Q3 2020 Lennar Corp Earnings Call
[music].
Welcome to <unk> third quarter earnings conference call. At this time, all participants are in a listen only mode. After the presentation. We will conduct a question and answer session. Today's conference is being recorded if you have any objections you may disconnect. At this time I would now like to turn the call over to Alexandra Lumpkin for the reading of the forward looking statement.
Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding when our business financial condition results of operations cash flows strategies and prospects.
These statements represent only <unk> 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 thought.
Many factors could affect future results and may cause <unk> 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 I think the filing.
Putting those under the caption risk factors contained in our annual report on form 10-K, most recently filed with the FCC. Please.
Please note that when our assumes no obligation to update any forward looking statements.
I would now like to introduce your host Mr. Stuart Miller Executive Chairman, Sir you may begin.
Good morning, and thank you everyone. This.
This morning, I'm here in Miami once again scale down crew that includes Diane Bessette, our Chief Financial Officer, David Collins, Our controller loose gross CEO of when or financial services and of course, Alex who you just heard from Rick Beckwitt.
Rick Beckwitt, our chief Executive officers in Colorado, and Jon Jaffe is in California, Jon Jaffe, our presence in California, and they're on the line with US This morning, and we'll participate in our question and answer period.
Today were going to keep our remarks brief.
We have historically given a broad overview when market conditions have been uncertain. Today, however, with a clearly defined strong and improving market will leave more time for your questions. There.
Therefore, I'll give a brief overview and Diane will give financial information the highlights and guidance and then we will attempt to answer as many of your questions as possible as usual. Please limit questions to one question per customer and one follow up.
So as you can see from our press release, our third quarter was an excellent quarter for Eleanor and it reflects the robust state of the housing market across the country.
Inventories are limited and demand remains strong driven by low interest rates and customer focus on owning and controlling their lifestyle.
Our solid sales growth rate of 16% year over year, which is well in excess of our targeted growth rate of 4% to 7% reflects excellent execution of a very disciplined approach to sales pace.
As we witness lumber prices accelerate throughout the quarter, we deliberately sold todays current inventory and limited sales on tomorrow's yet to be started homes are still.
Our strategy in the current market condition is to be patient with longer term sales and enable price appreciation to offset future cost escalation and maximize margin well selling only more current inventory improves our inventory turns.
Simply put sales could have been stronger with a singular focus on volume, but instead, we drove margin growth and cash flow, while allowing price appreciation to cover cost escalation in the future.
As I've noted in prior calls it is challenging at best to materially ramp production in this labor constrained market and it's even more challenging to replace entitled land in this land constrained market.
Therefore, our measured growth strategy produced produces sustainably high margins higher inventory turns and the best return on our assets.
Accordingly, while managing sales pace, our margins have grown as demand has grown and supply has remains limited.
Our 23.1% gross margin and 15.1% net margin represents strong pricing power in the market and careful day to day oversight by our management team.
We're expecting historically strong margins for the foreseeable future and throughout 2021, and we expect our bottom line to grow faster than our top line.
As expected our closings in the third quarter were limited by the production pause. We took in March April and May as we assess the impact of Covance on the housing market.
We increased starts and production as the market recovered so production and deliveries will normalize as we move into 2021.
Alongside the Homebuilder Lennar financial services continued its focus attention to technology enabled efficiencies.
L. assesses pretax contribution this quarter was $135 million as compared to $95 million last quarter, excluding a onetime profit realized from states vital which represents a 50% sequential increase.
With the market this robust the dominant questions for both Lamar and the industry are how will we continue to meet demand to grow land positions and manage labor materials, and particularly lumber costs.
These are the questions that have the undivided attention of our management team right now and we're very confident that we'll be able to meet demand drive high margins and cash flow, while we continued to grow with the market.
For the short term, we are already extremely well positioned to manage costs and meet demand, while we're selling through community somewhat faster than expected. We are well fortified with strong land positions that will be brought online and while lumber in particular and other costs are rising we are at.
Currently managing sales pace, primarily to started homes in order to manage that cost risks.
For the intermediate term, we are and have been accelerating starts and production of homes under construction, while also accelerating the readiness of new communities that we control wherever possible and.
And for the longer term, we are focused on ramping up our land purchases for new communities as we believe the industry will have a sustained expansion for the foreseeable future.
With historically low interest rates and the production deficit that has defined homebuilding for the past decade, together with the limited inventory and short supply in the market housing and especially affordable housing is and will continue to be an is an essential driver of the economy.
As we grow offerings for the future Weve remained focused on our options versus owned land strategy and we will continue to manage towards a 50 50 target.
At the end of the third quarter, we had expanded our options percentage to 35% from 30% earlier in the year. We also continue to focus on cash flow and returns on equity and capital as we ended the quarter with almost $2 billion of cash on hand there.
Zero drawn on our revolver and a healthy debt to total cap of 29.5%.
Needless to say, our well known technology initiatives have contributed meaningfully to our readiness for currency economic and structural shifts while helping to improve our core business and drive SDMA to an historical low of 8%.
Concurrently our meaningful investments in technology disruptor companies have not only informed change within lenore, but are proving to be successful investments in their own right.
Today's announcement by open door and early Lenore investment is a case in point.
Opened door pioneered the buyer space and opened door and Lenore jointly developed a seamless move up program that today is becoming an industry standard.
By coordinating and redefining the move up buyer sale of their first home, while moving up to a larger home the customer experience is becoming a frictionless coordinated and joyful engagement.
Less friction means more transactions and more transactions at a lower cost to all parties engaged.
I'd like to take a quick moment to congratulate our friends at opened door and their leader Eric Lou as they take their vision and their dream to the next level for us. It Lenore. It has been an honor to be part of their journey, thus far as we have learned and adjusted together to build a leader and innovator in the eye buyer space.
In advance of the completion of open doors transaction with social capital, we would like to welcome you opened door to the public markets. As you continue to define the path forward in this industry transforming space.
In conclusion, let me say that our third quarter results were solid in all respects and they reflect our focused execution on our strategy to balance between gross margin cash flow and returns.
In just a minute Diane will give some additional color on our third quarter numbers and our expectations for the fourth quarter, but b.
But before turning over to Diane Let me say the third quarter has been a clear point of pivot for the housing market in general from the slowdown created by cobot to the expansion ignited by Cove. It today.
Today, the home is becoming more and more essential to the way, we live and the quality of our lives.
The home, which used to be just shelter is now becoming the hub of your life. It is.
It is our shelter and our multiple generations shelter.
It is our office are Jim our Recreation Center and our school. It is Wi Fi connected and it is automated it is sustainable and environmentally sensitive it is both a healthy home and a health system.
While some of these elements will change overtime some of them will become our new way of life.
Regardless home.
Home is a refuge where families thrive through the best of times and some times as well through the toughest of times.
At Lennar, we are focused on meeting the needs and the changing appetites and aspirations of this changing world and we have never been better positioned financially organizationally and technologically to meet the challenge as well as the demand.
With that let me turn it over to Diane.
Thank you Stuart and good morning to everyone. So I'd like to begin with a few Q3 highlights and then provide detailed guidance for Q4, and so let's start with our balance sheet.
As Stuart mentioned as a result of our continued focus on cash flow generation. We ended the quarter with 2 billion of cash and no borrowings outstanding on our $2.4 billion revolving credit facility.
On a year to date basis through the end of Q3, we have generated $1.8 billion of homebuilding cash flow.
We also continue to make progress to become land lighter.
As stated our year to supply owned decreased to 3.8 years and our home sites controlled increased to 35% of total home sites for the quarter. Our land acquisition spend was 607 million and our land development spend was $571 million I did.
Additionally, we also made progress with our goal of reducing debt during the quarter, we paid off approximately 400 million of debt and as a result, our quarter end.
Homebuilding debt to total capital ratio was 29.5%. This is the lowest debt to total capital ratio we have ever achieved.
Our focus on debt reduction will continue as we pay off $300 million of senior notes due in November.
Since the acquisition accounts Atlantic and including notes, we intend to pay off in the fourth quarter. We will have repaid 2.8 billion of senior notes, which results in an annual interest savings of approximately $156 million our.
Our stockholders equity increased to 17.2 billion and our book value per share was 50, 941, 50 50 491.
And so with those balance sheet highlights let me now briefly review our operating performance as we said we ended the quarter with new orders of 16564 up 16% and our new order dollar value with $6.3 billion up 20% sales were matched with starts and.
Our starts were up 17% year over year, our sales pace was 4.2 for the quarter compared to 3.4 in the prior year and we ended the communities with 1198, we ended the quarter with 1198 communities, our cancellation rate was 15% compared to 19.
Percent sequentially in Q2, and 16% in Q3 of the prior year.
For the quarter deliveries totaled 13842 up 2% and both deliveries and new orders were the highest for a third quarter in the company's history.
Gross margin was 23.1% as a result of strong pricing power and our focus on construction costs and our SDMA was 8% as a result of creating an efficient platform and continuing benefits from technology to 8%.
Third quarter ESG today, we have ever achieved.
Turning to financial services. They also executed at high levels as Stuart mentioned reporting $135 million of operating earnings mortgage operating earnings increased to 113 million compared to $57 million in the prior year mortgage.
Mortgage earnings benefited primarily from an increase in volume through a higher capture rate of increase deliveries, 82% versus 77 last year and a lower percentage of cash buyers combined with an increase in secondary margins.
Title operating earnings were 21 million compared with $18 million in the prior year and title earnings increased primarily due to an increase in closed orders and.
An L.M.F. commercial had operating earnings of $1 million compared to $4 million in prior year, primarily due to lower securitization volume.
And so with that quick summary, let me provide you with a little more detailed guidance for Q4 than what we included in our earnings release Sean.
Starting with homebuilding, we expect new orders between 13000, 814300 and should end the year with approximately 1165 active communities, we expect to deliver between 15000 516000 homes.
Our average sales price should be around 390000, we expect our gross margin to be in the range of 23.25 to 23.5, and our EPS unit should be in the range of 7.7%, 7.8% and further.
And for the combined category of homebuilding joint ventures land sales and others, we expect a loss of between 15 and $20 million.
We believe our financial services earnings will be between 101 hundred $5 million and for both our multifamily inland our other segments, we expect a slight loss.
Corporate DNA, we expect that to be around $95 million for the quarter expect our tax rate to be approximately 23.5%. The weighted average share count should be approximately $309 million and when you combine all of this the guidance should produce an EPS range of.
$2.22 to $2.38. We hope you find this guidance is helpful and with that let's turn it to the operator for questions.
Thank you we will now begin the question and answer session of today's conference. We ask that you limit your questions to one question and one follow up question until all questions have been answered if you would like to ask a question. Please unmute your phone press star one and record your name clearly when prompted if you need to withdraw your question.
Question, You May press Star two.
Stop.
Good question, one while we wait for the first question to queue up.
And our first question in queue is from Ivy Zelman as Almond associates.
Your line is open.
Thank you and congratulations guys on a great quarter. So it although you mentioned and sort of highlighted the fact that you could have grown at a stronger rate. While we see other builders are posting numbers like MDC today over 70% growth I think the market is looking in founding on your results from it.
Order perspective, because you're losing market share which of course, we don't see that the sales over a longer term basis, you'll continue to gain share, but maybe talk about the benefits of measured growth you mentioned cash flow return cost.
And really the and the rest maybe have not trying to grow faster and walk us through in more detail, maybe providing some metrics on the risks and benefits.
And more specifics.
We highlighted some of this in our in our comments.
No. There there are a number of benefits as we see it we noted that as.
As we watched real time lumber prices spiral upward.
And this is across the country across the industry.
We we recognize the risk associated with getting way out ahead and costs.
As production ramps up we.
We all know that the labor market has been constrained it's possible that.
With unemployment levels will find new entrance to our market over time, we'll have to wait and see we know that there is exposure.
On the cost side of the equation we.
We have chosen not to get into the race to see how many sales we can have but instead to carefully focus on the homes that we havent inventories that we have under production and really limit sales going forward. So that price appreciation can cover cost increases as we go forward.
And of course the.
The focus on current inventory just helps.
Ramp up inventory turns which which.
Helps focus on returns on capital return on equity John.
John Rick do you want to weigh in on that.
Sure. So the store merchandising sales lumber it increased almost 100% from the beginning of a quarter to the end of a quarter and so to be very measured with taking advantage of increasing.
The sales price environment.
Match that maybe the.
As we patiently pace, our sales will benefit from the price appreciation really help us help offset that increase.
And as you look at the supply chain.
Though it is not just labor, but from the manufacturers both footwear leverage went up there theres constraints and so again to be very measure.
In terms of being able to communicate to our trades or a vendor is exactly what our production capacity is that of course.
Quickly try to wrap it up which is not really feasible to do they have a much more measured and appropriate approach.
Yes, the only thing I'd add to that is as Stuart John and I have really looked at the limited inventory that's available on the market.
Theres really premium pricing is available for things that are that are close to completion or completed and it doesn't make sense for us to sell so early or do a dirt sale. When we can command a higher price because people want something making movement.
You know at the end of the day. However, let me just say that at the end of the day for US It comes down to margin the margin growth and margin focus.
We're going to be able to.
Increased returns on the the assets that we have.
And have a measured approach going forward I think it's very difficult in this market to ramp up production at an accelerating rate when we see sales rates coming in with a very high rate per day.
Production just has to lag there is only so much but can that can be brought to the market at any one time.
And I would just add just to give you maybe have you frame the market share question, because we had a bunch of questions. This morning, and if we think about market share over a two year period and thinking about being the leading builder and the U.S. There's no question that Nextshares builders are going to have a very challenging time growing.
Off of that so maybe just comment around market share and recognizing you guys are it's about market share. It's about returns, but just comment on market share. If you would please.
Thank you and good luck, okay. Thank you Rick John go ahead.
I think we've talked for a long time argued about our size and scale.
Physician and we're we're number one or two in all virtually all the markets that we're in and Thats size and scale really gives us into their relative to land positions.
As they go to builder for the land sellers as they go through builder for the trades and this constrained environment that strategic position very important to us and its waters.
We're not going to give up but is that is a very as we said very steady and measured pace, creating predictability for both land and for the troops.
And I guess, the other thing I'd add Ivy, which is just math.
You just take a 16% growth in sales for the quarter on a 50000 plus type of run rate.
Compare that to a much higher growth rate on a much smaller builder, we're still gaining share.
Okay next question, but thanks guys.
Thank you. Our next question is from Carl Reichardt from BTG. Your line is open.
Thanks, everybody.
A couple of questions on land for you all.
We know about.
Constraints from the product perspective from a labor perspective can you talk about if theres been some normalization in terms of permitting processes entitlements and approvals since since we we've seen covance sort of come back a little bit here are we seeing some normalization in the time it takes to get land to market.
The call its John Thanks.
Certainly cities have quote real opened up.
Compared to wins and covert was.
First hitting us into these close sales.
But they clearly are under stress on their all of their budgetary constraints.
Many of them operating virtually so its not back to normal three co risk, but it's better than it was the worst quarter with record experiences somewhere somewhere in between.
So it is definitely not an easy process.
Given those constraints that exist.
Okay. Thanks, John and then as a follow up.
Can you talk about markets, where land has gotten appreciably tighter sales over the last year or two are there a couple out there that where we've seen a big change in the availability of lives pricing of lives as builders have expanded thanks level.
I don't think we've seen any specific markets that are are are out of whack.
We continue to benefit from the solid relationships, we have with the land community.
We've been doing transactions and strategizing for years with the land community and those deep relationships are continuing to provide us opportunities as Stuart mentioned.
Thanks, Rick.
I think as we look ahead.
And as we have looked ahead we.
We think that our position our strong market share positions across the board and they.
Enables us to access land and grow community count as we look towards 2021 Rick.
Rick maybe you'd like to comment on some of that.
Yes, so for 2021 were anticipating.
A 10% community count increase year over year.
We have all those communities in her.
In hand today.
We are very comfortable with the rollout of those throughout the balance of 2021.
Great. Thanks, guys very.
Very good. Thank you next question. Thanks.
Thank you next we have Stephen Kim from Evercore ISI. Your line is open.
Good morning, guys. Thanks, very much guys good morning.
Yeah, I think that that comment about the communities with something that we were kind of waiting for so that that really helps frame.
Frame all of your commentary about your longer term plans for growth and so forth. So.
So I want to ask your question about mix.
The data we have been seeing nationally seems to be pointing to positive mix occurring in the resale market at least from what you can see its pretty dramatic reversal from the past several years.
And at the same time, though for builders like yourself.
Moving away from the resale market you have so little inventory at the lower price points and the resale market Youre getting a lot of spill over demand into the new market. So I'm trying to figure out.
You got on the one hand buyers kind of wanting to trade up to maybe a little larger footprints and larger homes and at the same time, you've got the spillover demand out of the resale market flowing into the new home market, bringing lower mix. So as you look out over the next year, which is going to be a bigger factor the trading up positive mix effect or the first time buyer negative mix.
Effect coming from the resale market.
Okay.
Pleasure.
But I think we're benefiting from both and it's really a great time for for the housing market then.
Fluctuation mix may vary within specific submarkets, but we're seeing a tremendous amount of conversion of renters into homebuyers are the first ones segment, and we're seeing good strength and a lot of our move up markets from the spillover as you noted and with people looking for new looking for moving away.
From density.
So were continuing to see that the math and both of those sectors.
And just following up on the new home automation is Justin incredible demand.
Why Fi connectivity no dead spots in the home.
The home automation package that were offering is a real driver of growth whether it's on the entry level or the moves up so.
And along those very same lines.
You know home in the base.
Home innovation.
The way that people are using their home today is completely facilitated by new technologies or better technologies that are driving the home for whether it's automation, whether its connectivity whether it's healthy.
Healthy home more access to health services.
The home as I said in my remarks, it's not to shelter anymore. It's multi generational it's an office as Jim It's recreation, it's all of the attributes and some newer homes with newer designs and newer technologies are definitely benefiting into.
Day's market.
Temporarily at least for the time being cleanliness and access to a clean environment to look at a new home is.
As an added advantage.
And just going back to an earlier part of your question, Steve remember that the first.
First time buyer home market in many ways ignites the move up market. So whether first time buyers are looking at resale homes.
That enables the first time buyer of yesterday to move up.
And first time buyers are also looking at first time brand new homes in large part because of technologies and different designs. So it's all meshing together. The primary driver is the production deficit that we've been talking about for the past two years, it's been a decade long.
That you've seen production deficit, which means that we are in short supply across the board given the population. So all segments of the market are moving at the same time.
Yes. Thank you for that it's kind of been a thesis of ours that when you see home buying preferences change quickly that you would see the new home price premium increase because builders such as yourselves can change what you're selling what you built to adjust to those new preferences and so in that regard you talked about a 10% increase in community.
Next year, obviously with strong sales that's talking a year, you're bringing a lot of new communities online to sort of offset the ones that are you're burning out of or selling out of so if we were to look at the communities that you are bringing online over.
Over the course of the next year.
And we were to compare that with the communities that we brought online over the last year or so would we see a discernible.
Mix difference in those communities, whether it be the kinds of options and upgrade or the amount of options and upgrades that you would have included in your everything's included packages or some other things maybe more nexgen or just if there's some way you could talk about how your future communities are.
Selecting the opportunity for some of these new features and maybe directly enhancing your mix.
Okay.
At the at the community level.
You're not going to see much of a change it's at the product level that you will see discernible change.
You've seen us emphasize more and more our.
Next Gen product, which is the home within a home or an office within a home or Jim within a home that.
That product mix has been made.
Moving up but.
But additionally, you are seeing additional product offerings embedded in the homes that we deliver we are rolling out as we speak a a new.
Our new home automation package that.
That is designed for.
The family lifestyles of Tomorrow and.
And you are seeing more emphasis on elements like healthy homes and other attributes that people are looking for in today's market. These are action items that are defining the appetites of customers and you're seeing at the product level not so much at the community level and this is across our product offerings.
Right.
Yes, the only thing I'd add to that is that you see.
Utilizing extremely efficient.
Highly productive product.
That's going to continue to drive those margin increases.
John and the team have done.
Dennis phenomenal job and value engineering, what Weve built and just continuing to drive cost out that combined you also see it.
That's a continuation of our focus on the entry level on that first time move up to really captured capture the flag that you were talking about.
With regard to where the market growth is.
Great. Thanks, very much guys. Appreciate it okay. Thank you.
Thank you next next we have Michael Rehaut from JP Morgan Your line is open.
Thanks, Good morning, everyone and congrats on the results.
First I just wanted to hit on pricing, obviously, a lot of talk about managing pace versus price and the gross margin results are certainly impressive.
Just trying to get a sense for if you could give us any.
Type of range, perhaps of the magnitude of price increases on average that you were able to implement this quarter.
Across your community base.
And as part of that he mentioned premium pricing for your inventory, which which you would need.
I will.
If there is any ability to also give some color on if you were able to move price more on the spec.
Spec.
Or you know as well as what price you were able to achieve price increases on your overall.
Build to order product you're more you know the more typical mix.
[noise] [noise] so okay.
We've seen pricing power really across all.
Almost all of our markets.
There is.
Anywhere from goods is very strong.
As the hard to really say, well, one prototype or price point or markers are really shines. Another we're seeing strong sales pace and strong pricing power.
Across the board and Thats reflected in the margin improvement that.
We had over over our gardens.
As Rick said it was really a slide that.
Two our inventories so that turns very quickly into our deliveries are reflected very well or mergers our third quarter delivers.
And then the rewards is our backlog as we look forward so.
So it is unusual to think about inventories at premium usually inventory or the holes that you have trouble moving but in this environment or the growth. There. It really is what is our advisor consumer who wants to move now move into a new new situation.
They are all healthy.
Great now that's that's helpful. I appreciate that John.
I guess secondly, maybe shifting to returns and obviously you know turning your inventory fast over is it.
Certainly great way to achieve better returns.
There are several levers however that you guys continue to look at and.
Try and pull I think as part of your strategy over the next couple of years to drive higher returns.
You talked about the increase in option lots.
I was hoping to.
Maybe.
Shift the focus and ask about.
Two other areas one your balance sheet itself has been.
Has various investments that are as you kind of highlighted the hoping door you know important and strategic.
You, obviously have a big.
Ability into enormity family.
You have other you know.
Best visiting consolidated of around a billion how do you think about those assets going forward.
And also if I can squeeze in [noise].
On the share repurchase.
How should we start thinking about that over the next year or two.
Rick you want to take that.
Yes, I think we're constantly evaluating ways to maximize the underlying value of those investments.
Stuart I said over.
Over and over that we're very very focused on converting to core.
Very focus on enhancing the returns and maximizing the value of the assets. If you look at the various components, whether its LMC, which is a blue chip.
Class a multifamily.
Production machine.
Yes, they have created a great franchise.
Moving to the technology, I'll really let John and Stuart talk about that.
But the investments that have been made there as Stuart said benefit to core with regard to increasing the efficiencies of our operations, but also really lay the groundwork for.
Hopefully some great returns on those investments and then on themselves.
So let me just add to that and take two pieces of it if it does not escaped our attention that our multifamily reported earnings as opposed to the accumulated value that we've created new reported earnings are virtually nothing right.
Relative to a very sizable investments and that does not enhance our returns.
Accordingly, we have focused on the fact that it no longer is the strategic benefit for us to have that on book because.
Because it is dilutive to the returns that we're striving to achieve.
And so we are very focused on looking for our next program relative to LMC, our multifamily program as Rick properly notes. It is a blue chip asset a blue chip operating platform and.
We are we're focused on where it will land in its next iteration.
So this has been a day to day focus for both myself and for Rick We're working on that regularly you asked the question also about stock buyback you will remember the prior to.
[music].
The kobin.
[noise] moments, we were buying back stock on a regular basis.
We have we postponed to that as we saw co bid.
Right the market lower we took a wait and see attitude, we've continued that wait and see attitude and have not bought back stock.
During the past quarter as well.
But as we look ahead, we are clearly looking at are extraordinarily strong cash and liquidity position and looking at how we deploy capital and then even keeled way, we're clearly going to pay down debt, which we've already day lighted.
We will in some form resume a stock buyback program and look at other ways to properly deploy capital to enhance returns so thats our focus.
Great. Thanks, so much.
[music].
Thank you next we have Truman Patterson from Wells Fargo. Your line is open.
Hi, good morning, everyone and thanks for taking my questions.
So first question on on land you know you mentioned a few times you know tightness in the land market.
Do you all still plan on bringing your level of owned land down to three years and freeing up 3 billion in free cash flow or given the tightness do you plan on maybe holding on to a bit more owned land help growing your community count a little bit more.
And then just overall could you just elaborate a little bit more in the land market, what youre seeing competition, especially.
Post Cogan.
So on the Atlantic hold side, we are laser focused on bringing the land owners down to that three year level or less.
We're very focused as Stuart said of getting to that 50, 50% owned options.
And we have a high degree of confidence that we'll get there.
The entire company all of our land acquisition folks are laser focused on achieving those goals.
Near term note during.
During the quarter, we Didnt walk away from a single land deal we didn't lose a single window, we postponed and push and so no. We in this quarter starter repurchase fairly considering the purchase of land of as you saw or percentages shifted to a greater percentage of control so even though.
So we're in a constrained land market focus and execution is consistent with our stated goal and were were just described what we're driving towards.
Yes, we are in no way are we Truman.
Changing our strategy.
Given the fact that the market is much much stronger.
Then.
Any of us saw it coming in the midst of Covance.
As the strategy continues to be migrating towards a just in time delivery model for land and we have been working and focusing on getting their new.
You've heard Rick and you've heard John talk about land relationships and programs in specific markets. We've been focused on land relationships and programs at the corporate level as well in order to move and migrate towards that just in time delivery model, which includes a much greater emphasis on.
Optioned land much greater cash flow and deploying cash in areas, where we're producing highest returns and you can expect that's going to be continued strategy as we go forward.
If you think about a trim and when when you are a landowner.
I wanted to be one of the biggest drivers of your ability to make it cash flow on that asset is the builders ability to work through those those home sites on a on an accelerated basis engage.
Given the fact.
At our cycle times is industry leading.
We offer a great solution to a landowner on a take down basis, because they make their money at the end of the deal not at the beginning.
Oh, Okay. Thank you for that.
Jumping over to lumber and labor costs, I know lumber costs I believe you said increase to about a 100% during the quarter, but.
Both have been key talking points from the industry's lumber futures have really been bouncing around a lot.
How do you all think about.
Lumber costs and labor costs over the next two to three quarters and what type of pricing do you need to cover these costs.
You know it seems like you guys have been leaning a bit more on the price lever. So I imagine looking out a couple of quarters, you'll probably be able to cover this but kind of rolling off everything together.
As tremendous drawn or lumber peak really at the end of our quarter end of August.
It has already come back to about 19% in terms of futures.
Pricing so.
As we look forward.
I would expect we'll probably.
Okay.
See a decline to follow up 40%, maybe a little bit more.
As you roll forward about three months.
So we think about the impact will we will reward for all of our lower prices in October it will impact about half of our closings in Q1 is about half in Q2. This was a different cycle times and that is that I expect that.
The other half for Q2 will probably be lumber pricing that's somewhere fit.
50% to 60% of current levels.
We do see that coming down there as we look at our third quarter or labor and material costs were pretty much flat, both sequentially and year over year and as Rick mentioned earlier that the team's done a really great job of focusing on value engineering.
Our own plan.
Plan selection to me.
To make sure that we can really manage our costs well and.
Particularly on the labor side, we continue to be laser focused on or even flow strategy, which is just a huge benefit to the trades as they manage through the labor constraints and let's say, we just continue to hit stride as Rick mentioned.
No our cycle time is really strong as actually this quarter.
Is it helps over over prior quarter and year over year. So all those focuses are in bode well for us.
As as you mentioned, we are making sure that we're not.
Not solely out too far ahead, so it can take a better pricing power.
We continue to manage costs the way that we are we should continue to see those those higher margin results for us as we spoke about in the beginning of the call.
Okay. Thank you and good luck on the upcoming quarter.
Thanks.
Thank you next we have Jade Rahmani from KBW. Your line is open.
Thank you very much I was wondering to what extent do you believe the current uptick in housing represents a long term demand trend as opposed to something more short term and if theres any data at your mortgage company that perhaps gives do particular insights or perhaps the mix of spec lower spec deliveries and people, perhaps buying further out than.
Historically.
So.
This really goes back to the theme that we've had for the past many years and that is the one around production deficit.
Is this a short term phenomenon or has covance ignited a sustainable expire.
Expansion for housing.
You know I think that there are attributes of what has happened in the recent past.
That.
Dissipate.
The migration from urban to suburban.
Or from vertical to horizontal.
Might or might not dissipate, but at the end of the day, we still are left as a country across the country with a deficit in dwellings and housing both rental and for sales both.
Both multifamily and single family dwelling.
Loadings for the population.
We have seen millennials enter the market, we have seen more move out of a living space with their parents and enter the household formation and.
And.
Ownership market.
I think we're going to continue to see these trends people are valuing where they live how they live.
In a much greater way.
I think it was partially ignited by this moment with covance, but it was destined to happen.
Any time as family formation grew as.
As you know postponement gave way to the realities of family formation homeownership. So at the end of the day, a 10 year.
Production deficit, which is what we've seen is in our view going to.
It's going to be the fuel for and expansions that that.
Covers the next years not just for the short short term and that's how we're viewing the market. That's how we're thinking about our future.
And just to follow up is could you give the percentage of deliveries this quarter that were from spec and comment on how that compared with a year ago or historically.
Don't have that information off and.
But I know Diane will be able to accumulate it and will give us.
I will give us the latest well tested on later yeah.
Thank you.
You bet.
Thanks, I guess, Nick let me, let me just say that as part of as part of that the answer to that question.
Rick John do you want to comment on our inventory levels per community or.
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Across the board right now because they are at historic lows.
Yes, I'll tell you that right now, we're very lean on uncompleted inventory per community.
Exactly where we want to be it's around one or less on an aggregate basis on a community level basis.
Which means that we're we're keeping highly efficient cash flow model going we've got an assembly line that is producing homes to to fill that gap and where exactly where we want to be weighted homes as well as under construction homes right.
Okay next question.
Thank you next we have Matthew Blair from Barclays. Your line is open.
Good morning, Thank you for taking the questions.
I wanted to ask about the Q4 new order.
New order guidance.
Obviously, suggesting a bit of a deceleration in selling pace, which is normal seasonally and I hear you around limiting sales intentionally as well.
Community Count in addition sounds like it steps lower a bit so I understand all that but just in light of how much stronger Q3 came in versus that guidance is it fair to say that that what I. Just mentioned are is really the majority of the drivers.
Or are you baking in a similar level of conservatism as you did last quarter around the macro and around the sustainability of housing strength.
Well look I think that.
As we said in our remarks.
You know our 16% year.
Year over year growth rate and new orders was well above our targeted rate and we continue to maintain.
Targeted rate, it's a function of cash flow, it's a function of efficiency and effectiveness. It's also a function of what we believe we and the industry can actually put into production in the short term as we start to ramp up to meet the demand that's in the marketplace. So as we looked ahead to our fourth quarter.
And we started to give guidance.
Perhaps there is an element of.
Conservatism, but at the same time, we are managing to a more constrained growth rate.
Then, perhaps others or you don't want to get that far out over our skis. We recognize what is doable relative to production levels and we simply don't want to get into the rat race of chasing something that is.
That is way out over the horizon. So it's a function of not just what the market is giving or what we can sell into the market, but also a function of what rate, we can actually ramp up production and accommodate the requests.
And the demand that's in the market right now.
Yeah, and one of the things you mentioned is.
When we when we paused the activity on both the starts and the development during Cove it.
It slowed down some of our newer communities from opening so as you as you highlighted community count is shipping in Q4, but as I said in 2021, you'll see a rebuild of that.
Okay understood. Thanks, Thanks for that color.
And then I wanted to ask a question on the gross margin as well I guess, a little bit of a higher level. So exiting 2020 over 23% as you guided it kind of looks like when our pre Callaway Antech, we haven't seen a level like that perhaps.
Perhaps in 2016.
So putting kind of that lumber volatility aside should we be thinking that structurally when our gross margins can sustain at these type of levels or should we kind of understand that if there is any near term pricing power or mix. That's in there and we perhaps shouldn't get too carried away.
With assuming that that process. Thank you.
No I think thats, what we spotlights is in our opening remarks is that we expect gross margins to be taught.
Towards the higher levels.
As for the foreseeable future.
We we say that given the backlog that we have and the expectations for how we will manage the business going forward recognizing that there is an automatic caveat for where costs actually go and to how aggressively they move.
That will be in part determined by how quickly the industry moves to ramp up.
[noise] ramp up production.
And so we have to leave that out there as a question Mark but I think that if you look at where lennar situated and how we see the future you can expect that our margins are going to be migrating towards the higher side and as we said for the foreseeable future.
Why don't we take one more question.
Thank you next we have Jackman thing go from ESI GE. Your line is open.
Hi, Thanks for fitting me in and I guess I'll wrap it up with one bigger picture question bigger picture questions as most of the mask on Stuart.
For Q 18, I think the industry and collectively most of US on the call are surprised at how quickly the new home demand market decelerated when rates moved up and certainly no. One is thinking about that now although there is some conversation about inflation coming back in I'm curious, how you think about the strategy shift.
In light of the risk there.
Is it is it are you comfortable that being smaller than or sort of waning in the gross is somewhat defensive.
How quickly operationally can you can you can you change direction is if we see a spike in the 10 year and just general thoughts around how to manage that as you're clearly going and pushing price.
Sure is how do you how do you think about how do you think about that.
As in risk scenario.
Yes, it would be it would be easy to look at this as a defensive positioning.
But that's that's not at the root of our strategy.
Weve daylight is pretty consistently over the past quarters that our strategy is to manage our growth rate to focus.
On cash flow and returns and to deploy capital in that direction.
I think that what you are seeing in the way that we're managing our business as the market has ramped up very.
Very quickly.
Is a controlled program of moving forward of growing our business.
Expanding our production, but doing so in an orderly fashion focusing on returns and making sure that we're also focused on not selling way out ahead dirt sales where costs are less certain but instead inventory homes that are underproduction that increase our work our inventory turn.
As as well so.
So this is a very detailed strategies that we're we're very pleased with the way that we've executed and it.
And it's it's not at as Ive.
As I said earlier, we think that the dynamics of the market right now are poised for a future growth rate that that continues along the lines that you're seeing today I'm not talking about for Lenore Im talking for the industry. Overall, we think that the market is strong and is like.
Turning to remain strong and we're likely to see an expansion for homebuilding for the foreseeable future.
Thank you.
Welcome and want to thank everybody for joining us today, and we look forward to reporting back at the end of our fourth quarter. Thank you.
Thank you all for participating in today's conference you may disconnect your line and enjoy the rest of your day.
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