David Collins:

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.

Stuart Miller:

Thank you, 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 is here, our CEO of Lennar Financial Services; and we have a few others as well. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon's going to give an operational overview updating construction costs, cycle time, and some other operating overview. As usual, Diane is going to give a detailed financial highlight along with some limited guidance for our third quarter and full-year 2024. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask that you please limit yourself to one question and one follow-up so that we can accommodate as many as possible. But before I begin, however, I would like to express on behalf of all of the associates of Lennar the sadness we all feel for the recent loss of another pioneer of our industry, Don Horton. While we homebuilders compete, sometimes aggressively, in the field and across geographies, it is always with humble admiration and respect for our competitors. We learn from each other. We have reverence for all of their accomplishments. We learn from their successes and sometimes their failures and we are pushed to be our very best by their comparative accomplishments. This business is not easy. And those who succeed over years are to be admired. Don was a tremendous success among homebuilders. And his success spanned decades. He climbed from humble beginnings to the greatest heights within our industry. To the associates of D.R. Horton, as well as to Don Horton's family, we express our most sincere condolences. And we look forward to continuing to live, to learn, to admire, and, yes, to compete with the D.R. Horton name as you carry on Don's tremendous legacy. With that said, let me begin my remarks today. We're very pleased to report another consistent and solid quarter of operating results for Lennar. We have continued to execute our operating plan effectively throughout the first-half of 2024 as we have driven production pace and sales pace in sync, while we have used our margin as a point of adjustment to enable consistent production even as market conditions have changed. This program has driven excellent operating results to date, and we have simply never been better positioned as a company, from balance sheet to operating strategy, to execution, to be able to adjust to a changing market as it unfolds for the remainder of 2024, and beyond. In the second quarter, we started approximately 21,400 homes, we sold approximately 21,300 homes, and we delivered approximately 19,700 homes, keeping us on target to deliver approximately 80,000 homes for the year. Next quarter, we expect to start, sell, and deliver similar consistency as we continue to drive a continuously improving even-flow manufacturing model that we believe will continue to enhance our cash flow, our bottom line, as well as our predictability. We've continued to target a consistent production and growth rate in order to maintain volume, minimize production costs, maintain even-flow production and sales, all in order to drive cash flow, effective capital allocation, and higher returns. Our primary goal is to migrate to a pure play asset-light manufacturing model that will be supported by a durable, just-in-time homesite delivery program that will enable simultaneous growth and cash flow. We believe that a cash flow-enabled capital allocation strategy will drive higher shareholder returns, higher returns on assets, and ultimately higher returns on equity. As we migrate to our desired end state, margin is the springing mechanism that enables this all to happen. This quarter, our margin was somewhat higher than expected at 22.6%, up from 21.8% last quarter. Next quarter, we expect our margin to be approximately 23% depending on market conditions. And for the full-year, we remain focused on driving margins to be approximately the same as last year's full-year margin of 23.3%. While we understand that that will require a substantially higher fourth quarter margin, that accomplishment is partially embedded in our backlog, while, as I have said before, the result of that story will depend on market conditions, interest rates, and consumer confidence as we go through the remainder of the year; we will see. While we have been refining our operating platform, we've continued to drive strong cash flow, and have allocated over $600 million to repurchase approximately 3.8 million shares of stock, and additionally to repay over $550 million of senior debt as we continue to improve our balance sheet with a homebuilding debt to total capital ratio of just 7.7%. While we continue to hold a sizable $3.6 billion of cash on our book, we are crafting our strategy for strategic capital allocation in pursuit of our structural objectives which I will discuss further in just a few minutes. But let me briefly address the economic environment. Overall, the macroeconomic environment remains relatively constructive for homebuilders. There are challenges, and there are opportunities. The demand for housing remains strong and limited by affordability, interest rates, and sometimes labor and consumer confidence. Additionally, the chronic housing shortage driven by over a decade of underproduction of housing stock is additionally problematic for families seeking affordable or attainable supply. Demand remains robust if it can be supplied at an attainable price point with interest rate support that enables the consumer to transact. Through our second quarter, interest rate started lower and fell constructive at approximately 6.75% as the market was adjusting to a new normal. Then, through the quarter, rates began a gradual climb to 7.3% before dropping again as the quarter ended. Concurrently, consumers remained employed. They are confident that they will remain employed and they believe that their compensation will rise as well. This is most often the foundation of a very strong housing market. But the chronic supply shortage, the impact of interest rates on affordability as well as persistent and stubborn inflation has moderated housing market strength. In response, new homebuilders have worked out incentive structures that range from interest rate buy-downs, to closing cost pick-ups, to price reduction designed to meet the purchaser at their intersection of need and affordability. Those incentives have increased and decreased as interest rates have moved up and down. Home builders particularly those with strong balance sheets and ready access to capital have been able to adjust, capture demand, and drive efficiencies by using incentives to reduce the affordability constraint and enable purchasers to transact. Against this backdrop, in our second quarter we have continued to execute our core operating strategy. That strategy has been to refine a manufacturing production model that is pure-play home building and land light, asset light. And simply put, that is what we are refining. As I noted last quarter, we have been refining our manufacturing model. We have also been actively migrating to a pure-play and land light operating structure across our home building platform in each of our 40 homebuilding divisions. I will start with manufacturing. We continue to refine on manufacturing platform that has maintained production and sales base while we continue engineer our homes for efficiency and volume. Driving volume enables us to offer more attainable product. The as-needed supply to the market, we meet the needs of the consumer and we contribute to building a balance and therefore healthier housing market. In doing so, we have enhanced our inventory turn, and grown volume as we generate substantial cash flow. The consistency of our production and sales program across our platform together with constructive capital allocation enable us to simultaneously enhance shareholder returns, returns on inventory, and ultimately return on equity. Let me turn to pure-play. We are a home builder that builds affordable housing in strategic market that fill the chronic supply shortage. We will continue to reduce exposure to all non-core assets. We are intensifying our focus on producing affordable and attainable products across our platform. Land is more expensive, impact fees are getting more expensive, and labor and material cost has been rising as well. We can only reduce the cost of housing by increasing productivity through efficiencies of our operation. Our focus has been on doing just that. We are building more consistent products that we call our core products that are carefully value engineered. And, we are using our state pace to refine an engineered production cycle, enabling us to reduce cycle time and to work with our trade partners to build efficiencies in logistics and the way that we run our community production. We are building attainable homes for primary purchasers who can afford a down payment and qualify for a mortgage. And as market conditions dictate, we have and will use incentives to enable primary purchasers to purchase and achieve home ownership. We have also continued working on additional product approaches to help build a more healthy housing market. We have intensified our focus on build-to-rent, community scale, and single-family-for-rent scattered homes across markets. We believe that we can and need to build additional production for professionally owned housing that can fill an important additional need. Those professional purchasers need cost efficiencies in today's interest rate environment in order to make their rents attainable, and we can provide that. There are many families who are building their future and aspire to single-family lifestyle with backyards, schools, and parks, but who can't yet afford a down payment or don't have the credit characteristics to qualify the mortgage that they need. Institutional buyers fill that void for those families. Many have criticized the professionally owned market and the investor class that competes with primary homeowners to purchase product for rentals. This is quad thinking. We are also engaged in repurposing our blue chip multifamily platform to build attainable rental products in an off-balance sheet configuration. We will build a singular product, another core product, called our Emblem Series. It will be built by our home building division, but will be built with private equity capital. We have a strong history of successfully building multi-family products across the country. We have been building those products in an off-balance sheet configuration, and we expect to continue to build this vital, attainable product without encumbering our balance sheet. And currently, we are repatriating capital that has been deployed in prior multifamily engagements. We are under contract to sell the assets of LMV Fund 1. There are multiple buyers, and we are working through the closing process of each asset with those buyers. We expect the assets will close throughout the second-half of 2024. Also as we continue to stay laser-focused on our pure play and asset-like strategy of generating cash and increasing returns, we are regularly reviewing the best strategy for other multifamily assets that are on book, and we may decide to monetize additional assets also in the second-half of 2024. On a combined basis, these transactions could result in cash proceeds of approximately $250 million in the second-half of the year. So, let me turn to just-in-time. We have been complementing our manufacturing model with a durable, just-in-time, finished homesite delivery system. Every home that is going to be built needs a homesite with a permit, and those homesites need to be optioned and off-balance sheet until we are ready to build. We continue to focus on a just-in-time delivery program for land, just like we have for lumber and appliances, and we continue to make excellent progress in this regard. While we have always executed option land deals with third-party developers, those deals are not always available and there are no developers in many of our markets. We only become structurally and durably land-like and asset-like by both negotiating option deals with landowners and developers and also creating structured land strategies with private equity capital or permanent capital. Accordingly, we have worked with a series of private equity partners to create a homesite purchase platform where land is held and developed and ultimately delivered on a rolling option basis to the manufacturer as homes are ready to be started. This platform is a backstop for purchased land to be developed and delivered just-in-time to the manufacturer without land risk to that manufacturer. By consistently focusing on our land life strategy, we have materially enhanced and generated consistent cash flow through the ups and downs of interest rate changes, and we have enhanced our balance sheet and our liquidity. Our balance sheet, as I noted earlier, is situated with a 7.7% debt-to-capital ratio, homebuilding debt-to-capital ratio with $3.6 billion of cash on hand and $0 being drawn on our revolver. We have the flexibility to allocate capital strategically, first, of course to grow while also retiring debt, paying appropriate dividends and repurchasing shares of Lennar stock. We are aware that many have suggested that we have accumulated too much cash on our balance sheet and our leverage is very limited, which limits the ability of our returns to move higher. While we have understood the concern, we have remained patient as we have evolved not just the migration to land like configuration, but also have remained focused on the long-term durability of the structures involved. Private equity capital can be fickle. By driving volume through these programs, we have gained advantaged insights into the refined workings of our strategic land programs. Although we have a number of constructive partners in this regard, I would like to especially thank Ryan Mollett and Angelo Gordon for being an incredible and selfless partner in helping to evolve these programs over the past years. He has been truly invaluable in execution and evolution and of course, never a mercenary in any engagement. With Ryan's help, the underlying plumbing system for the land strategies have been refined and questions have been answered as to the durability of the relationships that make up the counterparty relationship with the homebuilding partner. Building on our experience, on our last earnings call, we announced that we were rekindling our focus on a strategic spin-off of most of our remaining land in order to create a permanent capital vehicle that can option developed homesites to Lennar, recycle capital into new homesites and distribute market appropriate returns to shareholders. I am pleased to inform you that we have made substantial progress over the last 90 days, and we confidentially submitted a draft registration statement to the SEC a few weeks ago. We are currently looking at approximately a $6 billion to $8 billion of land that we expect to spin-off into a new public company with no associated debt. The goal of this spin-off is to accelerate our land light strategy which would allow for off balance sheet present of the land assets. We are excited about the opportunities that we believe this spin-off will bring us to the innovations that we have developed for the operation of the spun-off entity. Following the spin-off, the new public company will be completely independent from Lennar. Lennar will have option purchase agreements to purchase back finished homesites on a just-in-time basis. Our team led by Fred Rothman has been fully dedicated to bringing this project to life as soon as we can, but we are still early in the process and there is no specific timeline to completion or guarantee that the transaction will be completed. Because of the ongoing review by the SEC, we cannot comment further on the spin-off, but we look forward to providing you with an update on progress and timing in the future. After the spin-off, the new company would be another bucket of capital, in other words, additive, consistent and compatible with other relationships that have existed and will continue to thrive alongside Lennar. Such a transaction would distribute capital to shareholders, it would reduce inventory on Lennar's books and it would provide permanent dependable capital for future land options. Our balance sheet would remain very strong with consistent earnings and cash flow to continue to pay down debt and to repurchase stock. So, let me conclude and say at Lennar, we are continuing to modernize and upgrade the Lennar operating platform as we drive consistent production and sales. It has been a busy and productive quarter, and we have continued to execute in the short term while we build our platform for continued and future success. Our second quarter of 2024 has been another strategic and operational success for our company. While market conditions have remained challenging, we have consistently learned and found ways to address market needs. We know that demand is strong and there is a chronic housing supply shortage that needs to be filled. We will continue to drive production to meet the housing shortage that we know persists across our markets. With that said, as interest rates subside and normalize and if the Fed is actually going to begin to cut rates, we believe pent-up demand will be activated and we will be well prepared. If not we will continue to produce volumes and add to market supply. For that, we are well prepared. Even though higher rates have remained sticky, strong pent-up demand has found ways to access the housing market. Given consistent execution, we're extremely well positioned for even greater success as strong demand for affordable offerings continues to seek short supply. Perhaps most importantly, our extraordinarily strong balance sheet affords us flexibility and opportunity to consider and execute upon thoughtful innovation for our future. We will focus on our manufacturing model and continue to execute. We will focus on our pure play business model and reduce exposure to non-core assets. We will continue to drive to just-in-time homesite delivery and an asset light balance sheet, and we will continue to allocate capital to growth, debt retirement and stock repurchases as appropriate. We have the luxury to execute flawlessly in the short term, while we continue to return capital to our shareholders through dividend and stock buyback, while we also and I emphasize also pursued strategic distribution to shareholders that fortifies our future. We have clearly earned an enviable position. As I look forward to a successful 2024, we are well positioned and expect to see much more of the same. We are confident that by design, we will continue to grow, perform and drive Lennar to new levels of consistent and predictable performance. We are guiding to 20,500 to 21,000 closings next quarter with approximately a 23% margin, and we do expect to deliver approximately 80,000 homes this year with a little over a 23% margin. We also expect to repurchase in excess of $2 billion of stock in 2024 as we continue to drive very strong cash flow. We look forward to a very strong year and for that, I want to thank the extraordinary associates of Lennar for their tremendous focus, effort and talent. And with that, let me turn over to Jon.

Diane Bessette:

Thank you, Jon, and good morning, everyone. 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 our balance sheet highlights, and then provide estimates for Tier 3. So, starting with financial services, for the second quarter, our financial services team had operating earnings of $146 million. The strong earnings were primarily driven by an increase in homebuilding volume and a higher capture rate. Additionally, there is a constant drumbeat to embrace technology to continue to find ways to run a more efficient business. Our financial services team is intensely dedicated to providing a great customer experience for each home buyer and has created true partnerships with our homebuilding teams to best accomplish that goal. That partnership is clearly reflected in their solid results. So, now turning to our balance sheet, this quarter, once again, we were steadfast in our determination to turn 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 were that we ended the quarter with $3.6 billion of cash and no borrowings on our $2.2 billion revolving credit facility. This provided total liquidity of $5.8 billion. As a result of our continued focus on balance sheet efficiency and reducing our capital investments, we once again made significant progress on our goal of becoming land light. At quarter-end, as Jon indicated, our years owned improved to 1.2 years from 1.7 years in the prior year, and our homesites controlled increased to 79% from 70% in the prior year, our lowest years owned and highest controlled percentage in our history. At quarter-end, we owned 91,000 homesites and controlled 340,000 homesites for a total of 431,000 homesites. We believe this portfolio provides us with a strong competitive position to continue to gain market share in a capital-efficient way. We spent $1.7 billion on land purchases this quarter. However, about 90% were finished homesites where vertical construction will soon begin. This is consistent with our manufacturing model of buying land on a just-in-time basis, which is less capital intensive. Of the homes closed during the quarter, about 60% were from our third-party land structures where we purchased the homesites on a finished basis. As we continue to reduce our ownership of land and purchase homesites on a just-in-time basis, our earnings should more consistently approximate cash flow. And over time, it would be our goal to align capital return to shareholders more closely with that cash flow. And finally, our inventory return was 1.6 times, up from 1.7 times last year, and our return on inventory was 31.4%, up 110 basis points from last year. During the quarter, and consistent with our production focus, we started about 21,400 homes and ended the quarter with approximately 40,000 homes in inventory, excluding models. This inventory number included about 1,100 homes that were completed unsold, which is less than one home per community, as we successfully managed our finished inventory levels. And looking at our debt maturity profile, we repaid $454 million of our 4.5% senior notes due April 2024, and we repurchased in the open market $100 million of senior notes due November 2027 at an average price of $98.6. Our next debt maturity is not until May of 2025. We continue to benefit from our previous paydowns of senior notes and strong earnings generation, which brought our homebuilding debts total cap down to 7.7% at quarter-end, our lowest ever, and a remarkable improvement from 13.3% in the prior year. Consistent with our commitment to increasing shareholder returns, we repurchased 3.8 million of our outstanding shares versus 603 million. Additionally, we paid total dividends this quarter of $139 million. And just a few final points on our balance sheet, our stockholders' equity increased to almost $27 billion and our book value per share increased to $97.88. In summary, the strength of our balance sheet, strong liquidity, and low leverage provides us with significant confidence and financial flexibility as we move through 2024, and beyond. And so, with that brief overview, I'd like to turn to Q3 and provide some guidance estimates. We expect Q3's new orders to be in the range of 20,500 to 21,000 homes as we continue to sell homes in line with our production pace. We anticipate our Q3 deliveries to also be in the range of 20,500 to 21,000 homes with the manufacturing focus of efficiently turning inventory into cash. Our Q3 average sales price on those deliveries should be in the range of $420,000 to $425,000. And we expect gross margins to be about 23%, and our SG&A to be in the range of 7.3% to 7.5% with both estimates having some plus or minus depending on market conditions. For the combined Homebuilding joint venture, land sales, and other categories, we expect to have earnings of about $20 million. We anticipate our Financial Services earnings for Q3 to be in the range of $135 million to $140 million based on expected product mix in our mortgage operations. We expect a loss of about $20 million for our Multifamily business, and this estimate does not include the impact of the multifamily transactions that Stuart outlined in his narrative since the specific timing is still uncertain. And then, turning to Lennar Other, we expect a loss of about $25 million for this category. This estimate does not include any potential mark-to-market adjustment for a public technology investment since that adjustment will be determined by their stock prices at the end of our quarter. Our Q3 corporate G&A should be about 1.8% of total revenues. And our charitable foundation contribution will be based on $1,000 per home delivered. We expect our tax rate to about 24.25%, and the weighted average share count should be about 271 million shares. And so, on a combined basis, these estimates should produce an EPS range of approximately $3.50 to $3.65 per share for the quarter. For the full-year, as we mentioned, we remain focused on delivering 80,000 homes, which would be a 10% growth year-over-year, with a gross margin that is consistent with last year's gross margin. We also remain confident with our cash flow generation. As such, we are still targeting a total capital allocation of at least $2.5 billion for 2024. $1.7 billion has already been utilized to repurchase shares and reduce our debt levels through Q2. And so, the balance will be applied to additional share repurchases in the second-half of the year. And with that, let me turn it over to the operator.

Stephen Kim:

Thanks very much, guys. Appreciate all the color and solid results in the quarter. Wanted to first start with the land asset structures that you're envisioning, particularly the spin, I know you said that there's going to be more information provided at a later date. But that you did offer up that it would have about $6 billion to $8 billion of land. That's higher than, I think, that you previously envisioned. I think you said it would have no debt; the team would be led by Fred Rothman. And so, just taking some of those, I'm curious what additional land assets are now being included versus what you previously thought? When you say the spin will have no debt, do you mean on a standalone basis it will operate with no debt? And if so, are you going to feed the entity with cash, do you think? And then, lastly, is the entity going to be staffed by current Lennar employees or primarily industry external personnel?

Stephen Kim:

Okay, so I guess we're going to -- that's fine, I guess we're just going to have to wait for more info. That's fine.

Stephen Kim:

The second question I have relates to your gross margin. I think you alluded to the curiosity that people have about the guide seeming to imply something around 25% or something in 4Q. I'm hoping you can talk about what gives you confidence that the 4Q gross margin will rise? And in particular, I know that you have talked about your even-flow production schedule perhaps affecting the seasonal cadence of gross margin. So, maybe I can ask the question this way. If, hypothetically, market conditions were to be stable for like a whole year, how much seasonal variance would you generally expect by quarter? Would it be that your fourth quarter would generally have the highest margin with a consistent set of market conditions? And help us think through the quarterly cadence, if you could?

Diane Bessette:

Yes, just the other thing is, as you know, the expense -- field expense, so that in and of itself, generally, if you look back last year, for example, from Q3 to Q4, we had about a 40 basis point benefit just from the field. So, that 40-50 basis points is pretty consistent lift that we get from Q3 to Q4 just from field expenses.

Stuart Miller:

I think that's a good takeaway. And I think that in many ways, this is structural and durable for the future. So, a lot of what we've been doing on the one hand has been muted by the fact that market conditions have moved around quite a bit, as I noted, interest rates moving up through this last quarter tested edges. But on the other hand, the cost savings and the way that we are, number one, configuring production in the field, and number two, re-engineering our product lines to be much more consistent with core products that are repeatable from market to market and across individual markets is creating a durable efficiency that will be with us for years to come. So, yes, I think that this will be sticky and stay with us as we move forward.

Stuart Miller:

You bet.

Carl Reichardt:

Thanks. Good morning, everyone. Thanks for taking my questions. Jon, you mentioned differentiating among markets that pricing power versus the need to increase incentives. Can you talk a bit about what those markets are or were in second quarter? And then in particular, I'm interested in Florida with the existing home inventory higher, some evidence of vacant capacity from the rental market coming back to for sale, second homes. Can you talk maybe specifically about those metros too? Thanks.

Carl Reichardt:

Thank you for that, Jon. And then, I have sort of a broader question. As you at Lennar and some others have kind of transitioned away from, I guess, what you could call a land speculation type of business model years ago to more of a vertically integrated manufacturer, retailer, building more spec, pricing more aggressively. Stuart, do you think the consumer is becoming conditioned to expect discounts in the market, especially seasonal ones, the same way we've seen it in other sort of big ticket retail businesses? And I ask in part because pricing and changing in base pricing has been a bit of an issue in this business given that homes are also investments as opposed to simply consumer products and so stability in price is of value to some degree. So, maybe you can talk about how the consumers responding or might respond in the long run if their views are changing on when they buy [technical difficulty] --

Carl Reichardt:

I appreciate your thoughts. Thanks, Stuart. Thanks all.

Operator:

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

Stuart Miller:

I'll pass back to Diane for a second. Go ahead.

Susan Maklari:

Okay. That's helpful. And then, as you do think about the business further out and, you know, as I said, the initiatives that you're going through, what is the level of cash balance that you will eventually feel comfortable holding on the balance sheet? How much will you need to sort of maintain the business? And how do you think about the allocation of the amount that comes in above that level?

Diane Bessette:

Yes, the only other thing I'd say that's really just in support of that is if you look at the statistic that I mentioned, which is when you look at the deliveries this quarter, 60% of the deliveries had homes that were purchased on a finished basis. And so, as I think as we see that migrate higher, that does get us to a more consistent, predictable, and visible cash flow. And then, when we get to that point, I think we can really start to have a conversation about what's that balance because that consistency and visibility has now you know come into more focus.

Stuart Miller:

Susan, let me just say one more thing. There's another element and that is appropriate capital for growth. So, it's something, it's another part of the equation. We remain growth minded, as we build structures for the future. So, that's another variable that goes into that question about how much cash do we retain. Just finishing up --

Operator:

Thank you. Next, we'll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.

Stuart Miller:

Yes. Thanks, Alan. You're right. We did detail that in the last quarterly call. I felt it was important to put out there at the time. Since that time, it has been much better documented. And so, I think it's fairly well known, but there has been some movement upward in consumer debt, the debt of some of our customers. It has not spiked, shrink spend. It has not changed materially to the negative. But there's no question that given inflation rates and the cost of living expenses, the consumer is definitely feeling a little bit more stressed and we are starting to see a little bit more credit challenge as customers come through, but that's consistent with what we were seeing last quarter. And of course that makes the interest rate movement all the more, it creates more sensitivity. So, as interest rates have started to subside a little bit, it will be interesting to see how that ripples with the current state of the consumer and we're looking forward to addressing market conditions as they present.

Stuart Miller:

Yes. We probably didn't spend enough time on SG&A. I thought about that as I was writing my remarks. SG&A is not the tight programming that we've had historically, it's simply because we are working on so much and recalibrating the way that the business actually operates. And if you think about the fact that over the past few years, we've probably migrated about $20 billion of land to off balance sheet kind of programming in favor of adjusting time delivery system. And the development of that delivery system in and of itself is a reorganization of the entire platform and comes with some cost ebbs and flows that are flowing through SG&A. And in particular, as we now start building an additional subsidiary kind of program in that regard, meaning the some of a large part of the other land that we own and building this SpinCo, you can imagine that some of the ebbs and flows of SG&A will be altered from its normal course by some kind of anomalous additions that are flowing through. So, Diane, maybe you can give a little bit more color on that.

Stuart Miller:

Yes. Look, I just got to add to this and say that, I think we can't really break it down and compartmentalize the costs that are flowing through. It's a little bit of a jumbled picture. So, if you look at the base operation in every part of our operation from construction costs and all the way through SG&A, we are getting more and more efficient. And as we go through these next quarters, there will be a little bit of cloudiness in some of that. But as we break through to the other side, we think we're building a much better efficiency model that is going to work much better in terms of capital deployment, capital positioning and capital allocation that will work through the long-term benefit of the company.

Alan Ratner:

Understood. I appreciate you running through all of that detail. So, thanks a lot, guys.

Operator:

Next, we'll go to the line of Michael Rehaut from J.P. Morgan. Please go ahead.

Stuart Miller:

Good morning, Mike. Thanks for the question. So, this is an imperfect calculation. It is always imperfect to flow through production cost reductions. And so, giving more detail is a little bit complicated. Some of that and some of the higher margins will flow through our third quarter. Some of it will flow through the fourth quarter and some into the next year. It's hard to know exactly where those numbers will flow through. And so, there's not a lot more detail that we can give. It's just that directionally; we understand margin is in part driven by the price that we get for home. It's in part driven by the cost we pay for the building of that home. As we have been focusing on volume at a time where there is variability in the marketplace, we've been able to rethink not only our product lines and our core products, but also the cost structure that we work with our trade partners. And so, it's in part flowing through the revenue side, in part flowing through the cost side of the equation and we're going to see how that evolves as we go through. And while all of that is happening, we are still continuing to sell homes in the current market conditions as it ebbs and flows. So, it's a little hard to put the pieces together, but those are the pieces that we see coming together as we give guidance and as we try to do the best we can to tell you what we see ahead. Of course, the part that is in backlog, we understand components of it, but we're not sure of which homes will close in the third and the fourth quarter and into the first. And as for the homes that we will sell over the next months, we're going to have to wait and see how the market evolves in a volatile market condition as we've been there. I don't know if that's helpful, but I wish I can give it to you in more granular form.

Diane Bessette:

The first one, I think you alluded to is incentives and as you think about the continual increase for most, in interest rates for most of Q2, of course, that impacts the closings in Q3, and so, if we see some stability, and then we don't have a crystal ball on that, but if we see some stability with rates instead of the increase that we saw last quarter, that will also be helpful to margins. So, what we saw in Q3, of course, we delivered in Q4.

Stuart Miller:

Well, let me start and maybe Diane will give us some additional color. But remember, as I said in my remarks, that when we started the quarter, the rates were at about six and three quarters. As we went through the quarter, it migrated up to about 7.3%. It wasn't really until right at the end of our quarter that interest rates kind of took a sudden turn in the opposite direction. So, that didn't really reflect itself through our quarter, certainly not in any of the deliveries in our quarter. So, what we have found is that the current market condition is pretty sensitive to interest rate movements. And there is a relationship and a very direct one between interest rates migrating higher and the need for higher incentives to offset some of those interest rates, it became a little more difficult as interest rates migrated to the 7.3% kind of range and there were higher incentives that went along with interest rates at that level. And I think that that's something that we can kind of expect is going to continue as rates trend up. There will be a little bit more incentive as rates trend down. It seems that some of the incentives come off. And we'll have to see if that continues to hold up, continues to be the consistent pattern. And order of magnitude, it's an everyday kind of assessment that moves around a little bit. I don't think I can peg for you that 25 basis points in interest rate translate into X number of incentive dollars spent in one area or another. It's very market-by-market, and the consumer base is very different in different markets. Diane, any --

Michael Rehaut:

Great. Thanks so much.

Operator:

And for our final question, we'll go to the line of Kenneth Zener from Seaport Research Partners. Please go ahead.

Diane Bessette:

So, Ken, you were asking specifically about the incentives on deliveries. Is that what you're referring to?

Diane Bessette:

So Q1, they were 3.9%. Q2, they were 9.4%. And then, of course, perhaps in seasonality, but I really, as we've been saying, I really think it's more a direct correlation, a more direct correlation to the interest rate environment. I think that perhaps what you're really referring to on a broader base, so as it's trying to punctuate that the gross margin on a go-forwarded basis should be more aligned with the changes that we've been talking about from an operational standpoint. So, the sustainability and the durability of the efficiencies and the cost benefits that we're seeing in margin should be maintained on a quarter-to-quarter basis with a little bit of seasonality mixed in, but you should see a very strong and sustainable gross margin as we become even more proficient with even soil. I think that's what you're probably trying to punctuate, so that sometimes there'll be some fluctuations in margin relative to the environment, but there's a lot of durability and sustainability in what you're seeing.

Stuart Miller:

Well, again, we are focused on being the greatest homebuilder that we can be and doing our part building a healthier housing market. The multi-family programming that we have in place is really quite adjacent to our core homebuilding business. We basically already build the same product, but the uncore product represents for a for-sale market. Building it for for-rent market is something that we can do at the division level because there is an adjacency to what we already build. And will build it in a third-party platform. So, we don't think that that will be impactful overall in term to ROI or ROA or any of those calculations. In terms of technology, technology is a small component of the overall. It's a very important component of how we are building our business. Every element of our business is being modified, reengineered, rethought in and around technology and the way that we actually -- in the way that we actually operate. From our machine, which we have talked about quite a bit, digital marketing, to dynamic pricing and everything in between that machine has been a game-changer. And the way it has been informed by the technology investments and engagements that we have worked through over these past years. The constant flow of technology, imagination, and innovation through our company is going to keep us modern and relevant as we continue to be a better version of ourselves. So, we will continue to be engaged with technology programming as we go forward. But many of the asset-heavy kinds of investments that has been part of our engagement in the past, those will be recalibrated out of the company and will be focused on things that are direct adjacencies to what we do. And that is to build affordable housing and fill the supply deficit that exists across the country.

Kenneth Zener:

Thank you very much.

Operator:

That concludes today's conference. Thank you all for participating. You may disconnect. And, please enjoy the rest of your day.

David Collins:

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.

Stuart Miller:

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 manufacturing model that we believe will continue to enhance our cash flow, our bottom line as well as our predictability. Last year, we grew at a 10% pace in a very difficult year, and we believe we'll grow at a 10% pace again this year in a complicated economic conditions. And it is being done by a carefully designed program to maintain volume, maximize efficiencies and cost reductions around production, maintaining even flow of production and sales and rebuild our asset base and balance sheet in order to drive cash flow, effective capital allocation and higher returns. That is total shareholder returns, returns on assets and returns on equity. I know I didn't mention margin yet. That's because, as I've said before, margin is the springing mechanism that enables all of this to happen. This quarter, our margin was 21.8%, somewhat higher than expected. And next quarter, we expect our margin to be approximately 22.5%, depending on market conditions. And for the full year, we expect margin to be approximately the same as last year's full year margin of 23.3%, but that, of course, will depend on market conditions as well, we will see. Additionally, we've continued to drive strong cash flow and allocate over $500 million to repurchase 3.4 million shares of stock and improve our balance sheet with a homebuilding debt to total capital ratio of under 10%. While we know we have accumulated a sizable $5 billion of cash on our book, we are crafting our strategy for appropriate capital allocation. Overall, the macroeconomic environment remains relatively strong for the new homebuilders. The general theme remains primarily focused around very strong demand for housing, limited by the chronic housing shortage that is particularly problematic for working class families, and their ability to find affordable or attainable supply. Demand for that product remains robust if it can be built at an attainable price point. The economic environment driving demand has been relatively favorable, supported by low unemployment and fairly strong consumer confidence. Generally speaking, consumers remain employed. They are confident that they will remain employed and they believe that their compensation is likely to rise. This is most often the foundation of a very strong housing market. Along with the supply shortage, the additional limiting factor continues to center around affordability driven by the impact of higher interest rates and stubborn inflation. With higher interest rates, affordability continues to be tested as higher monthly payments make qualifying for a loan increasingly difficult. At the same time, inflationary pressures have driven traditional cost of living expenses higher over the past two years, which has made savings for a down payment increasingly difficult. Higher prices have also started to lead to increased personal and credit card debt as families stretch to pay their bills. We've started to see early evidence of debt delinquencies showing up and derailing some mortgage applications. While interest rates have continued to move higher and lower, as the Fed continues to seek economic data indicating that inflation has been controlled, the consumer has been navigating an affordability gauntlet. The new homebuilders have worked out a variety of incentive structures that range from interest rate buy downs, to closing cost pickups, to price reductions, all designed to meet the purchaser at the intersection of need and affordability. Those incentives have increased and decreased as interest rates have moved up and down, homebuilders have been uniquely able to capture demand by using these incentives to unlock the affordability constraints and enable purchasers to transact. Against this backdrop in our first quarter we've been focused on and consistent in executing our core operating strategies. We continue to migrate to a pure-play manufacturing model across our homebuilding platform and each of our 40 homebuilding divisions in order to reduce production costs while we generate consistent cash flow. Additionally, we are reengineering our products for efficiency and volume in order to enhance our inventory turn and grow volume to contribute to build a balanced and therefore a healthier overall housing market. We have also continued to migrate to a land light balance sheet while we grow our business and expand market share in order to drive total shareholder return, return on inventory and return on equity. We are, so to speak, continuing to modernize and upgrade the Lennar airplane while we are flying the plane and putting execution and safety first as we fly. It has been a busy and productive quarter for Lennar and we've continued to execute in the short term while we continue to build our platform for continued and future success. So, let me break some of this down. On the operational side, we are running under a by design operational model, where we are starting homes at a pace designed to increase market share, while we maximize logistics and efficiencies in order to benefit from reduced construction costs. Our trade partners are given visibility on starts and timing expectations so that they can be more efficient and help pass efficiency savings on to our customers through more affordable product. By driving volume, we gained market share in most of our core markets, as we lean in when others pull back. Our trade partners see a consistent and dependable partner that is worthy of the designation of builder of choice. We work side by side with our trade partners, while we attract additional trade partner relationships. Participants find that they have dependable and consistent work with our production strategy, which leads to higher productivity and therefore, cost savings. Through market share growth in local markets, we enhanced the ability to better manage our costs, enhance our efficiency of operations, reduce cycle times with efficient production templates and enhance our inventory turn. Jon will discuss this in more detail in just a few minutes. Driving our confidence to start homes at pace in order to achieve maximum efficiency in the field is the Lennar Machine. The Machine is a combined program of digital marketing, sales consultant engagement and dynamic pricing. We've described the machine in prior calls, and many of you have now come to our office to see it in action. The machine has completely changed the manner in which we sell homes and enables us to drive maximum efficient production. If we build a home, we sell that home. We sell by digitally acquiring leads through our digital marketing programs, then we filter those leads, so the best leads go directly to our sales professionals. They nurture those best leads for customers while our dynamic pricing model assists in dynamically tailoring pricing in real-time to meet the market, given consumer desires, market conditions and competitive factors. The dynamically adjusted pricing using incentives or price alterations automatically adjust our margin up or down while we maintain production and sales base. We set the production to efficiency. We match sales pace to production, and we deliver the homes we build while we carefully maintain controlled inventory levels, all while reducing production costs and driving consistent cash flow. I know it all sounds easy, but it's not. But this has been a core pillar of the programming that we've been reworking over the past years, and it's really starting to kick in and work quite well. Next to our laser focus on volume with production and sales being an even better alignment, we are intensifying our focus on producing affordable and attainable product across our platform. We've recognized that the chronic housing shortage is a critical issue, and it's more than just a great talking point. The reality is that our industry needs to find solutions to building a healthier housing market that is attainable to participants across the economic landscape. Working-class housing is essential to the effective working of our cities across the country, and we hear that from mayors and governors everywhere. So we've been working on using our strategies for production and cost efficiencies to help build a healthier housing market that is accessible to everyone. Of course, it all starts with lower production costs across our platform. Land, we know is getting more expensive, impact fees also are getting more expensive and labor costs have been rising as well. We can only reduce our input costs by increasing productivity to efficiencies of our operations. Our focus has been on doing just that. We are building more consistent products that we call our core products that are carefully value-engineered, and we are using our start pace to enable an engineered production cycle as well enabling us to reduce cycle time and to work with our trade partners to build efficiencies in logistics and the way that we run our community production. We've also continued working on additional product approaches to help build a healthier housing market. We've intensified our focus on build-to-rent that is community scale and single-family for-rent, scattered home sale markets, we believe that we can and need to build additional production for professionally owned housing that can fill an important need. Those professional purchasers need cost efficiencies in today's interest rate environment in order to make their rents attainable and we can provide that. There are families who are building their future and aspire to single-family lifestyle with backyards and schools and parks but who can't yet afford a down payment or don't have the credit characteristics to qualify the mortgage that they need. Institutional buyers are filling that void for those families. Many across the industry have criticized the professionally owned market and the investor class that competes with primary homeowners to purchase product for rentals. This is flawed thinking. Those investors are actually filling a critical need for the underserved families who seek to bridge the lifestyle for their family while they build the down payment and credit score to ultimately achieve homeownership. This is the critical equitable side of home production, and the institutional buyers are not competitors to the primary buyers, they are additive to the valuable housing stock, enabling those who don't have a family that can help them achieve the lifestyle they want while they build their capital capacity. We are working across our platform with our institutional partners to produce more structured programs to provide more housing for those who need professional ownership as a stepping stone for the ultimate home of their own. We are also engaging our blue chip multifamily platform to build attainable rental product in an off-balance sheet configuration. We have a strong history of successfully building multifamily product across the country. We have been building those products in an off-balance sheet configuration, and we expect to continue to build this vital attainable product without encumbering our balance sheet. Finally, we have built and continued to refine our land strategy by design as well in order to dovetail with our production orientation. Every home that is going to be built needs a home site with a permit, and those home sites need to be optioned and off balance sheet until we're ready to build. We continue to focus on a just-in-time delivery program for land, just like we have for lumber and appliances and other products, and we continue to make excellent progress in this regard. We accomplished this by both negotiating option deals with landowners and developers. And we also – and also creating structured land bank strategies often with private equity capital. By consistently focusing on our land-light strategy, we've materially enhanced and generated consistent cash flow through the ups and downs of interest rate changes and we've enhanced our balance sheet and our liquidity even after redeeming debt and purchasing stock over the past years, along with purchasing $500 million of shares of stock through this quarter. Our balance sheet is situated today with a 9.6% homebuilding debt-to-total cap ratio with $5 billion of cash on hand and $0 drawn on our revolver and with an expected $3.5 billion plus or minus of net cash flow over this next year. Accordingly, we have the flexibility to allocate capital strategically first of course to grow while also retiring debt, paying appropriate dividends and repurchasing shares of Lennar stock. Accordingly, this quarter, we raised our dividend to $2 per share and authorized an additional $5 billion of stock repurchases as we continue to drive total shareholder returns. Even with these capital allocations, many have suggested that given the tremendous success of our migration to our land-light program, we have accumulated too much cash on our balance sheet, which limits the ability of our returns to move higher. While we have understood the concern, we have remained patient as we have evolved not just the migration to the land-light configuration, but also have remained focused on the long-term durability of the land bank structures involved. Private equity capital can be fickle. By driving volume through these programs, we have gained advantaged insights into and refined the workings of our strategic land banks. The underlying plumbing systems for the land banks has been refined and questions have now been answered as to the durability of the capital partners that make up the counterparty, [Technical Difficulty] namely us. Our consistent volume helped to find both trust and dependability and has taken those relationships to another level as we either party flinched as market conditions tested the boundaries of relationships. While adjustments were made and lessons were learned, the structures and relationships became stronger and more durable. Accordingly, we have now rekindled our focus on a strategic spin-off that can be cleanly focused on fortifying durable land strategy. By spinning our own land, excess land in a taxable spin, we believe that we can create an additional though with permanent capital vehicle that can option develop home sites to Lennar and recycle capital into new home site, while distributing market appropriate returns to shareholders. We have stood up a strong land vehicle that is under consideration, currently, with about $4 billion of land, it could be more, could be less, and it is under development and consideration right now. Such a transaction would distribute capital to shareholders, it would reduce inventory on Lennar's books, and it would provide permanent dependable capital for future land options. Our balance sheet would remain very strong with consistent earnings and cash flow to contribute to pay down debt and continue to repurchase stock. We know we've had a false start on a prior spin concept and there's no promise of certainty or completion on this program. But on the positive side, our Chief Operating Officer, Fred Rothman is singularly focused on this initiative and Fred likes to get things done. We'll keep you apprised of progress but progress should happen relatively quickly as this transaction is far simpler in structure. With that said, let me conclude by saying that our first quarter of 2024 has been another strategic and operational success for our company. While market conditions have remained challenging, we have consistently learned and found ways to address market needs. We know that demand is strong and there is a chronic housing supply shortage that needs to be filled. We will continue to drive production to meet the housing shortage that we know persists across market. With that said, as interest rates subside and normalize, and if the Fed is going to begin to actually cut rates, we believe that pent-up demand will be activated and we will be well-positioned and well prepared. If not, we will continue to produce volume and increase market share. To date, we have seen overall market conditions remain generally constructive for the industry. Even though higher interest rates have remained sticky, strong pent-up demand has found ways to access the housing market. Given consistent execution, we are extremely well-positioned for even greater successes as strong demand for affordable offering continues to seek short supply. Perhaps most importantly, our extraordinarily strong balance sheet affords us flexibility and opportunity to consider and execute upon thoughtful innovation for our future. We have the luxury in the short-term while we continuously in the short-term shareholders through dividend and stock buyback, while we also, and I emphasize the word also pursue strategic distribution to shareholders that fortifies our future as well. We have clearly earned an enviable position. As we look ahead to a successful 2024, we are well-positioned for and expect to see much more of the same. We are confident that by design, we will continue to grow to perform and to drive Lennar to new levels of consistent and predictable performance. We are guiding to 19,000 to 19,500 closings next quarter with approximately a 22.5% margin and we expect to deliver approximately 80,000 homes this year with a little over 23% margin. We also expect to repurchase in excess of $2 billion of stock as we continue to drive very strong cash flow. We look forward to a very strong year and for that I want to thank the extraordinary associates of Lennar for their tremendous focus, effort and talent. And with that, let me turn over to Jon.

Diane Bessette:

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 efficiency and reducing our capital investments, we once again made significant progress on our goal of becoming asset light. As Jon mentioned, at quarter end, our years owned improved to 1.3 years from 1.9 years in the prior year and our homesites controlled increased to 77% from 68% in the prior year. Our lowest years owned and highest controlled percent in our history. At quarter end, we owned just under 97,000 homesites and controlled 323,000 homesites for a total of 420,000 homesites. We believe this portfolio provides us with a strong competitive position to continue to grow market share in a capital efficient way. As Jon mentioned, we spent $1.6 billion on land purchases this quarter, however, 80% were finished home-sites where vertical construction will soon begin. This is consistent with our manufacturing model of buying land on a just in time basis, which is less capital intensive. Our goal is that over time, we will continue to reduce our ownership of land and purchase homesites on adjust in time basis and our earnings should more consistently approximate cash flow as the need to reinvest back in the business is lessened. And finally, looking at returns, our inventory turn was once it was 30.5%. During the quarter, inconsistent with our production focus, we started about 18,300 300 homes and ended the quarter with just under 40,000 total homes in inventory. This inventory number includes about 2,200 models and also includes about 1,000 homes that were completed unsold, which is less than one home per community as we successfully manage our finished inventory levels. Consistent with our commitment to strategic capital allocation, we repurchased 3.4 million of our outstanding shares for a total of $506 million. Additionally, during the quarter, as Stuart mentioned, we increased our annual dividend to $2 per share from a $1.50 per share. So we paid total dividends this quarter of $139 million. And looking at our debt maturity profile, our next senior note maturity is 454 million, which is due in April 2024. So next month. Then there are no maturities until May of 2025. We continue to benefit from our previous paydowns of senior notes and strong earnings generation, which brought our homebuilding debts total capital down to 9.6% at quarter end and improvement from 14.2% in the prior year. We remain committed to increasing shareholder returns. Our stockholders’ equity increased to almost $27 billion and our book value per share increased to $95.74 and our return on equity was 15.8%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant confidence and financial flexibility as we move through 2024. With that brief overview, I’d like to turn to Q2 and provide some high level guidance. Starting with new orders. We expect Q2 new orders to be in the range of 20,900 to 21,300 homes as we keep our production pace and sales pace closely aligned. We anticipate Q2 deliveries to be in the range of 19,000 to 19,500 homes, with a continued focus of efficiently turning inventory into cash. Our Q2 average sales price should be in the range of $420,000 to $425,000. We expect gross margins to be about 22.5% and our SG&A about 7.2%, with both estimates having some plus or minus, depending on market conditions. For the combined homebuilding joint venture land sales and other categories, we expect to have earnings of about $25 million. We anticipate our Financial Services earnings for Q2 to be in the range of $110 million to $115 million based on expected product mix in our mortgage operations. We expect a loss of about $20 million for our multifamily business and also a loss of about $20 million for our Lennar Other category. The Lennar Other estimate does not include any potential mark-to-market adjustments to our public technology investments, since that adjustment will be determined by their stock prices at the end of the quarter. Our Q2 corporate G&A should be about 1.8% of total revenues and our charitable contribution will be based on $1,000 per home delivered. We expect our tax rate to be about 24.5% and the weighted average share count should be approximately 274 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $3.15 to $3.25 per share for the second quarter. For the full year, we remain committed to delivering 80,000 homes, which is about a 10% growth year-over-year with a gross margin that is consistent with last year’s gross margin. We also remain confident with our cash flow generation as we indicated. As such, we are still targeting a capital allocation of at least $2.5 billion, $454 million which will be allocated to the April debt maturity that I mentioned and the balance to share repurchases. And with that, let me turn it over to the operator.

Alan Ratner:

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.

Bruce Gross:

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.

Stuart Miller:

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?

Alan Ratner:

Great. Thanks a lot guys. Appreciate it.

Operator:

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

Stuart Miller:

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?

Stuart Miller:

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.

Stuart Miller:

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.

Stuart Miller:

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.

Stuart Miller:

Okay. Thanks, Steve.

Mike Rehaut:

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.

Diane Bessette:

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.

Stuart Miller:

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

Stuart Miller:

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.

Mike Rehaut:

Great. Thanks so much.

Operator:

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

Stuart Miller:

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?

Stuart Miller:

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.

Stuart Miller:

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.

Kenneth Zener:

Agree, and thank you very much.

Operator:

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

Stuart Miller:

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.

Diane Bessette:

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.

Stuart Miller:

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.

David Collins:

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.

Stuart Miller:

Very good. Good morning everybody and thank you for joining today. I am in Miami today together with Jon Jaffee 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 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 updating 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 the fourth quarter and full year of 2024. And then of course we'll have our question-and-answer period. As usual, I would 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 begin. We are very pleased to report another very strong quarter and year-end operating results for Lennar. We've executed our operating plan effectively over the past year and accordingly, have simply never been better-positioned from balance sheet to operating strategy to address market conditions in the New Year 2024. Throughout 2023, the dominant theme at the macro level has been the impact of higher interest rates on the homebuilding consumer as affordability has been tested, and demand has been constrained, but the ability to purchase i.e., affordability and the ability to qualify. Generally speaking, consumers are employed and are generally confident that they will remain employed and the compensation will generally rise. Overall, consumer confidence has been reasonably strong, and buyers that can transact have transacted. Underlying this environment is a general chronic supply shortage of homes, especially affordable homes across the country as well as a growing pent-up demand for housing that has -- that is and has been held back by materially higher interest rates. There has been a very short supply of affordable products and a very strong demand for affordable products. The new homebuilders have worked out a variety of tenant structures that range from interest rate buy-downs to closing cost pickups to price reductions to meet the buyer, the purchaser at the intersection of need and affordability. The existing home market has been quiet as existing homeowners have coveted their low-interest rate mortgages and remained on the sidelines. Homebuilders have been uniquely able to activate demand by using incentives that unlock the affordability constraints and enable purchasers to transact. Over the past quarter, this narrative has been particularly difficult as interest rates spiked through the first two months of the quarter and then began to ease in November. As mortgage rates began to migrate from 7.5% towards 8%, the market began to feel like it was hitting a real inflection point and the overall market conditions softened materially. Most recently, of course, Chair Powell and the Fed has signaled that we might be closer to the end of the tightening cycle and we might see lower rates as we enter 2024, you get into the new year, we will see. Against this backdrop, Lennar's consistent strategy throughout the past year has been to continue to drive volume, to find affordability, to meet demand by using our dynamic pricing model, and using appropriate incentives and provide supply to the market. Over the past year, we have consistently detailed our operating strategy with the expectation that we would do as follows. Number one, reduce our land assets while growing our business. Number two, drive strong and consistent bottom-line earnings, while concurrently generating consistent net cash flow. Number three, reduce our construction cycle times, while increasing our inventory turn. And number four, ultimately enhance the quality of our returns on equity and return on assets by focusing on the allocation of liquid assets, i.e., cash. 2023 was a year of strategy and successful execution for Lennar and sets us up extremely well for another strong year of execution in 2024. We began the year with a strong statement of operating strategy in a higher interest-rate environment and we focus on execution throughout the year. Even as the macroeconomic environment continued to shift and adjust to inflation with higher interest rates, we adhered to our strategy and we drove volume and production. We believe that demand was strong, though constrained by affordability, and supply was very limited. As others pull back, we leaned in and maintained pace. We defined our operating strategy as driving production and sales pace while using price, incentives, and margin reduction to enable affordability. Rather than further constraining supply, we drove production and used our formidable size and scale to enable cost and operating efficiencies to drive affordability. As you've seen in our press release, while driving higher volume, we also achieved strong operating results. We delivered over 73,000 homes in 2023, which represents a 10% year-over-year volume increase over 2022, and we delivered a strong bottom-line of $3.9 billion or $4.82 a share. We also generated well in excess of the $3.5 billion of homebuilding cash flow that we generated, relative to what we generated in '22 and we are well-positioned with land and community count to expect to deliver 80,000 homes in 2024. Again, another 10% increase year-over-year. Given the current interest-rate signal from the Fed, we would also expect that margins will be at least consistent with our 2023 levels. And although we have embedded lower margins that will flow through in the first quarter, those reduced margins will clear over the next quarter, and using our dynamic pricing tool, we will recover margin quickly and efficiently as lower interest rates enable us to reduce incentives. The strategic benefits of driving volume came and will continue to come with advantages that are both immediately valuable as well as durable for the company's future. I'd like to briefly detail some of those advantages. First, by driving volume, we gained market share in most of our core markets as we leaned in when some others pulled that back. Our trade partners saw a consistent and dependable partner that became worthy of the designation of builder of choice. We worked side-by-side with our traditional trade partners, and additionally, we found additional trade partner relationships with participants that found that they had dependable and consistent work with our strategy. Through market share growth in local markets, we enhanced the ability to better manage our costs, enhance our efficiency of operation, reduce cycle times with efficient production templates, and enhance our inventory turn. Diane will discuss this in more detail shortly. Next and maybe most important, by driving volume, we are positioned with land and communities for strong volume in all of our operating markets. As we drove volume and delivered homes, we purchased new land in communities for the next year's delivery. We are extremely well-positioned to continue to sell on pace as prices recover and as incentives subside alongside lower interest rates. We are positioned to drive even stronger bottom-line results and cash flow as market conditions normalize. Additionally, by driving volume, we gained market share in land acquisition. Simply put, we continue to sell land by selling homes and then purchase land to replace communities, especially when others walked away. Market share advances have given us the critical position to be in even stronger land buyer of choice to the owners and developers of critical land assets. They saw a dependable market participant remain consistent as market conditions became more tenuous, and we found that we were able to experiment with innovative land structures that worked constructively as markets falter and then recover. Noteworthy in this regard is our variable land pricing tool that enables home site values to move up or down as a percentage of the sale price of the home as markets move up and down. Next, by driving consistent volume even at lower margin, we generated consistent cash flow through more challenging times and enhanced our balance sheet and our cash liquidity even after redeeming or repurchasing $1.1 billion of senior notes through the year and repurchasing 10 million shares of Lennar's stock through the year. Situated today with a 9.6% homebuilding debt-to-total cap ratio, with $6.3 billion of cash-on-hand and $0 drawn on our revolver and with an expected $3.5 billion plus or minus of net cash flow over the next year, we have the flexibility to invest capital strategically and grow while retiring debt as it matures and repurchasing shares of Lennar's stock, which we expect to repurchase at least $2 billion of stock over the next year. Fourth, by driving volume we gained advantaged insights into and refined the workings of our strategic land banks. The flow of volume through the land banking relationships that define our current approach to land acquisition was invaluable. Questions have now been answered as to the durability of the capital partners that make up the counterparty relationship with the homebuilding machine. Our consistent volume helped define both trust and dependability and making those -- and taking those relationships to another level as neither party flinched as market conditions tested the boundaries of the relationship. While adjustments were made and lessons were learned, the structures and relationships became stronger and more durable. Fifth, by driving volume, especially in the more difficult interest-rate environment of the past year, we were able to develop, enhance, use, and improve the Lennar machine. Our sales, marketing, and dynamic pricing machine is quickly becoming an advanced digital engine that has materially benefited by aggressive focused use and engagement while the market was most difficult. We focused on what was required to drive volume, while market conditions challenged affordability. We pushed data and engagement through the component parts of this digital tool and stressed it often into its limits. We reviewed 40 points of feedback from our 40 operating divisions and made adjustments and refinements as we learn. Today, and the result is that Lennar's machine is becoming an invaluable partner as we drive volume by finding market at affordable pricing and driving sales at the same pace as production. Overall, our strategic focus on driving volume in both production and sales has enabled us to become a stronger and better-positioned company that has become more durable through the ups and downs of housing cycles. Our balance sheet has never been stronger and our operating platform has never been better aligned. Our fourth quarter and year-end of 2023 has been another strategic and operational success for our company. While market conditions have been challenging, we have consistently learned and found ways to address market needs. We know that demand is strong and there is a chronic housing supply shortage that needs to be filled. We will continue to drive production to meet the housing shortage that we know persists across our markets. With that said, as interest rates subside and normalize, and if the Fed is going to begin to actually cut rates, we believe the pent-up demand will be activated and we will be well prepared. To date, we've seen overall market conditions remain generally constructive for our industry as higher interest rates has subsided strong pent-up demand has found ways to access the housing market. Most recent movements in interest rates suggest a better road ahead. Accordingly, we executed on our core strategy against the most difficult economic and industry backdrop. Given consistent execution, we are extremely well-positioned for even greater success as strong demand for affordable offerings continues to see short supply. We expect to start the new year with strong sales -- strong starts, sales, and closings as we have guided to 16,500 to 17,000 deliveries in the first quarter and a 21% to 21.25% margin as lower-margin sales move through the first quarter. We engaged the changing tides of the past year with a consistent strategy that has enabled certainty of execution throughout our company. Our strategy is well known and understood throughout our division offices and we have a simple and consistent model of execution. We focus on maintaining volume while we price our homes to drive match pace. We work with our trade base to manage costs and efficiencies and adjust product offering to meet the market. We manage both our land and our production inventories to drive efficiency, cash flow, and returns on our asset base. We focus on our land light model in order to drive balance sheet efficiency. Finally, we fortify our balance sheet to have the liquidity for strength and flexibility. Knowing what to do and executing per plan has driven this quarter's and this year's success and ensures consistent success for the foreseeable future. As we look ahead to a successful 2024, we are well positioned for and expect to see much more of the same. We are confident that by design, we will continue to grow, perform, and drive Lennar to new levels of performance. With that, let me turn it over to Jon.

Diane Bessette:

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 spend a few minutes on the results of our Financial Services operations in our balance sheet and then provide some comments on the first quarter. So, looking at Financial Services, for the fourth quarter, the Financial Services team had operating earnings of $168 million. Mortgage operating earnings were $119 million compared to $80 million in the prior year. The increase in earnings was driven by higher locked volume as a result of higher orders and capture rate and higher profit per locked loan as a result of higher secondary margins and lower cost per loan, as the team continues to focus on efficiencies. Title operating earnings were $50 million compared to $44 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 were accomplished as a result of great synergies between our Homebuilding and Financial Services team. They truly operate under the banner of One Lennar. Now turning to our balance sheet, this quarter, once again, we were steadfast in our determination to turn our inventory and generate cash on maintaining production and pricing homes to market with a goal of delivering as many homes as possible to meet housing demand. The results of these actions was that we ended the quarter with $6.3 billion of cash and no borrowings on our $2.6 billion revolving credit facility. This provided a total of $8.9 billion of homebuilding liquidity. As a result of these -- of our continued focus on balance sheet efficiency, we once again, as Jon mentioned, made significant progress on our goal of becoming asset-light. At quarter-end, our years owned increased to 1.4 years from 1.9 years in the prior year and our homesites controlled increased to 76% from 69% in the prior year; our lowest years owned and highest control percent in our history. At quarter-end, we owned just under 100,000 homesites and controlled 310,000 homesites for a total of 410,000 homesites. We believe this portfolio provides us with a strong competitive position to continue to grow market share in a capital-efficient way. We spent $1.5 billion on land purchases this quarter, with 84% in finished homesites where vertical construction will soon begin. This is consistent with our manufacturing model of buying land on an adjustment basis, which is less capital-intensive. And finally, looking at returns, our inventory turn was 1.5 times and our return on inventory was 29%. I will make one comment about our inventory balance. This quarter we re-classed deposits on future land purchases and inventory into a separate line on our balance sheet. This re-class, which was about $2 billion at year-end was made to better align ourselves with most participants in our industry and thus brings greater comparability and less confusion to the investor and analyst communities. During the quarter and consistent with our production focus, we started about 18,400 homes and ended the quarter with approximately 38,200 total homes in inventory. This inventory number includes about 2,200 models and also includes about 1,200 homes that were completed and sold, which is slightly less than one home per community as we successfully managed our finished inventory levels. In our continued effort to further strengthen and de-risk our balance sheet by reducing our debt balances, as we've mentioned in the fourth quarter, we redeemed the remaining balance, $378 million of our 4.875% senior notes during December 2023 and repurchased 110 million of senior notes due in fiscal 2024 and 2027 all at/or below par for a quarterly total of $488 million. For the full year, we repaid or redeemed $1.1 billion of senior notes. As a result of these debt reduction initiatives, we ended the quarter with a total senior note balance of about $2.5 billion. There is only one note due in 2024, which is $454 million due in April. Combined with strong earnings, our Homebuilding debt-to-total capital was 9.6% at quarter-end, our lowest ever, which is an improvement from 14.4% in the prior year. Consistent with our commitment to strategic capital allocation, we repurchased $3 million of our outstanding shares for $337 million in the fourth quarter and for the year, we repurchased 10 million shares totaling $1.1 billion. Additionally, we paid dividends of $105 million during the quarter and $431 million for the year. So, in total, we returned almost $1 billion to our equity and debt holders in the fourth quarter and about $2.7 billion for the full fiscal year. And then few final points regarding our balance sheet, our stockholders' equity increased to almost $27 billion and our book value per share increased to $94.61. In summary, the strength of our balance sheet and strong liquidity position provides us with significant confidence and financial flexibility as we enter 2024. So with that brief overview, I'd like to turn to Q1. Given the evolving interest-rate environment, we'd like to once again provide some guidelines for Q1 to assist with your modeling, starting with new orders. We expect Q1 new orders to be in the range of 17,500 to 18,000 homes as we keep production pace and sales pace closely aligned. We anticipate our Q1 deliveries to be in the range of 16,500 to 17,000 homes with a continued focus on efficiently turning inventory into cash. Our Q1 average sales price should be about $420,000 and we expect gross margins to be in the range of 21% to 21.25%, indicating some impact from higher interest rates in Q4. Additionally, also remember that our Q1 margins are always negatively impacted by the current-period expensing of fuel costs. While we are working towards an even flow process of starting and constructing homes on a fairly consistent quarterly basis, revenues in Q1 are the lowest of the year because of seasonality. So for this Q1, the current period expensing will have a negative gross margin impact of approximately 150 basis points when you look sequentially from Q4. Also note, consistent with last year, the first-quarter will be a low-point of margin during 2024. Turning to SG&A, we expect to be in the range of 8% to 8.2% for Q1. For the combined Homebuilding joint-venture land sales and other categories, we expect to have earnings of about $20 million. We anticipate our Financial Services earnings for Q1 to be in the range of $85 million to $90 million, and we expect a loss of about $25 million for our Multifamily business and a loss of about $15 million for the Lennar Other category. The Lennar Other estimate does not include any potential mark-to-market adjustments to our public technology investments since that adjustment will be determined by their stock prices at the end-of-the quarter. We expect our Q1 corporate G&A to be about 2.2% of total revenues. These expenses are likely to trend up a bit as we continue to invest in cyber security and technology development that is robust and durable to support our future growth. And our charitable foundation contribution will be based on $1,000 per home delivered. We expect our tax-rate to be about 24.5% and the weighted-average share count should be approximately 279 million shares. And so on combined basis, these estimates should produce an EPS range of approximately $2.15 to $2.20 per share for the first quarter. And then finally, just to reiterate a few notes on fiscal 2024. As we indicated, we affirm our target of 10% to literally growth in 2024, which would result in approximately 80,000 deliveries for the year. And for gross margin, as Stuart mentioned, we expect to maintain the levels produced in 2023. Whilst we also remain confident in our cash flow generation, as such, we continue to be committed to allocating capital to our stakeholders. We're targeting a total capital allocation of at least $2.5 billion for 2024 remembering that $454 million will be allotted to our April 2024 debt maturity and the balance of roughly $2 billion to share repurchases. I'd like to end by sincerely thanking the Lennar financial team’s accounting, planning and IR for their combined great efforts that allow us to host our year-end earnings call two weeks after year-end. You guys are amazing. And with that, let me turn it over to the operator.

Stephen Kim:

Great. Thanks very much, guys. Yeah, so much great information you provided. So thanks a lot. I imagine folks will be asking you about a little bit more detail on the gross margin. So what I actually wanted to focus on was your balance sheet. And in particular, you ended the year with very heavy level of cash, over $6 billion, I think, on the homebuilding cash. And I was curious what you feel sort of a normal level once all the dust settles and you get to a level of cash where you feel sort of sustainable and appropriate to sustain over the long term. What that level roughly would be, how we should think about that? And related to that, given that I assume $6 billion is probably more than that number, I'm guessing by maybe a couple of billion or something like that, your $2 billion in share repurchases that you sort of set as the baseline level seems frankly a little low, given that we're expecting you guys to generate cash flow and so forth this year. So I was wondering if you could help us understand how we should be thinking about your cash balance going forward? And what it would take for you to apply more of that to repurchases and I guess I should have specified that, I'm curious if you could articulate why you're willing to hold more cash than you need at this time?

Stephen Kim:

Really helpful because, obviously, you're undergoing a very significant transformation, and I think I'm hearing a lot of steady state. I'm hearing a lot of predictability in what you're laying out. And obviously, that's something that we think is critically important to an eventual revaluation. It just seems like when you had initially -- when you started off your comments, you said it's good to have cash, but I think when you're arguing for a revaluation, some of the investors that we speak with would argue that holding too much cash actually is a hindrance to a revaluation because it effectively seems like the company may be holding on to cash with the hope that they could deploy it in some sort of traditional way, i.e., land or something like that, which maybe isn't in line with what a lot of the rhetoric around being asset-light is. So your commentary about this is a period of time where you were sort of gradually developing the systems to the point where you have that predictability, I guess it's helpful. So if I'm interpreting your comments right, we should basically expect the level of cash to come down to maybe a lower level, once you have established those systems to your satisfaction, but you're not there yet. Is that a proper way of paraphrasing what you're saying?

Stephen Kim:

Okay. That's helpful. Really appreciate it. There was some news very recently regarding the marketing of your rental portfolio. I was wondering if you could put some context around that for us because we got a lot of questions from folks around whether this is something that we should be expecting to provide a cash infusion even above and beyond the normal operations would generate.

Stephen Kim:

Appreciate that. Thanks so much, Stuart.

Operator:

Next, we'll go to the line of Alan Ratner from Zelman & Associates. Please go ahead.

Stuart Miller:

Really interesting question, Alan. I thought about this a lot over the past year as the resale market has appropriately held down to mortgages that are very attractive interest rates and therefore, have not added to the traditional supply that defines the resale market. But the more I think about it and test my thinking, it just seems to me to be a zero-sum game if the resale market is activated by a tick down in interest rates, which it might be because in traditional fashion, first-time buyers find that the family is growing and they move up to a move up, second move up position. It does seem to me that to the extent that interest rates do activate the resale market and additional supply comes on the market, along with that supply comes additional demand because what has been missing from the market is the traditional resell buyer looking for that move-up home and decided the first-time market have been very thirsty for new home product because the traditional resell product simply hasn't been available. So I suspect if the existing home market is activated as interest rates do trend down, should they trend down, that it will result both in additional supply for the first-time buyer and additional demand for the move-up buyer. And we've been thinking a lot about that. And I think that we're very well prepared for that migration as well.

Stuart Miller:

So if you go back to the days when seasonality was the norm, and we went on the seasonality hiatus for a period of time, that was always the case. The trajectory of our margin started lower in the first quarter and accelerated through the year. And I think Diane detailed that in her comments. That's all -- that has been the case. I think that in our case, specifically, as we went through the fourth quarter, the fourth quarter was a pretty rugged interest rate quarter, especially as we went through the first couple of months. And so I think that you have kind of an anomalous margin push down in our first quarter. I think that you're going to see a normal flow of margin improvement as we go through the year. I think the more extreme incentivization in the fourth quarter to maintain pace was -- it looks today as if it's really a thing of the past at that level. And as we look at where our margin is likely to go, I think we have pretty good visibility because we went through November and then early December and seeing the market kind of ease up and the buyers come back to the market as interest rates did start to ease. Jon, do you want to weigh in on that?

Alan Ratner:

Great. Thanks again guys. Appreciate it.

Operator:

Next, we'll go to the line of Kenneth Zener from Seaport Research Partners. Please go ahead.

Stuart Miller:

Good morning.

Diane Bessette:

Well, can I just jump in? So in the fourth quarter, about 48% of our deliveries were on in some sites that we purchased from third parties. I don't know what it was at the beginning of the year, but I'm sure it turns it up every quarter, and I think that we should expect to see that trending up in 2024 as we continue to become even more land lighter, reducing land on our balance sheet and having more control.

Kenneth Zener:

Right. The margin impact versus the asset efficiency.

Kenneth Zener:

Excellent. And then I think the second item, and I think this is more about messaging, and we've spoken about this in the past, but investors are seeking clarity on net income to cash flow and buybacks. I realize your company is evolving as you reduce your land exposure, but just generally as a heuristic, could you kind of inform the statement, I think, Diane, you might have said this, actually, that the balance of cash flow will go to share repurchases absent debt payments. Is that a simple rule of thumb that is guiding your company? And Stuart, I think you were highlighting that you're not looking for large land deals. So I think with the simple heuristic people would have more confidence in that application of your cash flow. Thank you.

Diane Bessette:

And I think, Ken, I would also just add as it relates to that, you might be referring to the fact that in prior quarters and prior years, we did a fair amount of early redemption on our future senior notes. And obviously, because we really want to -- I've always said that while the debt to total capital ratio is important, I think what's perhaps more important in my mind, there's a little been nominal dollars on your balance sheet. And so we really wanted to take down the nominal dollars [indiscernible] And now we’re at $2.5 billion. It feels like there isn't quite a need to keep pulling debt forward. We can just kind of pay it down in an orderly fashion as it becomes due. So that's what I was thinking about it at the moment.

Stuart Miller:

Thank you.

Michael Rehaut:

Thanks. Good morning, everyone, or I guess, almost good afternoon. Thanks for all the comments so far. And also, congrats on the fast turnaround after year-end. That is very impressive. So I would agree with Diane's comments earlier. I wanted to first zero in a little bit on SG&A and corporate G&A for the first quarter. It looks like you're having revenue growth expectations alongside the -- predominantly driven by the higher closings. But negative leverage, I guess, on both metrics by a pretty decent margin given the double-digit revenue growth outlook. So I just want to understand the drivers of that. I know you said on the corporate G&A, there's more investments. So maybe just talking a little bit more on SG&A. If there's higher commissions or other factors that we should be aware of? And on a full year basis, should we expect SG&A and corporate G&A leverage outside of just this first quarter dynamic?

Stuart Miller:

Yeah. Well, that was that was a great articulation of the operational side, but that's good, Diane. But the fact is that as we've gone through this, the ups and downs of the past year with interest rates, the use of our digital platform has really been a learning curve and has challenged us to get better and better and better. And while we have great affection for and engagement with our realtor community, we certainly don't want to incur costs that we don't have to incur. And so we have been working carefully to make sure we're managing the balance between the necessary engagement with realtors and what we can actually accomplish organically through our digital platform, and that is rippling through our SG&A. We've seen the realtor spend and some of the marketing spend tick up as we have driven to maintain sales pace. So we're seeing some of that. It's going to be a story of evolution as we go through 2024. Anything you want to add to that, Jon?

Michael Rehaut:

Great. Thank you for that. I guess secondly, just drilling down a little bit more on the gross margins and understanding it's a pretty fluid situation, certainly. But against kind of a backdrop where you've done low 24% gross margins in the back half of '23, now you're talking about low 21% in the first quarter, but perhaps the full year getting back to something around what you did on a full year basis in '23, it would seem like this upcoming first quarter, obviously you took steps to ensure volume and orders coming in the door that appear to be maybe, I don't want to say extraordinary, but you did what you needed to do, let's say, to ensure those volumes coming through at maybe a little bit more of a stress period. Is it fair to kind of think about perhaps a 200 basis point or 200 to 300 basis points this type of first quarter deviation as being kind of -- I don't want to say a onetime event. But as you have the more recent interest rate backdrop coming back to late summer, and where you did a gross margin closer to that 24%, is there any reason not to think that you'll be getting back to that 23%, 24% type of gross margin and relatively short order outside of, again, perhaps some more aggressive measures that you took from an [Technical Difficulty] that are kind of tangible and quantifiable that you see as more of just affecting the first quarter. Is that kind of the right way to think about kind of moving past this period in the very short term?

Jon Jaffee:

Stuart, if I could add, as you think about the machine and the process that we've been describing to you for quarters now, it's really a reflection of the reality that none of us have a crystal ball at any moment in time to see which way rates or buyer enthusiasm is moving. So as we sat in the fourth quarter, we just dealt with the rate for what they were versus a speculation of where they might go. And so as Stuart just articulated, we appropriately used mortgage rate buydowns to keep a pace going. As we sit here today, rates look better. But again, we don't know where they're going, but we're well positioned to just maintain that pace, which by definition means we would use lower-cost mortgage buydowns, continue to drive the consistent pace. So as Stuart articulated, we'll use our margin as a sharp absorber given market conditions, interest rate environments, and you should see it move up and down as the market moves up and down.

Operator:

Thank you. Our final question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Stuart Miller:

Look, to that extent, everything that we are doing, even the migration to the larger number of deliveries is by design. It's about the number of communities that we have and the pace through those communities. And this is becoming very much a focused detailed program that is managed by Jon with what we call our daily call, it actually every other day, and our operating group is laser-focused on production pace, starts pace, cycle times dovetailing with sales pace at the division and community level. This is being handled on a very active hands-on basis. Jon you want to?

Susan Maklari:

Okay. And then in your comments, you detailed some really impressive market share gains that you've realized over the course of the year. As you think about the forward year, can you talk a bit to maybe who those share gains you think largely came from? And then the ability to further outgrow the market as you drive some of these company-specific initiatives?

Jon Jaffee:

I think the market share, the position is a byproduct of the strategy as you're hearing, it's becoming the most efficient, effective buyer of choice from Lennar sellers and the most efficient, effective builder choice for our trade partners. That's what really drives our strategy and it produces, other builders pull back or maybe accelerate will provide us consistent growth, that consistent volume to both Lennar sellers and to our trade partners.

Stuart Miller:

Okay. Thank you very much. We're going to end it there. I want to say thanks everybody for joining us. It's been a really exciting year for our company in terms of evolution, in terms of execution and in terms of learning curve and look forward to reporting on progress through 2024. Thanks for joining.

David Collins:

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.

Stuart Miller:

Very good. Thank you, and good morning, everyone, and thanks for joining us this morning. Pardon me, I've got a bit of a cold, so you'll hear that in my voice. I cough a little. So, today, I'm in Miami, 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; and Bruce Gross, our CEO of Lennar Financial Services. We're all here in Miami together. As usual, I'm going to give a macro and strategic overview of the company and our performance. After my introductory remarks, Jon is going to give some color on overall market conditions. He is going to comment on our land position and then he is going to give an operational overview, updating supply chain, cycle time and construction costs. And as usual, Diane is going to give a detailed financial highlight, along with some limited guidance for the fourth quarter and year-end 2023 to assist in forward-thinking and modeling. And then, we'll answer as many questions as we can, and please limit yourself to one question and one follow-up as usual. Now, as you all know, since our last earnings call, Rick Beckwitt retired effective the end of the third quarter. Rick began his 17 years with Lennar at the very beginning of the Great Recession, as it's called, in 2006. He rejoined an industry that was operating at the top of its game and was prepared to reach for even higher heights. Rick found himself, however, in an industry that was caught in a changing and devolving economic environment that altered expectations and aspirations. Rick jumped in at Lennar and treated problems as his own side-by-side with the rest of the team. And over the next years, he worked as part of the team fixing what was broken and righting what was upside-down. He became best partners with me and with Jon Jaffe, and together, we navigated difficult times. We positioned Lennar for future success and began anew to reach for new heights, and we achieved the extraordinary. All of us at Lennar appreciate Rick's service and partnership. We all benefited from his experience in the industry, his natural intellect and the camaraderie that we all shared. We all reach that inevitable moment of retirement, but it is uncommon for that moment to coincide with the timing when the company is well prepared as well. This is that real moment. As a team of three, Rick, Jon and I worked together and as partners with the rest of the Lennar operating leaders to lift and position Lennar for leadership in the industry. Lennar today is both organized and positioned financially to move forward with a smaller organization structure and more efficient overhead. Rick completed 17 years of service and retired as Co-CEO and President. Rick, I know you're out there. I know you're on the call and listening, because I know you just can't help yourself. I hope you're preparing to sharpen your golf game or building some wood cabinet in Maine. Rest assured that all is well and stable, and we are executing as expected here at Lennar. So now, let me turn to the business at hand and talk about the business of Lennar and how we are performing, as well as how we are positioned for our future. So, let me begin by saying that we're pleased to report that the Lennar team has -- excuse me, has remained focused on balancing and maintaining production and sales pace, reducing cycle time and increasing cash flow, improving inventory turn and driving strong bottom line. And we have again produced a strong and consistent result for the quarter. Our third quarter results reflect consistent adherence to the core operating strategies that we have detailed in prior quarters against the backdrop of an evolving macroeconomic environment and a constructively configured housing landscape. As I noted in our press release, the macroeconomic environment is constructive relative to the housing -- homebuilding market, and it has certainly stabilized relative to the aggressive interest rate climb that defined the environment last year. It seems that we have entered a phase of more measured adjustments in order to curtail inflation, while the Fed shrinks its balance sheet by approximately $100 billion per month and engages other mechanisms to reduce capital in the market. Over these time -- over time, these steps will hopefully bring inflation to desired levels. While persistent inflation remains in the system, aggressive rate hikes have given way to moderated and measured rate movements, allowing the market to adjust in a more orderly fashion. And while the Fed is working to reduce overall capital levels, the elimination of sharp turns and aggressive moves is generally constructive to consumers finding access to enough capital for their necessities, and housing is a necessity. Against that backdrop, the current housing market is generally defined by a very short supply of affordable products and strong demand for affordable products. The consumers have now adjusted to and accepted "higher for longer" interest rates and are willing to purchase or rent what they can afford. The consumer is employed and is confident they will remain employed and likely with a higher wage. Higher rates, with need driving demand and housing in short supply, is the new normal, and the consumer understands that the cost of housing will likely continue to be higher. Generally speaking, strong demand for housing has returned within the limits of affordability. The market has attracted consumers by adjusting prices, increasing incentives, including rate buy-downs, and driving down production costs in order to enable consumers to afford needed shelter, and customers have responded. The net price of homes has moderated, and the net average sales prices have stabilized. We've seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% from the peak of approximately $500,000 in 2022 to approximately $448,000 now, and we expect that pricing to remain fairly constant. Concurrently, multi-family rental rates have also moderated. Two years of 500,000 apartment starts per year are now being delivered and creating supply increases, and in some geographies, excess supply, which are moderating rental rates. While we expect a sharp drop-off in new starts this year, we don't expect that rents will drop too significantly, but they are not likely to grow very much either in the foreseeable future. Rentals and rent equivalents make up a significant part of the CPI calculation. Overall, we believe that the housing market has leveled, and while net average sales prices are lower, cancellations have been normalizing and margins have stabilized, as cost reductions and value engineering provide an offset to the price reductions. Additionally, we believe that the new supply of homes will be limited as developed land is scarce and increasingly more expensive to develop. This will continue to limit available inventory and maintain supply-demand imbalance. Bottom line, the economy is constructive, housing supply is short and limited, demand has returned to affordable offerings, and builders will need to continue to produce more homes to fill the void. So against that backdrop, the Lennar team has remained focused on our core strategies that are driving our company forward. First, we continue to remain production and volume focused with a primary focus on driving production efficiency, driving higher inventory turn, driving higher cash flow and strong margins, and while focusing on return on assets. At the same time, we maintain a carefully matched sales pace, using our digital marketing and dynamic pricing machine to keep production pace and sales pace closely matched. In our third quarter, we started 18,675 homes, while we sold 19,666 homes, and we delivered 18,559 homes, or an 8% increase over the last year. Our starts pace for the quarter was 4.9 homes per community per month, while our sales pace was 5.2 homes per community per month. While these numbers don't fit perfectly together, they are getting closer every quarter, and we're operating our platform more tightly than ever and by careful design. Our digital marketing and dynamic pricing machine helps drive our net sales pace to exceed our available starts, enabling us to backfill cancellations, which ran last quarter at a 3.3% rate. And we maintain a very controlled inventory level as a result, and that is just over one home per community. This has driven the confidence to continue a consistent start pace that enables operating efficiency. With this focus, we've continued to sell homes at current market prices, improving margins as conditions improve and reducing margins when necessary. Accordingly, our margins bottomed in the first quarter of this year at 21.2%. And as the market has improved, margins have recovered to now 24.4% this quarter, and we're expecting flat to modest improvement next quarter with a range of 24.4% to 24.6%. Of course, through all phases of the market cycle, we are consistently producing very strong cash flow. These elements of execution are working extremely well and improving. And accordingly, we've gained confidence in our ability to now guide to increased volume for the year of almost 71,000 to almost 72,000 deliveries with strong margins and strong cash flow. Next strategy, we've continued to work with our trade partners to maintain our now properly configured cost structure relative to the current sales price environment, while we continue to drive cycle time to pre-supply chain crisis levels. Jon will cover these production components in more detail shortly, but Jon and our purchasing team have been laser-focused across the platform. We were quick to reduce cost as the market corrected, and we have held costs down as the market has stabilized. And considerable success in this area is reflected in our margin improvement and as well as in the number of homes we will construct -- that were construction-ready and available for delivery this quarter. Our third strategy has been to sharpen our attention on land and land acquisitions, as well as land and land bank strategy. While Jon will give additional detail on land, this has been a specific concentrated focus across the platform in every division to refine our approach to reducing land exposure and continuing to become increasingly asset-light. We've made some significant progress in reducing land held on balance sheet with now just 1.5 years owned and 73% of our land controlled. We have made exceptional progress in creating a materially more efficient manufacturing platform. Accordingly, our land programs and partners have become strategic partners in maintaining volume and increasing market share, while helping to rationalize costs. Our fourth core focus and strategy has been to manage our operating costs or our SG&A, so that even at lower gross margins, we will continue to drive a strong net margin. While we've been driving our SG&A down over the past years quarter-by-quarter to new record lows and many of those changes, although not all, are hardwired into permanent efficiencies in operation, there are some components that have grown as we've seen in this quarter, and we've had to address interest rate movements -- as we have had to address interest rate movements and sometimes more difficult market conditions. Examples are realtor costs and marketing expenses, which have had to expand as customer acquisition and engagement have become sometimes more challenging. Both of these areas saw increases in our third quarter numbers. Nevertheless, we were able to achieve a very respectable 7% SG&A this quarter, which is higher than last quarter's 6.7%. But it is -- excuse me, but it did nevertheless result in a strong net margin of 17.4%, which is up from 15.8% last quarter. We've continued to streamline our business even as we grow so that we can accomplish more with less. And as an example, many have asked if we'll need to replace Rick as he's now retired. And the answer simply is, no, because we've built systems that are now in place that enable us to operate in ways today that would not have worked in past years. Our fifth playbook strategy was to maintain tight inventory control in order to control our asset base. The Lennar machine of digital marketing, sales management and dynamic pricing has materially improved inventory control by enabling a focus on selling homes in inventory, focusing maximum attention on underperforming communities, and bringing attention to product and plans that are not selling as expected. Clearing the homes that are complete and closable rather than selling homes that are many quarters in the future is exactly what drives cash flow, higher inventory turns and higher returns on assets, and we're focused on this part of the business every day. Both land and home inventory control is the mission control of our overall business. And in our third quarter numbers, you can see continuing quarterly improvement in our now 11.5% debt-to-total capitalization, down from 13.3% last quarter and down from 15% last year this time. Additionally, with our $3.9 billion cash position, our net-debt to total capital is actually negative, and our balance sheet is being carefully managed to provide extraordinary liquidity and flexibility. These elements of the business continue to be managed through an every other day management meetings where the numbers are reviewed at the regional and divisional levels by the entire management team. Sales, starts and closings are maintained and controlled, balanced [indiscernible] with the end result of volume with defined expectations. The sixth playbook strategy was to continue to focus on cash flow and bottom-line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our third quarter results, not only did we accomplish excellent cash flow and bottom-line results earning over $1.1 billion or $3.87 per share, but we used cash to repurchase $366 million of stock and we also repaid approximately $475 million of senior debt. We expect to continue to generate considerable earnings and cash flow, and accordingly, we'll continue to retire debt and purchase stock opportunistically. Let me say in conclusion that our third quarter 2023 has been another excellent quarter for Lennar. We saw overall market conditions remain constructive for our industry, as aggressive interest rate moves subsided and the new-normal-defined expectations. Additionally, the housing market has continued to be defined by housing shortage and generally strong demand that is prepared to transact. Accordingly, we executed on our core strategies against the economic and industry backdrop. Given consistent execution, we are extremely well positioned for continued success, as strong demand for affordable offering continues to [indiscernible] the current short supply. We expect to finish out this year strong, and we also expect to enter 2024 with a 10% initial growth expectation, and we're very well positioned to achieve that level. We engaged the changing tides of the past year with a consistent strategy that enabled certainty of execution throughout our company. The strategy is well-known and understood throughout our division offices, and we have a simple and consistent model of execution. We focus on maintaining volume, while we price our homes to drive match pace. We work with our trade base to manage costs and efficiencies and adjust our product offering to meet the market. We manage both land and our production inventories to drive efficiency, cash flow and returns on our asset base. We focus on land-light model in order to drive balance sheet efficiency. Finally, we fortify our balance sheet to have liquidity for strength and flexibility. Knowing what to do and executing per plan has driven this quarter's success and ensures consistent success for the foreseeable future. As we look ahead to a successful fourth quarter and year-end 2023 and into 2024, we are positioned for and expect to see much of the same as we go forward. We are confident that we'll continue to grow, perform and drive Lennar to new levels of performance. Thank you. And with that, let me turn over to Jon.

Diane Bessette:

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 Financial Services operations and our balance sheet and then provide guidance for Q4 2023. So starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $148 million. Looking at the details, mortgage operating earnings were $111 million compared to $64 million in the prior year. The increase in earnings was driven by higher locked volume as a result of higher orders and capture rates and higher profit per locked loan as a result of lower cost per loan, as the team continues to focus on efficiencies, and additionally, higher secondary margins. Title operating earnings were $37 million compared to earnings of $33 million, which excludes a $36 million one-time charge due to a litigation accrual in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction, as the team continues to focus on using technology to increase productivity. These solid results were accomplished as a result of great synergies between our Homebuilding and Financial Services teams. They truly operate under the banner of One Lennar. So, now turning to the balance sheet. This quarter, once again, we were steadfast in our determination to turn our inventory and generate cash by maintaining production and pricing homes to market to deliver as many homes as possible to meet housing demand. The drumbeat also continued with our determination to preserve cash and increase asset efficiency. The end result of these actions was that we ended the quarter with $3.9 billion of cash and had no borrowings on our $2.6 billion revolving credit facility. This provided a total liquidity of $6.5 million and great -- sorry, and great financial flexibility for the future. As a result of our continued focus on balance sheet efficiency, we made significant progress on our goal of becoming land-lighter. At quarter-end, our homesites controlled increased to 73% from 69% in the prior year, and our years owned improved to 1.5 years from 2.2 years in the prior year, our highest controlled percentage and our lowest years owned in our history. Jon mentioned, we spent approximately $1.5 billion on land purchases this quarter, however, about 85% were finished homesites where vertical construction will soon begin. At quarter-end, we owned 107,000 homesites and controlled 284,000 homesites for a total of 391,000 homesites. We believe this portfolio provides us with a strong competitive position to continue to grow market share in a capital-efficient way. During the quarter, we started about 18,700 homes and ended the quarter with approximately 43,600 total homes in inventory. This inventory number includes about 2,000 models and also includes about 1,400 homes that were completed unsold as we successfully managed our finished inventory level. In our continued effort to further strengthen and de-risk our balance sheet by reducing our debt balances, we retired $425 million aggregate principal of our 5.875% senior notes due in November 2024 and repurchased about $50 million of senior notes also due in fiscal 2024, all at or below par. We repaid about $6.1 billion of senior notes over the last two years, which equates to more than $330 million of annual interest savings. As a result of our debt reduction initiatives, we ended the quarter with a total senior note balance just under $3 billion, which was less than our cash balance of almost $4 billion. The net senior note maturity of $378 million is due in December 2023. Combined with strong earnings, our Homebuilding debt to total capital was 11.5% at quarter-end, our lowest ever, which is an improvement from 15% in the prior year. Consistent with our commitment to strategic capital allocation, we repurchased 3 million of our shares totaling $366 million. Year-to-date, we've repurchased 7 million shares totaling $763 million. Additionally, we paid dividends totaling $107 million during the quarter. So, in total, we returned almost $1 billion to all our investors this quarter, our equity holders and our debt holders. And just a few final points on our balance sheet. Our stockholders' equity increased to almost $26 billion. Our book value per share increased to just over $90. Our return on inventory was 26%, and our return on equity was 16%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant confidence and financial flexibility as we come to the end of 2023 and head into 2024. So with that brief overview, let's turn to guidance, starting with new orders. We expect Q4 new orders to be in the range of 16,200 to 17,200 homes as we match sales with production. And as Jon mentioned, we expect our Q4 ending inventory count to increase in the mid-single digit percentage range year-over-year. We anticipate our Q4 deliveries to be in the range of 21,500 to 22,500 homes. This would bring our annual delivery to be in the range of 70,800 to 71,800, which is an increase of 7% to 8% year-over-year. Our Q4 average sales price will be approximately flat with Q3, as we continue to price to market and offer incentives to match affordability. We expect gross margins to be in the range of 24.4% to 24.6%, and we expect our SG&A to be in the range of 6.7% to 6.9%, as we continue to focus on maintaining sales and production paces. And for the combined Homebuilding joint venture, land sales and other categories, we expect to have earnings of about $25 million. We anticipate our Financial Services earnings for Q4 to be in the range of $130 million to $135 million. And we expect a loss of about $20 million for our Multifamily business and a loss of approximately $25 million for the Lennar Other category. The Lennar Other estimate does not include any potential mark-to-market adjustment to our public technology investments since that adjustment will be determined by their stock prices at the end of our quarter. We expect our Q4 corporate G&A to be about 1.1% of total revenues, and our charitable foundation contribution will be based on $1,000 per home delivery. We expect our tax rate to be about 24.5% and the weighted average share count should be approximately 281 million shares. So, when you pull all that together, these estimates should produce an EPS range of approximately $4.40 to $4.75 per share for the fourth quarter. And finally, as Stuart mentioned, as we think about 2024, our initial growth expectation is currently 10%. And so, therefore, we look forward to another very successful year. And with that, let me turn it over to the operator.

Truman Patterson:

Hey. Good morning, everyone. Thanks for taking my question. So, Diane, thanks for clarifying that at the end, the '24 growth target of about 10%. But looking at your fourth quarter guide, you had very strong third quarter orders. Just trying to understand that fiscal fourth quarter order guide down about 15% sequentially. Was that really due to the healthy third quarter selling, where you reduced your spec availability and kind of internal inventory positioning going into the fourth quarter? Is it just normal seasonality? Does it imply a modest deceleration in the consumer, given the recent rate move? Just hoping you can help us unpack that.

Jon Jaffe:

And I'll just add, Truman, that it's all part of our process to have a design sales pace so that matches the production coming out of our assembly line out in our communities.

Stuart Miller:

Well, listen, we have very comfortably streamlined the business. Jon is overseeing operations across the country at this point, and he has been doing that for some time now. And what has happened over the past years is, our regional presidents and our operators have just really stepped up and have become far more self-sufficient, driven by some of the technology support that we've created across the platform. There's just a very orderly program of operations as we go forward that is guided by Jon on a regular basis in combination between what we call our daily call, it's actually every other day, and additionally, our operations review meetings, which we're kind of in the middle of right now. We begin at the beginning of each quarter. Jon goes to some. I go to some. But we are present, we are engaged, we are involved in kind of level setting our divisional focus across the platform. And Jon and I have comfortably shared responsibility for about 40 years. I think we've kind of been stepping in tune with doing that. We'll be able to comfortably do that right now.

Truman Patterson:

Perfect. Thank you, all.

Operator:

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Stuart Miller:

So look, as we've looked at 2024, it's not so much about adding production at this point. We are positioned for a very strong 2024 right now. We have the land. We have it identified. It is under contract or in our pipeline. It is under development. 2024 at this point, except for the overall sales environment, is pretty much embedded in our system. So, we have pretty good visibility at this point. We keep talking about selling and building and programming by process. And by process, we just have great visibility into what we're able to produce for 2024. And in fact, if you look at our kind of five-year land planning and overall production schedules, we have pretty good visibility even beyond. Now, the question is, what's the market going to do and how is the market going to react? We are going to continue to price to market conditions. We are an operating -- manufacturing platform that is going to price to market. And if the market moves a little bit, you're going to see our margins be, as I said before, the shock absorber. So, when we talk about a projection of growth for 2024, we have pretty good certainty that we can accomplish that. And how the market unfolds in these kinds of uncertain times where interest rates are moving, the Fed is clearly trying to take liquidity out of the system, we're going to wait and see how it actually evolves. But our target right now is in that low-double digit level of growth for 2024. And we think it's achieve -- we know it's achievable. We'll see how the market performs.

Diane Bessette:

And Susan, I guess I'd just add that 10%, low-double digits, that's from a volume perspective. We'll have to see how kind of margin and other items play out, but at least it gives you a perspective on the volume level.

Diane Bessette:

Target, yeah.

Stuart Miller:

Everything that we have done to reconfigure our business is focused on turning profitability into cash flow and making sure that we are generating a consistent level of cash coming in. And everything that we're underwriting right now, even if margin moves up or down to some extent as a moderator for where sales or interest rates might go, our cash flow is still going to be very, very strong as we go forward.

Stuart Miller:

Okay. Thank you.

Stephen Kim:

Yeah, thanks very much, guys. Appreciate all the color, and congrats on the results. I did want to touch on the -- some of your longer-term comments. So first of all, not to get too granular, but in 2024, the closings number, we've observed that as cycle times have improved, you've been able to deliver more units or close more units than you've taken orders for. I was curious as you look into 2024, Diane, is it reasonable to think that you could likely close as many units as you take orders for? And then secondarily, you talked about -- I think, Stuart, you talked about return on assets as being an important metric for you. Curious if you could give us a sense for longer term, where you target your ROA as you look -- think about the business going forward?

Diane Bessette:

Yes, I think that's right, Steve. You have to kind of make it a little bit more granular, right, as we focus on turning our inventory, as we focus on reducing our years of owned. Those are all helpful components, of course, to return on assets. And if we pair that with a consistent buyback program, which we have been consistent, the amounts may vary quarter-to-quarter, but we have a pretty consistent program. And I think that all bodes well in us achieving something over 20% as time goes on.

Stuart Miller:

We saw you coming.

Stuart Miller:

So, listen, as we've said, as rates move around, as demand moves around, we are tapping incentives up or down, we're maintaining pace. But the fact is that we haven't had to move dramatically in either direction as rates have moved currently. You asked whether it's the entry-level buyer or the move-up buyer that is doing better, frankly, there's strong demand across the platform. And in all segments, we are seeing strong demand out there. Affordability is kind of a question, and meeting the buyer where the affordability exists is kind of the trick of the market and getting it just right. And so, these are tweaks right now up and down. And of course, depending on where interest rates go, that is going to be the determinant of how much of an incentive has to be given or doesn't have to be given. And that's what we're kind of working our way through right now as you go through pricing. Jon, could you add to that?

Stephen Kim:

That's really helpful. Thanks very much, guys.

Operator:

Next, we'll go to the line of Carl Reichardt from BTIG. Please go ahead.

Jon Jaffe:

Hey, Carl, it's Jon. In every market we are using closing costs, mortgage rate buy-downs, pricing to hit that desired pace. Clearly, we don't have to use it as much in, say, Florida, the Carolinas, parts of Texas, other markets around the country where there's immigration, strong job growth. In some markets, where you've seen a shift, in Austin, in Boise, parts of California, we have to use them a little bit more. But as I said earlier in my comments, we're able to achieve our desired pace by managing those levers with each individual buyer, at each community, home by home basis, to find the right monthly payment for them to deal with their mortgage qualification issues, get them locked into a loan, and to hit our production levels.

Stuart Miller:

We pretty consistently said that the realtor community that supports the industry and that comes in and does the work of bringing customers to our sales center and actually engages the process is a friend of Lennar. And we're always trying to work with the realtor community. But at the same time, what we've tried to do is eliminate the friends and family component that is basically just giving away. So, we've done a pretty good job of creating a constructive relationship with the broker community while not overspending. And it migrates up and down as traffic is represented more and more by realtors. Now, of course, as the existing market has been more constrained, the realtors have been more focused on the new home market, and that means that we're getting a lot more traffic from the realtor community than we were getting when the existing market was more normalized. And with that said, you'll see our brokerage spend go up and down a little bit, which affects our SG&A.

Stuart Miller:

And let me just say lastly, we've talked an awful lot about our digital sales funnel together with our dynamic pricing level and sales engagement. We are really striving to drive more and more of our customer engagement through our digital world where we access customers, meet them where they want to find us, and engage them very directly. That's where we think we can have the very best engagement with our customers. And so, we've talked about our digital sales machine. It's an important part of the way that we're creating a process around our sales program for the future, and it is evolving.

Stuart Miller:

Okay.

Alan Ratner:

Hey, guys. Good morning. Really strong results. Nice job. Stuart, first question. When you kind of talked about the net price declines in that kind of 10%, 11% range, historically, the typical spread between a new home and a resale, I believe, has been around 15%. I'm not sure you see it that way, but that's kind of what the data would show roughly. And we clearly haven't seen that level of price declines in the resale market, which it feels like to me when you compare the strengths we're seeing in the new home market today versus the resale market, I think there's a thesis out there, it's all inventory driven, but it feels like some of that historical spread is definitely narrowed this year as you and other builders have been more aggressive on pricing to market. So, when you think about that and you think about some of your other comments with your land cost is probably going to continue to rise, construction costs, while -- there's been progress made there, it's probably stable from this point forward. If you don't see resale prices rising, can you maintain that progress you've made this year as far as now closing that spread versus resale? Or do you see that spread returning just as a function of higher costs over time?

Alan Ratner:

Got it. That's helpful to hear your thoughts there. Second, I guess circling back to the ROA conversation, it has been a few quarters I think since you've talked publicly about the SpinCo plans and recognizing that's seemingly on hold for the time being, you still have about 10% of your assets right now not generating returns, which is clearly, I think, impacting the overall return calculation. So, just curious if you care to provide any updated thoughts on ways to monetize that more quickly, recognizing the capital markets may not be most advantageous right now.

Alan Ratner:

Understood. Appreciate the update, guys. Thanks a lot.

Operator:

Thank you. Next, we'll go to the line of Ken Zener from Seaport Research Partners. Please go ahead.

Stuart Miller:

Good afternoon.

Stuart Miller:

So, Ken, we've been fairly unapologetic about saying that pace is our core focus. We're looking at even flow. We're using even flow to drive efficiencies, whether it's in SG&A or whether it's in construction costs, you can expect, as we've said before, that, that consistent drumbeat of production is going to prevail and we're going to use margin as shock absorber or moderator to enable us to maintain production pace. Your numbers are by and large correct. There will be some adjustments for seasonality, which is anticipated. You see this in our fourth quarter projections or guidance. But with that said, you can expect that you're going to see an even flow production model that within boundaries, we recognize that if the market really moves dramatically one way or another, we'll adjust those production levels. But within boundaries, you're going to see us focus on that constant production pace, defining a constant sales pace.

Stuart Miller:

Jon, did you want to add something?

Stuart Miller:

Okay. And to your more recent question, we think about the size of our stock buyback. We're very focused on continuing to drive cash flow. You are correct. Our land owned and controlled relationship is an area of focus. The year supply is very much an area of focus. You've seen these numbers migrate from much higher to the point that they're at now and we're not finished. We recognize that there will be an additional level of cash that comes into the company. We don't think it puts us in a bad position to end up with negative net to total cap -- negative net debt to total cap. And we recognize that we will continue to be cash generative. We fully expect that. We think that at year-end, we'll probably be in a better position than we are right now. And so, without projecting, let me say, that we are very focused on stock buyback and using our capital strategically to position the company well, to have flexibility, to have liquidity for the opportunities that might present themselves for us as markets kind of adjust. But at the same time, our stock buyback program is front and center of the way that we're thinking about our future.

Ken Zener:

Thank you so much.

Operator:

Thank you. And our final question comes from John Lovallo from UBS. Please go ahead.

Stuart Miller:

So, let me preface this by saying that community count is probably the most difficult part of the number in a projection to get right. So, whatever Jon is going to say about community count right now, I am saying this is not a projection, this is not guidance, this is just Jon answering your question.

Stuart Miller:

So, you can expect that our community count will grow. It will grow somewhere around where our growth expectations are generally. But it's not all about same store sales. Our business doesn't work perfectly that way. I'm not talking about Lennar's business, I'm talking about the new home business, it doesn't work perfectly that way. So, we expect our community count to grow.

Stuart Miller:

Well, the reality is we never really put it on the shelf. We've been working in the background on the way that we might or might not configure Quarterra. And so, it's not something to be dusted off. It's just at the right time, we will make the right move, something that works and dovetails with where we're going and how our company is configured. But we have to stop talking about it, because quarter-by-quarter we don't want to feel like we're missing expectations. We don't want to put something out there that just isn't right or doesn't feel right. One thing that I will say is that the opportunity to spin or to move off balance sheet some of our assets, we think is constructive for return on assets and some of the other calculations, we recognize that opportunity. It'll happen at the right time.

Stuart Miller:

Thank you. And so, let's leave it there. I want to thank everybody for joining us. We really look forward to continued execution as we go forward. I'm very happy with our third quarter. Looking forward to reporting year-end and look into 2024. We'll talk next time. Thank you.

David Collins:

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.

Stuart Miller:

Very good. Thank you, and good morning, everyone. Sorry about the delay. We had a lot of people joining. Wanted to make sure if people had an opportunity to get in. I'm in Dallas today together with Jon Jaffe, our Co-CEO and President, and we're joined remotely from Miami by Rick Beckwitt, our Co-CEO and Co-President, Diane Bessette, our Chief Financial Officer, David Collins, our Controller and Vice President, and Bruce Gross, our CEO of Lennar Financial Services. As I said, they are all in Miami, so there will be a bit of coordination here. As usual, I'm going to go ahead and give a macro and strategic overview of the company. After my introductory remarks, Rick's going to walk through our markets around the country, comment on our land position. Then John's going to update supply chain, cycle time, and construction costs. And as usual, Diane will give a detailed financial highlight, along with some limited guidance for the third quarter to assist in forward thinking and some guidance for the year. And then we'll answer questions, as many as we can. As usual, please limit yourself to one question and one follow-up so we can get as many in as possible. So let me go ahead and begin by saying that we are quite pleased to report that the Lennar team has remained focused on production and pace, cash flow, inventory turns, and return on capital, and we have again produced strong and consistent results for the quarter. Our second quarter results are consistent with the stabilization we have seen in the current economic environment, as well as consistent adherence to our core operating strategies that we've discussed on prior quarterly conference calls. As it relates to home building, the economic environment has stabilized as customers have adjusted to and accepted higher-for-longer interest rates, the supply chain chaos has normalized, inventories have remained low, and the supply of housing across the country is in very limited supply. This environment seems to represent a new normal that has formed in the wake of the Federal Reserve's aggressive interest rate hikes starting last year. While persistent inflation remains in the system, aggressive rate hikes have given way to moderated and measured rate movements, allowing the market to adjust in orderly fashion. The strong demand for housing that had been curtailed by sticker shock and affordability challenges has returned, while the housing market adjusted prices, incentives, including rate buy-downs, and production costs in order to enable customers to afford needed shelter. And even while interest rates and affordability were primary headwinds to demand, the well-documented chronic housing supply shortage has kept inventory levels very low, which has continued to propel customers to stretch their finances for needed housing, as incentives and price reductions combined to spark sales activity. The net price of homes has moderated through price reductions together with the use of interest rate buy-downs and other incentives, and the net average sales price has stabilized and not gone higher nor lower for that matter, even as demand has returned. We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% on home sales from the peak of approximately $500,000 in 2022 to approximately $450,000 now, and we expect that that pricing is going to remain constant throughout the year. I would note additionally that through our multifamily apartment division, we are also seeing that rental rates have moderated. Given our extensive experience in the multifamily apartment market, along with our for-sale and for-rent housing business, we see that there is general downward pressure on rents, as many markets have become somewhat overbuilt and there is additional inventory being completed and coming online. This inventory will complete over the next year and a half. While rents won't likely drop significantly, they are not likely to grow very much either. Remember that rentals and rent equivalents make up a significant part of the CPI calculation. Overall, we believe that the housing market has leveled and while net average sales prices are lower, cancellations have been normalizing and margins have bottomed and are recovering as cost reductions and value engineering provide an offset to the price reductions. Looking ahead, we continue to believe that the market and the economy will remain constructive for home builders as pent-up demand continues to come to market and consume affordable offerings. Additionally, we believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance. The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve. And note that even when existing homes with low-interest mortgages -- even when existing homes with low-interest mortgages that are not currently trading, do come to the market and add to supply, the sellers will also need a place to move and that creates a net zero to overall dwellings, in addition to supply and in addition to demand and therefore still a housing shortage. Bottom line, supply is short, demand is returning to affordable offerings and builders will need to produce more homes to fill the void. Against this backdrop, the Lennar team has remained consistent in our commitment to strategies that we articulated as rates began to climb over a year ago. Let me do a quick review as these strategies explain both what we have accomplished as well as what we expect to accomplish throughout the remainder of the year. First, we said then, as we say now, that we maintain volume and production as our constant and margin as our shock absorber and we manage our business with certainty through volatility staying focused on production, inventory turn, cash flow and return on assets. Accordingly, we maintain volume keeping our production machine working efficiently while rationalizing costs. In the second quarter, our sales team engaged our digital marketing platform in conjunction with our dynamic pricing model to continue to drive sales volume at market pricing in order to maintain consistent production levels and improve our inventory turn. We affectionately call this configuration the Lennar machine and it is designed to produce consistent sales pace at pricing that enables consistency as the market adjusts. Although it is not perfect yet, the Lennar machine drove new order volume to 17,885 new orders exceeding last year's volume by 1% and this enabled our production group to operate with predictability and consistency. Additionally, we efficiently backfilled cancellations in the quarter, which have now dropped to some 13.5% enabling our deliveries to exceed expectation at 17,074 deliveries and that was up 3% over last year. If by chance, by the way, any of you happen to be in Miami, come on by and ask to see the Lennar machine in action. I think you'll get a better sense of our strategy and you just might start to imagine where the often talked about AI might find its way into the sometimes stodgy home building industry and improve productivity. And to this end, we have a new and exciting Chief Technology Officer at Lennar named Scott Spradley. Welcome aboard, Scott. Let's get to work. We've continued to focus on selling homes at market clearing prices, reducing margin when conditions weaken, and improving margin as conditions level and improve. Accordingly, our margins bottomed in the first quarter at 21.2%, then as the market levelled this past quarter, we saw margin improvement to 22.5%, and we're expecting further improvement next quarter to 23.5% to 24%, and further improvement beyond that, of course, depending on market conditions. Through all phases of the market cycle, we are consistently producing strong cash flows. The elements of execution are working extremely well and improving with the Lennar machine, and we've gained confidence in our ability to now guide to increased volume for the year of 68,000 deliveries to 70,000 deliveries with strong margins and strong cash flow. Our second strategy has been to work with our trade partners to right-size our cost structure to the current sales price environment, while we continue to drive our cycle time to pre-supply chain crisis levels. John will cover this strategy in more detail shortly, but John and Rick have been focused across our platform with our production and our purchasing teams, as well as our trade partners. Considerable results are reflected both on the margin improvement and in the number of homes that were construction-ready and available for delivery. On the margin front, since Lennar led the way with a reduction in margin while maintaining volume and increasing market share, as the market corrected, in the wake of an industry-wide reduction in starts, we engaged our trade partners to work side-by-side with us to help find efficiencies in production, to right-size their margins as well, and to work side-by-side in driving efficiencies on the site. As margin expanded in the best of times, they benefited. As margins have now contracted in the more difficult times, we all understand the benefits of predictability and consistency that derives from consistent volume and scale. Cycle time continues to be a work in progress. While we continue to make improvement, we improved from 219 days last quarter to 215 days this quarter, this is truly like fixing a plane that is in flight, as progress is slow and difficult to measure as products change. Nevertheless, we're making slow but steady progress as improvement will help reduce inventory turn, which now stands at 1.2 versus 1.1 last year. Our third strategy is to sharpen our attention on land and land acquisitions, as well as on land and land bank strategy. While Rick will give additional detail on land, this has been a specific concentrated focus by all three of us, myself, Rick, and John, across the platform, working connected and together to refine our approach to reducing land exposure and becoming increasingly asset light. We've made significant progress in reducing land held on our balance sheet, with now 70% of our land controlled and only 30% owned. As with our trade partners, our land partners or sellers have become strategic partners in maintaining volume and increasing market share, while helping to rationalize cost. Our fourth playbook strategy was to manage our operating costs, or our SG&A, so that even at lower gross margin, we will drive a strong net margin. While we've been driving our SG&A down over the past years, quarter by quarter, to new record lows, and many of those changes, although not all, are hardwired into permanent inefficiencies in operations, there are some components that have grown as we've had to address more difficult market conditions. Examples, of course, are realtor costs and marketing expenses, which have had to expand as customer acquisition has become more challenging. Nevertheless, we were able to achieve a respectable 6.7% SG&A this quarter, which resulted in a strong net margin of 15.8% after net. We know that in more difficult times, there is and should be upward pressure on sales and marketing costs in order to drive and find purchasers and drive new sales. We believe, however, if we continue to drive volume, we'll be able to constrain increases and manage to a very attractive cost level and net margin. Our fifth playbook strategy was to maintain tight inventory control and the Lennar machine of digital marketing, sales management, and dynamic pricing has materially improved inventory control by enabling a focus on selling homes in inventory, focusing on -- focusing maximum attention on underperforming communities, and bringing attention to product plans that are simply just not selling. Clearing the homes that are complete and closable rather than selling homes that are many quarters in the future is exactly what drives cash flow and we're focused on this part of our business every day. Both land and home inventory control is mission central for our overall business and in our second quarter numbers, you can see in our continuing quarterly improvement in our now 13.3% debt to total capital -- capitalization ratio down from 14.2 last quarter and our $4 billion cash position that our inventory and our balance sheet is being carefully managed to provide excellent liquidity and flexibility for our future. These elements of business continue to be managed through every other day management meetings where numbers are reviewed at the regional and divisional levels by the entire management team. Starts, sales and closings are maintained in a controlled balance with the end result of volume with defined expectations. The sixth playbook strategy was to continue to focus on cash flow and bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our second quarter results, we not only accomplished excellent cash flow and bottom line results, but we repurchased $208 million of stock and we also repurchased approximately a $158 million of senior debt due in fiscal 2024. We expect to continue to generate considerable earnings and cash flow and accordingly, will continue to retire debt and purchase stock opportunistically. Let me say in conclusion that our second quarter of 2023 has been an excellent quarter for Lennar. We saw market conditions level and stabilize at least for now and we executed on our core strategies. We are extremely well positioned to navigate the uncertainties of the current market. We engaged the difficulties of the past year with a consistent strategy that promoted certainty of execution throughout the company. When market conditions were difficult and uncertain, Lennar associates knew their mission. Similarly, as the market has leveled, Lennar associates know mission and exactly how to execute. Our strategy is well known and understood through our division offices and we have a plan that -- we have a plan as the inevitable cycles of our industry even and flow. We focus on maintaining volume while we price our homes to drive a consistent pace. We work with our trade base to manage cost and inefficiencies -- and efficiencies. We manage both our land and our production inventories to drive cash flow and returns on investment. We focus our asset light model in order to drive balance sheet efficiency and drive return on investment. Finally we fortify our balance sheet to have liquidity for strength and flexibility. Knowing what to do and executing per plan has driven this quarter's success and continues to guide us into the next quarter and beyond. We are confident that we will continue to perform and drive Lennar to new levels of performance. Thank you and now let me turn over to Rick.

Jon Jaffe:

Thank you, Rick. As Stuart and Rick discussed, Lennar's operations have continued the steady execution of maintaining our starts and sales pace. Our strategy is to price homes to market so our construction machine can operate smoothly without the disruptions of stopping and restarting. This strategy enabled us to reduce our direct construction cost as expected, delivering gross margin improvement in the quarter. While we achieved some gross margin benefit in Q2 from cost reductions, a greater amount of cost reductions will impact margins equally in Q3 and Q4 based on the timing of when homes were started. As noted, our quarterly starts and sales pace were 5.3 homes and 4.8 homes per community respectively. Utilizing the Lennar machine, we focused on the orderly selling of homes at the right pace, so homes are sold prior to their completion. This process allowed us to not build up excess finished inventory as we ended the second quarter with approximately one inventory home per community, consistent with our Q1 ending inventory level. Our strategy of maintaining starts also plays a major role in gaining access to the labor we need and is the foundation for our previously stated objectives of lowering construction costs, reducing cycle time, and achieving even and flow production. While Lennar starts were down year-over-year for the first half of 2023, industry-wide start levels were down 100% more than Lennar's. We've heard from our trade partners how important it is to them that we have maintained starts in all of our communities and all markets. Our production-first strategy has had a dramatic effect on Lennar being the builder of choice for trades. At many of our trade partners, Lennar represents over 70% of their business. These trade partners saw little to no decrease in their work while at the same time the industry start levels were contracting by 30%. Looking forward, we will continue to increase our starts and expect Q3 and Q4 starts to both be above 2022 levels. Looking at our second quarter, as expected, our construction costs fell sequentially from Q1 by about 3%. While our Q2 costs were up about 8% on a year-over-year basis, this was down significantly from the 13% year-over-year increase we had in Q1. Again, this is the trajectory of cost reductions we guided to last quarter. In addition to our trade partners stepping up with cost reductions, we also took our value engineering focus to a new level. While we have always value engineered our plans, we created a dedicated team as part of our national supply chain group to focus on this area. This team works hand-in-hand with our divisions both in the field and the office to drive cost and constructability efficiencies. Going forward, this team will focus on our core plan strategy. Rick and I were in Houston last week attending our Internal Annual National Supply Chain Meeting led by Kemp Gillis. There, we saw firsthand how this team has shifted from fighting the battle of supply chain disruptions to achieving the needed cost reductions to offset our sales price reductions. Now, this team is looking ahead and is fully engaged in initiatives that will impact our results in 2024 and beyond. This includes programs to structurally offset future cost increase pressures and to implement new technologies to both make the field process more efficient than ever and transform the way we manage information for the bidding process. We can report that there is a great intensity in this team and more focus on innovation than ever before. With respect to the supply chain, the second quarter had the least supply chain disruption since 2020. This was due to the combination of a steep decline in industry-wide starts along with manufacturers operating in much higher capacities for an extended period, augmented by Lennar supply chain strategies and communication. The lack of supply chain disruptions helped our continued reduction in cycle time. We saw modest improvement in our second quarter and expect to see a more meaningful improvement in the back half of the year. For the quarter, cycle time decreased by four days sequentially from Q1. As we move into our third and fourth quarters, we will benefit from greater cycle time reductions that of a primary driver for our increased guidance and deliveries for 2023. Additionally, we will start about 3,500 homes in Q3 that will reduce cycle time, will allow us to have the appropriate inventory levels to achieve our delivery guidance. The reduction of cycle time in the back half of the year will also free up cash that is otherwise tied in our inventory, further strengthening our balance sheet. In the second quarter, we made meaningful progress in evolving from the production challenges of the supply chain disruptions for even flow production. While there is still meaningful progress to be made in obtaining even flow production from start to finish, I want to take this opportunity to recognize and thank all of our construction and purchasing associates for delivering one of the smoothest quarters of closings. All of us at Lennar are focused every single day on lowering costs, reducing cycle time, achieving even flow production, enabling improved margins as G&A efficiencies, a stronger balance sheet, and the delivery of high quality affordable homes. I would now like to turn it over to Diane.

Operator:

Thank you. We will now begin the question-and-answer session of today's conference. [Operator instructions] Our first question comes from Kenneth Zener from Seaport Research Partners. Please go ahead.

Stuart Miller:

Let me start by saying, Ken, that it's a combination of -- even flow is a combination of going asset light, but it's also a very focused program on our building partner relationships, enabling consistency and predictability relative to our trade partners to enable us and them to become the most efficient versions of ourselves. So your question is what is that start pace? And the start pace is a program that we think about putting in place as we evolve our understanding of performing and underperforming communities, their relationship to sales and closings. And a lot of this is data-driven and evolving. So there isn't a number that we can give you. It's more a concept that we are solving to and iterating to and using a lot of data feedback loops to come to numbers that make sense across a broad spectrum of 40 divisions, 40 geographies all working in sync. Jon?

Kenneth Zener:

I appreciate that there. It sounds like there's several layers to peel.

Kenneth Zener:

Right. No, no. It sounds like you have to be actually responsive to the trade in part. So second, considering your non-WIP inventory, owned lots fell about 20% year-over-year to 1.7 years, very impressive. And Diane, I'm very glad that you report and adjust out inventory units. So my question is, to what level can owned lots go to in your even flow framework, given Rick's 90% finished lot purchase comment, if I heard that correct. And are you willing to kind of offer a goalpost for FY '24, perhaps implied cash flows, given you've been dropping almost 0.2 years' owned. Sequentially, it's very impressive.

Rick Beckwitt:

We have a target out for 2024, yes. All I know is, as Stuart mentioned in his comments, Jon, myself and Stuart are laser focused on our asset-light balance sheet and continuing to improve the percentage of homesites we control versus own. We've developed some incredible relationships with our land partners and with our land banks that really have facilitated us to improve on these metrics.

Stuart Miller:

And let me just say that, look, we've set out a goal in terms of becoming an asset-light model. We report outwardly to all of you our progress along the way. But inwardly and in the background, we are working on not just relationships but structural programs to enhance the ability, to manage an asset-light model and to continue to improve it. Where we will actually end up, we're not going to lay out timeframes and numbers, but you can expect that there is going to be continuous improvement in the space.

Susan Maklari:

My first question is, it sounds like the supply chain is slowly improving, and you are seeing healing happening there. But it does feel like it's, in general, still fairly fragile. Are there lessons that you learned in the last couple of years that you can apply as the start pace does pick up from here, so that you can make sure that you're not running into some of those same challenges that you faced and therefore, maintaining those inventory turns, maintaining that cash generation that you're looking to do.

Jon Jaffe:

Susan, first, let me say that from Lennar's perspective, it really feels like the supply chain disruptions are behind us with a few minor exceptions. And perhaps that's, as I noted in my remarks, due to our size and scale, working with manufacturers that are running at an extended period of time of full capacity. But there are definitely lessons learned as. We had to scramble through the supply chain disruptions, we learned how to work differently with our manufacturers, providing them different types of forecast, more visibility into what's coming as well as how we can create local distribution for them that really cuts down the lead times. And so there's no question, there's lessons learned. And that really is reflective of my comment of the intense focus on the look forward that we hope is going to drive improved results in '24 and beyond.

Susan Maklari:

Okay. That's very helpful color. And then I guess staying on the topic of cash generation, when you think about Diane's comments to Ken's question around free cash flow conversion, it implies that you're going to have really some very impressive levels of cash. How do you think about the allocation of that capital? You bought back some stock this quarter. You paid down debt. But long term, how are you thinking about the shareholder return piece of that? And where that sort of fits relative to where we are today?

Susan Maklari:

Okay. Thank you for all the color and good luck.

Stephen Kim:

My first question is going to also focus a little bit on the balance sheet side. And I guess, specifically, in the wake of the regional bank trust, we're hearing that there's this window of opportunity that's opening up to maybe acquire some attractively positioned lots or even operations from some of the smaller, less well-capitalized builders, allowing builders such as yourself with a big war chest to accelerate market share gains. And I'm curious, could you weigh in on that? Are you seeing that as well? And if you are, can you take advantage of these kinds of opportunities, these emerging opportunities while maintaining your asset-light program by utilizing your existing off-balance sheet structures? Or is it reasonable to think your own lot count might move up a little bit before moving down again later? Or that you would need to create some other structures in order to accommodate it? If you can just give us some sense of how you're thinking about that relative to this window of opportunity that we're hearing about.

Stephen Kim:

That's great. Yes, it's going to be interesting to watch. With respect to your income statement, your -- you gave a 3Q order guide, which we appreciate. And it suggests an absorption rate, sales per community per month above what you achieved in the heyday of 2021 or post-pandemic period, it appears. And I'm curious, are absorption rates benefiting from a sort of mix shift of community types, such as maybe more communities with attached product or larger communities or something like that? And if so, if there is this kind of mix shift that's happening behind the scenes, can you give us a sense for how much further this mix shift can go in a positive direction?

Rick Beckwitt:

So I would tell you that the pace that we're looking at going forward, particularly with regards to Q3, is really a reflection of the strategy that we all have implemented with regard to starts. And as we said, we are going to run a production machine. Jon, Stuart and I have really laid out work with our regional teams and division team to develop that community-by-community start base. We are benefiting a bit by some lower entry-level communities in a few markets. But over and above, what it really gets down to is a very disciplined, carefully managed stretch program. And that's why we're comfortable in giving you the visibility that we've given.

Stephen Kim:

And starts base, got you. Appreciate it.

Truman Patterson:

Wanted to follow up on Steve's question on the third quarter orders guide. That suggests orders, they typically increase sequentially when they normally decline. A few ways of looking at this, clearly, your starts pace, but underlying demand, is remaining healthy and atypically strengthening sequentially or that solid start space that you talked about, available spec inventory is taking market share from traditional build-to-order builders and/or private builder capabilities are more limited today from bank tightening. I'm just hoping -- I'm hoping you all can help us think through this a little bit further.

Jon Jaffe:

Truman, so if you look at our strategy, we really accelerated our starts in Q2, recognizing the market opportunity where the industry was pulling back. And given that we didn't have an inventory buildup because of our strategy, we felt there was an opportunity to be more aggressive with starts and take advantage of the lack of resale inventory as well as the lack of new sale inventory. So we feel comfortable that we'll be able to sell at an accelerated pace because we'll have the inventory when the marketplace in general is in providing that inventory with a backdrop of really healthy demand for housing. So that gives us confidence that we'll be able to continue to accelerate our sales pace, managing that start pace.

Stuart Miller:

Yes. So we decidedly didn't give any broader thoughts on margin for our fourth quarter, recognizing that, number one, we're feeling some leveling. So we're giving you some guidance for our third quarter and some thoughts on production for year-end. I think that the market still has enough proving to do, and it's moving around enough to where we really don't want to go beyond what we've said, and that is depending on market conditions, and we're going to let them evolve. Certainly, yesterday, with the Fed chair pausing, but maybe it's not even a pause, it's -- I think there's a lot of wait and see in terms of where interest rates go and where the market goes and talks of recession and jobs. We're going to wait and see a little bit on that. But as we sit right now, what we've said is that we see our margins continuing to improve as we go through the year. We're not going to give a boundary as to what that actually means. Let's give it some time.

Stuart Miller:

Sure. Sure.

Stuart Miller:

I think, again, this is something that we're going to wait and see a little bit, see how demand patterns continue forward. But our constructive relationship with our trade partners really enables us to maximize. What we have found in this past year is that commitment to the consistency and the predictability of volume is really working to everybody's benefit. And I would say that -- again, not to get too far over our skis, as we look ahead, we continue to see consistency in the trajectory, but we will have to wait and see how they actually flow through.

Stuart Miller:

Thank you.

Alan Ratner:

Nice quarter. I do have a question on some of the more near-term demand drivers. But Stuart, you did kind of bring up AI in your prepared remarks. And I know you guys have always been at the forefront of innovation in housing. And frankly, you don't hear AI mentioned a lot when it comes to housing. So I'm just curious if you're able to share any specifics in terms of where you see AI impacting your business going forward? And any steps the company has taken to be at the forefront of that?

Alan Ratner:

Great. Looking forward to checking that out, and I appreciate the additional information there. Second, on the pricing side, would love to just drill an air a little bit. So volume has continued to come in ahead of initial expectations. Your closing guide for the year now is about 10% above where it was 6 months ago. You're expecting orders to be up sequentially, which understood is a function of your start pace but you're probably not starting homes, unless you think there's demand for them. Yet when I hear your pricing commentary, it seems a bit more muted than I would expect, frankly, as far as more stability as opposed to maybe some pricing power returning to the market. So I know you've always been very articulate about your belief in the housing shortage at affordable prices, which I think is the key distinction there. And I'm curious if your decision at this juncture to not be more aggressive raising price is a function of your views on perhaps if prices were to go up or reaccelerate that, that would kind of take demand out of the market? Or is it just more of a conservatism stance around wanting to take market share in this still kind of choppy environment right now?

Rick Beckwitt:

Stuart, I think you answered it well. It's really that consistency and cadence between starts and the sales that really keeps our machine going, and it makes us incredibly efficient. We're very focused on keeping our products affordable. In many cases, that's working hand in hand with our mortgage company and our mortgage in determining what that mortgage payment needs to be in order for us to transact. So it's a very careful and methodical approach. And if prices move, they move, but we're going to start and deliver the number of homes that we've targeted on a community-by-community basis.

Stuart Miller:

Why don't we go ahead and take 1 more question?

Mike Rehaut:

Appreciate you getting me in before the end here. I wanted to just circle back, if I could, on the idea around 3Q orders. I think it's an important distinction in terms of your approach and maybe how that differentiates versus the market. And really, what I'm trying to get at is, you're talking about obviously the orders being driven by your own starts pace and strategy. I'm curious if in effect -- because we've also heard in the last month, maybe 1.5 months of an expectation by a lot of builders to return to normal seasonality. And certainly, historically, your own sales pace has been down about 10% sequentially 3Q versus 2Q. So do you feel that at this point in the game -- and you kind of highlighted the first few weeks of June, do you feel that this approach that you're taking is in fact market -- resulting in market share gains? In other words, that what you've seen over the last few weeks, maybe a month, we've heard a little bit of sequential softening month-to-month, which is typical. So I'm just trying to get a sense of when you talk about your 3Q outlook and your approach to starts, if this is, in fact, kind of an active kind of gain of share relative to what you're seeing across the broader marketplace?

Jon Jaffe:

I would only add one point, Stuart. I think you covered it well. And that is remember, Mike, we have a lever that the resale market doesn't have. So it starts with the fact that there's record-low inventory in resale, as you know. But we can buy down mortgage rates where the resale market can't. So if we need to accelerate our sales pace when the market is giving us, we have that lever that we can pull, that's at our disposal.

Stuart Miller:

Okay. So Diane, why don't you go ahead and give some color on that? And we'll fill in.

Stuart Miller:

All right. Why don't we go ahead and leave it there. Mike, thank you for your questions. And I want to thank everybody for joining us. We're pretty enthusiastic about how our business is navigating sometimes turbulent waters. And we look forward to reporting in our third quarter how things have continued and progressed. Thank you for joining.

David Collins:

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.

Stuart Miller:

Thank you, and good morning, everyone. Thank you for joining us this morning. I'm here in Miami and joined by Rick Beckwitt, our Co-CEO and Co-President; Jon Jaffe, Co-CEO and Co-President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; and Bruce Gross, our CEO of Lennar Financial Services. There are other executives here with us as well. As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Rick is going to walk through our markets around the country and comment on our land strategy, and then Jon is going to update construction cost, supply chain and cycle time. As usual, Diane will give additional financial highlights and we'll give some rough boundaries, not guidance, just foundries given volatility in the market for the second quarter to assist in forward thinking and modeling. And then we'll answer as many questions as we can. And as usual, please limit yourself to one question and one follow-up so that we can include as many as possible. So let me go ahead and begin by saying that we're pleased to report that the Lennar team has produced strong and consistent results for the first quarter of what is shaping up to be a complicated and volatile 2023. The quarter started in December with traffic and sales stalled moving only with incentives and price adjustments. We entered January with interest rates declining and energized customer and improving margins, and then closed out February with rates again rising and challenging consumer confidence, although sales remained relatively strong due as adjusted prices, traffic was slowing. Of course, the quarter ended and the past couple of weeks have added new issues and questions that are reflective of a market that is looking for a bottom and looking for stability. With the Federal Reserve and Federal Government trying to reconcile the unintended consequences from aggressive interest rate hikes in order to curb the inflation, there is simply no way to see around corners and anticipate with certainty what comes next. This is exactly the kind of volatility that our core operating strategy of maintaining volume using incentives and sales price has been built to endure. With volume and production as are constant and margin as our shock absorber, we manage with certainty through volatility and stay focused on our mission. If market conditions deteriorate, we compromise margin through price and/or incentives, but we generate strong cash flow. If conditions improve, we improved margins and bottom line while also generating strong cash flow. Our primary focus is on cash flow. We maintain our volume to move through the limited legacy land that we have, which is at legacy prices while keeping our production machine working efficiently and rationalizing costs. And the fact that we are projecting a flattish number of deliveries in 2023 versus 2022 displays the strength of our strategy. Interest rates have continued to be the primary headwind to sales activity as inflation concerns have dominated the Federal Reserve's actions to date. At the same time, the housing supply shortage, especially workforce housing, discussed by every mayor and every governor across the country continues to drive customers to stretch their wallet as incentives and price reductions have worked to meet purchasers half way. Additionally, interest rates have also sidelined the professional or institutional purchasers. Higher capital costs, together with higher capitalization rates have made the purchase of single-family for rent homes less financially attractive as well. With that said, we still believe that the housing market is beginning to find a point of stabilization and customers, both primary and institutional are coming to grips with the new normal of higher but acceptable interest rates. The sudden sticker shock of rapidly rising interest rates in 2022 has mellowed. And while net prices are lower, incentives are moderating, cancellations have been normalizing lower and margins have been bottoming as cost reductions are beginning to provide an offset. As I have said many times in the past, the overall housing shortage remains a dominant theme and is defined by a decade-long production deficit in the country after the great recession. This deficit will be exacerbated by a growing reduction in housing starts of both single-family and multifamily homes brought on by the current housing recession. This shortage should be a stabilizing factor for the housing market over time. Against this backdrop, we've remained steadfast in our adherence to the strategies we adopted as the Fed began its tightening program approximately one year ago. As noted, we've continued to focus on selling homes at market clearing prices while building a consistent pace to meet the needs of a supply-constrained housing market. Whether for purchase or for rent, housing shortages are a major concern across the country, as I said, particularly at state and local levels. In spite of higher interest rates driving affordability concerns, more dwellings are needed and our mission is to meet that need. In the first quarter, we saw our margins fall to 21.2%, reflecting sales from prior quarters and adjustments to backlog. While margins fell 360 basis points over the prior quarter and 570 basis points year-over-year, they reflected the use of price reductions and incentives that is closing cost payments and interest rate buy-downs, to offset volatile interest rate and market shifts. We used these tools both to sell homes as well as to protect our backlog by adjusting pricing and incentives to ensure closings. Our first quarter cancellation rate improved to 21.5%. While this is higher than the 10.2% last year, it is decidedly lower than the 26% last quarter and has been falling in each consecutive month. While our new orders were down some 10% year-over-year, that result has compared favorably to reported market conditions and enabled us to maintain a strong start pace that enables us to increase our expected closings for the year to a range of 62,000 to 66,000 homes delivered. On a positive note, very limited new home inventory exists, limited existing home supply exists as existing homeowners hold on to extremely low mortgage rates and very limited multifamily production combined with the chronic housing production shortfall over the past decade and leads the industry in the middle of what we believe will be a fairly short duration correction without an inventory overhang to resolve. These factors will also extend the runway for longer-term housing growth as the correction develops. We derive growing confidence in our ability to achieve sales at the best possible prices from our significant investment in digital marketing, which is more relevant than ever before. We have used our dynamic pricing model in conjunction with our formidable and improving digital marketing platform to continue to drive sales volume at marquee clearing prices in order to maintain consistent production levels. Our proprietary DIGITS platform, which we built on a Microsoft backbone, provides digital marketing insights and analytics that guide us to better execution while maximizing pricing using our dynamic pricing model. Our digital marketing team and our dynamic pricing team are getting better and better each quarter and they enable us to refine and improve our execution and effectiveness as we accumulate more data and more experience. Our second strategy was to work with our trade partners to right-size our construction -- our cost structure to current market conditions while we re-establish cycle time at pre supply chain crisis levels. Jon will cover this in great detail shortly, but at a high level we continue to make meaningful progress with our trade partners as they appreciate our long-term strategy of maintaining consistent production. Relative to construction costs, Lennar led the way with reducing -- with a reduction in margin while maintaining volume and increasing market share as the market has corrected. As our margins have now contracted, we are driving cost reduction participation from our trade partners. Our trade partners are working side-by-side with us to reduce costs and to keep the production machine working. While there continues to be a lag in those reductions coming through our reported numbers, in the back half of the year, cost reductions will improve lagging margins. Cycle time reductions will also come through in the back half of the year. While cycle time has increased slightly this quarter from 211 days to 219 days last quarter, this timing reflects homes that have been in production for almost eight months. While we've reviewed the front end of construction for homes that have started more recently, we are seeing a two-week reduction already coming through, and we know that will improve over the next quarters. Improved cycle time will improve our inventory turn, which now stands at 1.2 and will help reduce inventory as we'll be able to carry less inventory to hit our deliveries; and accordingly, we will improve our return on inventory as well. Our third articulated strategy was to sharpen our attention on land and land acquisitions. While Rick will give detail on our land strategy, this has been a specific concentrated area of focus for all three of us, myself, Rick and Jon, across the platform. We recognized early that land would be expensive relative to reduced prices, and we therefore stopped the bleeding early. While we reconsidered every land deal in our pipeline, we have walked from deposits or renegotiated terms and price, and we have been relentless in focusing on protecting cash and only purchasing the next strong margin at today's market pricing. We purchased very little land this quarter as we await better pricing that is more in line with current home sale prices. New land purchases in time will improve lagging margins. Fortunately, we are well positioned with well-structured contracts and shorter-term deal structures that enable our capital allocation to be managed constructively. As with our trade partners, our land partners or sellers understand that we are maintaining volume and increasing market share while taking the first hit to our own margin. They will need to work together with us in cost reduction given lower home sales prices, where we'll just have to move on. Our fourth playbook strategy was to manage our operating costs, our SG&A so that even at lower gross margins, we will drive a strong net margin. We've been driving our SG&A down over the past years quarter-by-quarter to new record lows and many of those changes, though not all, are hardwired In our first quarter, we were able to marginally improve SG&A to 7.4% from 7.5% last year. And we believe if we continue to drive volume, we'll be able to limit increases and manage to advantageous cost levels. Nevertheless, as average sales prices come down, the percentages won't hold without corresponding additional cuts. We also know that in more difficult times, there will be upward pressure on some of our sales and marketing and realtor costs in order to drive and find purchasers and drive new sales. In this regard, the earlier discussion of our intense focus on our digital marketing platform is critically important in offsetting many of these potential cost increases. Our fifth playbook strategy is to maintain tight inventory control. This is exactly what drives cash flow and our cash flow machine, and we're focusing on this part of our business every day. Both land and home inventory control are a core focus of our overall business and leadership team. And in our first quarter -- and in our first quarter numbers, you can see our focus on these elements in our 14.2% debt-to-total capitalization rate, which is down 410 basis points from last year's 18.3%, and our $4.1 billion cash position, together with our 2% -- $2.6 billion undrawn revolver, which together provides excellent liquidity and flexibility. Tight control of land and completed home inventory has enabled cash flow so that our net debt to total capital is actually negative at this point. Inventory management is most carefully reviewed and as the most carefully reviewed and managed part of our business and enables us to maintain an extremely low inventory of completed, not sold homes, which are consistently -- which have been consistently been at or under one home per community for the past years. And right now, we have approximately 1,300 unsold and completed homes. We are well aware that inventory has remained flat as opposed to lower year-over-year as one might expect, because of expanded cycle time due to the supply chain disruption. We also know that this inefficiency will correct over the next few quarters and will return approximately $1.5 billion of inventory and turn it into additional cash. Additionally, a pause in growth this year will reduce inventory and generate additional cash over the next year as well. The sixth strategy is to continue to focus on cash flow and bottom line in order to protect and enhance our already extraordinary balance sheet. With our balance sheet strong, we are able to complement our strong operational execution with stock repurchases and debt reductions that improve total shareholder returns and return on equity. As we continue to execute our strategies, we will continue to drive strong cash flow and bottom line profitability. And even though bottom line profitability will be compressed year-over-year as prices and margins are impacted in a correcting market. Our balance sheet and our cash position will continue to improve. This improvement enables the flexibility to be opportunistic as market conditions stabilize. Finally, we have added an additional strategy, an additional core strategy since last quarter end. This is a strategy of continuous improvement focus throughout the company. Although it seems obvious and perhaps a little trite, we have created a central focus on continuous improvement metrics for every leader in our company with a direct tie to performance measurement and bonus structure. Last year, we recruited a new CHRO with specific expertise in this area, and we've developed a determined and constructive program of engagement and measurement across our platform. Welcome aboard, Drew Holler. Now that he has been with us for about six months, I wanted to formally welcome Drew to the company on our earnings call and let him know formally that we, meaning me, Rick, Jon and all of our shareholders expect really exciting improvements that will help Lennar continue to reach higher and drive harder to be the best version of ourselves. So in conclusion, it seems that the homebuilding industry has been skating on a very thin edge between some very strong headwinds and some equally strong tailwinds on that have required careful navigation and refined adjustment along the way. The headwinds have been defined by Federal reserve-driven interest rate increases driven by stubbornly high inflation. The consumer has attempted to adjust. The tailwinds have been defined by housing shortages across the country as well as production deficits over the past decade. And while the consumer remains challenged by affordability concerns, they are adjusting to the new normal of higher interest rates and opting to purchase their home. In these extraordinarily difficult and volatile market conditions, the Lennar team has focused on strategy, and we have executed with precision. We ended the first quarter with stronger-than-expected revenues and closings, strong profitability and cash flow, a fortified balance sheet and strong liquidity. We have a plan of execution to continue to navigate the uncertainties of 2023 with a focus on maintaining volume, maximizing margin, managing inventories, driving cash flow, managing land and -- land spend and further enhancing our balance sheet in spite of the challenging market conditions. Accordingly, we are not guiding but giving some broad boundaries for our second quarter closing to between 15,000 and 16,000 homes with a gross margin we expect between 21% and 21.5%. Additionally, we are targeting delivery volume for the full year to be between 62,000 and 66,000 homes as we drive volume and pick up market share and build margins back up through reconciliation of construction and land costs while carefully managing SG&A. While we're prepared for volatility and adversity along the way, we will stick to our focus on our core operating strategies in order to perform as expected. Simply put, that's what we expect of ourselves and we hope in the process, we will continue to earn your trust and respect. Thank you. And with that, let me turn over to Rick who's going to walk through a review of our market conditions across the platform.

Jon Jaffe :

Thank you, Rick. You've heard from Stuart and Rick how we remain focused on finding market community by community to maintain sales pace. Accordingly, this does enable Lennar to keep our production machine moving forward with starts. We continue with our stated construction strategy of being a production-first homebuilder, keeping starts consistent and then matching the sales pace to establish sort space to effectively manage inventory. This resulted in ending our first quarter with only about one inventory home per community. To remind you, our construction playbook has three primary areas of focus

Operator:

[Operator Instructions] And our first question will come from Stephen Kim from Evercore ISI.

Stuart Miller:

We're struggling with who should answer that question. Hold on please.

Stuart Miller :

I think it's most important to recognize, Steve, that when you look at the overview the overall numbers, they might not match up perfectly with the fact that we are managing our business and managing each of these numbers from a community by community base -- community by community basis. And it's really a roll-up of exactly what's happening in the field in each community. And so you're going to see some anomalies in the numbers. Your question as to whether if demand is stronger, we're going to see that reflected in higher volume numbers or higher margins. And it's really the answer to that is really going to be about optimizing to both. We will, with greater demand see some greater volume but additionally, that greater demand will express itself through our dynamic pricing model and the ability to garner a higher sales price and margin.

Stephen Kim :

Yes, that's exactly where I was going to go next. So thanks for that segue. So I know you have this dynamic pricing model. One of the things that we've really noticed recently, and I'm curious if you have as well, is that homebuyers seem to prefer QMIs much more even than they did, quick move-in homes than they did in the past. And so I would imagine that you could probably actually reduce the level of incentive that you need to offer as your spec homes near completion, which is something very different from the way things were in the past. And so I'm curious, is that true? Are you finding that you can actually reduce incentives as your specs get further along the construction process? And has your dynamic pricing model adjusted to reflect that change?

Stuart Miller :

I do think it's important to note that last night I finished writing my remarks and talked a bit about volatility in my remarks. Little did I know that this morning I’d wake up and see even increased volatility. I say that as an overlay to all of the discussion around numbers looking forward. Have to be looked at in the context of very strange and moving market conditions.

Stuart Miller :

Absolutely. We'll see what the other numbers look like.

Alan Ratner :

First, just I was hoping to reconcile a little bit of Stuart and Rick's comments earlier just as far as kind of the late February, early March activity and how that pertains to the overall pricing from you that at least in your opinion, sales have remained steady here through the first couple of weeks of March and not to parse too finally between weekly data. But Stuart, your comments were that you did see a little bit of a tick lower in late February from the higher rates. And obviously, that's a rearview mirror now, but now the banking headlines are taking over. So I guess I'm just curious, A, can you reconcile those comments? And B, given that you think pricing has kind of found a market clearing price, so to speak, if orders were to fade a bit, at what point would you get more aggressive on incentivizing again or adjusting prices to bring that sales pace up?

Jon Jaffe :

Alan, it's Jon. I think there's a connection of a point that sort of made and that is as interest rate rates went up, we pulled on the lever of mortgage rate buydowns to keep our customers who were in the queue moving forward with a purchase decision. That's, I think, part of why we didn't see an impact to our sales, while we're seeing an impact to our travel.

Alan Ratner :

Appreciate that. That's all really helpful. Second, I know it's early and this can kind of take a lot of different directions here. But given the uncertainty in the regional banking sector today, on one hand, you guys and the other publics are a huge advantage over private builders given your long-term debt and the balance sheet and the strength that you have. But if you think about the industry more holistically, it's so reliant on debt financing from the regional banks that may be coming up to a tougher period here in the near term which could result in some tightening, whether it's on AD&C financing or build for rent purchases, anything that kind of utilizes that capital. So maybe this one is best for Stuart. How do you see this playing out, if there are any headwinds or tightening that might occur? And how could that impact your business even if you do have that competitive advantage from a capital perspective?

Operator:

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

Jon Jaffe :

Hey, Susan, it's Jon. Our dynamic pricing model really gives us a very clear view of the different elements that go into pricing home and associated incentives, mortgage buydowns, base pricing premiums, et cetera. So we've evolved that product through these market conditions. We've developed additional tools within dynamic pricing that give our operators that view of what's happening on a plan-by-plan community-by-community basis where they can track week over week changes in base pricing, incentives, et cetera, and stay very much on top of sales pace, what's needed and what is having the biggest impact on driving results.

Jon Jaffe :

Yes.

Rick Beckwitt :

It also allows us to identify the ones that are performing well from a sales pace. But that need pricing adjustments to the upside because we're not maximizing the value of the opportunities.

Susan Maklari :

Yes. Okay. That's all very helpful. And then turning to the balance sheet, you've got probably the strongest balance sheet you've ever had, especially given the operating conditions right now. Historically, when we've gone through periods of slowdowns or the global financial crisis, you've been able to leverage certain opportunities to drive long-term growth. Obviously, it's really hard to know how things will come together this time. But what are some of the things that you're looking out for? Where do you think there could be opportunities to take advantage of? And how are you thinking about investing in long-term growth relative to, say, shareholder returns or other uses of the balance sheet?

Rick Beckwitt :

I think consistent with that on the margin, the opportunities that might come on individual community-by-community basis is if things on a regional level with the smaller builders, smaller developers where they need capital, we can put that in one of our land vehicles.

Unidentified Analyst:

Actually, this is [Paul Sadowski]. First question, your order ASP increased 3% to 7% quarter-over-quarter on a regional basis. You did dimension that was pricing power. But I can't imagine pricing power drove all that. Was it more the balanced product or geographic submarket mix, et cetera? And then following on that, what percent of your communities have actually come off the bottom in order pricing?

Unidentified Analyst:

Okay. All right. Well, the second question, your first quarter gross margin came in a little bit about guidance. The midpoint on 2Q is basically flat. In the last quarter, you mentioned that you thought you thought 1Q would kind of be the low point for the year. Do you continue to believe that the second half of '23 will see higher margins relative to the first half?

Operator:

And our next question comes from Carl Reichardt from BTIG.

Stuart Miller :

So we've spent a lot of time thinking about this call. We think it's a very important metric for us. And I'm not prepared to make that prediction. What I want to say that it is very much at the center of our thinking, and there are some cross currents right now because of the reconciliation of supply chain disruption and some of the holdovers and the reconciliation of that supply chain disruption getting our cycle times back in line will be a factor in the answer to that question, and let's leave the answer to that in another day, but just understand that it's very much part of the focus of our management team.

Stuart Miller :

I'll answer it in the negative and say not the conditions that we've seen unfold over the past couple of weeks. We are -- look, there's -- as I said last quarter, the markets are moving and the financial markets have created complication. Since that last quarterly call, I would say that the capital markets have become even a bit more complicated. This is just not the time for us to be taking Quarterra to the market. I think that we're going to wait and see and look for the right opportunity to do the next right thing for the company. And I want to leave that as an open item as well. I feel like I'm not answering your questions, Carl. It's not like me.

Stuart Miller :

We have time to two more, please.

Michael Rehaut :

The first question, I just wanted to circle back to -- I believe it was Jon's comments on that 14,000 of savings per home that you feel like you've been able to achieve, I guess, maybe over the last, I don't know, call it, three to six months. That against your second quarter closing ASP, that's a little over 300 basis points of margin improvement. So I'm just trying to think about -- you mentioned earlier about still expecting some amount of improvement in second quarter -- I'm sorry, second half gross margins provided the pricing and incentive backdrop remain relatively stable. It seems like you're a little more hesitant to kind of say, okay, back half gross margins up by 300. Are there other things that we should be considering that would offset that? Is this more of a fiscal '24 event? Just trying to think about those savings and how they might flow through in the back half.

Jon Jaffe :

Yes. So for Q2, as I mentioned, you're just seeing the very beginnings of that because there is a time lag that Stuart addressed a moment ago. We put something under contract today, it affects homes we start tomorrow, which delivered call it six months from now. So you have that timing cycle. You do have a likelihood that lumber does move up some. We are battling, for example, in aggregates and concrete as a headwind. There is a constant energy efficiency battle that goes on that affects our manufacturers. So it's give and take in that, and that's why I said we feel comfortable with what we have put under contract so far. But it's all about. And so you shouldn't do the math where you apply 100% of that because there will be offsets.

Rick Beckwitt :

I think it's more of a Q3, Q4 type of benefit. But if you look at our guidance, we've pushed up to 21.5, which incorporates some of that improvement. And the thing you need to think about incentives is incentive is one part of the equation. The base price is another. And occasionally, we have to adjust base prices down because ultimately, we're really focused on net pricing. So we feel that we will get a benefit from the reduction in incentives and net pricing as we move through the year. So we're at the beginning stages of really stabilized markets and making the improvements as volume and traffic change.

Stuart Miller :

Great. Last question please.

Matthew Bouley :

So one follow-up on everything going on around the banking system. You laid out some sort of broader industry thoughts there. And I very much recognize is very fluid, but just kind of pertaining to your own mortgage business. Kind of lay out or unpack kind of as you guys go through the process of selling loans to the secondary mortgage market, do you have any exposure to the regional banking system there? And just any sort of higher level thoughts on how all this may impact lending standards and all that?

Bruce Gross :

Nice to be here. With respect to sales of loans to investors, we have the agencies that we sell to and other parties that are not regional banks. Some of those investors did have financing from regional banks. We're paying very close attention to that, but no disruption. And the backdrop is we could always sell to the agencies. So we feel very good about the sales to investors. Our warehouse lines are primarily the big commercial banks. So very little regional bank component with the warehouse line. So we're in really good shape, we vetted that. This is an experienced team that's been through the financial crisis back in 2008 and '09. So we have the playbook and we've reacted very quickly, and we feel very comfortable.

Matthew Bouley :

Wonderful. All right. Thanks you Stuart and Bruce. Perfect color there. Second one, just you mentioned at the top around land and it sounds like prices are very sticky and you're trying to push back on that. I think you said you'd eventually see kind of a lagged benefit to margins, if I heard you correctly. I'm just curious if you can elaborate a little on what you're doing to kind of push back and kind of get the land market where you think it should be at this stage?

Jon Jaffe :

Just for clarity, operationally, we're really staying very close to all land that is out there, so that as it does ebb and flow, we are in that flow, know what's going on and can make decisions quickly.

Rick Beckwitt :

And I think there's no doubt that the land market, the land sellers are seeing the permits and starts activity that Jon highlighted. I think some of them are getting a little bit nervous. They all think they had the last piece of land that can be acquired or developed. Jon, I have heard that comment for the last 20 years. There's always more than in the last piece of land. So we're being very careful or underwriting specifically to today's prices for respectable and strong margins. And if the deals make sense, we're going to structure them really well, and we'll move forward with them.

Operator:

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

Operator:

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

Rick Beckwitt:

Thanks Stuart. As you can tell from Stuart’s opening comments, the overall housing market has been reacting to a significant increase in mortgage rates, which has impacted affordability and home buyer confidence. While we continue to have many strong markets, in our more challenging areas, we've had to adjust base sales prices, increase incentives, and provide mortgage rate buydowns to maintain or regain sales momentum. As sales strategy -- our sales strategy has been to find the market clearing price for each of our homes on a community by community basis as quickly as possible, and price our homes accordingly. In many cases, we're solving to a monthly payment and not to a sales price. This requires a detailed understanding of community and product specific pricing, financing programs, traffic trends, inventory levels, and buyer sentiments. During the fourth quarter, our new sales orders declined 15% from the prior year on a 4% lower year over year community count. Our year-end community count was lower than we projected at the beginning of the year as we walked away and renegotiated on many communities. Jon will walk you through this as he discusses our land strategy. While our cancellation rate and sales incentives increased sequentially from the third quarter, our sales orders and sales pace per community was relatively flat throughout the fourth quarter, as we successfully executed our pricing strategy in most of our markets. To maintain and regain sales momentum, our fourth quarter new sales order price declined 9.5% sequentially from our third quarter with mix accounting for 250 basis points of the decline, and base price reductions and incentives, accounting for 200 basis points and 500 basis points, respectively. The combination of adjusted pricing and rate buydowns have created a more stabilized environment. As we cleared out or closed many of our older contracts in our backlog, our backlog has reset to these new prices, admittedly at lower margins, and we're seeing more stability and a trend toward lower cancellation rates. To this point, our cancellation rate peaked in October, declined significantly in November, and we've seen a continued reduction thus far in December. We fundamentally believe that this price to market strategy reflects our balance sheet for its focus, where we can maintain starts and sales, generate cash flow, and keep our home building machine going. To this end, as Jon will discuss, by maintaining our starts pace, we've been able to get cost reductions from our trade partners, and significantly increase our market share as many of our competitors that either stopped or slowed starts altogether. I'd like to now give you an update on our markets across the country. They really fall into three categories

Diane Bessette:

Thank you, Jon, and good morning, everyone. Stuart, Rick, and Jon have provided a great deal of color regarding our homebuilding performance, so I don't need to provide any additional details. Therefore, I'll spend a few minutes on the results of our other business segments and our balance sheet, some points already noted, and then provide high level thoughts for Q1 ‘23. So starting with Financial Services, for the fourth quarter, our Financial Services team produced operating earnings of $125 million. Mortgage operating earnings were $80 million compared to $77 million in the prior year. We benefited from a higher level of lock volume than expected as buyers locked in the attractive rates offered with our interest rate buydown programs. These discounted interest rates provided certainty to our buyers to avoid potential future rate increases. Title operating earnings were $44 million compared to $30 million in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction as the team continues to focus on efficiencies through technology. These solid results were accomplished as a result of great connectivity between our homebuilding and Financial Services teams as they successfully executed together through this choppy environment. Then turning to our Lennar Other segment. For the fourth quarter, the Lennar Other segment had an operating loss of $106 million. This loss was primarily the result of non-cash mark to market losses on our publicly traded technology investments, which totaled $96 million. Although, it's been a very tough environment for technology stocks, we have found and continue to believe that there are incremental operating efficiencies through these technology partnerships for both, our homebuilding and Financial Services platforms, as well as greatly improving our home buyer's experience. Then turning to the balance sheet. As we've all noted, this quarter, we were laser-focused on our balance sheet. We focused on pricing to market, turning inventory and thus generating cash as we -- and we also focused on preserving cash by matching our starts pace with our sales pace, and as Jon mentioned, reevaluating every land deal in our pipeline to ensure the underwriting aligned with today's market conditions. The results of these actions is that we ended the quarter with $4.6 billion of cash and no borrowings on our revolving credit facility. This provided a total of $7.2 billion of homebuilding liquidity. During the quarter, we continued our progress of becoming land lighter. At quarter-end, we owned 166,000 home sites and controlled 281,000 home sites, for a total of 447,000 home sites. This translates into 2.5 years owned, which exceeded our year-end goal of 2.75 years owned and was an improvement from three years in the prior year. We controlled 63% of our home sites, which was slightly lower than our goal of 85% since we walked away from approximately 28,000 home sites related to option contracts that we terminated this quarter. Last year's control percentage was 59%. When we calculate our years owned and home sites controlled, we include home sites with vertical construction that is homes in inventory. Since the goal of these calculations is to assess future balance sheet risk and homes in inventory present lower risk since they turn into cash in a short period of time, we plan to exclude inventory homes from the calculations on a go forward basis. It's just a better way to look at our business and will provide greater comparability to others in our industry. So, for reference, we had approximately 40,000 homes in inventory, mostly under construction at November 30th. If we exclude those homes from the calculations, our years owned was 1.9 years and home sites controlled was 69%. We also remained committed to our focus on increasing shareholder returns. During the fiscal year we repurchased 11 million shares totaling 967 million or about 4% of our outstanding shares at the beginning of the year. Additionally, during the year, we returned cash to our shareholders by paying dividends of $438 million. From a leverage perspective as we mentioned, we continue to benefit from our paydown of senior notes and strong generation of earnings, which brought our homebuilding debt to total capital down to 14.4 at quarter-end, our lowest ever, which was an improvement from 18.3 in the prior year. And as we mentioned, our net debt to total capital at quarter-end was a negative 2.4%. As we look forward, we do not have any senior note maturities in fiscal ‘23. Our next maturity is $400 million due in December of ‘23, which is our fiscal ‘24. And just a few finer points on our balance sheet. Our stockholders’ equity increased to $24 billion. Our book value per share increased to $83.16. Our return on inventory was 32.8% and our return on equity was 20.9%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant financial flexibility for the upcoming year. And with that brief overview, let me turn now to the first quarter of ‘23. It continues to be difficult to provide the targeted guidance that we have historically provided, given the uncertainty of market conditions. So, as we did last quarter, we're providing very broad ranges to give some boundaries for each of the components of our first quarter. So, starting with new orders, we expect Q1 new orders to be in the range of 12,000 to 13,500 homes and expect our Q1 ending community count to be about flattish with the prior year as we walked away from deals that would have produced new active communities. We anticipate Q1 deliveries to also be in the range of 12,000 to 13,500 homes. Our Q1 average sales price should be in the range of 440,000 to 450,000 as we continue to price to market. We expect gross margins to be about 21%. This number will adjust somewhat based on the number of deliveries, primarily as a result of our policy to expense field costs. As Stuart mentioned, as we see things today, we expect our Q1 gross margin will be the low point for gross margins for the year. And we expect SG&A to be about 8%. This too will adjust based on deliveries and homebuilding revenue. For the combined homebuilding joint venture and land sale and other categories, we expect to have a loss of about $10 million. And looking at our other business segments, we anticipate our Financial Services -- earnings for Q1 will be in the range of $50 million to $55 million. We expect a loss of about $25 million for our multifamily business and for the Lennar Other category also a loss of about $25 million. This guidance does not include any potential mark-to-market adjustments to our technology investments, since that adjustment will be determined by the stock prices at the end of our quarter. We expect our Q1 corporate G&A percentage to be about 2.0% to 2.2%, as a result of lower total revenues and our continuing investment in internal technology initiatives to produce efficiencies. Our charitable foundation contribution will be based on $1,000 per home delivered, and we expect our tax rate to be approximately 24.5%. The weighted average share count for the quarter should be approximately 287 million shares. So, when you pull this together, this guidance should produce an EPS range of approximately a $1.40 to a $1.70 per share for the first quarter. Finally, given the market uncertainty, we're providing boundaries for deliveries only for the full year of 60,000 to 65,000, but are not providing further details at the time. However, we do look forward to giving another update on our next earnings call. So, with that, let me turn it over to the operator.

Stephen Kim:

Thanks very much, guys. I appreciate all the information, very exciting times here. I thought that the most interesting thing you commented on today was your outlook for gross margins in 1Q to be the low point for the year. And so I wanted to explore that a little bit. I think you -- there were a few components. I think you talked about lower costs that would start flowing through -- I think you said in the back half of 2Q and mostly into the back half of the year. You also mentioned, I think, Jon, that lumber benefit is already in the numbers for 1Q. So, that's probably not the reason. So, there's two other potential reasons I could see why margins might improve. One of them is that maybe you're benefiting from having lower the level of specifications or finishes, finish level of the homes, and so its cost in U.S. Maybe -- and those would be delivered in Q2? Or that maybe you've seen an improvement in buyer demand over the past several weeks. And so, I was wanting to see if you could comment on either of those. And also tell us what range of mortgage rate are you assuming in your outlook?

Rick Beckwitt:

I guess the only thing I think I would add to that is very thorough -- is that -- our gross margin is impacted by the volume of closings that we have at every quarter. And Q1 is most likely going to be the lower volume quarter. And as we close more homes, as Diane said in her description, the level field overhead that gets absorbed is spread over more closing, so that has a positive impact on margins.

Jon Jaffe:

I just want to clarify, Steve, on what I said about construction costs. As I noted, we're currently working closely with our trade and adjusting contracted pricing. That's what I was referencing in terms of will start flowing through in the second half of the second quarter. The biggest needle mover is lumber, which moved down throughout the year, and we will see a benefit of that throughout the entire second quarter.

Jon Jaffe:

No, starting now and through quarter and even on some open commitments on homes already started. It's just that we'll see the first benefits of those renegotiated prices with trade starting to happen in the latter part of the second quarter, and we will see the full -- the benefit throughout the full quarter of lumber reductions that started happening in the summer of '22.

Rick Beckwitt:

Diane, do you want to start that one off?

Rick Beckwitt:

Well, and I think that basically, if you think about what we're doing strategically, really building the pipeline between our land bankers, our land bank programming and the execution strategy embedded in our volume-based programming. And that's just going to continue to build confidence. I think that you'll see our owned home site count continued to moderate and be right sized relative to the business to be able to adequately provide for either stable delivery levels or growth levels as we choose. But that confidence that we're building and that pipeline I think is really value-add for the future.

Rick Beckwitt:

Very good. It's good, and it's getting better.

Operator:

Next, we'll go to Susan Maklari from Goldman Sachs. Please go ahead.

Rick Beckwitt:

So, looking at our sales pace for last quarter as well as our go-forward sales pace, we're going to keep -- as Stuart said, we're going to keep the machine going and feel that from an overhead and operational standpoint we get greater leverage by keeping that sales active. We know it's above where we were in 2019 from a pace standpoint and our focus is to keep and maintain that pace as we move forward into 2023.

Jon Jaffe:

I would just add and remind you that our strategy has been and remains matching sales to our start pace, and we have a very steady start pace that will inform our sales pace as we move forward. That ties directly into the dynamic pricing model that as a tool our operators use to do exactly that.

Stuart Miller:

Yes. So, I'm happy you asked that question. I know it's on the minds of many of our investors and people that follow the Company. We're not ashamed of having too much cash. In fact, in these -- in times like we've been in, it's a tremendous advantage and produces a lot of optionality. Looking backwards to this quarter, this was a tough reconciling quarter. Again, you have the clash of prices coming down in a very complicated supply chain that was in this repair, exacerbated by two hurricanes rolling through our primary markets. This was a very good quarter to focus on our balance sheet and cash generation. But here we sit in what we do with cash, we're likely to continue to generate cash with the program that's in place. Stock buybacks are clearly one of those avenues. We're constantly looking opportunistically at repurchasing stock. We did purchase some stock this quarter. But in the abundance of caution, we just decided to go slow before we go fast. Stock buybacks are on the table. But, also as we come around, we know -- and remember that in the body of my messages, we are going to sit with a production reduction, I think, it's going to be by a third, maybe more, a reduction in production of homes, both multifamily and single-family. We are not going to see the existing home market, putting a lot of supply in place because buyers are protecting low interest rates. And we're not going to have an inventory overhang. So, it is our belief that the duration of this correction is going to be somewhat smaller or more limited. And having additional capital enables us to be opportunistic in growing our business when those signals start to come our way as well. And you know us from the past. People have seen how we operate in the past. Lennar tends to be a first mover; we probably will be in this case as well. So, book to grow our business and to buy back stock and to pay down debt, all of these are viable uses of cash. We're fortunate to have the optionality to go slow first and then to accelerate and to pick and choose where the best returns are garnered.

Ken Zener:

Stuart, an iconic movie says, ABC, always be closing, which requires you to start homes to optimize inventory turns, which reduces your land, your most cyclical asset. A simple strategy as many investors overlook when considering margins alone. My first question is, with starts leading orders, could you comment on how you balance the unit economics of, let's say, the lower margin, 5% versus the incremental cash flow of selling that unit as your land goes down 20% or perhaps 50% when your actual inventory units decline because I think the idea is the income statement is nice, but the cash flow that comes from these choices is much more cyclically important.

Ken Zener:

Great. And then second question, Diane, I think your comments on owned land, 2.5 years versus 1.9 [ph] absent WIP is new. Within that context, my question is if you do 12,500 starts at 50,000 annualized, just to make it simple, does that suggest or imply your ending inventory units will probably be down versus -- year-over-year versus your 60,000 closing because that's going to be potentially an enormous amount of cash flow from that unit reduction? Thank you.

Stuart Miller:

And by the way, it reminds me of a meeting that we had with one of our investors some years ago, where we mapped out -- and when I say some, I’m talking about like 6 or 7 or 8 years ago, where we mapped out exactly the strategy. You remember that, Rick?

Stuart Miller:

We mapped out exactly the strategy and said, this is what we're going to do, all the way down to the reduction in that inventory level, and this is exactly the game plan.

Matthew Bouley:

So, I just wanted to ask about sort of the, I guess, the downside scenarios. The balance between price, margins and pace, clearly, your price taker model is successfully keeping that sales pace elevated and you're getting the cash generation out of that. And I know you mentioned the 21% gross margin is going to be -- or potentially the low point for the year. But my question is if market conditions were to deteriorate, kind of where the limit is to your willingness to trade margin further? Is there somewhere where you would draw the line? Basically, how does the model kind of change when you get to these levels on gross margin? Thank you.

Rick Beckwitt:

And you really can't underestimate the leverage that we get in working with our trade partners as things slow down across the board. People are looking for work. If we're going to be the ones out there to do -- starting homes, we're going to get cost concessions, bringing cost concessions from our trade partners, from our land partners, and we're just going to continue, as Jon said, value engineer and re-specify product in order to make it more affordable, so we can have more higher margins.

Stuart Miller:

Okay. Look, I understand the concern and the black box of impairments that naturally people feel. If you look historically, we've been very quick to get ahead of the curve. And so, when you ask the question, did we clear the decks, we're always clearing the decks and that's how we think about it. The answer is as if the market is going to continue to deteriorate, and we can't put a boundary on what that might mean. We're going to always be straightforward and give as much visibility as possible. And I don't think there's additional visibility to give right now. I think that the size and scale of what we took as an impairment is about all there is. We really -- especially given cash and balance sheet and everything else, we really shook the tree this time and -- as we always do, and the -- cleared the decks, as you say. I think you're going to consistently see that with Lennar. It's always been the case with Lennar. Diane, do you want to add to it?

Operator:

Next, we'll go to the line of Truman Patterson from Wolfe Research.

Stuart Miller:

So, was the first part that he was asking about the pricing model?

Truman Patterson:

Yes, yes, the dynamic pricing.

Stuart Miller:

To be able to understand and really get into the pricing model, you'd have to talk to the inimitable Jeff Moses, and he doesn't talk to anyone. Keep it internally. But, do you want to go ahead and answer that, Diane?

Stuart Miller:

And it is real-time available to the local market as well as to the corporate office and everyone in between. And so that connected engagement really enables us to stay close to the market, close to the pricing and very interactive at all levels of the company.

Jon Jaffe:

The other thing that tool does, you hear us throughout our strategies, talk about start pace and sales pace. This tool connects all of the dynamics and metrics Diane just referenced to that pace, so we can adjust in real time to make sure that we're not ever getting behind the pace that we want to be at.

Rick Beckwitt:

Well, as we said in the commentary, we're constantly evaluating what's going on with other competitors, what their inventory position is, what their pricing is, are they generating sales? And this is a very fluid conversation that Jon and I have with the regional presidents and the division presidents. We are all over this. And to the extent someone make a pricing adjustment and if we need to move something, we're going to move it. We want to stay ahead of it and hopefully have them follow what we do. And there's not anything that we're really not familiar with that's going on out there.

Rick Beckwitt:

And I think that the drop to mic or the proof in the pudding is, and Stuart mentioned that we've only got 900 completed homes in the Company right now. And in many ways, I would tell Jon, I’d like some more. Jon said he'd like less. We have our even flow and machine going and homes are being produced as we match them to sales, we've got the perfect amount of inventory.

Diane Bessette:

Premium.

Truman Patterson:

Okay. Perfect. And then just on the vendor and contractor savings specifically, what inning of cost savings do you think we're in today? And as of, we'll call it, December 15th, are the savings primarily on the labor side, or are there certain materials, products, outside of lumber?

Operator:

Our next question is from Alan Ratner from Zelman & Associates. Please go ahead.

Stuart Miller:

So first of all, Alan, I'd say that we could look at some of the larger builders, and I'm sure that they'll adjust their start pace and no one has fleeted the switch in industry, a lot of very smart participants. But there are some practical realities relative to smaller builders across the country. Remember, the larger builders are that we make a proportion. And the capital markets are complicated right now. It's not just a question of strategy for some. It's a question of what can you actually get started and how are the capital markets supporting it. I think that it might be only 10% or 20% or 30%. I don't know what the percentage is going to be. My personal view is that it looks like many of the smaller builders are really pulled back, the complication of price reductions and what's been paid for land and stuff like that. The other side of it, which makes up about a third of production is multifamily. And the multifamily capital markets are very frozen up right now. I think that the number of new communities coming out of the ground for multifamily and even the single-family for rent buyers are kind of seized up because of capital markets considerations. So, let's not even throw in strategy just from a capital market standpoint, it feels to me, can't prove that, a very sizable portion of starts for next year are going to be under limitation. Now, if it ends up being only 10% instead of 25%, still, you're looking at a housing shortage. I know that there are many with different opinions on this. I believe there's been a production shortage, housing shortage across the country. If you talk to mayors and governors across the country, their single biggest concern is workforce housing supply and affordability. It is a drumbeat that is in almost every major city and every state. And we feel that there is a shortage that is going to be compounded by the fact that there will be some production and reduction out of this and whether 10% or 35%, it's still going to be short supply, and I think a more limited downturn.

Stuart Miller:

So, we've seen a combination of increased traffic, greater buyer demand, traffic increase, both on -- in the community level and on our website, definitely fewer cams, [ph] which we noted. And all of that has just been stabilizing the environment, hasn’t quite led to higher pricing yet, but those are generally happened before you gain some sort of pricing power accounts.

Stuart Miller:

Yes. That's the range that we're expecting at this point in time.

Mike Rehaut:

First question, just wanted to be clear. I am sorry if I'm not fully grasping elements of the guidance or comments. But on your view around or outlook around first quarter gross margins being the lowest of the year and improving from there on in. Just wanted to be clear that -- or perhaps you could articulate a little bit what type of view on price or pricing trends over the next 6 to 9 months does that incorporate? Because certainly, it appears that it's incorporating some amount of cost relief, I guess, as you're going into the back half. I'd be curious how much of a basis point standpoint the cost relief is. But more importantly, what type of view on price does that outlook for gross margins throughout fiscal '23 reflect?

Jon Jaffe:

Just to emphasize Rick's point, Michael, if you think about mortgage rate buydowns is really being a very effective tool in making sales in this environment. To the extent that rates come in, the cost of that buy down becomes less expensive and you could see probably potentially the biggest benefit from that if that come in.

Rick Beckwitt:

That's correct. So, we're assuming no price appreciation, no incremental price reductions. We think that the incentives that we've been offering are good, solid incentives and base prices in order to attract the volume. I think you can see that in the numbers that we've been generating. The margin upside throughout the year as we noted Q1 is going to be the low point. It’s really going to come from several things. One, Jon went through the cost side, Jon went through the cycle time, Stuart talked about land and we're going to continue to value engineer product to the extent that we need to.

Mike Rehaut:

Okay. No, I appreciate that. And I guess just secondly, any thoughts around community count growth as the year progresses? I know obviously, there's been movement on the lot side and walking away from different amounts of lots on the option side. But oftentimes that might impact one or two years out. So, any thoughts around where the community count might be by year-end '23 versus '22?

Stuart Miller:

Okay. Thank you, Mike, and thank you, everyone, for joining us. I know that we went on a little longer than normal, but these are complicated times. It's been a complicated year-end and we wanted to give a lot of detail. Look forward to reporting back in our first quarter. And if you have further questions, give us a call. Thank you, everyone.

Alexandra Lumpkin:

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

Stuart Miller:

Very good. Good morning, everyone. Thanks for joining us. This morning, I'm here in Miami joined by Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and of course, Alex, who you just heard from; Jon Jaffe and Rick Beckwitt, our Co-CEOs and Co-Presidents are on the line also, but they will be participating remotely for the Q&A. As usual, I'm going to give a macro overview and strategic Lennar plan. After my introductory remarks, Rick is going to talk about our markets around the country. Jon will update on supply chain, construction costs, land strategy, and as usual Diane will give a detailed financial highlight and will give some rough boundaries for the fourth quarter to assist in go-forward thinking and modeling. And then, we'll answer as many questions as we can. And as usual, please limit to one question, one follow-up. So, let me begin and start by saying that once again, the Lennar team has turned in an excellent third quarter result, which continues to enhance our positioning for the evolving market conditions. Throughout our third quarter, we continued to manage the still constrained supply chain and workforce and delivered over 17,200 homes with a gross margin of 29.2%, and the net margin of 23.5%. These deliveries continued to drive very strong cash flow and bottom-line earnings as we continue to refine our already efficient operation with SG&A of 5.8% for a 120 basis-point improvement over last year. With strong bottom-line earnings of $1.47 billion or $5.03 per diluted share, driving strong cash flow, we've continued to fortify our balance sheet. After paying down $575 million of maturing senior debt without replacement, we ended the quarter with $1.3 billion of cash, nothing drawn on our revolver and a 15% debt to total capitalization ratio as compared to 21.2% last year. As a matter of careful capital allocation this quarter, given current market conditions, we chose not to repurchase stock in favor of early retirement of debt. As we continue to drive strong closings and performance, we are well-prepared to handle the current market conditions. In addition to the well-documented supply chain constraints and limited workforce slowing production, housing has now been considerably impacted by the more than doubling of mortgage rates over the past months and therefore, the doubling of monthly payment costs and reduction of housing affordability. The housing market has continued to weaken, as expected, in response to the Fed’s too late, but now very rapid and aggressive reaction to inflation. Home building finds itself, once again at the forefront of all that is happening in the economy, and the Fed's use of its interest rate tool to curtail inflation is certainly having the desired effect on the for-sale housing market. The market is now adjusting. The interest rate movements were very sudden and adjusted very quickly, and that suddenness has always led to a pullback in housing demand. Part of the pullback is driven by simple affordability, and part of the pullback is driven by the psychology of the sudden and aggressive interest rate hike, causing either monthly payment sticker shock or a sense of having missed the boat. The Fed chair's additional increase of 75 basis points of the Fed funds rate yesterday together with an articulated determination to do more, suggests that even more challenges lie ahead. While demand has cooled at once high pricing levels, demand for shelter still exists, where price intersects with current interest rates to produce an affordable monthly payment. There is still a housing shortage across the country, especially workforce housing and household formation has continued to rise. There's still very limited inventory and there's very little exposure to traditional inventory overhangs like foreclosures and speculators. Additionally, buyers are still seeking shelter from inflationary pressures on rentals as scarce rentals and increased demand from those who would otherwise purchase, drive and keep rents higher. As we bring prices down and incentives up, demand is still there. And these fundamentals give us assurance that while there is short and medium term reconciliation, the long term prospects for housing continue to be strong. Demand remains reasonably strong at adjusted prices as buyers still have jobs as well as down-payments and have attractive credit scores and can qualify. With higher rates, prices must be adjusted downward and incentives used to find the market or sales just drop off. Accordingly, we have carefully managed sales price and our pace through the third quarter, exactly as we said we would last quarter. Although our sales are down 12% from last year's levels, we have focused our management's attention on finding pricing levels that attract demand. Each market is different, and as much as it is an art and not a science, our efforts have slightly lagged our goal of matching our sales pace with our start pace, but we feel certain that we will find pricing and accelerate that pace in the near future. In a few minutes, Rick is going to give a more detailed overall market review that will give a more comprehensive snapshot of what we've seen in our markets across the country. Along with bringing home sales price down, we are also laser focused on bringing down production costs as well. We are working with our vast network of trade partners to recognize that the world has changed and we all have to work together to keep the machine working. In fact, last night I returned from a two-day extraordinary supply chain conference that was hosted by our purchasing leadership group led by Kemp Gillis, trade partners and Lennar division leaders convened to work together to attack costs, find efficiencies and adjust to current market conditions. Rick and Jon will drive continued and focused attention on this critical initiative. And as the market recalibrates, land costs will have to adjust as well. Accordingly, we are reviewing and re-underwriting every land deal in our pipeline to the current market conditions. In time, new land deals will have different pricing that will be properly sized to the home sales prices. Overall, these are the trends as we see them. And while we can choose to fight against the trends, the reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments. Last quarter, we laid out our simple strategy playbook going forward. Let me review and add a few items. We're going to keep it simple and focused and here to this core strategy. First, as I said, last quarter, we're going to continue to sell homes, adjust pricing to market conditions, and maintain reasonable volume. We have discussed over the past years that we have a strong -- that we have a housing shortage across the country. We will continue to build even as prices adjust in order to fill that shortfall and provide much needed workforce housing. As we have noted many times in the past, whether the market is improving or declining, we employ our dynamic pricing model week-by-week to price product to current market conditions in order to maximize pricing and margin while we maintain a very carefully and limited inventory level. As the market moves, that is how we will continue to be responsive. Second, we are going to work with our trade partners, as I've said, to right-size our cost structure to current market conditions as well. Third, we will and have sharpened our attention on land acquisitions. We are being extremely selective on new land acquisitions and new communities. We have re-reviewed and re-underwritten every land deal in our pipeline, and we are re-underwriting to current market conditions. Capital allocation is being micromanaged as every dollar invested in land must compete against repurchasing our own stock as we seek to maximize total shareholder value and return. In sync with selling homes, we will continue to improve our cost of doing business by focusing on and reducing SG&A. We have seen quarter-over-quarter improvement in our SG&A over the past years, and we expect to drive efficiencies through technology and process improvement to offset market adjustments where possible while we leverage our extraordinary management team across the country. Next, we will maintain tight inventory control. We are aware that our inventory levels are up 20% year-over-year. This increase is mostly a function of growth, supply chain dysfunction, and expanded cycle time. As our growth rate is reduced to zero and our cycle times revert to normal, our inventory should shrink and should generate sizable cash flow in the future. Our commitment to sales pace will ensure that we will not create standing inventory in its place. Next, we'll continue to focus on cash flow and bottom line to protect and enhance our already extraordinary balance sheet. And finally, we will conclude our long-planned and awaited spin-off by year-end. Recent back-and-forth questions with the SEC could push the final date by a month or so, but Quarterra will be listed very soon. Of course, prior to the spin, we will have a comprehensive company overview and conference call to introduce the new management team and to further detail the financial elements of the company. Stay tuned. As we have continued to refine and finalize the three verticals of our spin company, we will spin a mature asset management company into the public market along with billions of dollars of assets under management that we previously held on Lennar's books. Lennar will be a pure-play homebuilding company with a simple mandate to build and sell homes that delight our customers while we drive and maximize shareholder value. The final spin of our new company, Quarterra, will trade under the stock symbol Q, and will have -- as noted before, will be an asset-light asset management business that will have a limited balance sheet. We are very excited about the prospects for Quarterra as this is our second spin in our history, and we have great confidence for its prospects for the future. So, let me conclude by saying that while the market is shifting and adjusting to a new higher interest rate environment, we at Lennar are prepared. We have been here before, and we have navigated adversity. We have a seasoned team that knows exactly what to do and how to do it. Every member of the Lennar management team is fully aligned and working in a coordinated way. We are extremely well positioned financially, organizationally and technologically to thrive and to succeed in these conditions. We recognize that interest rates are rising, inflation continues to be a legitimate threat and important parts of the economy are slowing. We know that the Fed is determined to curtail inflation, and this will take some time. But we also know how to adjust to the market -- to these market changes, and we are making those adjustments. As we look to the remainder of 2022, we recognize there are challenges in the market that we must carefully regard, expect that we will meet the challenges and that we will continue to adjust to maximize opportunity and drive Lennar into an ever better future. With that, let me turn over to Rick.

Jon Jaffe:

Thanks, Rick. This morning, I will discuss our sales and inventory management focus, our land strategy, and give an update on the status of the supply chain. I'd like to start by laying out a few additional thoughts on the detail that Rick just walked you through. As discussed, this quarter was all about the daily process of adjusting home prices to find market clearing values in each individual community. As noted, our starts and sales pace for the quarter were 4.4 homes and 4.0 homes, respectively. This gap between starts pace and sales pace comes from the time it takes to make the pricing adjustments necessary to be perceived as value by the consumer. Finding that value proposition is a process that takes several weeks and is ongoing. In other words, once market pricing is found through discovery, the market often experiences further adjustments, and a new value proposition must be discovered. As we went through the process of finding clearing prices in communities, this informed our decision-making, which enabled broader pricing adjustments, leading to our improved sales pace across our entire platform for the month of August. As Stuart noted, our operators use our dynamic pricing model to help them understand the timing of inventory as it moves through the construction process. This tool gives us visibility into sales pace and associated pricing by community and even by plan, allowing us to maintain our starts pace without building up excess inventory. Our inventory position at the end of the quarter was just over 500 completed unsold homes or 0.4 homes per community. Next, I want to discuss our land focus in the third quarter. As expected, we focused a lot of attention on reassessing every land deal in our pipeline along with updating our underwriting. Based on our intense review, we move forward only on those deals with starts in 2023 and where we were also confident in the updated financial underwriting. Most of the land deals we closed on in the quarter came from our strong land relationships with existing structured quarterly takedowns. These takedowns are deals where we would be starting the homes quickly and still projected healthy margins. All other deals based on the updated underwriting, either had its timing delayed, was restructured or we did not proceed. Our intensified focus on our land-light strategy was evidenced by our controlled home site percentage increasing to 63% at the end of the third quarter, up from 53% last year. We also further reduced the years of owned home sites to 2.9 years at the end of the third quarter, down from 3.3 years last year. And we reduced the number of home sites purchased in the third quarter to about 13,100, down 21% and 25% year-over-year and sequentially, respectively. Our extreme focus on a deal-by-deal review and adherence to our disciplined land lighter model drove the significant improvement in the strength of Lennar's balance sheet, as Stuart discussed. Now, I'd like to turn to the current state of the supply chain. Our third quarter continued presenting some favorable cycle time results while still dealing with ongoing disruptions from certain material shortages. Although it was minor, it's still significant that we achieved a three-day reduction in cycle time in Q3 from Q2. Additionally, over 50% of our markets experienced cycle time reductions in the third quarter compared to 25% in the second quarter. The primary material disruption in the third quarter was related to the delivery of electrical equipment such as switchgear, multimeter boxes and pad-mounted transformers. Construction labor remains very tight as industry-wide high levels of volume for second half deliveries moves through the various stages of construction. We expect to start seeing some easing in labor as the overall industry reduces the level of construction starts. This easing should start to first occur in the fourth quarter with front-end trades and in the first quarter with finished trades. As expected, cost increased in our third quarter as increases from lumber that spiked in Q1 flowed through our third quarter closings. We also saw increases in other material costs and labor in Q3 closings, resulting in a total direct construction cost increase of 6% and 21% sequentially and year-over-year, respectively. As a reminder, the drop in lumber prices we saw earlier in the year materially benefited the cost of our starts in the third quarter and will flow through deliveries in the first half of 2023. Thank you. And I'll now turn it over to Diane.

Operator:

Thank you. [Operator Instructions] Truman Patterson with Wolfe Research, you may go ahead, sir.

Stuart Miller:

Why don't I let Rick take that? Go ahead. I'm going to play a role of traffic cop here because we are in remote locations. So go ahead, Rick.

Truman Patterson:

Okay. Perfect. So, that 4.5% increase captures both, the incentive level and the base price cuts. All right. Thanks for that. And you all now have increased your option land 63% of your portfolio. It's been a pretty rapid shift over the past couple of years. And you mentioned that you reassessed every deal in your pipeline, and you're working with partners to improve underwriting standards. Could you help us understand if you've actually been walking away from deals at an accelerated pace? I noticed your option lot declined in the quarter. Could you discuss just the willingness of your partners to work with you all? And any chance you might be able to help us quantify what portion of controlled deals might be on the watch list or at risk?

Diane Bessette:

Yes.

Jon Jaffe:

I would just add that we have extremely strong relationships with a lot of land partners. And relative to your question, we are able to work with them to either adjust timing, to restructure, to change pace. And that combined with, as Stuart described, just a constant refresh analysis just keeps us very current so that the land we are acquiring is turning into starts very quickly with very acceptable margins. And if it doesn't fit that criteria, we're finding the appropriate alternative solution for the asset.

Susan Maklari:

My first question is, Stuart, you talked a lot about cash generation. And as we do think about the overall market moderating, can you talk to some of the changes in the business today relative to the past cycle? What that will mean for your ability to generate cash as we think about things changing on the ground, and the areas that you're really focused on investing in, in order to position the business for that eventual recovery, and where you see Lennar going over time?

Susan Maklari:

Okay. That's very helpful color. And then following up, affordability is obviously a key focus as rates rise and the macro changes. Can you talk to some of the benefits of your underlying operations and how you're able to sort of drive that narrow band between the tensions that exist on the cost side relative to what the consumer needs and the ability to get those first time kind of home buyers into a house?

Rick Beckwitt:

Yes. It's exactly what you said, Stuart. It's a combination of us reducing sales prices and having the margin impact, and you saw that we executed on that during the quarter. We've discussed with our trade partners that there needs to be a sharing. Everyone made a lot of money during the up cycle, and it's time to work as partners to restructure the cost side on both the labor and material side. And in addition, as Stuart walked through the land side of the business, there's going to be some adjustments in land pricing. So, it's the collective of all three of those that we will do in order to execute the strategy to keep the sales momentum going.

Stuart Miller:

Yes. I guess, the bottom line, this is a dynamic situation. And the execution part of that is alignment. You hear alignment with me, Rick and Jon, and we've conveyed that to the Lennar organization, to the trade partners and to our land partners as well that work has got to be done, and everybody is at work.

Stephen Kim:

Just first question just from a housekeeping perspective, from calculating your starts, we're probably about 15,700. Correct me if I'm wrong. And then, you talked about inventory, maybe freeing up some cash. I think you said that cycle times, moderating cycle times eventually was 25%, I guess, of the growth. I suppose that was a comment about your sticks and bricks inventory. So, the bottom line is on the inventory, I'm thinking that the cycle time negative impact. Am I right in thinking that you're saying that that's about $1.8 billion of cash that's burdening your current inventory? So that number and then also the 15,700 starts, is that in the ballpark?

Stephen Kim:

Yes.

Stephen Kim:

Got you. And then in addition to that $1.8 billion neighborhood kind of number, you had also mentioned that you could see your inventory shrink further due to slower growth, more on the land side and that sort of stuff. But I assume that growth comment is temporary. So I'm thinking that near term -- the longer term, the opportunity is probably really on the WIP. [Ph] So, correct me if I'm wrong on that. But I wanted to ask about your standing inventory comment as well. You said, I think, Jon, you mentioned about 500 finished completed -- or finished specs right now. The way I calculate that that's about 2 to 3 times -- where you typically have 2 to 3 times more than that before the pandemic hit and all that on a per community basis. And so, I'm wondering, is this 500 like the new normal for you? Is this a new desired level for you? And if so, why is that if what we've been hearing is true that you're seeing that folks actually fairly actually preferring customers or preferring homes that they can move into more quickly. Just wanted to understand if there's any change in your thinking about managing specs as they get near completion, and why you might be looking to reduce that number in light of customer preferences.

Jon Jaffe:

I think you really covered exactly what our operating strategy is, Stuart. And Stephen, your assessment of the numbers is right and the consumer desirability especially in a changing interest rate environment for a quick move-in. They can lock in their rate if they buy today and create that certainty for themselves. So, that is definitely an advantage. But we're very-focused, as Stuart highlighted, using dynamic pricing to make sure our homes are sold in time. So, as they come off our construction assembly line, we're able to deliver them to the customer. And that will fall in that range in a more normalized time of about one community per week. It will fluctuate from time to time, but that's our focus.

Stuart Miller:

And then, just to add -- to go back to your earlier comment, yes, Steve, a zero growth rate would be a temporary condition, not a permanent one. But there's an overhang or an overshadowing concept, and that is we don't want to fight to take. So, we're not going to try to grow when the tape is telling us not to, and that's clearly the case. But as the market comes back and as I noted in my comments, the long-term prospects for housing are strong and good. As the market turns around, we'll be very well positioned with a very strong cash position to be able to lean into market conditions improving as that happens.

Alan Ratner:

I guess, first, Stuart, maybe directed to you. We've talked in the past about build for rent and that space being a potential kind of countercyclical vehicle in the event of a slowdown in primary demand, which is clearly what we're seeing today. I'm just curious if you could talk to your current BFR business, whether perhaps you're leaning a bit more heavily on that in the current climate. And obviously, with your relationship with the fund and the investors there, what the current appetite is among those investors?

Rick Beckwitt:

Yes. Stuart, as you mentioned, as rates have risen, several of the SFR players use leverage that's floating in order to underwrite and finance their deals. Accordingly, some of the investment in that space has slowed down, but rents are continuing to maintain. And as a result, they'll get -- they'll ultimately get their embedded yields that they're looking for. For us as a company, we had about 1,000 homes that we sold to the single-family rental space in the last quarter. It's probably underestimated because there were some additional sales in our communities that other folks are investing in and renting that aren't captured in that number. But it was about 1,000, and our SFR program itself was a little bit more than 700 during the quarter.

Alan Ratner:

Okay. No, that's really helpful. And thank you for that disclosure there. It's very helpful. I guess, second question just on the kind of the monthly cadence you described. I think, given the 4% increase in incentives/base price reductions, combined with the fact that in August, we obviously saw mortgage rates pull back temporarily, it's not too surprising to see that kind of be the strongest month of the quarter. I think you mentioned that September was kind of following a similar trajectory, which, I guess, I'm a little surprised given the continued increase in mortgage rates or the reemergence of mortgage rates since the end of August. So have you further increased incentives or gotten even more aggressive on price reductions to kind of combat that move we've seen in rates, or are you still seeing that momentum continue in spite of the higher rates?

Alan Ratner:

Got it. That's great to hear.

Alan Ratner:

To that point, Stuart, if I could sneak in one more. It sounds like many of your competitors have been a bit more reluctant to be as aggressive as you have on the pricing side. So I'm curious if you're seeing more builders of late kind of respond in force to try to match what you guys are doing and presumably one or two of the other larger builders are doing, or is there really a clear divergence right now in terms of strategies out there, some builders trying to hold on to margin as long as possible and others trying to find the market as you guys are doing?

Operator:

John Lovallo with UBS, you may go ahead, sir.

Stuart Miller:

Rick, why don't you take that?

Jon Jaffe:

I think that's right. As we've talked about on prior calls, the second half and the fourth quarter will be our peak construction cost as the highest lumber work through that. And that will start coming down at the very end of the fourth quarter and into the first quarter. So, that makes sense what you said, Rick. And clearly, the biggest driver is what we're doing to adjust to market to keep our sales pace.

John Lovallo:

Okay. That's helpful, guys. Thank you. And then, maybe switching gears to Quarterra. Third-party equity commitments for the asset management business, I think, were $4 billion last quarter. What has that grown to? And how much third-party capital has been committed to the land strategies?

Operator:

Mike Rehaut from JP Morgan, sir, you may go ahead.

Stuart Miller:

So Mike, I think the best way for me to answer this is to say that we have decidedly not given guidance for the fourth quarter because there are so many moving parts. We recognize the best we can do is give some boundaries to help the modeling. I think that there -- it gets even more complicated as we go out to the first quarter. So, we're not going to wade into those waters simply because there's a lot moving around. As we sat yesterday and listened to Chair Powell lay out kind of his thinking for the way forward, it just helps us recognize that that we're living in a dynamic environment that's going to change a lot of things month by month, quarter by quarter. And we're focused on week by week. Our management team gets together every other day to coordinate, to find alignment and to look at the patterns that are revealing themselves real-time in the marketplace, and each market is different. So, I guess, that's a big and long-winded excuse, but we're not really going to weigh in on our first quarter numbers right now.

Stuart Miller:

Great question. We've given that a considerable amount of thought. I'm going to turn to Rick in a second on this because this is his favorite topic. But we are thinking about community count growth into next year. I can't prove it right now, but we think that there's going to be some comparable reconciliation in land pricing, which will enable us to find opportunities that will rightsize for current market conditions. But we're going to have to wait and see on that. Rick, could you add to that?

Stuart Miller:

Thank you, Mike. All right. We'll wrap it up there. I want to thank everyone for joining us. These are tricky times, but this is a seasoned management team that's been there -- been here before. We have a game plan, strategy. You can expect that we're going to be adhering to that strategy with certainty and look forward to reporting back as we get to the end of the fourth quarter. Thank you, everyone.

Alexandra Lumpkin:

Thank you, and good morning. 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. As forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in this morning’s press release and our SEC filings, including those under the caption Risk Factors contained in Lennar’s Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

Stuart Miller:

Very good. Good morning, everyone, and thank you for joining us. This morning, I'm here in Miami and I'm joined by Jon Jaffe, our Co-CEO and President; Rick Beckwitt, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; and Bruce Gross, CEO of our Lennar Financial Services; and of course, Alex, who you just heard from. As usual, I will give a macro and strategic overview. After my introductory remarks, Rick is going to talk about our markets around the country. Jon will update our land program and supply chain and construction costs. And as usual, Diane will give a detailed financial highlight. And as noted in our press release, give some very limited boundaries to assist in go-forward thinking and modeling. And then of course, we'll answer as many questions as we can, please limit to one question and one follow-up. So let me begin and start by saying that we're very pleased to announce another hard fought and well executed quarterly performance by the associates of Lennar. Throughout our second quarter, we continue to sell homes and still offset higher land, labor, and material costs. Our gross margin as reported was 29.5%, net margin was 23.4%. They continue to drive very strong cash flow and bottom line results, as we continue to refine our business model for durability with a very efficient SG&A of 6.1%, which is a 150 basis point improvement over last year and a record for third quarter. With this strong performance and cash flow, we have continued to fortify our balance sheet with $1.3 billion of cash, nothing drawn on our revolver and a 17.7% debt-to-total cap rate ratio, as compared to 23.1% last year. Accordingly, we're very well-positioned to pay down another $575 million of debt later this year, as it comes due and further strengthen our balance sheet. We also managed our sales price and pace through the second quarter and increased new orders by 4% year-over-year, even though we began to see signs of weakening in the overall market. This weakening has continued into the third quarter. The housing market has cooled as expected in response to the Fed's aggressive and rapid reaction to inflation. The resulting very rapid almost doubling of the 30-year fixed rate mortgage rate in six months has had the desired effect of slowing price appreciation and moderating demand by increasing monthly payment costs and reducing affordability. While the market has cooled, it has clearly not stopped. Demand remains reasonably strong as buyers still have down payments and have attractive credit scores and can qualify. Household formation has continued to rise and although, we have adjusted some prices in many markets, those prices remain higher on a year-over-year basis. Buyers are seeking shelter from inflationary pressures as scarce rentals drive rents higher. Supply remains limited across the country and the need for affordable workforce housing continues to be at crisis levels. Clearly, production must catch up to the growing household numbers as production of dwellings over the past decade has lagged -- has lagged prior decades by as many as 5 million homes. Nevertheless, the rapid increase in interest rates together with price appreciation have created at least sticker shock and perhaps a more structural cooling of demand. In a few minutes, Rick is going to give a more detailed overview market by market review that will give a more comprehensive snapshot as to what we have seen to-date. Although, these preliminary reflections of market conditions are not as positive of the state of the market, indicators have been building since the Fed's tightening began, and given the Fed's expressed conviction to combat inflation by the definitive statements made recently. It seems that these trends will harden as the Fed continues to tighten until inflation subsides. While we can choose to fight against the trend, the reality is that the market has been changing and we are getting ahead of it by making all necessary adjustments. So what is the playbook going forward? We're going to keep it simple and we're going to adhere to our core strategies. To begin, we are going to sell homes adjusting price -- pricing to market conditions and maintaining reasonable volume. We have discussed over the past years that we have had a housing shortage across the country. We will continue to build as prices moderate and adjust in order to fill that shortfall and provide much needed workforce housing across markets. As we have noted many times in the past, whether the market is improving or declining, we deploy our dynamic pricing model week by week to price product to current market conditions in order to maximize pricing and margin, while we maintain a carefully limited inventory level. As the market moves, we will continue to be responsive. In sync selling homes, we will continue to leverage our extraordinary management team across the country and improve our cost of doing business. We have seen quarter-over-quarter improvements in our SG&A over the past years and we expect to drive efficiencies through technology and process improvement to offset market adjustments wherever possible. Next, we will continue to focus on cash flow and bottom line to protect and enhance our extraordinary balance sheet. Our great success over the past years to rise from the successes around careful land management and inventory controls which have driven cash flows, enables us to reduce our debt, repurchase shares of stock, and drive shareholder returns. In the second quarter, we repurchased another 4.1 million shares of stock for approximately $320 million and drove our return on equity to 21.4%, a 260 basis point improvement over last year. Finally, we will conclude our long planned spin-off by year-end. As we have continued to refine the three verticals of our spin company, we will spin a mature asset management company into the public markets along with billions of dollars of assets under management that we previously held on Lennar's books. The final spin of our new company, which we will call Quarterra, will trade under the stock symbol Q, and as we have noted before, will be an asset light asset management business that will have a limited balance sheet. By finalizing the spin, we will further reduce Lennar's asset base by another estimated $2.5 billion, which will drive higher returns on our assets and equity base and will not result in a material reduction of either our bottom line or our earnings per share. We're very excited about the future prospects for Quarterra as this will be the second spun company in our history and we have great confidence in the future -- in the prospects for its future. So let me conclude by saying that while the market might be shifting and adjusting to a new higher interest rate environment, we at Lennar are prepared. We are extremely well positioned financially, organizationally and technologically to thrive and to succeed in this evolving housing market. We recognize that the interest rates are rising and inflation continues to be a legitimate threat. We know that the Fed is determined to curtail inflation and this will take some time, but we also know that we can adjust as the market changes and we will. We also know the difficulties in the supply chain continue to persist and we know that land and labor remain in short supply. And we know that cash flow matters and that a strong balance sheet enables us to operate from a position of strength. As we look to the remainder of 2022, we recognize that there are challenges in the market that we must carefully regard expect that we will meet the challenges and that we will continue to adjust to maximize opportunity and drive Lennar into an ever better future. With that, let me turn over to Rick.

Jon Jaffe:

Thanks, Rick. This morning, I'll discuss our land position and give an update on the status of the supply chain. I will be brief as I know that sales and interest rates dominate the interest of our investors. We are pleased with the excellent progress we continue to make on our land light strategy as evidenced by our controlled homesite percentage increasing to 62% at the end of the second quarter from 50% last year. We also continue to make progress by reducing the years of supply of owned homesites to 3.1 years at the end of the second quarter, down from 3.3 years last year. To-date, we have worked with our land strategies group, which will become a vertical of Quarterra to continue to reduce our years of land owned even lower. Using this strategy, we have cycled some $10 billion of land and land development from owned to controlled as we refined the supply of just in time home sites to our homebuilding machine. Our extreme focus on the land lighter model saved us a significant amount of cash spend on land acquisitions during the quarter. We ended the quarter as noted with $1.3 billion in cash, no borrowings under $2.6 billion revolver and homebuilding debt to capital 17.7%. As Stuart noted, we are very well positioned to manage through the changing interest rate environment with our excellent asset land light position and very strong balance sheet as the foundation for that position. Turning to the supply chain and its well documented challenges for the industry. Our second quarter started presenting some favorable news. There were still intermittent disruptions and an increase in construction costs, but for the first time since the disruptions began, we saw a flattening in cycle time. Over the past four months, cycle time has expanded by only five days, which we believe signals at peak. Additionally, about 25% of our markets experienced cycle time reductions in the second quarter compared to the first quarter. There are still challenges that occur, but we are managing them effectively evidence not only by this flattening of cycle time, but also by being above the high end of our guidance for second quarter closings. Our direct construction costs in the second quarter were up 1.6% sequentially and 20% year-over-year, both lower than the comparable increases for the same period in the first quarter and fourth quarter of 2021. Rise in labor cost accounted for all of the increase in the second quarter. Material costs were lower due to the lower priced lumber from starts in the second half of last year. We expect costs will rise again in the back half of 2022 as increases in lumber that's back in Q1 will flow through those closings. The current drop in lumber prices that we're experiencing would start near the end of our second quarter will lower the cost of our starts in the second half of this year and related deliveries in the first half of 2023. Thank you. And I'll now turn it over to Diane.

Operator:

Thank you. We will now begin the question-and-answer session of today's conference call. [Operator Instructions] And our first question comes from Stephen Kim at Evercore ISI. Please go ahead.

Jon Jaffe:

32:06 Hey, Stephen. It's Jon. So relative to incentives, they're still relatively low. As Rick mentioned, we're calling about 1.6% of our -- that's what we're seeing today's market -- in some of those markets as they continue to adjust. It might get a little bit more. In lumber, what's flowing through our numbers and is already in our backlog, which gives us comfort our guide on gross margins is about a $6 a square foot increase from our start over the year. So we have good visibility to exactly what that is.

Stephen Kim:

Yeah. That's a fair point. And so I guess in regards to that, I was curious as to the exposure to cancellations, a lot of the builders -- well, all the builders, really, except you guys are sort of providing your documents, how much earnest money deposits they collect from their customers as a percentage and we look at that as a percentage of the ASP. I was curious, if you could talk about that and the other part of my question relates to the single-family rental business because Rick when you were going through all your markets. It was interesting you didn't really talk much about rents, but obviously that's an important part of the equation. I know that the single-family rental, appetite to acquire units has been really strong, but people are talking about whether that bids going to disappear in the current environment. And so, I was wondering if you could just sort of talk about the ability of your company to actually benefit unlike in cycles past from some of the rising rates pushing business into the rental arena?

Jon Jaffe:

Just mortgages in place, but interest rate dropped.

Jon Jaffe:

Yes. And what was the back part of that question, Steve?

Stuart Miller:

So let me say, Steve, that the entire rental market is interesting right now. We've talked a lot over the quarters about housing shortage. The fact is that even as interest rates go up, people still need a place to live household formation remains strong. I know you've covered a lot of these dynamics. And at the end of the day, we're probably going to push more people from homeownership towards rental that will mean multi-family, traditional multi-family as well as single family for rent. And I think there's going to be some dynamic shifting that moves around in all of these areas to the extent that we move more people out of home ownership and towards rental, it increases the demand for an already supply constrained component of the market, that's the rental market both SFR and traditional rentals. If you look at rental rates, and where they have been moving over the past year, both on the traditional rentals and the single-family for rent, you've seen pretty aggressive movements upward in rental rates. That is a function of limited supply and growing demand. So how this is going to play out, as part of what we point to as some of the confusion or some of the question marks that sit out there over the next quarters as the market reconciles to a new interest rate environment, rental rates that are moving and shifting and even the SFR buyers are going to have to rethink what their model looks like. They have higher interest rates in their capital stack, but they also are getting higher rental rates from their customers. So we're going to have to see how that plays out.

Stephen Kim:

Great. Thanks.

Operator:

Thank you. Our next question comes from Buck Horne from Raymond James. Please go ahead.

Stuart Miller:

I think we've noted before our start pace is primarily a function of an orderly program of building and delivering homes on a recurring basis. Our start pace has been more constrained by the availability of permits and people to actually generate the entitlements and permits that are required in order start a home. And so you'll see some variability in our starts as we look ahead to our third quarter, we actually see some modest pullback just because the difficulty in getting permits out. As I've said in my comments and I'll say again, we've been looking at over the past years a supply -- a limited supply of housing across the country. And while the country goes through the interest rate and sales price kind of reconciliation or rebalancing, we're going to continue and orderly start program even as demand moves up and down, we'll adjust pricing in order to get the appropriate amount of deliveries into the system to make up some of the work force efficiencies that exist in most major markets.

Stuart Miller:

The other thing that is behind the numbers is that we've been -- we strategically have as we've done in the last several quarters sold our homes later in the construction cycle, which works very effectively in this market because our buyers want to lock their loan closer to the time that they're going to be closing on the home. As a result, we've limited presales or early sales which makes the start pace a little bit higher than the sales pace.

Stuart Miller:

I think it's important to recognize, we have virtually no land impairment risk in our backlog. Our margins remain healthy. We remain focused on recognizing that prices are going to move around a little bit and we'll continue to build efficiencies in the way that we create value for our customers. But our land acquisition model and our land acquisition program has been rock solid and I think the market is going to have to fall an awful lot for us to start talking about impairments once again. That's a throwback to the last financial crisis and we just don't -- we have a lot of room in margin. We have a lot of adaptability in our program long way before we start thinking about impairments.

Stuart Miller:

And the other thing that we've seen with regard to backlog is to the extent in many markets that someone cancels out, we have a replacement buyer because there's such limited available inventory that's ready to close on.

Stuart Miller:

You bet.

Truman Patterson:

Hey. Good morning, everyone. Thanks for taking my questions.

Truman Patterson:

Just wanted to follow-up, main incentives were I believe 1.6%, when I'm thinking through the midpoint of your third quarter orders gas up kind of 4% to 5% year-over-year pretty healthy in the market I think right now. Just what sort of incentives or pricing adjustments do you think are needed in the upcoming quarter kind of sequentially to hit that metric? And then also when you're thinking across the three buckets of markets that you mentioned, are there any structural items or reasons that the no impact bucket might not move closer to the second or third tier?

Stuart Miller:

As I said in my opening remarks, our incentives have still historically run much higher than the 1.6% level. As we look forward, there's probably another point 1% that has been factored into our go forward look with regard to incentives. And as Jon said, that could be 0% in some markets and a little bit higher in others.

Truman Patterson:

Yes, I know. Understood. And clearly, you all are maintaining elevated absorptions to drive returns. But next question on your old shift in your land bank has been pretty dramatic over the past several years and option or control lots are now up to 62% this quarter. I'm trying to understand whether there's been any shifts in the land market, the past couple of months from either your land developers or land bank partners willingness to option deals, change in terms competition et cetera., that by year end is that kind of 65% metric maybe kind of cap this cycle?

Stuart Miller:

We have a couple of strategies embedded in our land program. First of all, we have some really comprehensive relationships with some of the land developers. I think we move in sync and everybody understands that sometimes markets move up. We all make money together. Sometimes markets move down, we all shift and adjust to market conditions. I think that's not a difference in the land development world. It's exactly the way that we've constructed our land development world. Additionally, Jon properly pointed out that our land strategies component of our Quarterra ultimately asset management business is a really important structural change for the company. We've built in elasticity in that program really to be able to act as a shock absorber as we go through the ups and downs of market conditions. And I think it's one of the more important structural changes that will provide stability for our land programming as we go through the years. And so this is something that we've been focusing on, anticipating gyrations and movements in the homebuilding world and building land strategies that are flexible for times just like these.

Operator:

Thank you. Our next question comes from Alan Ratner from Zelman and Associates. Please go ahead.

Stuart Miller:

It’s why we've given broad boundaries and instead of guidance, we don't want to guess because there are a lot of moving parts, a lot of them. They're the obvious ones like lumber prices and realtor costs and variety of things that, that we can put our finger on, but then there's also operating leverage and where ASP is going to go and a variety of things. We know that we're trying to aim for a moving target and that target is moving in ways that we can't always anticipate. So the answer to your question is, we're not quite sure yet. We've tried to give some boundaries as to what we see coming up in the third quarter and we're going to address the fourth quarter as we get closer to it and see what that landscape looks like, Alan. To get more granular than that would be a series of guesses but I don't think brings any of us closer to something that's actionable.

Stuart Miller:

Well, look Alan, I think you know, you've been around us and the business for a long time. Land is the most complicated and difficult part of the strategic composition of a homebuilder. And we have spent -- we at Lennar have spent tremendous hours thinking about land strategies and how we can have -- how do we create greater visibility to our future without greater risk to our balance sheet and that has very much been the balance that we've migrated over these six (ph) years. It's what we're most enthusiastic about as it relates to our land strategies vertical in Quarterra, the ability to tie up more land, to give us more visibility, but to do it in ways where we have maximum flexibility. The ability to, as you say, if the market changes in dramatic fashion, we can pull back or renegotiate or reposition some of the longer dated strategies. The shorter dated strategies are going to be more durable and we'll be able to just build through. So what we've done is we've trifurcated our thinking around land into short, medium and long term buckets And we have carefully crafted flexible programs so that we can enhance our visibility and reduce the risk to balance sheet and enhance flexibility in doing so. And I think that's what you're seeing evolve with our company. You look at our balance sheet today, it is as strong as it's ever -- it's stronger than it's ever been and the visibility to land only benefits our future.

Operator:

Thank you. Our next question comes from Mike Rehaut from JPMorgan. Please go ahead.

Stuart Miller:

Well, as I said in my remarks, we're adjusting pricing on a home by home basis. And in many of these markets, net pricing and gross pricing is up 40% to 50% over the year ago period. So it takes relatively modest price adjustments to move the needle in order to spur some activity in these markets. What buyers are really focused on right now is just sticker shock. There's been an increase in mortgage rates and that combined with the economic headwinds, people just are concerned are they making the right decision at this point in time. Reality is that the market has very limited inventory. We're seeing rent growth in all of these markets. So folks are really just trying to make sure that they don't feel that as when they talk to their neighbor that there is a downward pull. So people are working through the process. They understand that values have adjusted. And in the overall mix of the composition of our company as a -- on a global margin basis, these are very small percentage changes and what you've seen us factoring those into the go forward guidance.

Stuart Miller:

And I just want to direct my partner Rick and just say, downward pull was a little severe. I think the greater pool was a little bit [Multiple Speakers]. Go ahead, Mike.

Rick Beckwitt:

So we're not giving regular updates on Quarterra just yet and it don't want to get locked in that bucket, but I think we've given some boundaries in our past calls as to assets under management relative to Quarterra. I don't want to give you a number right now. I don't have it at my fingertips. But what I did say is an additional $2.5 billion over time, I think Jon highlighted some of the migration of some of our land assets through our land strategies program. But we've really seen quite a lot of assets come off our balance sheet already relative to our Quarterra verticals and the way they have developed over the past couple of years. I think as we move forward, we're going to continue to see our land strategies program really continue to develop and that will benefit Quarterra. It will also benefit Lennar, but the $2.5 billion that I've highlighted is additional to the dollars that have already been -- that have already migrated from the Lennar balance sheet to the Quarterra private equity components.

Mike Rehaut:

Yes. No, it's just the clarification or follow-up here, the answer to my first question on mortgage buydowns or adjustments. [Multiple Speakers] component, where that flows through on the income statement if it's the financial services or the regular gross profit?

Mike Rehaut:

Okay, perfect. Thank you so much.

Operator:

Thank you. Our last question comes from Susan Maklari from Goldman Sachs. Please go ahead.

Susan Maklari:

Thank you. Good morning, everyone or good afternoon, I guess.

Susan Maklari:

My first question is, you commented that you have seen some relative improvement in the supply chains and it feels like we are maybe at or coming off of the peak there. Can you give a bit more color in terms of what you're seeing on that side? And obviously as the demand does shift and moderate a bit, how you're thinking of the further improvement that can come through there?

Stuart Miller:

Right. Is it the resolution of supply chain issues is not so much in the supply chain and has gotten easier. It's that we've figured out and worked hard to manage it better. We have the residual impact of the fact that our cycle time still remains a sticky kind of larger version of itself. So it still takes us longer to produce a home, which is inefficient and a derivative of supply chain management.

Stuart Miller:

Well, here's the positive thing about what's happened at Lennar is over the past years, we've had terrific prosperity and we've used those moments not to sit back on our laurels, but instead to really focus on enhancing our business model. We've refined the cost of operation. We focused on cash generation. We've built models that limit inventory and limit the exposure land on our balance sheet and enabled us to generate a tremendous amount of cash. We expect to continue to think very much the same way as we go forward that we're going to be positioning our company with land visibility that enables us to continue to build our business in an orderly fashion. We expect to continue to pay down debt. We expect to continue to opportunistically buyback stock and we have the capital in the balance sheet to be able to do that, even while we're spending $2.5 billion of additional capital from Quarterra -- so -- with Quarterra. So I think that we are in an enviable position of strength. We said so at the end of our press release and in my comments and that position of strength at times like this is a great way to be positioned and to deal with the market condition. I think that's a good off road, good time to wrap up. Let me say that we as a group, as a management group, are happy to have our partner Rick back in the fold after his belt with COVID last week. He was manned down for a few days, but the company was still able to operate without losing a step, but now we're at full strength. And we look forward to reporting back at the end of third quarter, hopefully with a bit more certainty. Thank you, everyone.

Alexandra Lumpkin:

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

Stuart Miller:

Great. Good morning, thank you. And thank you all for joining this morning. I’m here in Miami, joined by Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Bruce Gross, CEO of Lennar Financial Services; and of course, Alex, who you just heard from; and we also have Rick Beckwitt, Co-CEO and President on the line with us, and he's joining us from Colorado. As usual, I'm going to give a macro and strategic Lennar overview. After my introductory remarks, Rick's going to talk about market strength and land and community count. Jon will update on supply chain, production and construction costs. And then as usual, Diane will give a detailed financial highlights and additional guidance, and then we'll answer as many questions as we can, and we'll limit to one question and one follow-up, please. So let me begin and start by saying that we're quite pleased to announce another hard fought and well-executed quarterly performance by the associates of Lennar. Our operating results reflect both the extraordinary focus and determination of Lennar's management and operating teams, as well as the general strength in the housing market. As questions abound given geopolitical turmoil, inflationary pressures building both around the globe and domestically, and interest rates are rising, the housing market remains very strong in all of our major markets. Demand trends remain strong, as family formation continues to rise. As our team from around the country reviewed our weekly sales starts and closings on Monday for our regions and our divisions, the unanimous view was that our sales pace range in each market from strong to very strong. Buyers are seeking shelter and they are seeking shelter from inflationary pressures as scarce rentals see rents escalating and escalating housing costs can be controlled with an owned home with a fixed rate mortgage, while wages are going up, so too our housing costs. So with employment strong and home prices rising, it is best to fix these costs. Additionally, the home is ever more the control center or hub of our customer’s lives and frankly, geopolitical stress makes the security of home all that much more comforting. While demand is strong, supply is short and constrained, the ability to actually build and deliver homes has been slowed by the supply chain that is all but broken, by the workforce that is short in supply and the intense competition for scarce and titled land assets. Therefore, the supply of homes has remained quite limited and is not prone to overbuilding. Accordingly, we're pleased to report operating performance that reflects the general strength in the housing market. Setting aside for the moment, our noncash mark-to-market gains last year and losses this year, our operating performance is consistent and very strong. While deliveries increased 2% year-over-year to 12,538 homes, our gross margin improved 190 basis points to 26.9% and our SG&A improved 90 basis points to 7.5%, which drove net margin to 19.4% and drove net earnings from operations to just over $800 million and almost 20% bottom line improvement from operations. Although deliveries have been constrained by the supply chain disruption, efficiency in our operations continues to drive strong bottom-line improvement and very strong cash flow. Additionally, our financial services group continues to perform exceptionally for the company, adding $90 million of earnings, while supporting the closings of every possible home and making the closing process as joyful as possible in the current, very difficult environment. Our strong cash flow has been constructively deployed, as our operations have been our primary focus. First, with the lengthening of our cycle times by 6 to 8 weeks over the past year, driven by supply chain disruption, we have more capital invested in our inventory, as we are increasing starts and taking longer to deliver homes, even as we are significantly reducing the amount of land held on our books. We are deploying more cash into shorter-term assets, while generating cash from longer-term assets. Next, we're continuing to pay down debt as it comes due, with the next tranche available for paydown in August, and that's $575 million that we expect to pay down from cash flow. And of course, we have continued to repurchase stock with another 5.3 million shares purchased in the past quarter and another $2 billion authorized by our board just yesterday. With strong performance and cash flow, we have fortified our balance sheet with $1.4 billion of cash on book, nothing drawn on our revolver and an 18.3% debt-to-total cap ratio as compared to 24% last year. We expect our results to continue to strengthen throughout the year, as our already increased start pace results in more deliveries and as we use our size and scale and our builder of choice relationships to alleviate and resolve some of the supply chain friction. To that end, last quarter I noted that Jon and Rick, our co-CEOs have not chosen to sit idly in difficult times, but instead, they went to the problem and visited each of our 38 divisions over a six-week period. Well, that was last quarter. Monitoring Jon and Rick came this quarter, I noted that on top of regular in-the-field operations reviews at division offices, they have jointly with Kemp Gillis, our esteemed Head of Alfen [ph] Supply Chain, gone to the problem and visited approximately 10 of our most strategic manufacturers at their offices to engage directly the problem-solving process. This is just the beginning, as many more trips are planned, and the supply chain problem will find its way to becoming a supply chain opportunity. I'm betting on them time, focus and attention, problems are being solved and that is simply the Lennar way, leadership matters. So let me quickly turn back to the mark-to-market volatility that I mentioned earlier. Our total first quarter earnings in the first quarter were $503.6 million or $1.69 per diluted share compared to first quarter 2021 earnings of $1 billion or $3.20 per diluted share. These numbers include our mark-to-market loss this quarter and gain last year at this time. Let's avoid confusion. We have made significant strategic investments in various new technology companies that are working to reshape various parts of our company and our industry. Some are disruptors and some are enhancers. All of them are core to the future of, as well as the presence of our core operating platform. They have informed change in the core that have reduced SG&A and production costs. These cost reductions have made the investment in the company and the and the LenX strategy extremely valuable in creating long-term shareholder value. These investments are also the tip of the spear in identifying and engaging our substantial industry-leading sustainability initiatives from solar on the rooftop to microgrid technology across the community, from water conservation to sustainable cement, our LenX strategy is setting the course from Lennar's sustainable future. A number of our LenX investments have matured and become public companies and their short-term market price movements are volatile. And that volatility runs through our earnings. On the one hand, this causes some confusion on both the upside and the downside. For example, in Q1 2021, we reported a $470 million mark-to-market profit, and in Q1 of 2022, this quarter, we reported $395 million mark-to-market loss. On the other hand, these investments have been stepping stones to our higher gross margins, as well as our never been lower SG&A at 7.5% in the first quarter, which is now the lowest we have ever seen in the first quarter. These are non-monetary and non-operational profits and losses, and they really do not reflect the state of the housing market, or the operating performance of the company within that market. With that said, we choose not to sell the ownership in these companies, just because they go public. Instead, we are strategically engaged in the businesses because -- in the businesses of these companies and because we are very enthusiastic about the future of these businesses and our LENX strategy. And of course, you can expect to hear a lot more about this part of our business in the future. Now, finally, let me talk briefly and update our progress on SpinCo and are focused on becoming a pure-play homebuilding company. As noted last quarter, we filed our private letter ruling with the IRS. Since then, we've taken the next step with SpinCo and filed our confidential Form 10 filing in February, so we can control the timing of the spin. We have received, since then, our first round of comments from the SEC. We have also initiated the process with the NYSE to have the shares of SpinCo listed. Nevertheless, given the choppiness of the capital markets and the work that is still being completed, we're pushing our expectations for the actual execution to the third or fourth quarter of this year. We have noted before that the spin company will be an asset-light asset management business that will have a limited balance sheet. Many of the assets targeted for SpinCo will be either part of the limited balance sheet of SpinCo or are currently being monetized in the form of assets under management that will be housed within the private equity verticals of SpinCo, or they're being resolved and monetized in other ways. Additionally, while we are taking more time to execute the spin, we continue to migrate assets from the Lennar balance sheet into the assets under management that will comprise SpinCo. Therefore, we are growing the management fees and returns that will define the value of the spun company. This monetization has been and will be completed over the next year or so and the cash proceeds will be deployed in Lennar to fortify the balance sheet and/or to continue to buy back stock on an opportunistic basis. As a reminder, our three core verticals of SpinCo have been identified in business plan and are already growing AUM and fee generation. They are multifamily, single-family for rent and land strategies. Each of these verticals already have raised and are continuing to grow third-party capital and our active asset managers. LMC, our multifamily platform, had almost $10 billion of AUM at the end of 2021. And as of the end of our first quarter, had approximately $10.7 billion of gross capital under management and is very close to our first closing for our third fund. LSFR, our single-family for rent platform, has grown from approximately $1.2 billion of assets deployed at the end of 2021 to approximately $1.9 billion deployed as of the end of our first quarter. And our land strategies platform, which is still being refined for SpinCo, expects to have $4 billion to $5 billion of assets under management at the time of the spin. As I've noted in the past, the remaining Lennar Corporation will drive higher returns on our assets and equity base and the spin will not result in a material reduction of either our bottom line or our earnings per share. So let me wrap up and conclude by saying that we're extremely well-positioned financially, organizationally and technologically to thrive and grow in this evolving housing market. As I said earlier, we expect our results to strengthen throughout 2022. We are picking up steam, and we are picking up confidence. We recognize that interest rates are rising and inflation is a legitimate threat. We also know that difficulties in the supply chain present challenges for Lennar and for the industry, and that land and labor are in short supply. But we also recognize that the economy remains strong with wages rising and the housing is in short supply across the country. Strategically, we remain focused on orderly targeted growth, with our sales pace tightly matched with our pace of production. We focus on gross margin by selling in step with production, while controlling costs and reducing our SG&A, and therefore maximizing our net margins. As we look to the remainder of 2022, we expect continued strength in the market and double digit growth for the company. As noted in our press release, we are projecting 16,000 to 16,300 deliveries in the second quarter at a 28% to 28.25% margin. And we are now projecting 68,000 deliveries for a year-end at a 27.25% to 28% margin for the year. At this pace, we will have a very strong bottom line and a very strong cash flow with a projected spin-off in the second half of the year. And Lennar will have another record year. So with that, let me turn it over to Rick.

Jon Jaffe:

Thanks, Rick. This morning, I'll discuss how our first quarter was impacted due to supply chain disruptions, inflationary impacts on construction costs and on cycle time increases, as well as our team's ability to manage through these challenges. At Lennar, we continue to deal with our fair share of disruptions. Some of the supply chain disruptions were like the ones, we faced in our fourth quarter, where we experienced intermittent disruptions affecting different trades, at different times and in different geographies. The first quarter was also different and that the Omicron spike in January dramatically impacted everything. A significant amount of labor at manufacturers, suppliers, local trade partners and our own associates was out from work. This was most severe in January and then ease rapidly in February. At times, in January, it seemed as though as much as one-half of the workforce across the industry was quarantined at home. This challenged our management, purchasing and construction teams to be extremely nimble in finding workaround solutions to the unique challenges that the Omicron spike created. Labor returned in February to the manufacturing plants and at our communities, as manufacturers and trades are now hard at work to make up for lost time. Many manufacturers have stabilized their lead times, and there are currently fewer situations of late deliveries. However, some manufacturers still have meaningful challenges ahead. The following categories are continuing to deal with significant constraints. These are electrical equipment, garage doors, HVAC condensers, flex duct and cabinets. In response to the ongoing disruptions and future unknown risk of new disruptions, our divisions are more closely managing the inventory of local trades and adding additional labor by onboarding new trade partners, while our regional and national teams stay in constant communication with manufacturers and suppliers in support of our divisions. The supply chain challenges in the first quarter resulted in an increase in cycle time and contributed to an increase in direct construction costs. Our average cycle time increased approximately two weeks sequentially over Q4 and about two months year-over-year. Given the severity of the challenges created by the sudden Omicron spike, I want to take this opportunity to recognize and thank our associates for their leadership, creativity and tenacity in overcoming this situation. Their extraordinary efforts enable Lennar to deliver over 12,500 homes to eagerly awaiting homeowners in our first quarter. As we look at the balance of the year and our guidance to deliver 68,000 homes, we are strategically focused on accelerating starts to give us more inventory under construction. This will provide a cushion against expanding cycle times, allowing our management teams more opportunities to complete homes in line with our plans. Turning to cost now. Our direct construction costs were up 3% sequentially from Q4 and 23% year-over-year. Lumber was relatively flat sequentially, but accounted for about 60% of the year-over-year increase. As you are aware, lumber dramatically increased again, up almost 100% since December 1 to $1,400 per thousand board feet. This increase in lumber will cause about a $5 per square foot increase by August of this year. Further increases are anticipated as lumber futures indicate short-term inflation through the spring cycle or into early summer. Then based on our analysis and on feedback from key lumber industry participants, we believe the deflation of lumber prices will follow. This pattern looks to mirror what took place last year with dramatic -- with lumber's dramatic rise and fall. Despite operating in this cost inflationary environment, our first quarter direct construction costs as a percent of revenue were stable at 43%, which is basically flat compared to 42% both sequentially and year-over-year. Simply put, our pricing power is offsetting these cost increases. As Rick noted, we are achieving this through the disciplined matching of sales pace to construction pace. Our divisions have been and remain laser-focused on being a production-first operation. Our execution is an ongoing refinement and improvement of our dynamic pricing and FIFO sales approach, allowing effective control of which homes are released for sale and at what price. In conclusion, it bears repeating that we remain disciplined and focused about our everything's included strategy and on being the builder of choice for our trade partners, a program, which is now entering its seventh year. This program has successfully created close-knit relationships with our strategic building partners, allowing both parties to make adjustments in these unprecedented times. These strategic relationships enable us to be better at solving problems in 2022 than we previously were. Additionally, as Stuart aptly noted, Kemp Gillis, Rick and I are currently traveling the country, meeting with senior management of key supply chain relationships to explore how to solve issues that need immediate attention and how to think differently about the supply chain going forward. We have meaningful exchanges of thoughts and ideas on how to alter the current configuration of the supply chain to reduce and/or remove future disruptions. We believe these -- the results of these efforts will provide for the fastest path to stabilization of the supply chain for Lennar. We also expect to achieve meaningfully improved efficiencies throughout the supply chain, providing for better control of both costs and cycle times. Thank you. And I'll turn it over to Diane.

Operator:

Thank you. [Operator Instructions] Truman Patterson with Wolfe Research, you may go ahead.