company. That is directionally where we're headed. But don't measure us against 3x because that's a pretty hard hurdle to get to. Go ahead, Jon.

I would just add, Stuart, is as we've discussed and discussed in prior quarters as well, this ongoing focus on efficiency. So just-in-time into our land banks, just-in-time out of our land banks where we're ready to start production, all of this is a constant tweaking and refinement of processes to do just that is continuing to drive that metric, which, as you've seen, is that we're making good progress on.

And every one of these programs, thinking processes, now Jon talked about land, into the land bank land, out of the land bank and those efficiencies, all of these tied to modern technologies that are partners of what we're trying to do. And as we get those technologies working, those efficiencies are going to amp up.

Yes. Okay. That's very helpful color. And then maybe taking that one step further, as we do think about the inventory turns and these efforts coming through, can you talk about the cash generation of the business? And how you're thinking about the uses of that cash, especially in this sort of an environment that we're in? And any updates on the M&A environment, those kinds of strategic efforts?

Well, as far as we're concerned, everything is on the table. We are certainly focused on total shareholder return. That is sometimes defined by how we grow and what kind of M&A strategy we might inject into our business as we go forward. We are looking at everything. And as I've said, the use of our land banking program is something that enables more of that focus. At the same time, we're focused on returning capital to shareholders. You've seen that we've had a pretty steady program of doing exactly that. And we are very, very focused on driving cash flow. Now there's been an adjustment period in the wake of Millrose and getting the pieces working exactly together takes a little bit of time, but our program is laser-focused on how do we get to that total shareholder return, how do we use cash effectively? How do we drive growth effectively? And look, at the end of the day, the focus of this company is how do we become something different in the future from what we've been in the past and a big [Audio Gap] capital allocation. Diane, do you want to say anything on that? No?

No, I was going to just -- really, I agree with Stuart. I think that there's no change in our strategy from quarter-to-quarter, given the incentive because of our push on volume, cash flow was down a little bit, and this was an unusual year with Millrose. But the trajectory is to really keep the focus on cash generation, which is definitely benefited by the efficiencies that we're focused on.

Next, we'll go to the line of John Lovallo from UBS.

The first question is orders were obviously very solid and a little bit ahead of expectations. You guys are working at the lowest cycle times in a very long time, if not in history. What caused sort of the slight miss in the third quarter deliveries given those factors?

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

Okay. Understood. And I guess we've heard from several of your peers and from some other companies through the value chain that Florida inventory levels are beginning to stabilize, maybe even improve a bit. Obviously, there's a lot of markets in Florida. But in some of the key markets, maybe the I-4 corridor, if you could talk about, I mean, is this consistent with what you're seeing on the ground?

Yes. On that Tampa, Orlando markets along I-4, as I commented, we have always remained very laser-focused on inventory levels. It's part of our strategy, even flow production, sales pace. With respect to other builders, we did see some buildup, but I would agree with that in general, starting to see some stabilization.

Yes. And remember that the size of inventories across the competitive landscape, meaning existing homes and new homes is big part of what defines the stress on the sales process. And in Florida, that has been a factor. Inventories have been high, both across existing and the new home market. They have been moderating, and that has started to build a more stable environment, which we sell.

Next, we'll go to the line of Matthew Bouley from Barclays.

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

So interesting question. A number of people have asked why are you focused on interest rates coming down, you're buying them down anyway. And so the market has access to the lower interest rate. The reality is, it is the stall that's embedded in the existing home market that is relevant because as the existing home market starts to unlock a little bit, it enables people to activate the process of going from a first-time home to a move-up home and a move-up home to a second move-up home, it just unlocks an awful lot in and around the ability of people to engage in the housing market. So that -- yes, the homebuilders are generally providing that lower interest rate by buying down, and it is impactful to margin. But unlocking the rest of the housing market as a flywheel kind of approach or effect -- and that effect unlocks a lot of activity for the entirety of the ecosystem.

Okay. Fair enough. Yes. Secondly, the -- I guess sort of following on John's question, I think what he was alluding to around orders and deliveries into the next quarter. I'm just curious if you can update us on the cancellations environment a little bit. And I guess, whatever the trend was, kind of what you're reading into what you're seeing in cancellations today?

I'd say it's really remained pretty consistent from second quarter through third quarter in terms of order pace, cancellation pace. As we said, we really didn't see any effect in the third quarter relative to interest rates coming down at the end of the quarter. And it directly ties in on a community-by-community basis of what do we need to do to support our customers as they're challenged by affordability. So bottom line is, it's remaining pretty consistent.

Okay. Why don't we take one more?

Perfect. Our final question comes from Jade Rahmani from KBW.

Can you say what quantity or percentage of year-to-date deliveries have come from Millrose?

Diane?

Yes, I want to say it's been about -- Dave, correct me if I'm wrong, about 25%-ish, in that zone.

And so in terms of the gross margin outlook, looking beyond the fourth quarter, should we still expect the remaining 75% once you're at a steady cadence with Millrose to come through that interest cost on gross margins?

Yes, stating the obvious with the low cost that Millrose offers us, the more that we have deliveries from that vehicle, it's benefiting our margins.

But realistically, across our land banking environment, we're focused on managing the option costs of those communities. And one of the things that benefits -- and this is an interesting flywheel within the land banking world, is our ability to build certainty within the land banking structures, and that is certainty of close, certainty of execution, enables us to maintain a more moderated cost structure within those systems and to actually bring down costs. And therefore, when we talk about does land banking drive our business? In one sense, we have the ability to walk away from deals if we need to. But the reality is, we are highly, highly incentivized to keep each of our structures, whether it's vertical construction, horizontal construction or whether it's land banking, operating in a smooth, effective way because that's how we get to the best cost structure and therefore, produce affordability. And all of this kind of ties together as to why our strategy relative to volume.

I think that's well said, Stuart. For us, it's a manufacturing approach, meaning even flow from beginning to end. So it starts with land into our land banks, as I said, just-in-time coming out predictably just-in-time from the land banks to a production team that's focused on bringing cycle time and cost down. And it's an ecosystem that's all the way through. So the more effective we are in doing that, as we've noted, we bring down our construction costs. But as Stuart is highlighting now, the more effective we are creating stability and reliability in the land bank world, the more that, that capital costs come down. So they all have our laser focus on how do we become more efficient, more durable and bring value to our partners.

So even while we might have the ability to -- as a risk mitigator to walk away or to do something else, our whole strategy is focused on building certainty and across our land banking system, bring down cost and option costs in each of our land banks to help with the affordability factor. I'm not sure if that's answered your question, but I think that's what you're getting at is when you talk about 25% for Millrose and advantage cost, the question is, can we get more advantage costs across the whole spectrum?

Okay. I was trying to understand, as the 25% grows toward 100%, shouldn't that -- I think the market is assuming that would be a negative, an incremental headwind because that $560 million of annual interest cost is not yet fully reflected in gross margin.

While I have tremendous affection for Millrose and Darren and the group there, and we want to do a lot of business with them, we think that our business is best configured with a range of participants that are providing low-cost capital to enable us to be the best version of ourselves. With that diversity of engagement, I think we get the best out of everybody, and we really have been migrating towards building, enabling, participating in an industry solution, not just a myopic one for Lennar. All right. With that said, I want to thank everybody for joining us, and we look forward to reporting back on consistent and focused progress as we go forward. Thanks, everybody.

That concludes Lennar's third quarter earnings conference call. Thank you all for participating. You may disconnect your line, and please enjoy the rest of your day.