Q1 2021 Lennar Corp Earnings Call
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Welcome to and ours first 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 statements.
Thank you and good morning, Today's conference call May include forward looking statements, including statements regarding <unk> business financial condition results of operations cash flows strategies and prospects.
We're looking statements represent only <unk> estimates on the day to 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 <unk> actual activities or.
And to differ materially from the activities and results anticipated and 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 and monarch annual report on form 10-K, most recently filed with the SEC. 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.
Great and good morning, and thank you everyone on.
This morning on here in Miami and the World is seemingly beginning to normalize with a scaled down and still socially distance crew that includes Diane Bessette, our Chief Financial Officer, David Collins, Our Vice President and controller Bruce gross.
CEO of Lennar financial services and of course, Alex and you just heard from.
Rick Beckwitt, our chief.
<unk>, Chief Executive Officer, and co President and Colorado, and Jon Jaffe, Our co Chief Executive Officer, and co President is in California, and they're on the line this morning as well.
So today, we have a lot of ground to cover I'll give a macro and strategic Lenoir overview, Rick will talk about market strength land and community count and John will update supply chain production and construction costs and as usual Diane will give the detailed financial information highlights and additional guidance.
And then we will attempt to answer as many questions as possible.
And as always please limit your questions to one question per customer and one follow up.
So.
From a macro perspective, the housing market remains strong demand has continued to strengthen as the millennial generation, which had previously postponed its entry into the housing market has now continued to drive family formation, while at the same time, the supply of new and existing homes remains.
Strained, even though interest rates have moved higher at the same time that home prices have moved higher overall affordability remains strong.
Interest rates are still lower than they were a year ago and personal savings for deposits are strengthening and many American families have fortified savings.
<unk> and recreational activities have been canceled or postponed and stimulus money from the government continues to fill the remaining gaps the American dream of Homeownership ship is an essential aspiration of the American population and the seemingly and.
Imminent resolution of the pandemic.
Not slowing the growing demand.
Apartment dwellers and today are for the first time home and demand is strong and growing yesterday's first time homes are selling quickly and at higher prices, enabling first time move up the market for yesterday's move up home is strong and enabling customers to consider.
And purchased a larger home with a larger yard with an office and nicer kitchen, and a new set of necessary spaces for and evolving market.
Also the <unk> buyer and single family for rent participants are providing additional liquidity to the marketplace to sell and purchase homes as they evolve and provide ever more frictionless transactions.
The underproduction of homes for the past 10 years has created a housing shortage and with strong demand home prices are moving higher.
Although this reality is exacerbating the well documented affordability crisis across the country as workforce housing is limited and getting more expensive the solution. It seems will be and the growing supply.
And we'll be and growing supply by building more housing.
Current conditions have given rise to strong pricing power strong, though controlled sales pace, certainly labor and material increases very strong gross margins and even stronger net margin and of course, the challenge of land scarcity.
In the context of overall market conditions <unk> first quarter results reflect the intersection of our clearly stated strategic focus with excellent operational performance, let me connect the dots.
We have stated consistently that we would remain focused on orderly targeted growth and maintain our sales pace tightly matched with our pace of production.
We actively managed growth at the topline in favor of even greater growth at the Bottomline, we focused on gross margin margin by harvesting pricing power and controlling costs, while building a better mouse trap as I've called it in order to reduce our SG&A we.
Have focused on cash flow debt reduction and stock buybacks land owned versus controlled return on capital and on equity and of course innovative technologies. All of this strategic focus shows through and our first quarter results.
We grew our deliveries 19% year over year and grew revenues, 18%, which drove a pretax income before extraordinary items.
Debt to an increase of 95% year over year and an after tax pre extraordinary items income and EPS increase of 61%.
To achieve this we've controlled sales pace and matched it with production.
And while some have questioned our controlled and managed sales pace. The virtue of that strategy has been borne out by our 25% first quarter gross margin versus 25% last year.
At the same time, we remain focused on improving our operating efficiency driving our SG&A down SG&A down to a first quarter all time low of eight 4% versus nine 2% last year and driving our net margin to 16, 6% this year versus 11 four.
Percent last year.
Alongside our homebuilding operations, our financial services group has continued to exceed all expectations as well.
While some of the remarkable $146 million of earnings contribution from this segment is capital markets, driven and today's market environment.
Much of the consistent performance beat from this group continues to be driven by constant work and rework of the cost structure.
And our financial services continues to be a leader and the drive to create a better experience for our customers and a lower cost to transact.
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While operations have performed extremely well we have also further improved our balance sheet.
Rick will discuss our land program and our single family for rent program, which will which have.
Which continue to drive balance sheet improvements and just as <unk> seen dramatic improvement and other facets and other facets of our business just in time delivery of land and just in time delivery of completed homes enables us to be laser focused on our inventory turn.
And we will be reporting on progress and that area and coming quarters.
Of course, all of our work has strategically focused attention on our returns on equity and returns on capital, which have improved year over year by 470, and 420 basis points, respectively, and Diane will give more detail and our guidance in her comments.
Yeah.
So moving on.
In addition to the solid operating performance that we reported this quarter. We also had an extraordinary item of note.
We've been talking about the strength of our Lennox technology platform and this quarter Lennox requires some additional discussion.
Let me start by noting the remarkable contribution of Eric Fader and his team led by Santa Con and Christian Farc at Lennox.
We have learned from scratch, how to be a constructive strategic investor and disruptive or adaptive technology companies through trial, and it's through trial and error together with study and engagement and we have learned quite a lot.
And this group has learned how to balance both the tip of the spear and engaging best of breed entrepreneurs and innovators and the soft touch required to engage and bridge change management together with our operating leaders within the company.
Great work team.
With that said last quarter, we daylight that open door one of our many Linux technology business investments would begin trading as a public company and would require mark to market gain recognition recognition.
Accordingly opened door is now a public company and we recorded a $470 million profit as a result.
While this gain is extraordinary relative to our operating platform. It is not a one time event for the company.
Through <unk>, we have invested and a number of high quality technology businesses that are changing the way business is transacted and is transacted and our company and in the housing business and general.
Two more of our Lennox investment companies Doma previously known as states title and Hippo home insurance have both announced pending spec combinations and.
Additionally, as we have recently announced our son streets Solar power company will be acquired by Synovus energy give.
Given our ownership interest and these companies.
And understanding that we might or might not qualify for mark to market accounting treatment, we are conservatively estimating and economic gain and access of $1 billion from these companies.
Additionally, we believe that other companies and our technology portfolio will mature over time as well.
While some have questioned the heat and the technology market space, our Lennox investments are not driven by the onetime gains that might capture attention.
Instead, our Linda Lennox investments are focused on best of breed management teams that are building solutions to important problems that are adjacent to our core homebuilding and financial services businesses.
These companies their solutions and their form of execution, our models for us to learn participate with and reengineer our own operating platform for improved performance.
Our investment focus prioritizes the return to our operating platform over our outsized return on our investment.
Although the gains can be sizable and positively impact our earnings and balance sheet. They are more importantly, indicative of the maturity and relevance of the underlying management and business.
And while they are subject to the up and down fluctuations of stock market movements. The part of our investment that is not subject to market fluctuations as the permanent impact to our operating platform and company performance.
Each of these companies have meaningfully impacted our core operating platform.
Let me give some examples.
Open door pioneered the <unk> space, we invested and participated and molding and evolving this business, we learned that the <unk> space can reshape the entire home transaction, especially on move up transaction.
Is this solution continues to evolve and mature the buyer sale will become an industry standard as seamless trustworthy and timed for the customers' convenience becomes and expected way of transacting and the home buying world.
For Lenore open door ignited and in turn and.
Internal digital marketing transformation that altered our entire customer acquisition and engagement.
We both learned from them and then began to teach ourselves we changed.
And as a direct result, we significantly reduced SG&A by reducing selling marketing and outside realtor cost and enabling better coordinated closings for us and for our purchasers.
Doma, formerly states title is pioneering the instant digital home and mortgage closing that.
On the conventional process of title insurance underwriting and traditional escrow closing is confusing to the customer time consuming for lenders and time consuming for lenders builders and customers alike.
Doma is simply working to reduce a 14 day work stream to 14 minutes.
By eliminating the traditional process of buyer dashboard and seamless customer interface.
And instant closing with one and convenience.
This eliminates time and risk for lenders reduces.
Reduces complexity for the customer and reduces cost for all parties involved.
Lenoir and became a shareholder and doma by selling our retail title business for debt and equity and the company.
<unk> retail platform and title underwriter became a springboard for <unk> growth and evolution.
And are we simplified, allowing our team to focus all of their attention on just our captive business, our operation and overall operating costs were reduced significantly helping.
Helping to drive Lenoir financial services bottom line.
Hippo insurance has pioneered and instant and personalized home insurance product.
Home insurance history, historically has required a detailed application process that resulted in a one size fits all overly expensive insurance policy.
Hippo uses big data and technology together detailed information on each home deliver a refined policy at a lower cost and with coverage for what matters most to the customer.
The process is simple and frictionless.
Lenoir, and Vista invested and Hippo by joint Venturing, our captive home insurance agency and investing additional dollars over time.
This investment enabled us to participate and the development of the Hippo product for the new home market.
Ed design elements to the home like security by ring, and Flo by Moen water shutoff valve that lowers home insurance rates and designed the engagement for the new home buyer.
Today Hipple Underwrites every <unk> home before the purchase.
Our customer simply option to hear from Hippo, and they will get and immediate quote.
<unk> has already done all the work <unk> participates in the agency fee with no overhead and thus simplifying on our financial services once again and enhancing our bottom line.
Finally, we have recently announced that we will sell our Sun Street solar operations to some Nova and exchange for stock and the company.
We built the Sun Street platform to install solar panels on every <unk> home and certain markets, where it was feasible.
And we built a blue chip chip team that excels at installations for production new homes as opposed to retrofit.
The Sun Street platform is readily expandable and we expect <unk> will effectively grow that business.
And <unk> will benefit by simplifying our business and partnering with the Nova to take standard solar and installations and turning communities into micro grids with battery storage generators and advanced arbitrage technology.
We expect to develop next generation energy solution for new homes and communities that will solve the problem of power outages and electric grid deficiencies for new communities.
We look forward to working with Sanofi the synovus team who specializes in this space to solve the critical problem of energy generation and distribution and and environmentally efficient manner.
Simply put <unk> is a very different company.
We are no longer just a homebuilding company with technology operating and the background. We are now a focused technology aware and technology engaged homebuilder that incorporates effective and new technology solutions to enhance our core operations and our product offering.
We invest in technology companies and professionals, we worked on.
Alongside them to develop products for our industry, we incorporate new ways of doing business and we profit as well by investing and world class innovators and entrepreneurs that help help illuminate our path forward.
To the Investor World, We would not make the case that a higher EPS from non operating income or loss for that matter should be used with our multiple to value our company.
But instead I would make the case and we'll make the case over time.
For multiple expansion as our focus on cash flow and returns together with and improving operating platform with embedded upside from strategic investments merits consideration.
Now before I turn it over to Rick Let me briefly turn to our ancillary business divisions, and our drive to focus on our core homebuilding and financial services businesses.
We have continued to drive and grow our excellent ancillary business divisions and they continue to mature.
But being simpler enables us to focus on our core business units evermore.
As noted in past conference calls, we have been working on strategies to better position, our multifamily business called LLC, along with are now maturing SSR or single family for rent business that Rick will talk about in a minute.
Additionally, we have a dynamic and growing land program and land management business. We have also LMS lenoir and mortgage finance, our commercial mortgage business another excellent business.
And finally, we have a growing technology investment business, which is part of onex.
We've concluded that the best way to enhance corporate value is to have lenoir stand alone as a pure play homebuilder and financial services company and to enable these these blue chip businesses to thrive and excel independently.
Therefore, we are working to construct a tax free spin off of all or parts of these ongoing businesses and a unified company.
This spin co may contain all or part of the assets of these businesses together with certain land assets and programs as well as part of our Lenox investment business.
The expected size of the spun and enterprise would be between three and $5 billion and asset base with no debt, which our balance sheet can comfortably accommodate.
The remaining Lenore would see almost no loss of operating income from the spin off.
And we will continue to have a very liquid balance sheet.
And the Standalone company.
And would ultimately drive income from significant asset management fees.
The spin co will be focused on building and active asset management business debt raises third party capital to support ongoing business verticals included and land developed including land development.
The company will become an active asset and property management company. The backbone for the company will be Llc's operating platform together with the <unk> structures.
The resolute. This resolution is no longer a long term strategy, but is immediate as we focus on driving higher returns with less noise in our numbers from lumpy profits and losses, which will increase visibility for the capital markets into our core.
<unk> expect to hear a lot more about the spend over the next quarters as our thinking matures.
Today, we can only give a brief sketch of the future of this program I know you will thirst for more detail, but we're not in a position to give at this time.
But we did feel that it was time to share our thinking with the investment world as we work to fill out the detail and build a new company.
So in conclusion.
Let me say that our results and our expectations for the year are solid in all respects and they reflect our focused strategy to balance growth and drive bottom line margin cash flow and returns.
But complementing our business performance, we continue to be folk and to focus on our broader mission of making the world around us even better.
Whether it's with our social focus on extending home ownership to a broader social and economic array of customers with our emerging single family for rent program, which Rick will discuss shortly or our $1000 per home that we contribute to our Lenoir Foundation for social health and education.
And on programs across the country or our solar initiative for better and more sustainable energy for our homes.
We are positioned to do well, but always focused on doing good.
At <unk>, we have never been better positioned financially organizationally culturally and technologically to thrive and grow and this evolving and exciting housing market with that let me turn over to Rick.
Thanks, Stuart as you can tell from Stuart's opening comments. The housing market is very strong our team is extremely well coordinated and our financial results continue to benefit from a solid execution of our core operating strategies.
Key to that has been running a finely tuned and homebuilding machine, where we carefully matched and homebuilding starts with sales on a community by community basis and.
And this environment it makes no sense to sell too far out ahead.
As you lose the ability to offset potential cost increases with sales price increases.
Our first quarter results prove out the success of this strategy.
In the quarter, both new orders and starts were up 26% over the prior year.
Enabling and orderly construction program and a just in time delivery and convenient as completed homes.
This sales and production focused program allowed us to drive a 450 basis point improvement and our gross margins year over year with strong results and each months of the quarter.
And the first quarter, new orders deliveries and gross margins were up strongly and each of our operating regions and.
In addition, we saw strength in all product categories from entry level to move up to our active adult communities.
The strength of the market was also reflected.
And historically low cancellation rate, which was nine 6% and the quarter down 450 basis points from last year.
This is additional evidence debt buyers and the required down payment and mortgage qualifications to purchase and new home and they have little desire to risk canceling their new home purchase due to the risk of rising sales prices.
As Stuart mentioned technology, driven innovation and a focus on process and significantly lowered our SG&A.
This has been reflected in each of our operating regions with net margin up across the board and every region.
Now I'd like to spend a few moments talking about growth and community count.
As expected our community count at the end of the first quarter was down 8% from the prior year.
Notwithstanding the 8% decline, we achieved a 26% increase and new orders and the first quarter driven by a 45% increase and sales per community.
Part of the increase and absorption pace was driven by improved market conditions part of it was due.
Two the fact that we had been targeting larger.
Higher volume entry level communities that can deliver more homes for months and smaller communities.
And the next several quarters, our growth will continue to come from and overall higher absorption pace as well as an increase and community count and we are still on track to increase our active communities by about 10% and fiscal 2021 with the increase coming in the back half of the year.
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While we continue to be focused on our community count we are intensely focused on replacing our existing communities with larger higher volume communities and this allows us to better leverage our overhead and improve our bottom line and.
And increase our returns and cash flow.
As I've mentioned on prior calls and improving our returns on capital and reducing our balance sheet, our on balance sheet investment and land is a top priority.
With that and mind, we've been laser focused on increasing our percentage of option homesites and reducing our year's supply of one time sides, all while increasing our overall home site supply.
During the first quarter, we made significant process on all of these fronts as our controlled Homesites and percentage increased 4500 basis points year over year, and 600 basis points sequentially to and the first quarter at 45%.
In addition, our years owned supply of Homesites dropped 234 years from four years, and a year ago period and $3 five years sequentially.
Most importantly, we increased our total controlled and on Homesites by approximately 37000 homesites in the quarter with approximately 95% of these being optioned or controlled home sites.
Based on this progress we are in excellent position to achieve our goals of 50% controlled home sites and have through your own supply by the end of fiscal 2021.
These improvements reflect the strength of our relationships with local developers and other strategic partners.
We've been building adjusted time delivery system for our land inventory that we believe is sustainable throughout the cycles, we've created relationships with developers and investors with appetite for different duration risk for land.
And have matched that duration risk with appropriate risk adjusted returns day.
Short term land and long term land programs will allow us to continue to strengthen our balance sheet.
While generating strong margins and increased returns on capital.
Consistent with our land light strategy and are focused on increased profitability and returns and we're excited to expand our business through the creation of a first of its kind single family rental platform that will facilitate a better time delivery of our homes with reduced cycle times.
Following this earnings call, we will formally announce the formation of the upward America adventure.
This business will initially be capitalized with a total equity equity commitment of 125 billion led by Centerbridge partners alongside Ali on real estate and other high quality institutional investors and.
Including leverage the venture will be positioned to acquire over $4 billion of new single family homes and Townhomes from Lamar.
We expect <unk> peak capital investment to be $50 million and in the upward America adventure.
This venture is uniquely positioned to quickly scale given its direct access to on our pipeline of both purpose built single family communities and scattered single family homes that meet the index debentures investment criteria and.
The initial pipeline of purpose built communities for this venture includes approximately 3000 homes and 2007 communities with a total purchase price of approximately $900 million.
Like our multifamily build to core business. This platform will be asset managed <unk> with third party equity and debt owning the assets and an asset light program for Illinois.
As housing needs and demographics continue to evolve we believe that the single family rental sector will continue to outperform.
In addition, the upward Americas entered continues on our vision of becoming and ESG driven homebuilding company by.
By making our high quality homes, not only available for sale, but also for rent with a portion of the homes available with a rent to own option.
The vehicles, social focus provides a unique opportunity for families and individuals across the country to live and brand, new and our homes and and attainable price point, all without putting up and down payment.
Given this we have a distinct opportunity to create upward mobility and the housing market through this initiative.
Now I'd like to turn it over to John.
Thank you Rick and good morning, everyone as Rick and Stuart noted matching sales pace with our production pace has been our consistent strategic focus that has enabled us to drive excellent performance by Permian production and sales, we've maximized margins and driven bottomline profitability and.
The current environment, we could have easily generated more sales, but our view has been and remains the key to success and this market is all about managing the supply chain and production.
I'd like to briefly describe our strategy performance and expectations for production and construction cost and in order to shed some light on how this strategy has been central to our accomplishments this quarter and how it will impact the balance of 2021.
First let me share with you some statistics of our first quarter. Our total construction cost per square foot was down 0.7% and Q1 year over year, but up one 9% sequentially from the fourth quarter.
And the first quarter lumber cost increased about $1 per square foot or $2300 per home both year over year and sequentially.
These cost increases were more than offset by other cost decreases year over year, but not sequentially, resulting and the overall year over year cost decline and sequential cost increase.
Year over year, our construction costs as a percentage of average sales price decreased from 45% to 42% and remained flat sequentially as our pricing power driven by our control sales pace.