Lennar Corp Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Alan Ratner Ratner - Zelman & Associates, LLC - Analyst : Thank you for all of that detail. Still digesting everything, Stuart, but it sounds like you guys have gotten busy and --

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

Question: Alan Ratner Ratner - Zelman & Associates, LLC - Analyst : Got it. I appreciate that, and that's helpful. So looking forward to seeing it all unfold. Second, just on the gross margin, I'm sure you're expecting lots of questions on this. But relative to where you were three months ago, six months ago, kind of expecting more of a ramp this year as opposed to now more kind of flattish through the year on gross margin. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 20, 2024 / 3:00PM, LEN.N - Q3 2024 Lennar Corp Earnings Call Just curious, what, I guess, surprised you relative to what you would have expected three months ago? Because it doesn't seem -- if anything, rates have come down about 100 basis points since June. It seems like August was a pretty decent month based on some of the macro data and commentary from other builders, yet you are expecting a lower margin in Q4 than you maybe articulated three months ago. So what was the main driver for that revised outlook?

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

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

Question: Stephen Kim Kim - Evercore ISI - Analyst : Well, great. We'll be waiting for that, but I appreciate all the color in the meantime.

Question: Susan Maklari Maklari - The Goldman Sachs Group, Inc. - Analyst : My first question is, Stuart, given the commentary that you gave around the strategic shift that's coming through as well as Jon's comments on the operational improvements that you're focused on, can you talk a bit about the upside to those inventory turns, which obviously moved really nicely this quarter already, and what that means for the cash generation of the business as we think about the next year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 20, 2024 / 3:00PM, LEN.N - Q3 2024 Lennar Corp Earnings Call

Question: Susan Maklari Maklari - The Goldman Sachs Group, Inc. - Analyst : Yeah. Okay. And building on that, perhaps, you did in the quarter, you had $4 billion of cash on the balance sheet, how are you thinking about the amount of cash that you need to hold going forward given the strategy that you'll be operating under and the uses of that extra cash?

Question: Michael Rehaut Rehaut - JPMorgan Chase & Co. - Analyst : So wanted to delve in a little bit more on the land spin. I know obviously, you remain a little limited on fully what you can say. But I think there's a lot of devil in the details here that we will be interested in trying to gauge. You talked about, I think, last quarter $6 billion to $8 billion of land. I think the language this quarter was $6 billion to $8 billion of land and cash. Was hoping to get any kind of rough sense of how much of the cash portion of that would -- the cash portion would represent. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. SEPTEMBER 20, 2024 / 3:00PM, LEN.N - Q3 2024 Lennar Corp Earnings Call Also, roughly, the stock received in exchange, if there's any kind of, again, range or degree of magnitude that we should think about. And lastly, if it would affect your cost structure at all by spinning off all of these assets? I don't know if there's also any associated personnel that might result in a reduction of corporate G&A or your SG&A?

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

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

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

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

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

Question: John Lovallo Lovallo - UBS Group AG - Analyst : Okay. Thank you very much.