Stuart Miller
Very good. Thank you. Good morning, everyone, and thanks for joining us today. I'm in Miami today together with Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President, who you just heard from; Katherine Martin, our Chief Legal Officer; Jim Parker, our Chief Operating Officer; and David Grove, our Executive Vice President for Homebuilding. Similar to last quarter, Jim and David, who jointly oversee our operations across the country are here with me and will participate in our question-and-answer period. As usual, I'm going to give a macro and strategic overview of the company, and Diane is going to give a detailed financial overview and guidance for the fourth quarter of 2026. Then we'll open it up for questions. And as always, please limit to one question and one follow-up. So let me begin by saying that we believe our third quarter 2026 results represent continued and consistent operational execution in a market that has, if anything, gotten more difficult since we last spoke in June. I think that our press release pretty much covers the summary of the quarter, but I'm going to try to give some additional color. As noted in the release, we delivered 20,840 homes within our guidance range of 20,500 to 21,500. We generated 20,879 new orders, just below our range of 21,000 to 22,000. Our gross margin improved sequentially to 15.8% as our sales incentives rate on deliveries came down to 12%, our net margin improved to 6.6%, and our earnings per share came in at $1.19 on a GAAP basis and $1.23, excluding one-time items. Nevertheless, interest rates and consumer confidence constrained the improvement that we anticipated going into the quarter. So let me briefly discuss the overall housing market. Generally speaking, the housing market remains constructive as the housing shortage that has persisted for the past decade plus continues to limit availability and drive the need for more supply. While market conditions are certainly not terrible, as can be seen from our rather strong volume, the market becomes more difficult as interest rates test affordability, particularly within our price ranges. During our third quarter, interest rates moved in the wrong direction. At our last call, the 30-year fixed rate was sitting between 6.4% and 6.5%. Today, it is at approximately 7% with the 10-year treasury hovering right around 5%. So the modest relief we saw earlier in the year has reversed and the buyer at median family income is stretching well past 30% of gross income to carry a home. Fewer families can afford to both produce a down payment and qualify for a mortgage as in many of our markets, almost 50% of our visitors cannot immediately qualify. Buyers are clearly stretching to try to afford the stability of a home. And of course, we are adjusting our price and incentives in order to enable them. Second, the driver of rate moves is inflation and the current driver of inflation is energy. Of course, everyone knows that the conflict in Iran has kept oil supply disrupted, and it doesn't look like there's an imminent end in sight. And as we heard from the Fed yesterday, the data suggests that inflation is not subsiding. Inflation, of course, is a double-edged sword in that it both increases the basic cost of living while also driving up interest rates. When families are paying more at the pump and more for electricity, their willingness to make the largest financial commitment of their lives moderates even when their underlying desire to own has not changed at all. Accordingly, consumer confidence has been moderating as both interest rates test the boundary of affordability while inflation increases the cost of living. Third, the Federal Reserve's assistance is clearly off the table for practical purposes and not a near-term source of relief. While this was clearly the hope of some, yesterday's rate hike clearly demonstrates that the Fed will continue to be data-driven. Rate cuts when they eventually come, will be a meaningful tailwind for our business, but we are not holding our breath. We're waiting for them, and we are not building our business plan around those rate cuts. Fourth, the resale seller has become a more aggressive competitor for our customer, especially at our price range. Resale supply has continued to rebuild and is now very competitive in price. Active listings nationally are back above historic levels. In Texas and in Florida, they are particularly high. Those are our 2 largest markets and states. When a resale seller cuts price, they are competing directly for our customer, and we respond, which is a meaningful part of the incentive and pricing dynamic you see in our South Central and Southeast markets. On the cost side of our world, while we continue to perform extremely well, labor availability has started to become more of an issue. Immigration enforcement and enthusiastic data center construction continue to create tightness in certain geographies. While we've been able to offset labor cost increases with efficiencies from scale, the pressure on cost is certainly building. On the policy front, the federal government's engagement with housing affordability continues, and I'll repeat what I said in June, the level of attention being paid at the highest levels of government to this issue is unprecedented in my experience. Affordability has become a critical political issue. I continue to believe that meaningful federal and/or state action is likely, although I'd also say that it's taken longer than I would have liked. And we are pleased to see that the state and federal efforts to constrain institutional and investor purchases of single-family homes, both as single-family for rent and build-to-rent communities seems to have been resolved in recent legislation. We continue to view those avenues of supply as long-term positives for housing and for the buying public because they accommodate demand in local markets in ways that ultimately produce the very supply that this country is short of. So in summary, interest rates moved up, inflation is driving rates up and consumer confidence down, the Fed is focused on data, the resale supply is competing harder. Additionally, even while our incentives are down and our margin is up, our cost structure is beginning to see pressure from short labor supply. While this is a difficult landscape, we are doing what we said we would do in a market that is just not helping. Against that backdrop, let me turn to our operating strategy. Our strategy has not changed. We remain focused on 2 priorities: first, driving consistent even flow production and volume in order to effectively manage our cost structure and in order to monetize land that was underwritten in different market conditions; and second, continuously refining our asset-light, land-light balance sheet model to ultimately generate strong and growing cash flows and returns. As to the first, across the Lennar platform, we have clarity that we price to market and maintain volume in order to meet demand at affordability. We offer the incentives our customers need to achieve the value they can afford, and we hold our production pace through the adjustment. That means we are compromising margin in order to maintain volume. Of course, we understand that this is a choice. It is deliberate, and it is not something the market is doing to us. And it is not the choice that we made only to add needed supply to the supply-constrained market. It is also a strategic choice that has enabled us to drive construction costs down and to financially transform our business model and our balance sheet. Here is why we believe and continue to believe it is the right choice. If you go back to 2023 as a baseline, our revenue per square foot is down 13%. Our construction cost per square foot in the same time frame is down 14%. On the vertical side of this business, labor, materials, product design, cycle time and overhead per unit, we have fully offset price with cost. That work is done, and it will continue to benefit the future of our business. Construction cost per foot have continued to improve and improved again this quarter to approximately $80 per square foot. That is down 6% from a year ago and down 14%, as I said before, from our fourth quarter of 2023. Our record cycle time of 116 days is down from 121 days last quarter and 126 days a year ago. And that is evidence that we're managing those dynamics very well. And our carefully managed inventory level of 1.8 homes per active community reflects a well-balanced program with our starts pace and sales pace both at 4.1 homes per community per month. Over the same period, our land cost per home site is up approximately 6% and option maintenance fees have grown to reflect a true cost of capital across our asset base and for the duration that, that capital is deployed. That is the entire margin gap. It's not labor, it's not material, it's not overhead. It is land, land that was identified, underwritten and committed to in very different market conditions. And land is the one input that we cannot reengineer. We can only deliver through it. Every home we close retires a home site that was priced for a market that no longer exists and frees us up to replace it with a home site priced for the market that we actually have. So when we accept a 15.8% margin rather than holding out for something better, we are buying 2 things. We are buying volume and volume is what converts expensive land into cash while we still produce positive margin, and we are buying time because every quarter we move through that land at a lower margin is a quarter closer to normalized land basis. The alternative, holding price and selling fewer homes leaves us carrying the same expensive land for longer and generating less cash or perhaps writing off deposits with the same problem and less runway. We made the decision deliberately. We have been consistent about it every quarter. And consistency of strategy, especially through a difficult cycle, is itself the point. It is what builds confidence throughout our company and we believe an enduring competitive edge in any market. On the asset-light side, we continue to make excellent progress toward an ever more seamless and sustainable model. We own roughly 2% of our homesites and control the rest through third parties. That is approximately 11,800 homesites owned against 476,000 controlled or about 6 years of supply in total. 86% of the homes we delivered this quarter came from land bank land, which is the model working exactly as designed. Deposits and pre-acquisition costs ended the quarter at $7.3 billion, up $265 million sequentially, which, as Diane has walked through before, reflects the natural imbalance of standing up a multiyear option pipeline while relieving 1 year's worth of homesites at a time. This imbalance will equalize. The other half of keeping the balance sheet clean is keeping finished homes off of it. As I noted earlier, completed unsold inventory came down again to 1.8 homes per community from 2.1 last quarter and 3 in the first quarter. I want to be clear that we are managing both of these components at the same time, low land inventory and low finished home inventory because that combination is precisely what we believe protects our balance sheet in a market like the one that we're in. We will build inventory when we can see a selling season in front of us, and we will work it down when we cannot. We are not going to carry standing homes into a soft market, and we are not going to carry land on our balance sheet. Our land banking partnerships continue to function extremely well, and we continue to work on those structures every day. We recognize that deal duration has extended as we've moderated our growth, and that extension is what is driving option maintenance fees higher. It is a real cost. It is front, center and visible, and it is a core focus of our management team. In addition, we continue to inject modern technology into every aspect of our land-light execution. As I said in June, we expect that by year-end, we will have an extremely efficient land operating system and process that reduces our cost structure while enhancing our land acquisition, diligence and review. Simply put, we will be a materially better land buyer, land developer and land administrator at a significantly lower overall cost of capital. That remains a laser focus, and it remains one of the largest single opportunities inside of our company. Let me turn to quality. Quality always comes first at Lennar. We remain continuously focused on improving the quality of every home that we build with a world-class customer experience and with safety first for our building partners. That program starts with the first time we meet a customer through our digital marketing funnel and never stops through contract, through closing and through every engagement after they move in. Quality also means that we continuously improve the Lennar value proposition. Our Everything's Included platform remains both a competitive differentiator and an affordability lever. By standardizing features at scale, we capture purchasing efficiency, offset cost pressure, protect margin, and put more value into each home that we deliver for less money while keeping the process simple and transparent. And our targeted financing programs, rate buydowns, and closing cost assistance allow us to solve to an affordable monthly payment for the large share of our buyers who qualify on payment rather than on price. Our mortgage capture rate was 83% this quarter, and that internal relationship is the mechanism that makes these programs work. So now let me briefly turn to our quarter results, and I know I'll be somewhat repetitive. As I said earlier, we delivered 20,840 homes and generated 20,879 new orders against a strong 23,000 in the prior year. We started just under 21,000 homes at a start pace of 4.1 homes per community per month with a sales pace of 4.1 per community per month across 1,713 active communities, and that is 3% more communities than a year ago. Starts, sales and deliveries all came within a couple of hundred homes of one another, which is exactly the even flow machine we have been building. Our average sales price came in at $372,000, modestly below guidance with sales incentives on deliveries of 12%. Gross margin was 15.8%, up from 15.6% last quarter and just below the approximately 16% we guided to. SG&A was 9.2%, above our expected range of 8.8% to 9%. Roughly half of that is simply less revenue to leverage on a lower average sales price and another large part is sales with higher brokerage commission. While I'm not satisfied with the 9.2% SG&A, divisional headcount is down approximately 12% year-over-year, and deliveries per corporate associate are up 12%. So the fixed base is coming down, and you should expect SG&A to improve as fourth quarter volume alone should produce leverage. Net margin was 6.6%, producing net earnings of $284 million and earnings per share of $1.19 on a GAAP basis or $1.23, excluding one-time items. Financial Services produced $129 million, above our guidance, but helped by a one-time net gain in our title business. Relative to our balance sheet, we ended the quarter with $1.2 billion of cash and a homebuilding debt to total capital ratio of 16.6%. We had $650 million drawn on our revolver at quarter end, reflecting seasonal working capital as we build towards a heavier fourth quarter delivery schedule. Our inventory turn was 2.4x and return on inventory was 13.2%. We paid down $400 million of senior debt, repurchased 3 million shares of stock for $256 million, and paid $119 million in dividends for the quarter. As we look ahead to the fourth quarter, we expect to generate new orders of approximately 19,500 to 20,500 and to deliver 22,000 to 23,000 homes with a gross margin between 15.5% and 16%. Of course, these expectations are dependent on market conditions and how the quarter evolves. So I'll leave the financials there. Diane will cover the balance sheet in detail, along with our fourth quarter guidance and expectations. So let me conclude. This was a quarter of execution within a market that moved against us. Rates went up, inflation ran hotter than hoped, resale supply got heavier. And through all of that, we delivered inside our range, improved gross margin, brought incentives down, set another cycle time record, and reduced standing inventory while owning almost none of our land. I want to be very clear about where we are in this process. We are not waiting for the market to rebuild our margin. We are working through a land basis that was set in another market condition. And one quarter at a time at a pace we control, we are replacing it with land priced for this market condition. That process is not finished, and it will not finish quickly. The land headwind is still in front of us for a while, but it is finite, it is visible and every quarter of volume shortens it. That is the trade we made, and we would make it again. Meanwhile, the fundamental shortage of housing in America has not yet been solved. It has not yet subsided. Demand is real, it is deferred and it is building. When affordability returns through rates, through wages or through serious national action on the entitlement and regulatory barriers that constrain supply, we will be well positioned to capture it with the lowest cost structure, the fastest cycle time, the leanest finished inventory and the cleanest land basis. We keep in mind that sometimes the best companies are called on to defy gravity for some period of time. We are becoming a materially better positioned builder one quarter at a time, and this quarter was another one. Let me finish where I finished so many times before. We simply could not be prouder of the extraordinary work driven by Lennar associates across this company. I thank them all. They are aligned in mission and strategy, and they have executed through an extended period of real difficulty, building new capabilities, driving down costs, shortening cycle times and never losing sight of our mission to provide affordable, high-quality homes to families across America. With that, let me turn over to Diane.
