Lennar Aktie

Welcome to Lennar's second quarter earnings conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results.

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

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

Very good. Good morning, everybody, and thanks for joining today in this interesting day with the SpaceX IPO at the same time. So I'm in Miami today, together with Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; Katherine Martin, our Chief Legal Officer; and Jim Parker, our newly promoted and appointed Chief Operating Officer. Congratulations, Jim, and David Grove, our newly promoted and appointed Executive Vice President for Homebuilding. Congratulations, David.

Jim and David jointly oversee our operations across the country. And while they will not be giving opening remarks today, they will participate in our question-and-answer period. And as usual, I'm going to give a macro and strategic overview of the company, although abbreviated, and Diane will give a detailed financial overview and guidance for the third quarter of 2026. Then we'll open it up for questions. And as always, please limit yourself to one question and one follow-up.

Before we begin, I'd also like to reiterate so that all of you know that we have now posted our new investor deck on our website today at investors.lennar.com in conjunction with this earnings release. This deck was created in an effort to give investors, analysts and interested parties, a clear view of the Lennar transformation and strategy that we've described consistently on these calls over the past years.

From our volume-based operating strategy to our asset-light manufacturing model and from our technology platform and initiatives to our path to margin recovery and long-term value creation, we've tried to tie it all together for your review and comments. We believe it provides important context for understanding where we are, where we're going and why.

With that said, let me begin by saying that we're pleased to report Lennar's second quarter 2026 results that we believe represents strong operational execution even as the macro backdrop has grown more complicated and sometimes erratic since our last earnings report.

In the second quarter, we delivered 20,519 homes around the midpoint of our guidance, and we generated 21,749 homes or new orders near the high end of our guidance. Our gross margin improved sequentially to 15.6%. Our net margin increased to 6.4% and our earnings per share came in at $1.31, excluding mark-to-market items. Notably, our sales incentive rate on deliveries was 12.9% this quarter, down from 14.1% in quarter 1 and down from 14.5% in Q4 '25.

After 3 years of incentive levels that have been generally increasing, we're starting to see the first real and potentially sustainable decline. While this decline may be a leading indicator of margin recovery, the overall market remains choppy as economic and geopolitical crosscurrents marked the way forward. Against this backdrop, let me briefly discuss the overall housing market. The macro economy has grown more complex since the first quarter earnings call, and I want to spend a few minutes reviewing the specific dynamics shaping the market right now.

First, mortgage interest rates have remained stubbornly elevated in the mid- to upper 6% range throughout our second quarter. The 30-year fixed rate sits between 6.4% and 6.5% today, modestly better than a year ago, where rates were closer to 7%, but still at a level that keeps affordability challenge. At 6.5%, the buyer at the median family income is spending above 30% of gross income on their housing needs.

Buyers are stretching and our incentives are enabling purchase. The fact that incentives are declining, although slowly, is an encouraging signal even though the math has not yet changed meaningfully yet for the buyer. The inflation picture has also become more complicated. The May CPI report released recently showed headline inflation at 4.2% year-over-year, up from 3.8% in April and the highest reading since early 2023.

The primary driver was energy as gasoline prices increased 7% in May and are up over 40% year-over-year, driven by disruptions to oil supply tied to the Iran conflict. While this is possibly just an energy-driven spike, as core CPI came in at 2.9% and actually decelerated on a monthly basis, higher energy prices touch every part of the American household budget and tend to depress consumer confidence.

When families [ see ] gasoline at the pump and electricity bills climb, their willingness to make major financial commitments, including purchasing a home moderates, even when their underlying desire to own has not changed. This inflation backdrop most likely has taken the Federal Reserve off the table as a near-term source of relief. The federal funds rate remains at 3.5% to 3.75% and there's a little probability of the cut in the immediate future. Rate cut when they eventually do come can meaningfully -- it can be meaningful tailwinds for our business, but we are not waiting for them.

We are building and executing to the market as it currently exists. On the employment side, the economy remains solid on the surface. But consumer psychology is being affected by anxieties about the long-term security of jobs at the time of rapid technology change. The advance of artificial intelligence is raising questions about the future of employment across a wide range of the workforce.

We see this in buyer behavior. Traffic is inconsistent, intent is high, but urgency to close is still measured and deliberate rather than confident and energized. We continue to make homeownership achievable and attractive through value-oriented pricing compelling financing and the speed and quality of our customer engagement. While currently urgency is lacking, we continue to build the platform to serve buyers even better in a normalized market.

On the cost side of our world, a broad range of commodities and building products continue to create headwinds across the industry. We have managed these pressures effectively as construction cost per square foot improved to $81 this quarter, down 7% from a year ago. But the cost environment remains fluid and bears close attention. Additionally, labor costs require oversight as well. Labor availability has improved modestly in some markets as multifamily construction has slowed, providing some relief, although immigration policy and enthusiastic data center construction continues to create tightness in other geographies.

Our record cycle time of 121 days, though is evident that we're managing these dynamics effectively will also. On a positive note, the federal government's engagement with the national housing crisis continues to deepen. While the legislative vehicles moving through Congress are likely to have little impact on supply and demand components, housing affordability is still a focal point of both the administration and the legislature.

The level of attention being paid at the highest levels of government to housing affordability is genuinely unprecedented in my experience, and I remain confident that meaningful federal action is closer than the market currently believes. If and when government action does come and depending on its content, it can be a significant tailwind for the industry. One component of our attention on this matter. We continue to watch closely if the legislative and regulatory effort at both state and federal levels to contain or constrain institutional and investor purchases of single-family homes.

Several states have passed or are advancing restrictions on large-scale investor acquisitions, and federal attention is growing to this issue as well. We view this initiative as a concerning long-term development for housing as it is recalibrating demand dynamics in a number of local markets and might have the effect of reducing production of housing and reducing much needed [indiscernible].

So in summary, rates remain elevated, a fresh inflation spike is complicated in the consumer picture and the Fed is on hold, but underlying demand is real and growing. Supply is structurally short. Our own incentives are slowing -- are slowly declining for the first time in 3 years, and the government is focused on affordability. Cost currents, yes, but on balance, optimistic. Against this backdrop, let me briefly turn to our operating strategy.

Our strategy has not changed and consistency of strategy, especially through a difficult cycle, is what builds confidence through our company, and we believe an enduring competitive edge in the market. We remain focused on 2 strategic priorities. First, driving consistent, even flow production and volumes; and second, continuously refining our asset-light land like balance sheet model to generate strong and growing cash flow and returns.

As for 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 that our customers need to achieve the value they can afford, and we maintain consistent volume even as the market adjusts. We have remained steadfast in our execution and our results reflect that conviction.

We continue to believe that our focused strategy has built consistency through the Lennar platform, which is creating a real competitive edge in the market. This focus has enabled us to drive down construction costs per square foot to $81, as I said, down 13% from 2 years ago, and cycle time is down to 121 days, which is a record low, a direct driver of inventory turn improvement to 2.5x from 1.8x a year ago.

On the Asset-Light side, we continue to make excellent progress on an ever more seamless and sustainable asset-light model. Less than 5% of our land is on balance sheet. Total homebuilding inventory has declined to $10.9 billion this quarter from $11.4 billion a year ago. Our land banking partnership continued to function extremely well and are getting increasingly more efficient while providing just-in-time home site delivery at an 86% delivery rate.

In addition, we inject modern technology in every aspect of our land-light, and we expect that by year-end, we will have an extremely efficient land operating system and process that will reduce cost structure, while enhancing our land acquisition, diligence and review.

Simply put, our land-light model will enable us to be significantly more efficient and effective as a land buyer, as a land developer and land administrator at a significantly lower overall cost of capital. By strategically focusing on volume and asset light, we are becoming a materially better and singularly focused homebuilder/manufacturer. This enables us to spend more time and attention to drive quality and value in our homebuilding operations.

Quality always comes first at Lennar. We remain continuously focused on improving the quality of every home we build with a world-class customer experience for our customers and with safety first for our building partners. Lennar's excellent but always improving customer experience program starts at the time we first meet our customers through our digital marketing funnel and never stops through the signing of the contract to the closing of the contract to the engagements with our customers after they close.

We are focused on embracing and engaging our technology platform to enrich and expand Lennar's customer experience as we build a customer for life. Additionally, we continuously improved the Lennar value proposition. We are using our market share, land access and cost advantages to enhance the value proposition embedded in each home offering to our customers.

Our everything's Included platform and program continues to serve as an important competitive differentiator and affordability lever. By standardizing features at scale and offering more for less, we capture purchasing efficiencies, offset cost pressures, protect margin and deliver meaningful value to buyers, all while keeping the buying process simple and transparent.

Additionally, our targeted financing programs, rate buydowns and closing cost assistance allow us to solve to an affordable monthly payment for buyers who are qualifying on payment rather than price, which describes a large share of our buying population in the current rate environment. Now let me turn briefly to our Q2 '26 results.

In the second quarter, we delivered 20,519 homes and generated 21,749 new orders, both reflect the continued underlying demand for new homes and the effectiveness of our pricing strategy. Our average sales price came in at $371,500 and our sales incentives rate on delivery trended down to 2.9%, as I said, compared to 14.1% in Q1 and 14.5% in the fourth quarter of '25. I would reiterate that this is starting to look like a trend.

Our gross margin was 15.6%, while SG&A was 9.2%, reflecting continued investment in our digital marketing and technology platforms. Net margin was 6.4%, producing net income of $305 million and earnings per share of $1.24 on a GAAP basis, or $1.31, excluding mark-to-market losses on technology. We are currently expecting to continue the trend of margin improvement. Relative to our balance sheet, we ended the quarter with $1.8 billion in cash as our homebuilding debt to total capital ratio was 15.8%.

Our inventory turn of 2.5x and return on inventory of 15.3% reflect efficiency gains in our manufacturing model. We continue to focus on cash generation and improving returns. I will leave it here for now, as Diane will cover our guidance in our third quarter expectations.

So let me conclude by returning to where I started at the opening of the call. The new investor deck that we have now posted at investors.lennar.com. We have spent some time putting together a presentation that we believe gives investors a clear view of our consistently articulated strategy. The mechanics of our asset-light model, the technology investments we're making and the path to margin recovery.

And we expect to continue to add to and refresh this presentation as we continue to advance our program. But overall, we have made the hard decisions, built the right platform, and we believe that we will continue to see that work mature into real bottom line results. After over 3 years of navigating a rather difficult and complicated housing market, we believe that we are well positioned for market conditions as they unfold.

In the current market, incentives are declining, margins are starting to improve, and our sales and marketing machine is generating stronger lead, faster engagement and better conversion. Our operational platform, cost, cycle time, inventory turns continues to improve on every dimension. And our market position is very strong in the vast majority of our markets, which gives us the scale and influence to drive that recovery intentionally rather than waiting for it.

We are building towards that with clarity, discipline and confidence. We simply could not be prouder of the extraordinary work driven by Lennar associates across this company. They are all aligned in mission and strategy as they have executed through this extended per difficulty, building new capabilities, driving down cost, 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 it over to Diane.

Thank you, Stuart, and good morning, everyone. Stuart's comments combined with our earnings release, provide a comprehensive overview of our second quarter operating results. Therefore, I'm going to focus on balance sheet highlights and then provide estimates for the third quarter. For this quarter, once again, we were highly focused on generating cash by pricing homes to meet affordability.

As Stuart noted, we ended the quarter with $1.8 billion of cash and total liquidity of $4.9 billion. During the quarter, we started approximately 20,600 homes and ended the quarter with approximately 38,600 homes in inventory, which included about 3,500 completed, unsold homes or just [ about ] 2 homes per community. This is a meaningful reduction from 3 homes per community or 5,100 homes in Q1. Our construction cycle time improved to 121 days, our lowest cycle time in history, reflecting the impact of our production efficiencies.

With respect to land, we own 2% on our balance sheet and control 98% through third parties. This configuration significantly lowers our balance sheet risk, especially in challenging markets. We ended the quarter owning 11,000 homesites and controlling 484,000 homesites. We believe our land portfolio of primarily auctioned homesites provides us with a strong competitive position to continue to grow market share in a capital-efficient way.

The total balance of deposits in ACORE and ACORE pre-acquisition cost on real estate, was $7.1 billion at quarter end, an increase of $237 million sequentially. The Deposit component of this balance remained flat with Q1, which is consistent with a relatively flat number of homesites controlled. The ACORE balance increased was primarily driven by a net increase in capitalized option maintenance fees. We pay current pay option maintenance fees to land banks based on the capital deployed on a multiyear pipeline of communities.

Those fees are capitalized into ACORE. ACORE has been reduced as we purchase homesites from lending and the cost becomes part of our land basis. So in summary, ACORE increases by the fees paid on multiyear land and ACORE decreases by homesites purchased one at a time. Our inventory term was 2.5x, and our return on inventory was just over 15%.

We maintain our focus on increasing asset returns which will enable us to capture more return upside as margins normalize. Turning to our debt position. Homebuilding debt to total cap was 15.8% at quarter end. We ended the quarter with no outstanding borrowings under our revolving credit facility and $1.7 billion outstanding under our term loan. Note that $400 million of 5.25% senior notes matured on June 1. We used cash to redeem the notes. Our next maturity is June 2027.

Consistent with our commitment to increasing total shareholder returns, we repurchased 5 million shares for $447 million, and we paid dividends totaling $123 million. Our stockholders' equity was approximately $22 billion and our book value per share was approximately $90. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the second half of the year.

So with that brief overview, I'd like to provide guidance estimates for Q3. Starting with new orders. We expect Q3 new orders to be in the range of 21,000 to 22,000 homes with continued focus on matching start and sales pace. We anticipate our Q3 deliveries to be in the range of 20,500 to 21,500 as we maintain even flow production and turn inventory into cash.

Our Q3 average sales price on those deliveries should be between $375,000 and $380,000. Gross margin should be approximately 16%. As we noted last quarter, we expect sequential margin improvement quarter-to-quarter as the year progresses. Our SG&A percentage should be in the range of 8.8% to 9% and all of these metrics are dependent on market positioning. We anticipate our Financial Services earnings to be between $95 million and $100 million. And for our multifamily business, we expect a loss of approximately $15 million.

For our Lennar Other segment, we expect a loss of approximately $20 million, excluding the impact of any potential mark-to-market adjustments. For the combined homebuilding joint venture, land sales and other categories, we expect a loss of approximately $15 million. We expect our Q3 tax rate to be approximately 28% and the weighted average share count should be approximately 238 million. And so on a combined basis, these estimates should produce an EPS range of approximately $1.20 to $1.40 for the quarter. And finally, as Stuart indicated, we are adjusting our annual delivery guidance to 82,000 to 83,000 homes given current pressures on interest rates and continued macro uncertainty.

With that, let me turn it over to the operator.

[Operator Instructions] Our first question comes from Susan Maklari from Goldman Sachs.

I wanted to talk about the cash flows of the business and how you're thinking of the ability to generate cash as you continue to leverage the standard product and the inventory turn improvement that we've seen...

core product, you wanted to talk about core product?

Susan, is that what you meant? The impact of core product.

Yes, the core -- yes. Yes.

Yes. I think I'll turn it to Dave and Jim, but I think there is an increasing percent of our deliveries that are trending towards core product is very efficient. I think the real impact is the returns that we get on because they're smaller products, easier to bill, lower costs. So while I think there's cash benefit, I think the real benefit is on the return side. But Jim?

Yes. I'd say we're continuing to optimize product across the whole company. We're taking different divisions in different geographies, seeing what works the best, what cost structure is the best and really using those more across more communities, which I think is really going to have a long-term effect on costs and selling.

At the end of the day, as we migrate towards more of our core products, we're going to continue to see reductions in both cycle time and our cost per square foot. And we think this is a real strategic advantage as we go forward. And as we reduce cycle time and cost per square foot, we're going to see increases in inventory turns. We think there's still room for improvement there. And this, of course, directly impacts the cash flows.

Yes. Okay. All right. That's helpful. And then thinking about a lot of these cost savings that you've been focused on generating returns from those tech investments, those kinds of benefits, can you just give us an update on how some of that is evolving in there? And how we should think about the ultimate savings that you can realize? And what that will mean for profitability and cash generation over time?

So let me start with that and say that our savings are going to come from a number of items. As I just noted, cycle time is one and cost per square foot is another. But as we continue to improve, number one, our foundational technologies, they're basically the engine for efficiencies we're going to start to see our SG&A start to go down together with our corporate G&A.

The efficiencies are coming through, basically, a system that has required an awful lot of updating our technology systems at the foundation level have required a lot of work, and we've had some missteps along the way in that regard. This is going -- as we really get our new systems entrenched, it's going to enable us to bring costs down. And of course, the efficiencies that we'll see through our operating systems, we think can be very strong. So I don't know that we can quantify either the amount or the timing, but we know that the cost reductions are going to be quite substantial as we go forward, particularly in some of our corporate and SG&A costs.

David, do you want to say anything on that?

I think what's interesting about both of those is that our core product and our technology are both very -- also very focused on our customer and our customer experience. So as we create a better customer experience, utilizing technology and also in our core product as we continue to refine it to meet the customers' needs and provide them what they expect and more than they expect it, everything's included in model. We both have cost efficiencies and cost savings on our side, but we also are going to market with a better product and a better experience for our customers.

Next, we'll go to Alan Ratner from Zelman & Associates.

Thanks for all the color and the presentation. Appreciate it. First question, I'd love to drill in a little bit on the kind of the incentive and volume interplay. It's encouraging to see the trend moving lower on incentives. At the same time, you did slightly reduce the volume expectations. And I'm just curious, as you in the field are out there, I know this is community by community, but in the field as you're out there, trying to dial back some of those incentives.

Are you seeing an immediate negative impact on your sales pace and absorptions that's translating to that reduced guidance? Or should we think about it more the other way in that you're expecting to see maybe volume pull back a little bit as you try to reduce incentives and therefore, you're reducing your start pace commensurate with that. I'm just curious how you're seeing that in the field.

Go ahead, David.

I think we've done a good job through the quarter, a really excellent job actually about maintaining a sales pace, a very respectable sales pace of 4.3 sales per community per week, while reducing our incentives, and I think that's a combination of core product execution. I think it's a combination of our presentation and the way we engage with our customer, and it's a result of our improving sales and marketing funnel, leading to more appointments kept that we can then convert at a higher rate.

Yes, I think that's right. I think the even sales is the biggest -- if you look at not just weekly, almost daily is how we measure it, and it takes away from the pressure on the weekends. So I think keeping that cadence, if you look at our last quarter, every week lines up, similar sales number every Friday, similar percentage. So I think keeping that really allows us to lower those incentives.

And I think just layering on top of that, what you've seen is a disciplined approach to both sales pace and production pace to alleviate some of the driving pressure so that we can allow some of the incentive reductions and pricing to kind of catch up with pace. The market has been under stress. The market overall has been somewhat erratic. And so we've taken some pressure off of pushing into the market in order to let some of those incentive reductions mature.

Great. That makes a lot of sense. I appreciate that. Second, and bear with me for a second here. I just was hoping to get a little bit of clarification on some of the numbers in your investor presentation. So you have a number near $18.5 billion of inventory control effectively. What I'm assuming that is, is kind of like the cost basis, if you will, of all the land that you control either through options or land banking. I'm guessing it's not a finished lot value because if it was, that would seem pretty low per unit. So first, can you just confirm that, that's correct that, that's kind of like the current cost basis of all of your 400 plus thousand auction lot?

Yes. Let me -- I'll say it differently, Alan. It is total amount outstanding, so the total amount of capital deployed by our land bank at that point in time. So that will be acquisition dollars that they paid as well as development dollars that they have incurred. And so you're right, it's not the finished price and it relates just to the land bank population. So you are right we'll to tweak it a little bit. .

Okay. So that's just land bank. So of the 400,000 -- 480,000 lots that are kind of controlled through third parties, only a portion of that relates to this number.

We do have some of the land developers for the majority.

Okay. So then of that $18.5 billion that it sounds like, should we think of all of that being relevant to your ACORE, meaning if you're assuming a 10% cost of capital on $18.5 billion should we think about $1.8 billion being kind of the check you're writing every year to maintain those land banking? Or are some of those structured, more picks on the back end? I'm just trying to figure out the cash flow impact of that cost of capital. .

That's exactly right. There are some .

Most of the land banks have a current pay, but there -- we do have some that are deferred payments. That's right. And [ pick ] is for purchase price time.

Okay. So do you have, I guess, a number in mind that we should think about as far as what the ongoing maintenance is on an annualized basis, assuming some of those are picked, I mean it's going to be less than $1.8 billion, I presume, but I'm just trying to figure out how much left.

Well, the -- listen, the way we think about it, Alan, and it moves around a little bit. So what you have here is kind of a static moment. But what you have is as land is coming on either one platform or another, you're adding to. And with each home delivered, you're relieving from. So you've got an input and an output on a regular basis. Now remember that while we're catching up to the starting point, we [ are more building ] on land bank then coming off through deliveries. But I think that when you get down to it, I don't know what the percentages are of front versus amortized.

The majority are current pay.

Next, we'll go to Michael Rehaut from JPMorgan.

First question, I guess, I have 1 question on the direction of the 3Q gross margins, but I wanted to start off with a question just around kind of more broadly volume versus price? Because I think in the last couple of years, you've certainly kind of put a stake in the ground and saying you're a volume-driven company and you use price or margin as the lever to maintain a good volume number and that number theoretically being 10% growth every year.

Obviously, this year is a challenging environment, but I'm just curious on the thought process behind lowering the closings guidance as you did this quarter by 2,500 homes at the midpoint, instead of maybe lowering -- further lowering your margin or price to maintain the prior 85,000. It would seem that it's almost -- you're kind of saying, hey, we really don't want the gross margin to go below this level. But correct me if I'm wrong, and just any insights into that shift for this year at least?

So the answer, Mike, is that we're dealing right now with a changing -- constantly changing macro environment. And this past quarter has been particularly awkward, you have geopolitical uncertainty that's driving elements of whether it's interest rate expectations, or certainly inflation expectations. And we just felt that as we manage sales and starts pace and as we are managing carefully our inventory levels, what we didn't want to do is kind of go headstrong into a clearly uncertain environment with just a conviction with a market that's just moving around too much.

So we felt that the prudent thing to do in managing our business is to focus on the absorption rate that we felt was comfortable for the system so that we can manage inventory levels that you've seen a critical part of our narrative here is that our inventory has come down from 3 rooms per community to 2.1 homes per community, which is kind of our comfort zone. We articulated last quarter that we had built up inventory looking forward to a more robust selling season, that didn't really materialize in force and at the same time, the uncertainties in the geopolitical world just said less to err on the side of prudence. That's where the calculus came from.

Okay. No, I appreciate that. And certainly makes sense. Every policy needs flexibility for extenuating circumstances theoretically. Secondly, I just wanted to circle back to the third quarter gross margin guidance and kind of understand a little better. So you're looking at about a 40 bp sequential improvement. How much of that is from the incentives coming down a little bit.

And I'm curious, I believe it was [ 12.9% ] on the homes closed in the second quarter. What you're expecting that to be for the third quarter. And what other drivers might be behind the sequential improvement, be it a little bit more volume or lower construction costs.

We're not really guiding to nor are we injecting a projection as to where incentives might decline. This is more -- our increase in margin is more an expectation relative to inclusion of more core product, continuous improvement in our cost structure and some of the more operational side of our business, it is. So we really don't have an expectation right now for where incentives are going to migrate to that could potentially be additional upside. But remember in my remarks, I was clear to say that incentives are coming down.

But I said it a couple of times, though slowly, which is a positive thing because they're not going up. But that migration down is slow and looking to present itself as somewhat of a trend. So we're going to see, and we're not projecting something but embedded in our margin improvement, our expectations from the operational execution that we're seeing and able to look forward to.

Next, we'll go to John Lovallo from UBS.

I wanted to go back to sort of the ACORE comments. And it seems like the implied option maintenance expense was maybe $270 million or so greater than what was expensed in the quarter. A, is that correct? And if so, is that implying that 2Q EBIT is overstated by $270 million? And I guess along the same lines, what's the expectation in the third quarter for this -- for the option maintenance expense?

Say the question one more time. I want to make sure I'm answering the right question.

Yes, sure. So the implied option maintenance expense, it seems like it was $270 million greater than what you expensed in the quarter. So I'm curious, are earnings actually overstated in the second quarter because of this? And then I also was curious what you expect it to be...?

John, that's a good question. I want to make sure that I was understanding it right. So what you've seen and what you are seeing is as we have stood up our asset-light strategy, remember that you are covering one year's worth of home sites and you are starting in ACORE accumulation or capitalization of the option maintenance fees for a broader range of land assets that are covering 2, 3, 4 years, maybe 5 years.

[indiscernible] of land accumulating ACORE on the platform. So for a period of time, there will be that imbalance, and that is a natural ebb and flow of capital. It's why we've been more conservative on things like cash and stock buyback over time because we knew that there would be this imbalance for an extended period of time. It will ultimately equalize. And so the answer is no. That's not an overstatement of earnings or anything else. It's a natural migration from an on-book balance sheet with land embedded or the way we think about it, a land company that happens to build homes; two, an off-balance sheet asset-light approach will become a manufacturing platform, and that migration will have that in balance for some period of time.

Yes. And John, I would just add on the positive note, most of our land -- so if you think what Stuart is saying, right, most of our land banks are getting closer to kind of that equilibrium because think about the fact that most of our land banks have -- are close to kind of like a maturity [indiscernible] Milrose is the one that is still on the journey. We've formed Milrose 1.5 years ago. So that's one that has a little bit longer to go to get to that point where you're matching the 2 sides, if that's helpful.

Yes. Second question is -- and maybe I'm just looking too deeply into this, but it seems like the wording of how you guys described the incentives over the past 2 quarters in the press release changed a bit. So I just want to clarify, the incentive load of [ 12.9% ] versus the 14.1%. Part A, I mean, does that include the base price adjustments in that number? And if so, I guess the question is, why didn't we see a bigger impact sequentially in gross margin from 120 basis points of reductions in incentives.

Go ahead, Daine.

Q4 to Q1, is that what you're asking?

I'm asking does the 12.9% include base price adjustments? Or was that just buy downs is the first part. So that's all in?

It does include both...

Fantastic. And then just with that in mind, if that's an all-in number, we saw 20 basis points reduction sequentially. So if we think quarter-over-quarter, I'm just curious why there wasn't more of a gross margin good guy, if you will.

Pickup. Yes. It's a function of a few other items. And I guess the only thing, I'd say is, generally, if you think about incentives, it does get a little convoluted because sometimes you change your base price on community, for example, and because it's the whole community, it's not an individual home price reductions. So it does get a little confusing as to what you're measuring against when you're looking at your base price versus your net price. And additional -- does that makes, John?

And additionally, you're opening new communities that have different pricing. So it's not even necessarily a price reduction. It's maybe a change in community A Versus community B and you open up at a lower price. You've seen our average sales price come down at the same time. So there is some mixing and matching in all of this.

Next, we'll go to Jay McCanless from Citizens Bank.

First question I had, if we look at the backlog at the end of 2Q, roughly 16,000 homes, should be about 80%, I think, of the closings that you're projecting for third quarter. Could you talk about what the backlog incentive looks like right now, maybe just as a directional for what gross margins and incentives might look like in the third quarter.

I don't know, David, why don't you take that?

Backlog incentives?

Yes.

I think right now, we're sitting at right at about that same 12.5% on sales from Q2 that beat into Q3 closings.

I think they're flat to down a little bit right now. And I think that they give us -- I think that you said 12.5 versus...

12.5 versus 12.9.

Versus 12.9. And just so you know, to our operators, 40 basis points is almost flattish, but some of us every 10 basis points matters, right? So they're coming down a little bit. And we really don't put that number out there because as you go through the quarter, some of the backlog gets delivered in the next quarter.

Some of it gets delivered in a quarter after that. And it gets mixed with homes that are going to be sold during the quarter. So it's a mixture, and it's not necessarily a good indicator. That's why my initial reaction was to say, and we probably don't want to give that information.

Okay. The second question I had, and thank you guys for putting this deck together. I guess is there opportunities over time to improve that WAC further to something lower than 11%. Or do you think you've maxed out for now? And also, I know you said Milrose has some more time to develop. Is that going to be something that could also help that WAC move lower over time?

Go ahead.

Yes. I think it's a great question. I think absolutely because Stuart [indiscernible] it, but you might not have caught it, there's continual work on with regard to the land bank structures that we have. And every day, we're refining and making them better. So I do think that there is opportunity. We try to give you just an illustrative example of how that cost has decreased, but I think there is a great amount of opportunity there as we continue to partner with our land banks.

Yes. I think this is one of the big opportunities for the company going forward. It's a laser focus of ours right now, making the migration, the transformation which is a financial transformation from on book to asset-light book a lot of work, a lot of focus, and we had to bring capital to a market that really didn't exist. Now that we are established every day within the company, we're looking at cost of capital, cost of execution and refining the model so that costs come down. It's another area of big and sizable opportunity within the company, and I think you'll see movements here over the next 2 quarters.

All right. From there, why don't we take one more question, please?

Next, we'll go to the line of Buckhorn from Raymond James.

I was just wondering if you could elaborate a little bit on maybe your conversations that you've been having in Washington, D.C. and the comment that you believe some meaningful federal action is closer than the market maybe believing. I'm wondering, is that -- does that relate to something that may be beneficial for builders, in particular, beyond what's in the current housing bill that's still kind of being negotiated? Or to the extent you're willing to elaborate on that comment, what levers could be pulled further that would be beneficial for the industry? So.

I think that all of the builders have seen and been engaged in various discussions in D.C. And while it would be inappropriate and probably not meaningful to talk about those conversations with specificity because you don't know where they're going to end up. And I don't need to create false optimism or anything like that. but the focus and attention has been something that I haven't seen in my career. That's meaningful.

It indicates that the affordability question in and around housing is something that is significant and something that has the attention of this administration. Now if you look over the past quarter, they might have been distracted on some other things. And so things that might be on the agenda are may be overshadowed by other parts of the attention of the administration. But I can say that the attention has been consistent.

And I think that the affordability question is front and center and housing is an important part of that. Where the discussions will end up and what kind of programs the administration might choose to pursue is something that we'll just all have to wait and see on. I bring it up only because many things that goes a flash in the pan and an interest and that it's subsided, I just think that other things have taken the place of current thinking, but it's going to come back. It feels to me like it's going to come back as a front-end similar consideration, affordability matters.

Okay. That's a good place to end. I want to thank everyone for joining, and we'll get back with you in a quarter. Have a nice day.

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

Welcome to Lennar's first quarter earnings conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

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

Okay. Good morning, everybody, and thanks for joining us today. We're in Miami. And I'm here with Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; Katherine Martin, our Chief Legal Officer; Bruce Gross, CEO of Lennar Financial Services; Eric Feder is here, President of LENx; and we have today, Jim Parker and David Grove, our Area Presidents, who are new to this program and who are now overseeing operations across the company.

As you know, Jon Jaffe officially retired at the start of this year. And while Jon's absence is deeply felt, the depth of experience and leadership on our team ensures that we're just not going to miss a step. And Jon, if you're listening, all is good, and we know you're listening. We hope that you're enjoying your time at the beach. We're working hard. And I promise you that Jim and David are comfortable with everything in their day-to-day new positions, except for the trauma embedded in today's conference call, but it really is the only thing that you didn't prepare them for.

All right. So let's move on. And as usual, today, I'm going to give a brief macro and strategic overview of the company. After my introductory remarks, you will hear briefly from Jim Parker and David Grove, who will give a brief operational overview. We hope you will all get to know them over time, over the next quarters, as we are certain you will be quite impressed. Of course, after they speak, Diane is going to give a detailed financial overview, along with some limited guidance for the second quarter of 2026. And then, of course, we'll have our question-and-answer period as usual. I'd like to ask that you please limit yourself to one question and one follow-up so that you -- so that we can accommodate as many as possible.

So let me begin. As we noted in our press release last night, we're pleased to review our first quarter 2026 results against the backdrop of what remains a stubbornly challenging housing market. Of course, recently, the challenges seem to have intensified given the volatility and uncertainty surrounding current events in the Middle East and the recent pullback of institutional purchasers as participants in the market. Nevertheless, even with additional hurdles, we believe that we are closer to an inflection point for Lennar than at any time in the past 3 years.

In the first quarter, we remained focused on our clear and consistent strategy. We drove consistent volume and we matched production and sales pace. We used margin as a circuit breaker, and we continue to refine and improve our asset-light, land-light manufacturing platform. We have not pulled back and waited for the market to improve. We have maintained volume and focused on building improved business programs to bring costs down so that we can remain profitable and still provide needed housing supply.

While in our first quarter, margins and our bottom line continued to reflect the affordability-driven realities of the current market -- housing market, we also saw continuous improvement in all facets of our underlying cost structure that has set us on a course to stabilize and improve margins as we continue to produce volume and meet the market at affordability. Even with the current market challenges, we are feeling optimistic about our position in strategic markets and the progress made in reshaping our business for current conditions. We are, in fact, actually adapting to market conditions as they are and not waiting for the market to bounce back.

So let me briefly discuss the overall housing market from a macro standpoint. The macroeconomy continues to present a complex and at times unsettling backdrop for the housing market. Home prices remain high and have generally continued a pace of increase nationally that is generally higher than the pace of wage increases. Mortgage interest rates, which showed some early signs of easing towards the end of last year, have remained stubbornly over 6%, hovering around 6.2% to 6.4% through most of our first quarter. With home prices plus interest rates at these levels, affordability remains the central challenge facing our buyers, and consumer confidence, while not collapsing, continues to be tested by a range of uncertainties, both domestic and global.

Additionally, and it goes without saying, that the war in the Middle East is a wild card. It might end quickly and the world is a better and safer place, or it might trigger higher gas prices, higher inflation and higher interest rates, and we'll just have to wait and see. On the employment front, consumers who had previously felt secure in their jobs are now questioning that security as technology-driven disruption, particularly the rapid advance of and constant news coverage of artificial intelligence, raises important questions about the future of our workforce. This uncertainty layers onto already strained household budgets and has made consumers more hesitant to commit to large purchases, particularly homes. Traffic has remained reasonably consistent across our communities, but the urgency to transact remains measured.

At the same time, a combination of tariffs and immigration issues are keeping upward pressure on materials -- material and labor costs and are pushing overall costs higher. With affordability at stake, we have been working hard to push against and to manage these pressures through our trade partner relationships and through the efficiencies we have built into our manufacturing model and our product. Nevertheless, the cost structure in the industry is pushing higher and is difficult to manage.

Additionally, since our earnings call, the federal government has made only one strategic move relative to housing. The institutional purchasers have been sidelined by political pressures and popular sentiment that suggest that they are part of the housing problem. They have generally purchased somewhere between 5% and 7% of new homes in order to rent them to those who either can't afford to purchase but want a single-family lifestyle or those who prefer to rent. Ultimately, this movement will reduce demand in the market and signal to the industry to build less supply.

On a more positive note, the federal government's engagement with the housing crisis continues to deepen. As I noted last quarter, federal officials have been actively engaged with the builders and industry associations to understand the affordability challenge and explore practical solutions. These specific programs remain to be finalized or to be seen, but the level of attention being paid at the federal level to the housing shortage is unprecedented, and we believe that meaningful policy support is more likely now than at any time in recent history. Any program that effectively broadens access to affordable or attainable homeownership would be a significant tailwind for the industry and for Lennar specifically. Of course, and additionally, the legislature is currently working on the 21st Century Housing Act.

Simply put, our best assessment of the bill is that it will not meaningfully impact housing or affordability in the short term. Perhaps over the longer term, with the right regulations written in its wake, there will be some impact. In summary, the housing market remains caught in the tension between the underlying demand and constrained affordability. Supply is still critically short and years of underproduction have created a structural deficit that will take years to close. The combination of high home prices, still high interest rates, constant cost pressure and continuous consumer -- and cautious consumer sentiment has kept the market soft, but we believe the conditions are building for an eventual recovery.

Against this backdrop, let me turn to Lennar's operating strategy. Our strategy is and has remained very clear. We are focused on 3 core tenets. One, operationally, driving consistent volume to maximize efficiency both within our operations as well as in the way that we operate. Number two, financially, refining our asset-light, land-light balance sheet to generate strong and growing returns and cash flow. And three, technologically engaging and incorporating new technologies to help advance our operational progress and to enhance our customer experience.

To date, we have carefully defined and refined each of these tenets, both within the company, and we have kept you apprised of the strategy as well. In 2026, we are bringing new levels of expectation and accountability to each of these areas and expect to drive definable results quarter-by-quarter in each of these areas. We are on a focused and determined march to drive costs down this year by using and enhancing each of these components. As I've said before, we are not nostalgically waiting for the market to reset in the way -- to the way things were. Instead, we're adjusting ourselves to the way things are, and we have made considerable progress.

Progress can be seen in 3 distinct areas. First, we see real progress now in cost and efficiencies embedded in execution in our operating divisions. You have and will continue to hear more about progress in our production and supply chain areas that are enabling us to become a low-cost provider, and you will hear more about this shortly from Jim and from David. Second, we are starting to see real traction in our technology initiatives that are creating efficiencies in the way that we operate and the speed at which we add additional efficiencies. As a company, we are actually getting good at these things, as we have already paid the dumb tax of -- dumb tax embedded in learning and unknown disciplines.

We are now -- we now have our operators working collaboratively with engineers to develop the products and product upgrades at speed, and we have built transmission lines through the company for execution across our platform in order to drive uniformity. Additionally, we have brought into the company as associates, an important "special services" acquihire team of engineers and tech specialists that are enabling us to accelerate. Over time, you will hear a lot more about our TigerEye associates and associated excellence initiatives that celebrates best-in-class execution in our technology endeavors. This program will drive accelerated product development and dissemination.

Currently, we are seeing important progress in our marketing and sales machine, and David will discuss internal progress shortly. But let me just note that alongside our TigerEye team and initiatives, our engagement with Opendoor and their leadership team continues to help us drive change at Lennar in both our product offerings, in our customer acquisition program and in improving our customer experience. We are also seeing progress in driving change in the manner in which we operate our extensive land-light land bank administration.

Technology improvements have started to and will continue to reduce friction and improve option costs in this critical part of our business as transacting becomes more fluid and seamless. These improvements are already enabling us to transact with more counterparties and discover the best risk-adjusted cost provider for each unique land deal. We are seeing significant current cost improvement, but we are still at the very beginning. We believe this is a big area of opportunity for this year and for future cost reductions as the inefficiencies embedded in this area of financial transformation can be resolved with modern technologies.

Third area, and we are in the early stages, is of rightsizing our overhead as these changes take some time to -- and these changes will take a little bit of time to flow through our earnings. But make no mistake, we have been working hard already on these changes. In past calls, I have noted that technology migration is expensive and has inflated our overhead. We have carried additional associates, consultants and various other costs as we've started the process of modernizing our 71-year-old company with new technologies. The process started 2.5 years ago with our JDE ERP transition from World to E1. This transition is now complete, which enables our resources to be focused on driving our business forward. Our entire tech team is now being configured to build important parts of the future of Lennar.

We have seen a new shot of energy in the Lennar technology group as we can deploy our best and brightest associates to focus on the most interesting company solutions. At the same time, many of the resources that were needed to get started and move the program forward are no longer needed. Much of this cost was in the form of consulting and contract labor that can be readily reduced as needs subside, and these costs will be transitioned throughout 2026, this year, as those resources are being returned to industry.

On the more corporate front, as Jon Jaffe retired at the beginning of the year, many of you have asked about leadership changes and if all is good at Lennar. Actually, Jon's retirement is a great example. In fact, a number of our longer-term Lennar associates have chosen to retire more recently and in the context of current market conditions. Let me say first that any of our tenured associates who have made Lennar what it is today always have the absolute privilege to retire on their terms and on their time frame. With that said, each of them has led, trained and nurtured future leaders who are themselves now tenured, ready to lead and eager for the opportunity.

Jon felt it was a good time to retire, and frankly, Jim and David were ready and anxious for their turn at bat. They are tenured. They are proven Lennar professionals, and they are energized by the opportunity. It all makes sense. Jon retires, the next leaders are ready to take on new opportunity with fresh legs and new energy, and overhead is benefited at the same time. This is exactly how it's supposed to work, and it's working well here at Lennar. New leadership is taking a fresh look at efficiencies as well, together with new technologies. SG&A will continue to shrink and the bottom line is that our overhead costs are coming down meaningfully throughout 2026.

Now let's turn to our first quarter 2026 operating results in more detail. We continued in the first quarter to focus on volume and match our production pace with our sales pace. We started 17,425 homes, and we sold 18,515 homes, staying closely in balance and keeping our inventory properly sized. While we ended the quarter with approximately 3 completed unsold homes per community, slightly above our target of 2, we constructively entered the spring selling season with ready inventory. As the quarter progresses and sales volume picks up, we expect to work that inventory back towards our target range.

Our average sales price came in at $374,000, essentially flat to plan and down 8% from the prior year, a reflection of continued use of incentives to enable affordability and drive volume. Sales incentives on deliveries were 14.1%, roughly flat with Q4 of last year at 14.5%, and we are cautiously optimistic that incentive levels are beginning to stabilize. The new order incentive rate actually showed some early encouraging signs, notably below the 14.1% delivery incentive rate, and we believe reflects improving demand dynamics. Of course, with an asterisk around the evolving macroeconomic elements that we're seeing in the market.

As a result, our gross margin in the first quarter was 15.2%, reflecting improving discipline across construction, land and overhead. Our SG&A came in at 9.8%, slightly above expectations. Net margin was 5.3%, producing net income of $229 million and EPS of $0.93. Our inventory turn improved to 2.5x, which is up from 1.7x a year ago, and our return on inventory was 17.4%. Our community count stood at 1,678 at quarter end, up 6% from a year ago, and this positions us well for the remainder of this year, and we have additional communities opening as we go into the second quarter.

On the asset-light side, we continue to make strong progress. Less than 5% of our land is on balance sheet and our total homebuilding inventory has been reduced from just under $20 billion 2 years ago to $10.5 billion today. Our land banking relationships with Millrose, Angelo Gordon, Doma, Hearthstone, Apollo and others continue to function extremely well, providing just-in-time homesite delivery in support of our manufacturing model. We have an 86% land bank delivery rate this quarter, up from 52% in Q1 of last year, and this reflects both the maturation of those relationships and the volume consistency that makes us a valued partner to each of our counterparties.

On the balance sheet, we ended the quarter with $2.1 billion in cash and a homebuilding debt-to-capital ratio at 15.7%. Our strong balance sheet continues to give us flexibility to both invest in growth and return capital to shareholders. So in conclusion, let me say that while it has been another challenging quarter in a challenging housing market, it is another constructive quarter for Lennar. Our numbers are not yet where we'd like them to be, but the trajectory is just right. Costs are coming down, volume is holding. Our asset-light platform is functioning extremely well, and our technology initiatives are beginning to yield real and measurable results.

We are very well positioned with strong and growing national footprint, a community count that is 6% above last year and a cost structure that is materially more efficient than it was 2 years ago. When mortgage rates normalize, we believe that pent-up demand will be activated quickly and our margin will recover rapidly. We always keep in mind that normalized incentive levels run 4% to 6% compared to the 14% we are carrying today. That gap is our opportunity, and we are building toward it deliberately and with confidence.

Our balance sheet is strong. Our land banking relationships are deep and productive, and our technology initiatives are positioning Lennar to be a materially different and better company in the years ahead. We are building not just for this market, but for the long term. We couldn't be prouder of the extraordinary associates across the company who have executed through one of the most challenging environments in the history of housing, doing hard things, building new capabilities, and never losing sight of our mission to provide affordable, high-quality homes to families across America. We are truly delivering the American Dream. And with that, and for the first time, let me turn it over to Jim Parker.

Thanks, Stuart, and good morning, everyone. I am Jim Parker, and I am Lennar's Area President for the eastern half of the country. I came to Lennar about 8 years ago through the CalAtlantic transaction and have been in the homebuilding business for over 30 years. David Grove and I work together to drive performance across the Lennar platform, and you will hear from David right after me.

Let me start by saying that I'm very enthusiastic about where we are as a company and the tremendous progress we've made over the past 3.5 years. While the market has been difficult since interest rates spiked in 2022, we have had a clear and well-communicated plan at Lennar, and we have been coordinated in our execution. The overall housing market has and continues to adjust to a combination of elevated prices in the wake of COVID and elevated interest rates, pressuring affordability and homebuyer confidence across our geographies. Instead of waiting for the market to correct, we believe this was a new normal and began to adapt our business execution to provide the volume the market needs at the prices and incentives where the market can transact.

We are focused on refining product, optimizing our Everything's Included packages, rebuilding margins and using mortgage rate buydowns to maintain or regain momentum. Through our first quarter, we've been seeing early signs of a more consistent demand environment. We will see how that holds up as the market adjusts to the new geopolitical turmoil. Over the last 3 weeks -- over the next 3 weeks, David and I will visit each of our divisions and conduct our quarterly operations reviews, which happen at the beginning of each quarter. This is always exciting as we walk through the market at a very local level. We get a direct view of how our leaders think, how they adapt to change and how they represent Lennar in our markets.

These sessions allow us to pair the macro environment with what's actually happening in the field, so our decisions remain grounded in reality. The reviews also give us the ability to discuss our strategies at work in real time. The ongoing dialogue is collaborative, rewarding and allows us to refine our approach continually, making sure that we stay aligned with the ever-changing conditions and needs of each market. These conversations aren't just about metrics, they're about people. We get to see our talent in action and understand how each operator engages with landowners, developers, trade partners and customers. Those relationships drive our ability to secure land, maintain cost discipline and grow market share.

After our people, land is our most vital asset, and we stay closely involved in shaping a disciplined, refreshed land strategy in every submarket so we can grow community count, reduce absorption pressure and improve margins. We also take a close look at how we are resonating with customers through our local and national marketing and sales efforts, through intelligence tools like Rila, which captures real-time feedback from buyer interactions and through our dynamic pricing machine and Everything's Included platform. This collaborative approach ensures that we are aligning product, monthly payment and value in a way that meets today's buyers' needs while allowing us to strategically reduce incentives and rebuild our margins.

This business approach and local focus have allowed Lennar's market position to remain exceptionally strong. We are the #1 builder by market share in 22 of the top 50 homebuilding markets and a top 3 builder in 42 of the top 50. That leadership reflects our volume-first, value-focused strategy and the strength of Lennar's operating machine. We ended Q1 with 1,678 active communities, up 6% year-over-year. With that growth, we continue to right-price our communities and lessen our incentives. At the end of the day, we run this business hands-on and as one Lennar. When we stay close to our operators, close to our customers and aligned around land, product and execution, we create consistency across the company. I'm proud of the discipline and momentum our teams are building, and we look forward to carrying that into the rest of the year. With that, I'll turn it over to David.

Thanks, Jim. Good morning, everyone. I'm David Grove. I'm the Area President for the west. Nice to be with you today. As Stuart said, we remain extremely focused on capitalizing on our strategy of asset-light and even flow production to fuel operational efficiencies and consistent growth. The execution of our strategy is resulting in exactly the outcome we expected. While we have certainly impacted our margin, we are also realizing lower costs, improved cycle time and continue to buy well-structured land at rationalized prices, all while continuing to drive efficiencies in our operation.

Let me start with our cost savings and cycle time improvement. Our technology-driven bid tool software, coupled with our even flow starts and Everything's Included strategy, has allowed us to consistently realize cost savings quarter-over-quarter. We have lowered our direct costs 12 of 13 quarters sequentially, and we are down 12% over the last 2 years. Our directs are now below pre-COVID levels. In Q1, we achieved just over a 2.5% reduction in direct construction costs from Q4, which represents a 7% year-over-year reduction.

Our cycle time on single-family detached homes was down another 5 days quarter-over-quarter to 122 days. This is an 11% year-over-year reduction and an all-time low for Lennar. On the land front, we continue to capitalize on strong relationships with developers and land sellers to fill our land pipeline. Our consistent strategy and creative problem solving has given us the ability to negotiate both land pricing and terms that will position us for stronger margins and allow us to maintain our land-light strategy. These operational improvements increased our inventory turn by 47% from prior year to 2.5.

Turning briefly to our marketing and sales machine, which through constant refinement continues to mature and facilitates our ability to execute our strategy and produce results even in the face of a tough market. In the first quarter, we achieved a sales pace of 3.6 sales per community per month while carefully managing incentives on a home-by-home basis as we use technology to drive volume while preserving price. Our intense focus on optimizing digital spend and driving high-quality leads is continuously improving. In the first quarter, our qualified Q leads, which represent the highest-intent buyers in our funnel, increased 10% year-over-year.

Once a lead enters the funnel, speed of engagement becomes a critical metric. Our average response time to customer inquiries improved to 35 seconds in Q1, a 12% improvement from prior quarter and a 71% improvement year-over-year. And this responsiveness now extends around the clock, 24/7, with digital agents available at any hour. We also measure the quality of our engagement as another critical component. In Q1, we improved our quality scores by 7%, reflecting our continued investment in coaching and AI-assisted performance analysis. We are measuring and accounting for every aspect of our business in order to drive improvement.

As a result of refined targeting, faster response time and higher quality engagement, our digitally driven sales appointments kept, increased 11% from our prior quarter and 17% from Q1 '25, which helps support sales activities in a seasonally softer demand period. Our focus extends to predictive capabilities of our pricing machine as well. Our pricing strategy focuses on daily evaluation of demand patterns, inventory levels and pricing discovery data designed to set the price and incentives for each home in each community to optimize margin while maintaining a targeted sales pace.

This maximizes sales efficiency and maintains appropriate inventory levels. As Stuart mentioned, we ended our first quarter with 3 completed unsold homes per community. In conclusion, our team is focused on executing our strategies that drive improving customer acquisition results, reduced direct costs and enhanced operational efficiencies. These efforts, among others, are delivering measurable results and position us for future success.

Before you go forward, Diane, great job, guys. But David, how many years have you been with the company?

27.

27. So just want to make sure that everybody understands, Jim, you got 30 years in the industry and 8 years here at Lennar from the CalAtlantic program. And David, 27 years right here at Lennar.

Homegrown.

Okay. Carry on.

Okay. Good morning, everyone. So Stuart, Jim and David have provided a great deal of color regarding our operating performance. So therefore, I'm going to spend a few minutes on the results of our Financial Services operations, summarize balance sheet highlights and then provide estimates for the second quarter.

So starting with Financial Services. For the first quarter, our Financial Services team had operating earnings of $91 million. The lower earnings were mainly derived from our mortgage business. The decrease was primarily based on the mix of buy-down programs offered to our Homebuilding division, including an increase in ARMs versus fixed-rate mortgages, with ARMs generating significantly lower earnings.

And now turning to the balance sheet. Note that this quarter, once again, we were highly focused on generating cash by pricing homes to meet affordability. The result of these actions was that we ended the quarter with $2.1 billion of cash and total liquidity of $5.2 billion. We are well positioned as a land-light manufacturing homebuilder. Our year's supply of owned homesites was 0.1 years and our homesites controlled percentage was 98%. This configuration significantly lowers our balance sheet risk, especially in challenging environments.

We ended the quarter owning 11,000 homesites and controlling 486,000 for a total of 497,000 homesites. We believe this portfolio of primarily optioned homesites provides us with a strong competitive position to continue to grow market share in a capital-efficient way. Our inventory turn increased to 2.5x with return on inventory of approximately 17%. We maintain our focus on increasing asset turns, which will enable us to capture greater improvement in returns when margins normalize.

During the quarter, we started approximately 17,400 homes and ended the quarter with approximately 38,600 homes in inventory. This includes about 5,000 completed unsold homes, which as we've noted, equates to about 3 homes per community. And then turning to our debt position. Homebuilding debt-to-total capital was 15.7% at quarter end. We ended the quarter with $1.7 billion outstanding under our term loan and no outstanding borrowings under our revolving credit facility. Our next debt maturity of $400 million is due in June.

Consistent with our commitment to increasing total shareholder returns, we repurchased 2 million shares for $237 million, and we paid dividends totaling $123 million. Our stockholders' equity was approximately $22 billion and our book value per share was approximately $89. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through 2026. With that brief overview, I'd like to turn to the second quarter and provide some guidance estimates.

Starting with new orders. We expect Q2 new orders to be in the range of 21,000 to 22,000 homes with continued focus on matching starts and sales paces. We anticipate our Q2 deliveries to be in the range of 20,000 to 21,000 as we maintain even flow production and turn inventory into cash. Our Q2 average sales price on those deliveries should be between $370,000 and $375,000, and gross margin should be in the range of 15.5% to 16%. As we focus on maintaining volume, we continue to price to market. That said, we believe our Q2 -- our Q1 margin of 15.2% should represent the low point for the year.

Our SG&A percentage should be in the range of 8.9% to 9.1%, but of course, all of these metrics are dependent on how market conditions unfold. For the combined Homebuilding joint venture, land sales and other categories, we expect a loss of approximately $2 million. We anticipate -- I'm sorry, approximately $20 million. We anticipate our Financial Services earnings to be between $100 million and $110 million. And for our multifamily business, we expect earnings of about $10 million.

Turning to Lennar Other. We expect a loss of approximately $25 million, including -- excluding the impact of any potential mark-to-market adjustments. Our Q2 corporate G&A should be about 1.9% of total revenue, and our foundation contribution will be based on $1,000 per home delivered. We expect our Q2 tax rate to be approximately 25.5% and the weighted average share count should be approximately 243 million. And so on a combined basis, these estimates should produce an EPS range of approximately $1.10 to $1.40 for the quarter. And finally, we continue to aim for a full year delivery target of 85,000 homes for the full year. With that, I'll turn it over to the operator.

[Operator Instructions] And our first question comes from Alan Ratner from Zelman & Associates.

David and Jim, nice job. Glad to have you on the call. So first question, obviously, I think top of mind on recent activity. I think you kind of phrased it well, Stuart, but I'm just curious with the move we've seen in rates here over the last couple of weeks, obviously, you kind of probably started the process of thinking about the guidance towards the end of your quarter in February when rates were 20, 25 basis points below where they are today.

A, I'm curious, have you continued to see the ability to either stabilize or inch lower your incentives even over the last couple of weeks amidst this volatility? And b, has the cost of rate buydowns gone up alongside the move in rates we've seen here? And how is that contemplated in the margin guide?

So the question is interesting, Alan, because it happens to be an interesting time to do an earnings call. There's enough brand-new volatility since the end of our quarter to call into question any number of things. I think that we've tried to give as much guidance as we saw through the quarter and not do too much to update that thinking or guidance kind of under the banner that one week in a row doesn't make a trend either to the positive or to the negative. And the benefit we have right now, today is that immediately after this call, both Jim and David, as Jim carefully described, will be out in the field working with the divisions to see what the actual impact is and think about what we do to either offset or lean into the things we're seeing in the field.

As we sit today, without doing too much to update, I don't think we have an update. We haven't seen significant movement either in traffic or in the ability to sell. And I'll let Jim and David weigh in on that in a second, but I just don't think that there's enough information to know whether this will be a short-term program or even as a long-term program whether domestically it will be a net positive or net negative. But as we see things right now, we're not seeing significant movement in the market. It really has been pretty steady. Jim, you first?

No, I agree. Right now, we haven't seen an impact, but it's early to tell. We talked to our division presidents this morning and they have not seen any change to date this week or the previous week. So we're confident, but we're being very cautious. And like Stuart said, we're making sure we stay really close to the local markets to make sure we stay in tune with that.

David?

Yes, we're generally in the last -- this week, seeing a similar demand pattern that we've seen in the prior couple. So no significant negative impact. I think, generally speaking, that's positive in light of the state of the macroeconomics.

Yes. So look, I would just summarize and say that first of all, we generally don't give updated guidance or information, but given the anomalous moment that we're in, it's worth putting it on the table that right now things are steady as we see them. Both Jim and David and myself for that matter are day-to-day in touch with our operators to get that feedback in real time.

And we're not seeing something that would adjust the way that we have thought about the information that we've given, including our guidance. And for those of you who know me well, I don't complete writing the material that I deliver in our earnings call until generally late at night or early in the morning, the night before. So we keep it pretty up to date, and this was pretty well thought through.

That is incredibly helpful. So I appreciate just kind of walking through the timing there of when you kind of put this plan together and what you've seen. Second question on SG&A, recognizing you're not going to give guidance beyond the second quarter, I just wanted to touch on, I think, some of the comments you made, Stuart, about -- I think you referenced an expected improvement in SG&A in '26 versus '25 given all of the changes and maybe some of the head count changes, I guess, that have gone on the last several quarters.

Just want to make sure I'm understanding that correctly. I mean if I look at your SG&A as a percentage of revenue year-to-date through the first half of the year, at least including your 2Q guidance, you're going to be up about roughly 100 basis points year-on-year as a percentage of revenue. Does that mean you're anticipating that to actually be lower on a year-over-year basis in the back half of the year? Or am I reading too much into that commentary?

So let me say that, first, let me broaden the discussion to overhead, which is broader than just SG&A. But the answer is that as numbers are reduced, it takes time for those numbers to flow through and come through our earnings reports. I think theoretically, yes, we are seeing opportunities and expectations that our overhead is going to be meaningfully lower as we come to the end of the year, whether it actually flows through one quarter or another, we're going to wait and see. Some of these things get a little bit sticky.

But at the end of the day, it's happening in so many interesting areas that we're reducing costs. Some of the costs associated with our technology initiatives are clearly front-end loaded. The transition from World to E1 was extraordinarily expensive. That's tapering off. It might take some time for that to flow through, but that's happening more quickly. But there are other elements of what we have been working on, and even the things where we misstepped and went down bad paths initially where money was spent and we don't have to spend that money anymore.

Additionally, as I talked about senior management, we have so many extraordinary people within our company that are deciding to use this opportunity to retire and let the next generation shine. Though we haven't put out a public announcement, I'm sitting off from one of our favorites in Bruce. Bruce is going to be retiring. This has been embedded in -- we've known this for months. And Bruce is actually going to transition and become part of the Lennar Foundation working hand-in-hand with Marshall.

But it's really across the company recognizing that overhead reduction or -- yes, overhead reduction is a positive, but enabling the next generation of leaders to come up, step up and put themselves on display, just as you've seen here this morning, is really a greater good. And when I say fresh legs, if you look at the energy that Jim and David are bringing to the equation, if you listen to Laura Escobar in Financial Services, you listen to others around the company, the opportunity to take a fresh look at a lot of things is a really unique opportunity that we're leaning into right now.

Next, we'll go to the line of Stephen Kim from Evercore ISI.

I guess my first question has to do with how you determine what's the optimal level of volume that you need to extract the efficiencies in your Homebuilding operation and given all the technology initiatives as well. I'm curious, is it based on a certain market share? Or is it more sort of a bottoms-up kind of approach? And therefore, like independent of what volumes are doing in the broader market.

Like last year, it sounded like it was a little bit more like the latter. You were focused on achieving a certain level of volume so you could get the efficiencies that you needed. And because industry starts were down high single digits, that meant you happened to gain a lot of share, right? But -- so this focus wasn't on the share, it was on maintaining a certain level of volume.

But in your opening remarks, you also mentioned about growing market share almost as if it was a goal in and of itself. So I just wanted to make clear, how should we think about how you think about the volume that you need in any given year? Are there situations, for example, where you would willingly relinquish some market share or are you -- or should we think that you're always looking to gain market share?

Well, Steve, the -- interesting question. I'm thinking about it as you're asking it. The reality is that the answer is unique to each market, and each market is a little bit different. And so when you look at a roll-up of our company, it would be hard to cobble together a unified strategy. The fact of the matter is, there are a number of considerations that are going into that calculation. Some of them are -- and they're all very market-specific.

We don't have a specific mandate to grow market share, but we do recognize that with advantage market share, we are able to work with trade partners and landholders to do a better job of negotiating. So I'm going to turn over to David, first, why don't you talk a little bit about land opportunities and things like that. And then, Jim, maybe you'll think about some other components.

Yes, sure. I'd say that market share, we -- by market, we understand based on our position in the market where we ought to be and we have a target. But that doesn't really drive what you're asking about. What drives our consistent volume is the way that we thoughtfully put together each one of our land positions and our communities, and we have expectations early out -- early on that we hit a certain pace. And our strategy right now is to maintain that pace, which is the increased market share is a derivative of our maintained pace on a community-by-community basis to our underwriting. And then the competitors are generally slowing down a little bit.

Jim, trade partners, thoughts about that?

Yes, I think the trade partners, we absolutely -- we build it from the bottom up. It really starts with the community. It really starts when you plan that community and you come up with what the ideal absorption is, and then we try to build from that. And the better job we do with that, with trade partners and land sellers and everything else, the growth kind of comes with it. We get more looks at different communities in the future, and it just kind of all ties together.

But I really think it's not going in having a set number in mind. It's really from building from the bottom up of the communities. As we open more communities, that's really what really accelerates that market share. So it's smart growth, but we really try to get to a set absorption based on what the market will give us and what we think is the right level with the trades and everything else, and it just kind of builds up from there.

And I just have to say that the volatility embedded in putting your foot on the accelerator and then taking it off and putting it on the brake and going back and forth, it only creates inefficiencies in the development process, in the construction process, in all the process. If we can build dependability for trade partners and even for land partners, we're going to get the best pricing, and we're using that to our advantage. And then each market, we are doing our own very separate, very focused market study to think about the combination of pricing and pacing in our own unique way focused not on answering competitive information but contextualizing it in terms of how can we rationalize affordability with cost structure to end up with the best configuration for the future.

And I just want to say one last thing, and I've said this over and over again, that we didn't start with this -- with a notion that we're going to wait for the market to recover. Instead, market by market, we have focused on how do we construct the best version of Lennar to build efficiencies for a market that's likely to remain stubborn for a long time. It's now 3.5 years and we haven't had that throwback to the past. We're constructing an operating platform that is reconfigured to be able to build affordability for the future.

And if you think back to the COVID time and to the inflationary period that we went through in 2022, '23, that the cost structures grew alongside the pricing structures. We're left with the pricing, and the cost structure is very sticky, both on land and on vertical construction, horizontal as well. And rebuilding the company to be better positioned to build affordability has been hard work. It's being done at every division, division by division, within its own structure, and that rolls up to the number that you see corporately.

Got you. Yes, that's very helpful. Appreciate that. I guess my second question has to do with volume through the year. So you reiterated the guide to 85,000 closings and you're kind of off to a little bit of a slower start than even last year. And it just sort of feels like the year is going to be kind of more back-end weighted. And I just wanted to ask, how important is it for you to achieve a more sort of even flow of volume through the year? Is the fact that this year is not going to be quite maybe as much as you might like, is that a hindrance to your achieving the efficiencies that you ultimately want to get? Longer term, should we be expecting that you're going to achieve more of a kind of a 50-50 kind of front half, back half kind of cadence?

Look, this is an art, not a science. I can't predetermine today what we're going to do throughout the year. As I said, Steve, and as Jim carefully laid out, Jim and David are getting out into the field for operations reviews, division by division, bottom-up approach, working with the people. And that happens at Lennar all the way through the year. So what we say today might change over the next couple of weeks.

We know that there's a lot going on in the world that is affecting both gas prices, inflation levels, interest rates and that might be short term, it might be longer term. We're going to be connected with what's happening on the ground. And it might be unique to different markets, how it actually plays out. What we are solving to is how do we use as much volume consistency as we can to build efficiency in everything that we're doing. But we don't want to, at the same time, not pay attention what the market is allowing us to do. We don't want to break the market. And so it's a balancing act. And that's why I say it's an art, it's not a science. Jim, you want to weigh in on that.

Yes, I would just say this is a huge priority for the divisions. We start this process even before the year begins with our early forecasting. We look at the different quarters. We look at whether they are as equal as they possibly can be. It really goes back to focusing in on the land and opening communities in a timely manner and not letting delays hit. And I think we're getting much better at that, but I think it really comes down to looking out 18 months, seeing what quarters look like, and that's when you decide where are we at with community count? What do we need to push? What do we need to do? You take Northeast markets, what do we need to do as far as getting the homesites developed quicker with different methods, dealing through the weather? So I think it really starts with planning. And I think you see divisions that are doing it well, they just have a tremendously well-oiled machine.

David, any thoughts?

I'd just say that we are focused on consistency of volume, but we are also responsive to the market as the market shifts underneath us. I think what holds us in good stead is that we have clarity of strategy. We are going to start at our sales paces, open communities on time. We're going to price to market where the market happens to be, and we're going to deliver our homes and not carry excess inventory homes.

And our pricing mechanism, our pricing tool is really primarily focused on getting a kind of tactile sense of where the customer is and where affordability lies. And this is our primary driver in our day-to-day hands-on pricing all the way through the company.

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

My first question is, it's impressive to see how the inventory turns hit 2.5x this quarter despite all the pressure that you are seeing in the market. I guess, could you talk about where you see the upside to inventory as you think about the construct of those key areas of focus that you're really looking to achieve as we move through the next several quarters?

Well, not only is that a good question, that's a timely question. Eric and I spent some time in New York working through some of the capital markets approaches that we think about and dream about in terms of charting the path for the future of the company. I'm not going to be able to give you an answer as to where I think it can go. But I think that there's a field of opportunity. I will say that I think that the financial transformation that we've gone through, and that is separating land from homebuilding and balance sheet, is really interesting. It's getting more interesting by the day.

If you look at and think about risk-adjusted pricing for capital, when you look at risk profiles and you separate risk profiles, there's a field of opportunity to rationalize the costs that are associated with the different dimensions of land that we currently have. I said in my remarks that we are targeting specific land banking programs and relationships and trying to find the right bucket for the right land to maximize or minimize the capital costs associated, the option costs associated. But additionally, we think that over time, by taking a capital markets thought process to the way that we have configured this, we're going to be able to think even better about how we bring land into availability for the company, how we manage the just-in-time delivery system. And all of this is going to have incremental benefit to that inventory turn number.

So I don't think you've heard the last of inventory turn. I think that we're continuing to reach higher, and I think that we're going to see more come of this. I think that we're all going to find that the program that we put in place is going to enable us to marry this operational view of our business with a capital markets view and make us better. So one of the things that I want to detail, and maybe David and Jim, you'll weigh in on this, is the importance of our core product to this discussion. The more we migrate to fewer products that we build over and over again, the more efficiency we're going to inject. I still look at our cycle times and how they've come down just year-over-year from 137 days to 122. And quarter-over-quarter, you're looking at, I think it was 127 days down to 122, might have been 126. But I look at the focus in the field and the opportunity to make it better by using core products. How would you say -- talk about that, David?

Yes. I think the core product is going to -- is not only producing -- or resulting in our cycle time reduction, I think it's going to continue to improve. Also, it helps us rationalize our cost structure. A couple of core products that are designed very efficiently within Everything's Included package, it helps us capitalize on our purchasing structure, capitalize on our scale. And that combination of volume, core product, efficiency of build is materializing in lower cost and faster cycle times, which are going to be accretive to our inventory turns.

I would just say the cycle time, you go to these ops meetings and the teams are so proud of getting lower and lower, and it's become the best friendly competition I've seen amongst divisions. So I love sitting there, and when Charlotte says, they're at 101, I say, well, that's great, but why is Greenville at 96? They come back the next quarter and they even hit it harder. So it's become a very badge of honor. And the core plans just make it so much more efficient for our trades to build. They know they get repetition. They know what we're looking for, inspections go smoother. So it really all helps with the cycle time.

Yes. And look, I've been there with you. You've been the instigator. And it's not just a competition to see who can do things faster. It's a combination of being able to bring the consistency that we give to our trade partners and even to land partners, but to our trade partners enabling us to get better and better at the coordinated dance of building homes. And some of our divisions are just really paving new ground to improve that cycle time in a very constructive way.

Yes. And the best thing is quality has improved with cycle time. It has become so much more efficient.

Quality and customer experience, North stars for the company.

Okay. Well, that was very helpful color. And actually, just following up on it quickly, where are you in terms of the core plans? Can you talk to what percentage of the deliveries today are coming from that? Is there any kind of a target that you can share with us as you think about, I don't know, the next 12 or 24 months? And I guess also as part of that, it leads to the question around capital allocation. And as this comes together, can you talk to how you're thinking about the top uses of cash and how shareholder returns and growth and all these other initiatives fit within that?

So look, the discussion of core plans, again, we can talk about it corporately, but the reality is it's division by division by division. But the more important thing is how technology plays into all of this because we are migrating to a place where our due diligence program relative to land is going to be tied to an element of core plan engagement that is going to nudge the company using technology towards greater and greater use of core plans.

Now you can imagine if we're talking about land engagement and due diligence process, it's going to take some time for this to actually come through the system. But this is an area where modern technologies across a diffuse platform, 50 divisions coast-to-coast and getting that entire enterprise to push towards core plans. It is going to be technology that really drives us forward, and we're building those connectors right now. But is there anything that you guys would say about where core plans are percentagewise and how we are migrating through your ops reviews and division engagements?

That's generally across the platform, call it, 65% core, and that's going to vary by division from some at 50% to some at 90%. And that is really relative to the rollout of our core in order to meet different buyer profiles at different price points.

Our final question comes from John Lovallo from UBS.

Maybe firstly, in trying to kind of bridge the Homebuilding cash, it appears that there's roughly maybe $1 billion or so of cash flow use in the first quarter. It seems like it was largely attributable to inventory, which was a bit surprising given that you started and you delivered roughly the same number of homes in the quarter. So kind of what's driving the pressure on cash flow given the expectation for pretty strong conversion in 2026.

Probably relates most to average sales price coming down.

Yes, I think so, John. I'll jump in. We're -- as you know, we're very focused on pricing to market. Our incentives are on a higher level. And so while we're getting cost savings that are increasing cash, as you've heard us say, it's hard to outpace the lower revenue on a per home basis. So we have to keep purchasing homesites to keep the production going. So I think you'll see a little bit of better matching as the quarters progress, but the first quarter is so light on revenue because it's light on deliveries. It's a little bit of an anomaly for the year.

Okay. Understood. And understanding that we're in a pretty dynamic market right now, I just wanted to follow-up on Steve's question. The 85,000 delivery target seems to imply that you plan to start more homes than your orders in the second quarter and then kind of work through that inventory in the back half. If that's correct, I mean what's -- if that's not correct, maybe I'll say it that way, what's driving the much higher kind of second half deliveries than the implied second quarter inventory?

So first of all, let me say, we have -- we clearly have question marks around the 2 things that I detailed as things that have happened in the short term that have kind of changed the landscape. And of course, turmoil in the Middle East has everybody's attention. and we have a question mark. What's that going to mean? How's it going to ripple through? And number two, the sidelining of the -- institutional investors is another component of that. There are a lot of people thinking about it. And if the institutional investors are really sidelined, is that going to instigate more primary buyers to the market as some believe? Or is it going to reduce volume? We're going to have to wait and see.

And I tried to leave room for those changes. That impacts the question of what will our deliveries be as we come through the year. But what drives us to continue to aim for that number is a base belief, a base optimism that I've been getting from both David and Jim about the configuration of our business. And so on the one hand, you have these geopolitical issues or domestic issues that are counterbalancing. But I will tell you that leading up to the past couple of weeks, there is -- has been a sense of optimism about the programs that we have in place. Jim, why don't you talk about that a little bit?

Well, look, I think it comes down to -- we see the steadiness in a lot of markets, but more importantly, we see the energy with our associates and they're starting to really see these different programs. They're starting to see the advantage to it. A quick example is virtual customer care. And I had ops meetings yesterday at 3 divisions over the last 2 days. And to every division, they all talked about, at first, they were challenged, now all of a sudden, the efficiency, the customer experience, the quickness of the response to the customer. I think that's really what we're seeing is our teams are really starting to buy into what we've been working on for years and they're now seeing the advantages. And optimism fuels a lot of people and I think that you get that positive energy going, that's what's driving it.

David?

I'd just say that we have the privilege right now of being able to -- having the time to read what the market gives us over the next few months within this environment. And we have -- because of our cycle time reduction, we have the room to adjust accordingly so that we can determine as the year progresses whether 85,000 is rational or not.

But I think that generally speaking, the unified view right now is it's definitely within our scope and within the opportunity set. And we're pretty enthusiastic about the programs that we have in place that have given us somewhat of an edge on the market, certainly an edge on information flow and staying close to the market. And of course, that very careful dance that we -- dance of having corporate closely tied to the individuals and the divisions that are actually seeing what's happening on the ground. I think that there's a general sense of optimism through the company right now that we're going to do as good as the market allows.

And I think that's a good place to stop. I want to thank everyone for joining us. I couldn't be more excited about the program we have in place and having David and Jim take it through their first traumatic conference call. And we look forward to coming back together, of course, in the second quarter and beyond as a management team that's invigorated and focused on making the best of a tough situation. Thank you.

That concludes Lennar's first quarter earnings conference call. Thank you all for participating. You may now disconnect your lines. Please enjoy the rest of your day.

Welcome to Lennar's Fourth Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

I would now like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.

Very good, and good morning, everybody, and thanks for joining today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; and Katherine Lee Martin, I don't want to forget the Lee, our new Chief Legal Officer, I guess, you're not new anymore, Katherine; and Bruce Gross, CEO of Lennar Financial Services, along with a few others as well.

As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction cost, cycle time and some of our other metrics. As usual, Diane is going to give a detailed financial highlights along with some limited guidance for our first quarter of 2026 and for the year. And then, of course, we'll have a question-and-answer period. [Operator Instructions]

Before we begin, however, let me note, as I'm sure you're all aware by now, that this will be Jon's last earnings call as he has decided to retire and will officially step down on January 1, which is now right around the corner. Jon has been a partner and a leader at our company for well over 40 years, we stopped counting years after 40 years, and his leadership will certainly be missed. Affectionately, Jon has been known as our company's plow horse and as such, Jon has driven Lennar's operations with relentless dedication and commitment. He joined the company just one year after I started full time and together, we've learned every facet of this business, continually adapting and evolving.

Over the years, we have tried new things. Some have been successful, others not so much. And we've navigated both the best and the most challenging of times. Through it all, Jon's partnership has been a joy and a privilege. Jon, I hope you find plenty of time to improve that ugly golf game of yours, and perhaps you'll find some time to work on that singing voice as well. And with that, let's get started.

So let me begin by saying that we are very pleased to present Lennar's fourth quarter and year-end 2025 results against the backdrop of what is still a stubbornly difficult housing market. While our margin is under pressure, as we focus on bringing affordable housing to an affordability constrained consumer base, we can see that underlying demand is still strong, while supply is short.

During the past 3 years of difficult market conditions, we have maintained volume, we've grown market share, and we've reengineered our operating platform for a better and more efficient future when the market bottoms and normalizes. We're extremely well positioned with very strong market share in strategic markets, and our margin is leveraged to the upside.

As you may recall, last quarter, I noted that declining interest rates could signal the start of a market recovery. Unfortunately, that turnaround has not yet materialized. As rates slowly moderated in September, eased more in October, and remained flat in November, the customer response remained fairly tepid suggesting that a combination of affordability and consumer confidence issues were continuing to limit demand. Of course, the coincident threat of government shutdown in September and the actual shutdown from October 1 through mid-November further eroded already weak consumer confidence.

While traffic was consistent, customers were both hesitant and limited by what they could afford to purchase. With that said, our fourth quarter results reflect a continued softening of market conditions and affordability. Sales volume has been difficult to maintain and required additional incentives to achieve our expected pace and to avoid an unintended buildup of excess inventory. While we exceeded our delivery goal for the quarter and while we sold in line with the low end guidance during the quarter, these accomplishments came at the expense of further deterioration of margin which came down to 17%, even though we eased back the pressure on sales and pulled back our delivery goals for 2025.

As we look ahead to next quarter, we know that margin will remain under pressure and sales and closings will be seasonally light. Nevertheless, we're very well positioned to provide the affordable supply that the market needs when demand is ultimately activated by either lower interest rates or government-sponsored programs to enable affordability. We are situated with a lower cost structure, efficient product offerings and strong market positions to accommodate pent-up demand as rates moderate and confidence ultimately returns.

We believe that we have gotten ahead of current market realities, and we built what we believe is a stronger, long-term, margin-driving platform. We know the market has remained weaker for longer, but we also know our strategy has helped build a healthier housing market and has positioned Lennar for strong cash flow, higher returns on equity and capital, and stronger bottom line growth in the future. Accordingly, we will remain focused on volume and even flow production. We will maintain responsible volume to maintain an affordable cost structure, and we will find our floor and rebuild our margins as overall market -- as the overall housing market continues to remain short on supply.

Let me turn to a quick macro view of the housing market. Consistent with our third quarter, the macro economy remained challenging through our fourth quarter. While mortgage rates drifted marginally lower in the fourth quarter, consumer confidence became even more challenged by economic uncertainties and of course, became even more challenged still by the government shutdown. Clearly, inflation-driven affordability concerns rose to the center of the national conversation shaping headlines and policy debates across the country. Cost inflation has clearly had a significant impact on the lifestyle of the average American family.

At the same time, concerns about job security have become increasingly prominent as advancements in modern technology and artificial intelligence raise important questions about the future of employment for the American workforce. The current housing market is entrenched in an affordability crisis, leaving many average American families feeling excluded from the traditional promise of upward mobility and home ownership.

Against this backdrop, some advocate for what many call sweeping and sometimes "socialist solutions" offering broad promises of free and readily accessible resources as an appealing answer to the affordability dilemma. This narrative gains traction, especially when there is a lack of clear actionable alternative that addresses the challenges facing American families today. The "capitalist framework" has yet to speak and present tangible, practical strategies that effectively confront these realities and restore affordability and access to homeownership for the broader population.

As I've noted on prior calls, mayors and governors across the country, both Republican and Democrat, understand this and continue to list the housing shortage as a priority concern, and they point to affordability or attainability as a real crisis. But they also understand that this has been a difficult cycle, as low supply has fueled high prices and high prices, especially with higher for longer interest rates, have locked out many buyers. Inflation and short supply have kept home prices higher. Supply remains constrained in most markets, driven by years of underproduction. And additionally, new construction has slowed recently, exacerbating the chronic supply shortage as builders have pulled back on production due to slow sales and affordability concerns.

But short supply can't be fixed by simply adding supply. It is important to recognize the downside of artificially lowering home prices, or boosting inventory solely to drive prices down. Such actions could negatively affect the 85 million Americans who already own homes by diminishing their property values, which in turn could further weaken overall consumer confidence. Moreover, if builders are unable to achieve sufficient returns, they may be forced to slow or halt construction, disrupting the production levels needed to address ongoing supply shortages in the housing market.

On a positive note, the federal government has intensified its focus on the national housing prices with a strong likelihood of taking decisive actions to enhance affordability. In a constructive move, federal officials have initiated discussions with builders and industry associations, among others, to gain a comprehensive understanding of the challenges and work towards practical solutions. Although the specifics of potential programs remain to be seen, it is clear that significant attention is being paid to developing impactful initiatives, while thoughtfully considering possible unintended negative consequences.

Despite the public scrutiny and debate surrounding various proposed programs, it is encouraging to see that many bold ideas are being carefully elevated with the goal of improving affordability. Increasing affordability has the potential to spark new demand in the housing market, which can, in turn, drive an increase in construction activity and help address ongoing supply shortages. Although the specific outcomes and programs remain uncertain at this time, it is significant that for the first time in decades, the federal government is actively recognizing the vital role that housing plays not only in the broader national economy, but also in the well-being of American families. I am confident that housing will emerge as a central element in addressing the affordability crisis and providing meaningful solutions for the future.

So now let me turn to our results. As we noted in our press release, in our fourth quarter, we started 18,443 homes. We delivered 23,034 homes, and sold just over 20,000 homes. While we were just above the low end of sales expectations and exceeded our delivery expectations, we were able to grow our community count to 1,708 communities, or 18% over last year, positioning us for a better next year.

As mortgage interest rates moderated and consumer confidence declined, we continued to drive volume with our starts so at a slower pace while we incentivized sales to enable affordability and limit undesired inventory buildup. As we approach the beginning of the year, we intentionally focused on building inventory above our 2 completed unsold homes per community level to almost 3 per community to provide ready supply for the new year.

During the first quarter, sales incentives remained relatively flat at 14%, but reducing our gross margin to 17%, which was slightly lower than expected on an average sales price of $386,000. Our SG&A came in at 7.9%, which produced a net margin of 9.1%. As we look ahead to the first quarter of 2026, we expect our margins will be lower, as is expected in the first quarter, between 15% and 16%, of course, depending on market conditions.

We expect to sell between 18,000 and 19,000 homes, and deliver between 17,000 and 18,000 homes. We expect our average sales price to be between $365,000 and $375,000. And as I noted earlier, we expect to deliver approximately 85,000 homes in 2026.

We expect our overhead in the first quarter to be approximately 9.1% as we continue to invest in and evolve our various Lennar technology solutions that will define our future. These initiatives have been and will continue to add to SG&A as well as corporate G&A for some time as they represent a significant investment in our differentiated future.

As I think about our results in the fourth quarter, 2 additional components really stand out. First, we have now rebuilt our entire company with an asset-lighter inventory structure. Currently, less than 5% of our land is on our balance sheet. Accordingly, our overall inventory has been reduced from just under $20 billion 1 year ago to just under $12 billion today. With our now greater focus as a manufacturing company, we have also consistently reduced our vertical construction costs -- cost to build over the past 2 years from 2023 to 2025 by approximately 10%. While costs generally have been going up, we have been bringing ours down.

Additionally, we have reduced our cycle time from 138 days a year ago to 127 days today for detached single-family homes. This has enabled us to improve our inventory turn to 2.2x from 1.6x last year. These measures tell us that we are now built for materially improved efficiency in the way that we execute our business, and we have a lot of room for additional improvement in each of these areas as well.

We have certainly positioned Lennar for the time when market conditions normalize and our margins improve, and they will improve dramatically. We always keep in mind that incentives in normalized market conditions run in the 4% to 6% range as opposed to the 14% incentives today. That gap defines our opportunity as market conditions change.

The second item is that we have now officially completed the Millrose transaction. This quarter, Lennar launched and completed the split-off exchange offer to swap our remaining 20% stake in Millrose, approximately 33.3 million shares, for outstanding Lennar shares tendered by our stockholders. While this transaction resulted in a $156 million onetime paper loss, this paper result was simply a function of the book value of the shares on Lennar's book on the day of the trade versus the stock price of the trade. More consequentially, this transaction resulted in an approximately 8 million share cashless repurchase of Lennar's shares.

Finally, and before I conclude, let me briefly talk about our operating team as Jon retires. As you all know, here at Lennar, we have a deep bench of experienced professionals who have been here at the company for many years. Of course, Jon has been an important part of the execution and culture at Lennar. But that means that many of our leaders have worked together, and together with Jon, and are very prepared to pick up where Jon leaves off. Specifically, Jim Parker and David Grove, both tenured Regional Presidents, will each oversee operations for about 1/2 of the country, and they have, and will continue, to work cooperatively.

Additionally, Greg McGuff will move from his Regional President position to a new leadership role taking on strategic corporate functions. Greg will begin by working on our land banking program by refining the execution around that very strategic part of our business. All 3 of these leaders, Jim, David and Greg, are very enthusiastic about their new opportunities to perform and -- in their new positions, and they are anxious to get started.

We will be hiring -- we will not be hiring a replacement for Jon because the experienced leadership from within the company is part of the Lennar culture and are both -- and are all 3 capable and qualified to carry the company forward without missing a step. So let me [indiscernible] to conclude and conclude by saying that while this has been another difficult quarter in the housing market, it's another very constructive quarter for Lennar. While the short-term road ahead might seem choppy still, we are very optimistic about our future. We are well aware that our numbers aren't where we'd like them to be, but neither are market conditions.

We are very well positioned with a strong growing national footprint and growing community count and growing volumes. We have continued to drive production to meet the housing shortage that we all know persists across our markets. And as we have driven growth, production and volume, we have positioned our company to evolve and create efficiencies and technology that will make us a better company and build for the future.

We have materially reduced our inventory, our construction costs and our cycle times, and we have and will continue to increase our inventory turn. We are determined to build more with less capital deployed so that as margin begins to grow, our returns on capital and equity will grow even faster. In that regard, we will focus on and refine our manufacturing model and continue to use our land partnerships to grow with a focus on cash flow and high returns on capital and equity.

Additionally, our strong balance sheet and strong land banking relations afford us flexibility and advantaged opportunity to consider and execute on strategic growth for our future as well. Lennar is extremely well positioned for the future, and we look forward to keeping you up-to-date on our progress.

And with that, let me turn it over to Jon.

Good morning, everyone, and thank you, Stuart, for a very special partnership, and to Lennar team for what's been an amazing journey. As Stuart described, we remain steadfast in executing our strategy. Every day, we work on driving homebuilding efficiencies in our operations. This execution is reflected in achieving our targeted sales pace, record low cycle times, overall cost reductions and increased inventory turns.

Starting with our sales and marketing machine. In the fourth quarter, we achieved a sales pace of 4 homes per community per month, meeting our sales plan. This starts with attracting qualified leads to our digital funnel followed by rapid high-quality customer engagement. Our average response time for customers submitting RFIs, which we view as a critical metric, dropped to 42 seconds in the fourth quarter, a 12.5% improvement over the third quarter. This responsiveness now extends after hours with digital agents available to assist customers at any time, even at 2 a.m., if that's when a customer is online looking for their new home. We analyze customer interactions and our RFI responses to drive improvement in the quality of engagement, improving our speed in responding and the quality of those responses drove a 15% year-over-year increase in appointments in the fourth quarter.

Our pricing strategy focuses on continuous evaluation of demand patterns, inventory levels and price discovery data, designed to set the price and incentives for each community to maintain the targeted sales pace. This maximizes sales efficiency and maintains our inventory at appropriate levels. As Stuart noted, we ended the quarter with an average of just under 3 unsold completed homes per community. This process and the easing of pressure on our sales targets resulted in new order incentives decreasing by 70 basis points quarter-over-quarter.

Next, I'll discuss our volume-oriented production-first strategy to drive efficiencies resulting in reduced construction costs. In the quarter, we maintained a consistent start pace of 3.7 homes per community per month, in line with our expectations. We continue to work throughout our supply chain using this consistent volume to lower cost quarter after quarter. We continued our focus on plan and SKU optimization, along with a new national bidding software tool that streamlines management of thousands of SKUs in real time. This has enabled faster and more effective decision-making across the company, achieving further cost reductions.

Direct construction costs in the fourth quarter decreased by approximately 2% from Q3 and over 5% year-over-year. This downward trend will continue as we move into the first quarter of 2026. The average cycle time for single-family detached homes was 127 calendar days, matching our record low from Q3. This represents an 8% year-over-year reduction. With improved quality control and communications with our trade partners, we have reduced cycle times, minimized travel for trade, lowered warranty spend and improved the customer experience. We saw tangible results with fewer work orders and a 45% year-over-year reduction in warranty spend. This was accomplished while maintaining consistent high-quality home deliveries for our customers resulting in a highly regarded NPS score of 79 for 2025.

Turning to land and our asset-light strategy. In Q4, we continued to carefully structure land acquisitions for just-in-time land closing, leveraging land bank and land developer relationships to minimize carry cost and deliver just-in-time finished homesites. Our asset-light strategy delivered improved metrics. Supply of owned homesites decreased year-over-year to 0.1 years from 1.1 years, and controlled homesites increased to 98% from 82%. These operational improvements increased our inventory churn 38% from the prior year.

In conclusion, our team is united and focused on executing strategies that drive improving customer acquisition results, reduced costs, enhanced operational efficiencies, all while improving the customer experience. These efforts are delivering measurable results and positioning us for future success.

Now I'll turn it over to Diane.

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our homebuilding operations. So therefore, I'm going to provide a quick summary of our financial services operations, summarize our balance sheet highlights and then provide guidance for the first quarter of fiscal 2026.

So starting with Financial Services. For the fourth quarter, our Financial Services team produced operating earnings of $133 million, within our guidance range of $130 million to $135 million, and for the year generated $610 million. Once again, our Financial Services team contributed great profitability, and most important, worked in partnership with our homebuilding teams to provide a great customer experience for each home buyer.

So now let's turn to our balance sheet. This quarter, once again, we continued to generate cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $3.4 billion of cash and total liquidity of $6.5 billion. Our year's supply of owned homesites was 0.1 years, and our homesites controlled percentage was 98%. We ended the quarter owning just under 10,000 homesites and controlling 496,000 homesites for a total count of 506,000 homesites. We believe this portfolio of homesites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way.

During the quarter, we started about 18,400 homes and ended the quarter with approximately 38,000 homes in inventory. This includes just under 5,000 completed unsold homes which, as we've mentioned, is just under 3 per community. Our inventory turn increased to 2.2x, and our return on inventory was approximately 20%. And then as we turn to our debt position, we ended the quarter with $1.7 billion outstanding under our term loan facility and no outstanding borrowings under our revolving credit facility. And our homebuilding debt to total capital was 15.7%. We had no redemptions or repurchases of senior notes this quarter. Our next debt maturity of $400 million is in June 2026.

As Stuart mentioned, we successfully completed the divestiture of our Millrose investment by exchanging Millrose shares for Lennar shares. The result was a non-cash repurchase of 8 million Lennar shares. Note that during the exchange period, we were subject to a tender [ offer rule ] which includes an exchange offer that prohibited us from using cash to purchase our shares. However, during the year, we did use $1.7 billion of cash to repurchase 14 million Lennar shares. Thus, in total for the year, we repurchased 22 million shares valued at $2.7 billion.

Additionally, we paid total dividends this quarter of $170 million for a total of $521 million for the year. So in the aggregate, for fiscal 2025, we returned about $3.2 billion to our shareholders. Our stockholders' equity was just under $22 billion, and our book value per share was about $89.

In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress into fiscal 2026. And with that brief overview, I'd like to turn to Q1 2026 and provide some guidance estimates. Some of these that we've noted but to start at the top, starting with new orders, we expect Q1 new orders to be in the range of 18,000 to 19,000 homes as we match production with sales pace. We anticipate our Q1 deliveries to be in the range of 17,000 to 18,000 homes with a continued focus on turning inventory into cash. Our Q1 average sales price on those deliveries should be between $365,000 to $375,000.

Gross margin should be in the range of 15% to 16%. As a reminder, we expense rather than capitalize field expenses. So the first quarter is historically the lightest -- since the first quarter is historically the lightest delivery quarter of the year and therefore, light on revenues, we lose field leverage. Typically, Q4 gross margins to Q1 gross margins in the following year decrease 100 basis points to 150 basis points because of this loss of leverage. As it stands now, we believe Q1 gross margins will be the low point of the year. Our SG&A percentage should be around 9.5%, but all of these metrics, of course, are dependent on market conditions.

For the combined homebuilding, joint venture, and land sales and other categories, we expect a loss of approximately $10 million. We anticipate our Financial Services earnings to be approximately $105 million to $110 million. For our multifamily business, we expect earnings of about $20 million as we continue to strategically monetize assets to generate higher returns.

Turning to Lennar Other, we expect a loss of about $20 million, excluding the impact of any potential mark-to-market adjustments to our technology investments. Our corporate G&A should be about 2.2% of total revenues, and our foundation contribution will be based on $1,000 per home delivery. We expect our Q1 tax rate to be approximately 25.25%, and the weighted average share count should be approximately 245 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $0.80 to $1.10 per share for the first quarter.

With that, let me turn it over to the operator.

[Operator Instructions] Our first question comes from Alan Ratner from Zelman & Associates.

Thanks for all the details so far. I think gross margin is obviously on the top of everybody's minds, and you obviously walked through a lot of the moving pieces there. It's encouraging to hear that incentives actually ticked lower in the quarter. And I know you also gave some encouraging data on your cost reduction.

So can you just walk through exactly what's contributing to the continued pressure on margin? I know there's some seasonality in Q1, but this quarter's results came in a bit below guidance, and I know in the past you've kind of talked about margins maybe stabilizing. So I'm just curious if you could walk through exactly what's contributing to the downside given the improvement or the reduction in incentives.

And the follow-on to that, I guess, more broadly is if we don't see any material improvement in demand, given your growth expectations for '26 at 3%, a little bit below kind of your target range you'd given previously, is that an environment where you think you can potentially dial back those incentives further?

Alan, it's Jon. I'll begin. During the quarter, we faced some unexpected headwinds, particularly with the government shutdown that definitely had an impact on consumer confidence, which is primary to our customer. And so that definitely challenged our ability to, particularly in some markets, stabilize pricing. So we saw some impact in terms of what we accomplished versus what we expected because of what was happening in realtime in the marketplace.

And it's not consistent, varies across the country. If you're asking like which markets are strongest or weakest, it really ebbs and flows across our markets with just sort of an overhang of what's going on in the economy, with the government and the general customer confidence erosion.

I think as we started the quarter, the expectation was that with interest rates kind of moving down a little bit, even with consumer confidence somewhat negative, the thinking was, from our division, that the incentive structures would come down through the quarter. I think that it's our feeling that the government shutdown had a material effect on the consumer psychology coming -- going through the quarter and reacting kind of real time.

Now does that come back? It is -- as we look through our numbers, as we go through next year, I think that there's a general view that incentives will be coming down. And then layer on top of that, it does seem that the federal government is very focused on coming up with programming that kind of activates affordability. What that's going to look like, I just don't know. But it does seem like there's a lot of activity around focusing on this very important part of the economy.

So we think that incentives will come down through the year. But as we went through this quarter, we definitely hit a headwind across the country. It's pretty consistent that, that really brought down -- brought our incentive expectations to be lower than what we actually ended up with.

Got it. I appreciate the detail there. And then, Stuart, you obviously spoke a lot about the administration efforts and recognizing maybe there's nothing ready to bring public at this point. I'm just curious, do you feel like this is something that will be announced in 2026 and something, whatever the government does have in mind, is there anything that can be implemented fairly quickly, obviously, the midterms are coming up? Or is this something that is more of a multiyear view in your mind?

Look, I think the crystal ball around government activity is really complicated. But I can tell you that a number of homebuilders have gone in to see critical officials within the government. It is -- we have received a lot of attention. There's a lot of thought process going on. You've seen trial balloons put out around various types of programs.

What's interesting is that the government has been very tuned in to the industry to make sure that they're not walking into unintended consequences. So whatever is done that it be constructed properly is important. And to your question, do I think that something will come out in 2026? I'd be surprised if something isn't done.

I think affordability is very much on the table, it's a political issue right now. And I think across the country, you're hearing the drumbeat of that being a primary focal point. And politically, it's important that someone pick up the mantle and do something to address it rather than just throw money at it. So it will be interesting, and we'll all have to sit back and wait and see what comes out.

Next, we'll go to John Lovallo from UBS.

I guess, the first one, Stuart, is given your strategy of maintaining volume and you're really focusing intently on cost and efficiency, I'm curious how you sort of envision the upside in your ability to recapture margin as the market improves. I mean particularly considering all the hard work and the changes that have been made over the past few years.

Yes. Look, that's really at the heart of what we've been doing is if you buy into the notion that there is a supply shortage, and I think that's pretty well documented, we certainly believe that there is a significant supply shortage. If you believe that there is a pent-up demand that is not able to activate itself because of affordability, and we definitely believe that and see that in our traffic and in the field, then -- if we -- as we maintain volume over time, we're going to figure out and push our large enterprise to rerationalize its cost structure. And that's what we're doing. We've detailed this in prior earnings calls.

We're focused on using modern technologies. We're focused on building efficiencies in everything that we do. You see this in every element of our business, how we're rerationalizing our overhead expense, our vertical construction cost, horizonal construction cost. And we think that embedded in our program at 82,500 homes, growing to 85,000 homes, we are going to be an efficient structure as market conditions rethink themselves.

So at the end of the day, I lay out that there's a pretty clear path to margin improvement. There will be, at some point, a reconciliation of incentives that migrates from what it is today, or 14%, down to a traditional kind of 4% to 6%, and that's a lot of margin improvement. And we think there's still a lot of efficiency that we're going to bring to our operations as we go forward. It's just a time game and we're going to patiently keep pursuing the focus.

The core reason that we're focused on building inventory is because the country has such a significant shortage. So we're going to continue to be that machine that keeps pushing forward, recognizing the shortage and believing that there's going to be a moment where we're able to activate the buying public to purchase at prices with lower incentives.

I'll just add one thought, and that is, you hear us talk about our operational efficiencies. We think about it as structural, not episodic. So as the market does stabilize, does recover, we have really retooled ourselves to maintaining these efficiencies, and that we've worked so hard on achieving.

Yes. And Jon is a good example of that. I mean we have built efficiencies and effectiveness in our operating group. And as Jon retires, we're not going to replace him because we're going to lower the vertical nature of our hierarchy. We're going to take costs out, but we're using modern technologies and homegrown talent to be able to do that. And Fred retired a couple of months ago, same thing there. We have a talent base that can fill that gap and we don't have to build replacement. But a lot of that has to do with the technologies that we've incorporated that enable us to transmit information more efficiently and effectively to a shallower operational structure.

That's helpful color. And then embedded in the fiscal year '26 -- so embedded in the fiscal year '26 delivery outlook of 85,000, it's up about 3% year-over-year. How should we sort of think about community count growth versus absorption, and your performance versus the market?

Well, we're continuing to focus on community count growth. You've seen our community count grow year-over-year at a higher rate than we're going to continue to grow it. But if you look at our volume growth, if we look at last year to this year, at 82,500-ish, it's about 3%. We're expecting about a 3% growth rate next year. A lot of that will come from additional community count in strategic markets across the platform. And I think that you're going to see a consistent model of execution if you look backwards projected forward.

And that's very much the strategy. The strategy is, let's build the volume that the country and the consumers need, let's make it affordable at this time where affordability is so strained, and let's find ways to make ourselves more efficient, and let's expect that something is going to come through the governmental ranks to support that affordability and enable the market to enter the housing market. And the reduction in incentives is going to flow through to our margin.

Next, we'll go to Stephen Kim from Evercore ISI.

Yes, Stuart, taking the risk of paraphrasing what you're saying, because I know that it's obviously a bit complex. And I don't want to oversimplify, but am I hearing you right that you anticipate that there's the makings for government actions to improve the affordability in some way, shape or form? And if we assume that, which I don't necessarily disagree, Lennar has, over the last year or so, really emphasized volume, while others in -- your peers have sort of ratcheted back volume.

Are you saying that in 2026, your expectation is that you've got the volume, you've got the -- therefore, the platform to be able to harness margin improvement from lower incentives without necessarily needing to increase your volume? And that you can do that even if others, in a somewhat better environment, do have to increase their volume so that you might actually give up a little bit in terms of share, if you will. But your margin will more than make up for that. Is that essentially what you're laying out for us in '26?

A, that is what we're laying out. That's what we've been laying out. And the reality is we don't have to restart the machine. The machine is actually just running and running very efficiently. We don't have to run out and buy new community count, we're already doing that. We don't have to retool and increase the volumes. We just have to accept a lower incentive structure in order for margin to grow. And that's why I say in my comment that we're just levered to the upside in terms of margin growth.

Yes. Okay. That's really helpful. Very interesting and important. I did also want to follow up on the machine. I think that when -- obviously, you've been at the vanguard of developing technology and AI-driven tools so that you can more dynamically respond to market conditions. Obviously, that's been something that's been a big focus.

If I listen to the way you talk about the elevation of Jim, David and Greg into somewhat new roles, but not replacing Jon or Fred, is it right to think that these investments and developments of the, for lack of a better phrase, [indiscernible] machine have now reached a point where you can have those systems play a more direct role in managing the business? And that not replacing the Co-CEO and COO positions is a function of -- or an indication of just how far that machine has come in actually being able to have tangible effects on your business. Is that the right way to think about it, I guess, is essentially the question.

Yes. So I'm going to tread in an area that I promised our friend, Rick Beckwitt, that I wouldn't tread into. And that is technology because I feel like you've all gotten more now with our discussion about technology. But we are massively enthusiastic about our technology initiatives in large part because of the things you've daylighted.

I mean if you listen to Jon's comments in the middle of the night, we're at a point where we can engage a customer on their terms, at their time, when it's convenient to them, with digital technology that gives them an experience that is getting very close to an interpersonal experience. We're going to be able to be faster and better, higher quality in the way that we engage with our customers. And I think that we're making this progress.

It's not fast because we don't have the engineering teams that some of these high-tech technology companies have. But we're building them, and we're going to get better, faster and stronger because of the technologies that we incorporate. And it's not just in the machine that is marketing and sales machine. It's in our overall customer experience all the way through to warranty. It is in our land acquisition component. It is in our financial reporting component. It is in our financial services group.

Every part of our company has its own unique strategy relative to modern technology to not just modernize and be a better interface with our customers, but to be a better interface internally to breed efficiencies and effectiveness that we've not seen before. And I think that you're going to see -- over the next year, 2 years, you're going to see a lot of those advancements really reveal themselves.

Wonderful. We'll be watching. Appreciate that color.

Okay.

Next, we'll go to Mike Rehaut from JPMorgan Chase.

So first, I wanted to kind of dive in a little bit towards your approach. Last quarter, your approach to the market, and I know you kind of stressed even on this call, prioritizing supply and making sure that you have the product out there when things turned. Last quarter, you maybe dialed back slightly around that approach and said you wanted to ease back on your delivery expectations to help establish a floor on margin. And I don't know if this is exactly the right way to interpret today's results or fourth quarter results, but your margin did come in a little less than expected despite maybe some of those efforts.

There's been a lot of focus on prioritizing supply today. So where are you in that journey of perhaps trying to establish that floor on margin? And it seems like even without -- if you kind of exclude the seasonality, maybe you're still looking at a slight further erosion in gross margin in 1Q versus 4Q. So just trying to triangulate how committed are you to just pushing through that supply versus, if demand remains weak, maybe you would even further continue to ease back on some of your delivery aspirations.

Mike, I think we're pretty committed to the volume and maintaining the volume. And I think your assessment is correct that we had an expectation of finding a little bit more of a floor. But I've said consistently in every one of our earnings calls that the numbers and expectations that we're giving to you are dependent on market conditions. And market conditions are fluid and they evolve day by day. Interest rates have been going up a little bit, down a little bit, down further a little bit and then back.

It's not just the interest rates. It is the inflation impact from a spike of inflation that we had a few years ago that is still rippling through the consumer's wallet. It's built up in debt. It's a general consumer confidence. I don't want to overstate it because it seems like I'm blaming a hurricane or blaming weather conditions. But the government shutdown was relevant. There were a lot of people that were affected there. And so that comes about in the middle of a quarter where we made an expectation that lower interest rates would help bring consumer confidence up a little bit. Well, there was an offset to that.

Hopefully, the government and its shutdown will then step up and find kind of a counterbalance and say, okay, we're going to do something to activate consumer confidence and affordability. So we're ebbing and flowing relative to a dynamic marketplace with an understanding that behind us, there is a supply shortage, there is a demand for the housing, there is a need for affordability and government action is going to matter here. So we'll see what happens. But we are focused on the volume because it's with the volume that we're able to build the efficiencies that are going to build us into a company for the future.

And Mike, I would just add, to state the obvious, we don't control the economy and its impact on our consumer. But we've been very laser-focused on becoming a manufacturer of homes. And with that, we can really leverage volume, technologies to be the most efficient manufacturer that one can be. That's what we remain laser-focused on.

Right. No, I appreciate that. I guess, secondly, you highlighted in your prepared remarks, obviously, the ongoing focus of returning cash to shareholders through a combination of repurchase and dividends. On the repurchase side, I think you've finished up the year around $2.7 billion. How should we think about 2026 now that your balance sheet is significantly repositioned than the much more aggressive move via Millrose to asset-light?

Just trying to get any sort of boundaries on -- kind of numerically, should it be similar to '25 at this point? Should we be modeling something maybe a little higher than that? Just your thoughts, given the fact that you've already kind of outlined a closings number, and you're hoping that the gross margin number will, in the first quarter, be the low point of the year.

Yes. So I'm pretty enthusiastic about looking and seeing what happens in 2026. If you think about the transition that we've made as a company to an asset-lighter model, if you think about the dynamic of all the changes that we've made as we have maintained volume, it's pretty extensive. And when I said in my comments that it is noteworthy that we have now completed the Millrose transaction, this has been a few years in the making, it's now behind us.

And a number of other things are behind us, whether it's essential housing and the land banking program that we started with them. It extended to Millrose and we have a number of other land banks. Less than 5% of our land is on book today. That migration took time, energy, money, focus, and that's behind us. We are now focused on a much more pure manufacturing model with a lot less energy spent on other things that are the transitional things that got us to where we are. I'm enthusiastic to see how our operations evolve over this next year.

We have very high expectations, and we're pretty enthusiastic about it. Of course, everything is going to happen in the context of what's happening to the economy, what's happening to consumer confidence, and what's happening to affordability. The government is going to play a role in that. I can't predict what's going to happen there. And so there's variability.

But for us, as we think about the way that we run our business, it is an everyday hands-on approach to how do we be the best manufacturing model that we can be. And ingrained in some of the transitions and evolutions we've gone through, there are still wonderful efficiencies to be reaped from the focus and attention on the details that surround those programs.

I laid out Greg McGuff's new role. He's starting off with our land banking programs. We've put these things together pretty quickly. There's a lot of efficiency and execution that we can bring to that. These are the kinds of things that 2026 is going to engender. And we'll see how it plays out. But it's all going to be modified, amplified or changed by the macro economy that we end up playing into.

Next, we'll go to Susan Maklari from Goldman Sachs. Can you hear me?

All right. Why don't we take this as the last one?

Okay. Our last question comes from Susan Maklari from Goldman Sachs.

My first question is thinking about the efficiencies that we've talked a lot about. How do you think of where you can get inventory turned over the next several quarters given the environment that we are in? Can you hit that 3x number in this kind of condition? And just generally speaking, how does the core products fit into that strategy?

So it's a great question because I -- there's a part of me that almost pinches myself when I see our inventory turn at 2.2x. There was a time where we didn't think we'd be able to get there. But the interesting thing is, given the way that we've reconfigured the company, we think that there's a lot of improvement that can come on top of where we are. And a lot of it derives from, number one, cycle time. We are improving our cycle time and all of this drives back to our core product.

Our core product offerings are getting more and more efficient, more and more effective in terms of the way that not only -- how do we -- how does the cost structure come in, but more importantly, how do we build and how efficiently do we build product that is very familiar out in the field? And so our focus on core has accelerated. And we're still fairly early stages in that regard.

And I don't want to go through it, but I will tell you that a lot of the ways that we're getting to greater adoption and engagement with our core product is technology-based. It's the technology of how we're looking at land and how we're adapting to an environment where each piece of land is looked at through the lens of core product. And with the diffuse environment, getting that to happen in 50 different divisions, technology is a big part of the assistance.

So all of this ties together, we think there's a lot of upside in bringing our inventory turn from where we are to where we think it can be, and a lot of it does surround our core product.

Yes. Okay. And then maybe building on Mike's question on uses of cash, as you do you think about all the efficiencies that are coming through and that you will realize, how does that play into the cash that you think you need to hold on the balance sheet for the business? Does it change that at all? And what are you watching to determine what the appropriate levels are there in terms of the cash?

Well, we think that our model becomes ever more cash flow efficient. And we know that over time, we're going to be using cash to buy back stock and to return to shareholders. And that's going to be a more programmatic part of our business.

One of the things that we've all -- don't know how to say this, but that we've all heard from the government is the government certainly wants to see that we as homebuilders and as the machine for supplying the homes that are needed in the country, that we're focused on our growth model and focused on how we bring affordability to market. So we're going to knit all of this together. As we go forward, we're going to see how things evolve.

So I'm not going to speak to use of cash right now, but that's going to be evolving picture as we go forward. And the bottom line of what I'd say is as you get to an inventory turn that is higher, as we're producing more volume and as our margin starts to come back, our cash flow is going to be very, very solid.

And, Susan, I would just add relative to your question on how much do we hold on the balance sheet. It really depends on market conditions, right? You see us have a little bit more cash on our balance sheet when there's uncertainty and less cash when that uncertainty ebbs into a more positive direction.

Additionally, we look at what are our upcoming maturities. So I would say generally, as conditions stabilize and uncertainty becomes less of a focus, you'll see us holding less on our balance sheet at each quarter end.

Hard to determine amounts and don't want to make a -- give a goal of a specific amount, but it really does depend on market conditions and other things, because we have a lot of readily available liquidity. It's just what type of market conditions are we in.

Congratulations, Jon, you made it through your last earnings call. Congratulations. And I want to say to everybody, thanks for joining us today. We're really pretty enthusiastic about our business and our business model. We're proud to be supplying homes to a difficult market. But we think that we are, as I said, levered to the upside in terms of margin improvement, and we'll see where the market takes us. Thanks, and we'll see you at the end of the first quarter.

That concludes Lennar's fourth quarter earnings conference call. Thank you all for participating. You may disconnect your lines, and please enjoy the rest of your day.

Welcome to Lennar's Third Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for the reading of the forward-looking statements.

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

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

Very good. Good morning, everybody, and thank you for joining us today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, who you just heard from, our Controller and Vice President; Katherine Martin is here. She's our new Chief Legal Officer. Welcome, Katherine; and Bruce Gross, CEO of Lennar Financial Services, along with a few others as well.

I do want to note that Mark Sustana, our 20-year General Counsel, is not here today, and he's sorely missed. I don't believe that Mark has missed an earnings call in his 20 years with the company and his service to and with the company has been truly remarkable. While Mark recently retired, and we have Katherine here as our Chief Legal Officer, Mark will remain a strategic adviser and consultant to the company, and we're sure that Mark can't help but listen today. So Mark, you're definitely here in spirit.

As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction costs, cycle time, some of our land strategy and positions. As usual, Diane is going to give a detailed financial highlight along with some guidance for the fourth quarter. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask that you please limit yourself to 1 question, 1 follow-up, so that we can accommodate as many as possible.

So let me begin. We are pleased to review Lennar's third quarter 2025 results against the backdrop of what might be the beginnings of an improving economic landscape for the housing market. With that said, our third quarter results reflect the continued softening of market conditions and affordability through our third quarter. Sales volume was difficult to maintain and required additional incentives in order to achieve our expected pace and to avoid building excess inventory.

While our deliveries were just below our goal for the quarter and while we sold more homes than expected during the quarter, these accomplishments came at the expense of further deterioration of margin, which came down to 17.5%. Accordingly, we're going to begin to ease back our delivery expectations for the fourth quarter and full year in order to relieve the pressure on sales and deliveries and help establish a floor on margin. We will reduce our delivery expectations for the fourth quarter to 22,000 to 23,000 homes, and we will reduce our full year expectation to 18,500 to -- I'm sorry, 81,500 to 82,500 for the full year.

For Lennar, this is an opportune time to pause and let the market catch up a little bit. Even though mortgage rates began to trend downward towards the end of the quarter, stronger sales have not yet followed. We have certainly begun to see early signs of greater customer interest and stronger traffic entering the market. With lower mortgage rates, purchasers are showing greater interest in considering their home purchase, and this is generally an early signal of stronger sales activity to follow, assuming rates remain lower.

And if interest rates continue to fall, we're quite optimistic that this all will happen soon. The extended period of higher interest rates for longer than expected forced us, however, to adjust construction costs in order to enable sales in difficult market conditions. Our lower construction cost structure, together with reduced margins, enabled us to meet affordability and support the supply and demand balance. We drove sales pace to match production pace and we as we fortified our market share and position in each of our strategic markets. We are now situated with a lower cost structure, efficient product offerings and strong market positions to accommodate pent-up demand as rates moderate and confidence ultimately returns. As I said before, this is the right time. This is just the right time for us to pull back just a little bit.

We believe that we've gotten ahead of the current market realities, and we have built what we believe is a stronger long-term margin-driving platform. We know that this has taken some time as the market has remained weaker for longer, but we also know that our strategy has helped build a healthier housing market and has positioned Lennar for strong cash flow and bottom-line growth in the future.

We are optimistic that if mortgage rates approach the 6% level or even lower, we will soon see some firming in the market, and we will benefit from stronger affordability and, therefore, demand. Accordingly, we'll remain focused on volume and even-flow production, although at just a little slower pace. We will maintain responsible volume to maintain an affordable cost structure, and we will find the floor and rebuild our margin as the overall housing market continues to remain short on supply.

So let me turn quickly to a quick macro-overview of the housing market. Consistent with last quarter's earnings call, the macro economy remained challenging throughout our third quarter. Mortgage interest rates remained higher and consumer confidence remained challenged by a wide range of uncertainties, both domestic and global. Across the housing landscape, actionable demand remained diminished by both affordability and consumer confidence, and therefore, the market continued to soften as we moved through the quarter. Nevertheless, as we came to the back half of the quarter, interest rates began to drift downward and that drift began to accelerate as we came to the end of the quarter and into the fourth.

Today, we are possibly getting closer to 6% mortgage rate that's fluctuating a little bit, and we're just beginning to see consumers return to the market. Against that backdrop, supply remains constrained in most markets, driven by years of underproduction. New construction has slowed as builders have pulled back on production due to slow sales and affordability concerns, therefore, exacerbating the chronic supply shortage.

Demand is still high as people want and need homes, but affordability and waning confidence around buying now have been constraining that demand. This has been a difficult cycle as low supply fuels high prices and high prices lock out many of our buyers. As I've said before, mayors and governors around the country continue to list the housing shortage as a priority concern and point to affordability or attainability as a priority. I do suggest that if you want to better understand the conundrum of the housing market, read the book Abundance by Ezra Klein to better understand that housing has a long-term future defined by both structurally short supply and not just growing demand but growing need for housing as well. The current environment is all about recognizing that short supply is keeping prices higher and that only lower prices enabled by lower cost structures will achieve affordability.

Turning to our results. In our third quarter, we started approximately 21,500 homes. We delivered approximately 21,500 homes and sold just over 23,000 homes. While we were just short of delivery expectations, we exceeded our sales expectations, and we were able to grow our community count, positioning us better for the remainder of the year. As mortgage interest rates remained higher and consumer confidence declined, we continue to drive volume with our starts, while we incentivize sales to enable affordability and limit inventory build. We have successfully focused on maintaining inventory within our 2 completed unsold homes per community level that has been reflected historically.

As a result, during the third quarter, sales incentives rose to 14.3%, reducing our gross margin to 17.5%, which was lower than expected on a lower-than-expected average sales price of $383,000. Our SG&A came in at 8.2%, which produced a net margin of 9.2%. As we look ahead to the fourth quarter, we expect that our margins will come in at approximately 17.5%, consistent with our last quarter, of course, depending on market conditions. We expect to sell between 20,000 and 21,000 homes and deliver between 22,000 and 23,000 homes. We expect our average sales price to be between $380,000 and $390,000 as we expect to continue -- as we expect to somewhat alleviate pricing pressure on homes that will be sold during the quarter as a result of taking some pressure off of our sales base.

And as I noted earlier, we expect to deliver between 81,500 and 82,500 homes for the year 2025. We expect our overhead in the fourth quarter to continue to run between 7.8% and 8% as we continue to invest in and evolve various Lennar technology solutions that will define our future. These initiatives, as I've said before, have been and will continue to add to SG&A as well as corporate G&A for some time to come as they represent a significant investment in our differentiated future.

So in conclusion, let me say that while this has been another difficult quarter in the housing market, it is another constructive quarter for Lennar. While the short-term road ahead might seem a little choppy, we are very optimistic about our future. We are well aware that our numbers aren't where we would like them to be, but neither are market conditions. We are well situated with a strong and growing national footprint, growing community count and growing volume. We have continued to drive production to meet the housing shortage that we all know persists across our markets. And as we have driven growth, production and volume, we have positioned our company to evolve and create efficiencies and technologies that will make us a better company built for the future.

Perhaps most importantly, our strong balance sheet and even stronger land banking relations afford us flexibility and advantaged opportunity to consider and execute on strategic growth for the future as well. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow, and we will lean into reshaping our business by developing and using modern technologies with a focus on cash flow and high returns on capital in order to drive long-term shareholder value.

So before I end, I can't help but note how inspired I am by the resurgence of a technology company that Lennar has supported for many years. We are quite confident that Opendoor with its new CEO, Kaz, that's how he's referred to, will be a contributing force and partner in Lennar's technology journey and evolution. Kaz joined Opendoor after 6 years at Shopify, where he is mission-driven as he takes the helm of a company that has the ability and the ambition now to bring modern technology to change the homeownership market forever. I have always said that the Opendoor platform functioning properly will add significant bottom line to Lennar while creating convenience and joy for our customers.

As Kaz took the CEO position, he sent out a note on why he joined Opendoor and left a flourishing career behind at Shopify. This is what he said in part. It is incredibly important that we use all of our energy and modern tools at our disposal to build products that make homeownership easier. We must make the process of buying and selling a home less frictionful, so more people do it. Homeownership isn't about a house. It's about families and community. And that is why I am so incredibly proud that I get to support this team in our mission to use every tool at our disposal to make selling, buying and owning a home easier.

AI gives -- he goes on, AI gives us the chance to accelerate this work in ways never before thought possible. From simplifying the process of buying and selling, to unlocking personalized pathways to ownership, AI can help millions of families access homes more efficiently, more affordably and more transparently than ever before. This is a once-in-a-lifetime opportunity to redefine what's possible in real estate. That is the message from Kaz. We can all do better, we can all be better, our mission is worthy. Lennar is on that same mission, and we are connected to the success of Opendoor as well. We are extremely well-positioned for our future, and we look forward to keeping you up to date on our progress.

And with that, let me turn it over to Jon.

Good morning, everyone. As Stuart described, we remain intensely focused on executing our core strategy, maintaining consistent high-volume production by leveraging advanced technology throughout our homebuilding operations. This is all about driving efficiencies to position us as the leading technology-enabled, low-cost homebuilding manufacturer. Our ongoing strategy has resulted in greater efficiencies, evidenced by improvements in our cycle time, inventory turn and overall cost.

In this update, I will discuss our third quarter performance concerning sales pace, cost reduction, cycle time improvements and the execution of our asset-light plan strategy. For the third quarter, we achieved a sales pace of 4.7 homes per community per month, which aligns with our sales plan. To reach this goal, we utilize the Lennar machine, beginning with attracting qualified leads through our digital funnel. We then focus on a rapid response with each customer along with the quality engagement. Notably, our average response time to leads improved by 53% from our second quarter, reducing it to just 46 seconds. This means that when a lead submits a request for information, they typically receive a call or text within 46 seconds.

Supporting our sales process, our Internet sales consultants benefit from real-time analytics for coaching immediately after each interaction, thanks to proprietary software. This technology-driven approach results in a 8% quarter-over-quarter increase in appointments. Additionally, we utilize our dynamic pricing tool that matches home prices to real-time supply and demand inputs, helping us reach our targeted sales goals. Our pricing technology continues to evolve using the feedback and data from our results. The successful execution of the Lennar machine has enabled us to sell the right homes at current market prices, keeping our inventory well-positioned with an average of under only 2 unsold homes per community -- completed homes per community.

Affordability continued to challenge customers throughout all of our markets in the quarter as incentives increased by approximately 100 basis points to achieve our sales targets. It is this ongoing affordability challenge that drives our focus on a production-first strategy. As the foundation to this strategy, we delivered a consistent start pace of 4.4 homes per community per month in the quarter. This sustained volume benefits the supply chain, allowing us to leverage volume to reduce both cost and cycle times. Consistent volume supports ongoing negotiations with our trade partners, resulting in lower cost. Over the last 11 quarters, we have achieved cost reductions in 10 of them. The average decrease for each of the 11 quarters is $1.50 per square foot. Direct construction costs for the third quarter were down approximately 1% from the second quarter and about 3% year-over-year, reaching the lowest construction cost for our company since the third quarter of 2021.

This trend of decreasing direct construction costs will continue into our fourth quarter. We have now achieved cycle time reductions for 11 consecutive quarters with a 6-day sequential decrease from Q2, bringing the average cycle time for single-family detached homes down to 126 calendar days. This represents a 14-day or 10% year-over-year reduction and marks -- the lowest cycle time in our company's history. Technology continues to drive these improvements by providing our construction teams with real-time information displayed in user-friendly dashboards, facilitating better scheduling and field problem-solving. Improved cycle times and technology-driven quality assurance processes have also contributed to higher home quality, evidenced by fewer work orders and a reduced warranty spend, down about 35% year-over-year.

Our focus on efficiency and cost reduction extends to land development, where we apply similar volume-based strategies to negotiate lower cost with trade partners in a slowing land market. In the third quarter, we began to see meaningful progress in these efforts and expect further improvements in the coming quarters. Land acquisitions are strategically structured to be just-in-time, utilizing our land bank relationships and phased takedowns to minimize carrying costs. Regarding our asset-light strategy, we concluded the quarter with improved metrics. Our supply of owned homesites decreased to 0.1 years from 1.1 years a year ago, and the percentage of controlled homesites increased to 98% from 81% a year ago.

Together, these operational improvements have led to an increased inventory churn in the third quarter, now at 1.9 versus 1.6 last year, representing a 19% improvement. In the fourth quarter, our team will continue to focus on executing the strategy of maximizing efficiencies to drive down costs across our operating platform. And now I'll turn it over to Diane.

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our homebuilding operations. So therefore, I'm going to provide a quick summary around financial services operations, summarize our balance sheet highlights and then provide guidance for the fourth quarter.

So starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $177 million. The strong earnings were primarily driven from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins. Once again, our Financial Services team worked in partnership with our Homebuilding teams with the goal of providing a great customer experience for each homebuyer.

Turning to our balance sheet. This quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.4 billion of cash and total liquidity of $5.1 billion. As Jon noted, consistent with our land-light lower-risk manufacturing model, our year's supply of owned homesites was 0.1 years and our homesites controlled percentage was 98%.

We ended the quarter owning 11,000 homesites and controlling 512,000 homesites for a total of 523,000 homesites. We believe this portfolio of homesites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way. With our focus on turning inventory, our inventory turn increased to 1.9x, and our return on inventory was 24%. During the quarter, we started about 21,500 homes and ended the quarter with approximately 42,500 homes in inventory. As Stuart mentioned, we carefully manage our inventory levels, ending the quarter with fewer than 2 completed unsold homes per community, which is within our historical range. And then turning to our debt position. We ended the quarter with $1.1 billion debt outstanding on our revolving credit facility, and our homebuilding debt to total cap was 13.5%.

We had no redemption or repurchases of senior notes this quarter. Our next debt maturity of $400 million is not due until June of 2026. Consistent with our commitment to increasing total shareholder returns, we repurchased 4.1 million of our outstanding shares for $507 million, and we paid dividends totaling $129 million. Our stockholders' equity was just under $23 billion, and our book value per share was about $89. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the remainder of 2025.

So with that brief overview, I'd like to turn to Q4 and provide some guidance estimates, starting with new orders. We expect Q4 new orders to be in the range of 20,000 to 21,000 homes as we match production and sales paces. We anticipate our Q4 deliveries to be in the range of 22,000 to 23,000 homes with a continued focus on turning inventory into cash. Our Q4 average sales price on those deliveries should be about $300,000 to $390,000 and gross margin should be approximately 17.5%, consistent with the prior year. And our SG&A percentage should be in the range of 7.8% to 8%. All these metrics, of course, are dependent on market conditions.

For the combined homebuilding joint venture, land sales and other categories, we expect earnings of approximately $50 million. We anticipate our Financial Services earnings to be approximately $130 million to $135 million. For our multifamily business, we expect a loss of about $30 million as we continue to strategically monetize assets to generate higher returns.

Turning to Lennar Other. We expect a loss of $35 million, excluding the impact of any potential mark-to-market adjustments to our public technology investments. Our Q4 corporate G&A should be about 1.9% of total revenues, and our foundation contribution will be based on $1,000 per home delivered. We expect our Q4 tax rate to be approximately 23.5% and the weighted average share count should be approximately 253 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $2.10 to $2.30 per share for the quarter.

With that, let me turn it over to the operator.

[Operator Instructions] Our first question comes from Alan Ratner from Zelman & Associates.

Stuart, obviously, I think a lot of people want to dig into the pivot here on strategy a little bit and understand whether this is a little bit more short term in nature or just a change in the way maybe you're thinking about the longer term. I guess from a incentive standpoint, I'm just curious, have you already started to dial back some of the incentives? And if so, what has the response been in terms of order pace or margin or any color you can give there?

So I wouldn't really look at it as a change in strategy. I would look at it more that we are making adjustments as we go forward. We're still very focused on volume. We're maintaining a very, very strong volume. I think we're taking the edge off as the market has continued to become a little bit more stressed. And I think that as we went through our third quarter and interest rates were trending more towards the 7% range than what ultimately took place at the end of the quarter and into the fourth.

We just felt that it was an opportune time to take a step back, particularly as perhaps interest rates are starting to moderate a little bit. They're a little up and down still. We thought it was a good time to let the market catch up a little bit. In terms of have we already started, the answer is no. That is something that Jon will be directing and focusing on over the next few weeks. But we're just recalibrating to make sure that we're not pushing too hard on a market that really doesn't want to be pushed.

Got it. That's helpful color. Second question relates to the land strategy, in relation to this. This isn't my view, but it's one I hear from investors that given the spin to Millrose and given the fact that now you're 100% off balance sheet with option contracts that are tied to some certain takedown schedule. I know there's been some concern that maybe you don't have the flexibility to meaningfully change the start pace or the takedown pace. So I'm curious, I know this is a fairly modest pullback in start activity, so it probably doesn't affect things too much. But is there any adjustment that's also going on, on the land side to account for this slower start pace, meaning have you adjusted the takedown schedules or paused in any cases? Or on the flip side, would land begin to then accumulate on the balance sheet potentially if you don't reaccelerate those starts in '26?

Thanks, Alan. I've heard that question a number of times. The answer is we are not constrained in any way by our land relationships or the reconfiguration of land. To the contrary, we were very deliberate about injecting the ability to pause as market conditions change and adjust. And additionally, we have the ability, though it is expensive, to walk away from programs that we have in place. So it is not the constraint of our land relationships that define our strategy at all. To the contrary, it is much more about the recognition that we're going to have to find, frankly, as an industry, a way to build and deliver homes at a more affordable level, and that is all going to derive from cost structure, all the way from land to -- land finance costs, all the way through to vertical construction and horizontal restructuring and SG&A.

It's why we are so focused on a differentiated way forward relative to modern technologies. We have to get more efficient and effective. And unfortunately, the road to get there is one of volume [Technical Difficulty] system and working with our trade partners to deal with logistics and cost structures and also building new technologies that are expensive to do. The SG&A goes up before it goes down. But to bring this back to land would be -- it would be a mistake. Because land was carefully crafted to not be a factor in strategy, but instead to be a steppingstone of the strategy for going forward.

Next, we'll go to the line of Stephen Kim from Evercore ISI.

Thanks for that commentary, Stuart. I was going to follow on Alan's question there. With respect to the duration of this pause, could you give us a sense or do you see this planned slowdown in your sales production as maybe like a 1- to 2-quarter pause, several months kind of thing ahead of what is hopefully a better spring selling season? Or do you see this as a more lasting recalibration of your Lennar machine to a lower level of volume? And I guess you could say, address that both in terms of the housing production as well as the land.

So our strategy remains very focused on volume and delivering supply to markets that need it. It is very focused on how do we -- and we're working on it every day, Steve, how do we bring our cost structure down so that we can drive margin even in a slowing market. It's not an easy thing to do. It's not a linear kind of program. This is how you get there. It's a rocky road. So the answer to your direct question is, is this a change in strategy or a slowdown that's more permanent? We don't see it that way at all. The focus of our strategy is to maintain volume, to use volume, to enable us, our trade partners, even our land partners to find ways to be more efficient and effective as we try to meet the growing need of our communities, of our population that needs more affordable housing.

Okay. But you have indicated that you are looking to slow your volume versus, let's say, maybe what you had thought or thought about 3 months ago. And I guess the nature of my question is, is this slowdown, however you characterize it or this adjustment, is it something that you see as a -- measured in a few months? And then you're -- on the other side of that, there's going to be sort of a reacceleration. Are you sort of like pushing things off? Or is this something where you are sort of just lowering your overall or recalibrating to an overall lower level of volume than what you may have thought 3 to 4 months ago, let's say?

So look, I think we're living in a fluid world right now. We're going to have to see how the market evolves. But the way that I would think about what we're doing is we're running a marathon and partway through, we're just taking a moment to take a breath, let our body catch up to where we are, and we're on a mission to move forward and to keep pursuing the strategy that we have in place.

Got you. Okay. That's helpful. And then I was wondering if you could help me with -- just -- I wanted to run some math by you a little bit on the margin. I mean, just very simplistically, if we were to say that mortgage rates stay around 40 basis points or so lower than they were earlier in this year, then I'm guessing that the cost of a rate buydown should basically go down by or add a 100 basis points or maybe even a little bit more to your gross margins, just given what I think the cost of a rate buydown is.

And then on top of that, if you're slowing your volume while rates drop, I would think that, that would improve the supply and demand relationship and thus improve your pricing power. And so that would be additionally additive to your gross margin. So I'm wondering, is this a reasonable framework to think about the kind of or the magnitude of margin leverage that we might be able to see going forward? Or is there something that you would -- you think needs to be corrected in that?

I think that the pieces are correct and the timing is not going to be directly translatable. It will be somewhat of a rocky road to get there, too. But I think the pieces and the way that you're thinking about it are correct.

Next, we'll go to the line of Michael Rehaut from JPMorgan.

I don't -- certainly don't want to beat a dead horse here, but I just wanted to try and put maybe perhaps a finer point on this kind of shorter-term adjustment in approach given the challenging market. And I'm wondering, on kind of a bottom-line basis, if you guys just felt like you didn't want to go below 17.5% margin and the cost was too high to drive that volume where you hoped it was where you wanted it 3 months ago?

Or is there also, in your view, sort of an elasticity of demand issue where part of the problem here is that even if you were to drop margins or raise incentives to keep that, you really wouldn't ultimately even be successful in what you needed from a volume perspective. And so with that maybe demand becoming more inelastic, just a lack of demand in the marketplace, it just didn't make sense to drop that gross margin below where you're looking in the back half of this year currently.

I'm not sure that we've gotten quite that philosophical, but I think that we are responding real time to what we see as market conditions. And we just felt, and I said it clearly, Michael, that we just felt it was a good time to take a little pressure off. We have some tremendous athletes that are working on our marketing and sales programs across the company, and they've just done terrific work to pull us through some really challenging times.

We felt that this was a good moment for us to take a little pressure off of that part of our program and recalibrate as we go forward, think about what is our next step. But our base strategy remains the same. We're focused on building volume, supplying the market with an affordable, attainable product. Jon, do you want to weigh in on that?

Yes, I would agree, Stuart. And I think it's really hard to answer your question, Michael, because it's market by market and even community by community. So it is just, as Stuart said, it's taking some of that hedge off so we can better fine-tune exactly how we price in that market-by-market analysis and community-by-community analysis.

I appreciate that. And I understand it's probably a bottoms-up analysis to really fully answer that question, I suppose. But I think ultimately, though, this idea around elasticity is really important. And maybe just as a second question, follow-up question, we did see rates come down, mortgage rates that is maybe 20, 30 basis points in August and so far in September, another 20 or 30 basis points.

I'm curious, amid that type of -- that's a net 50 basis points roughly, but kind of gradually seeping into the market. I'm curious if you could comment on if you did see any impact on demand trends across your markets, perhaps which ones, if that's the case? And all else equal, would this potentially reduce pressure on gross margins or incentives? Or are you just at a point right now where, given what you've done during the quarter, you expect the incentives that you've laid out to effectively remain in place throughout the fourth quarter?

I think, Michael, as Steve laid out, it does help reduce the cost of those mortgage rate buydowns. But as Stuart responded, it's not exactly linear. It's each market, it's each community, how they're used and what the buyer demand is and the affordability stressors that exist.

I think the way that I would think about it, Michael, is when we think about elasticity, I think that's more of a news report looking backwards. And when we think about what we're doing, it is, as you described, a bottoms-up approach. I think Jon has said, it is community by community, and we're responding and pulling the levers as a company to be reflective of what we see our best and brightest doing in each market across the country.

And I think that in terms of 30 basis points in August, 20 to 30 in September, there are fluctuations in the 10-year right now, maybe it's migrating up a little bit. We'll have to see. I think the volatility in it impacts consumer confidence. So we're going to have to see how it plays out. At the end of the day, when we look back at our third quarter, and as I noted in my remarks, we did not yet see sales impact, but we did see some -- a little bit of pick in the consumers' engagement.

And as we've gone into the fourth quarter, we generally don't comment on what we're seeing so far in this quarter, but I will and say that as we've come into the fourth quarter, we've seen a little bit more interest, but we're pretty confident that if interest rates really do go down and stay down as you get to 6%, closer to 6%, as you go below 6%, we think you're going to see some real optimism in the marketplace and people who have need really activating because they can afford to.

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

My first question is on the inventory turns. Can you talk through how some of these company-specific efforts are continuing to come through even as you moderate or adjust the strategy? And how we should think about the upside to those inventory turns in this kind of an environment and long term, the ability to get to 3x as you do think about the setup on the ground?

So I will tell you that I -- so Jon and I, at the end of each quarter, we go out and we do what we call operations reviews, and we sit with our division management teams and really go through their operations and strategies. And what has been fascinating to me is to sit and watch our divisions focus on their inventory turn, which to me, and I think -- and to Jon as well, is really an indication of are we're focusing on effectiveness and efficiencies and really working on using the things that we're doing to become more efficient and drive costs down to build affordability.

The answer to your question is, I was sitting in one of those ops reviews this week with a team that is actually getting closer to exactly that 3x inventory turn. As a company, it will be -- we'll be adding together all the divisions, and you'll see averages. But at the local level, that kind of North Star is very much a part of the discussion as we get cycle times down. Jon talked about the fact that these are the lowest cycle times as an average that we've seen as a company. That is directionally where we're headed. But don't measure us against 3x because that's a pretty hard hurdle to get to. Go ahead, Jon.

I would just add, Stuart, is as we've discussed and discussed in prior quarters as well, this ongoing focus on efficiency. So just-in-time into our land banks, just-in-time out of our land banks where we're ready to start production, all of this is a constant tweaking and refinement of processes to do just that is continuing to drive that metric, which, as you've seen, is that we're making good progress on.

And every one of these programs, thinking processes, now Jon talked about land, into the land bank land, out of the land bank and those efficiencies, all of these tied to modern technologies that are partners of what we're trying to do. And as we get those technologies working, those efficiencies are going to amp up.

Yes. Okay. That's very helpful color. And then maybe taking that one step further, as we do think about the inventory turns and these efforts coming through, can you talk about the cash generation of the business? And how you're thinking about the uses of that cash, especially in this sort of an environment that we're in? And any updates on the M&A environment, those kinds of strategic efforts?

Well, as far as we're concerned, everything is on the table. We are certainly focused on total shareholder return. That is sometimes defined by how we grow and what kind of M&A strategy we might inject into our business as we go forward. We are looking at everything. And as I've said, the use of our land banking program is something that enables more of that focus. At the same time, we're focused on returning capital to shareholders. You've seen that we've had a pretty steady program of doing exactly that. And we are very, very focused on driving cash flow.

Now there's been an adjustment period in the wake of Millrose and getting the pieces working exactly together takes a little bit of time, but our program is laser-focused on how do we get to that total shareholder return, how do we use cash effectively? How do we drive growth effectively? And look, at the end of the day, the focus of this company is how do we become something different in the future from what we've been in the past and a big

[Audio Gap]

capital allocation. Diane, do you want to say anything on that? No?

No, I was going to just -- really, I agree with Stuart. I think that there's no change in our strategy from quarter-to-quarter, given the incentive because of our push on volume, cash flow was down a little bit, and this was an unusual year with Millrose. But the trajectory is to really keep the focus on cash generation, which is definitely benefited by the efficiencies that we're focused on.

Next, we'll go to the line of John Lovallo from UBS.

The first question is orders were obviously very solid and a little bit ahead of expectations. You guys are working at the lowest cycle times in a very long time, if not in history. What caused sort of the slight miss in the third quarter deliveries given those factors?

It really is just timing and relative to when sales occur, getting through the mortgage approval process, nothing more than that.

Okay. Understood. And I guess we've heard from several of your peers and from some other companies through the value chain that Florida inventory levels are beginning to stabilize, maybe even improve a bit. Obviously, there's a lot of markets in Florida. But in some of the key markets, maybe the I-4 corridor, if you could talk about, I mean, is this consistent with what you're seeing on the ground?

Yes. On that Tampa, Orlando markets along I-4, as I commented, we have always remained very laser-focused on inventory levels. It's part of our strategy, even flow production, sales pace. With respect to other builders, we did see some buildup, but I would agree with that in general, starting to see some stabilization.

Yes. And remember that the size of inventories across the competitive landscape, meaning existing homes and new homes is big part of what defines the stress on the sales process. And in Florida, that has been a factor. Inventories have been high, both across existing and the new home market. They have been moderating, and that has started to build a more stable environment, which we sell.

Next, we'll go to the line of Matthew Bouley from Barclays.

One on incentives. I guess sort of another philosophical question. But I mean, I guess, going forward, depending on where the rate environment goes, I mean, do you anticipate kind of maintaining some level of these buydowns as kind of a competitive advantage sort of structurally versus the resale market? Or as you do get to -- if we do get to 6% or lower, I mean, is there some level where you really do foresee a kind of a more material pullback on those incentives?

So interesting question. A number of people have asked why are you focused on interest rates coming down, you're buying them down anyway. And so the market has access to the lower interest rate. The reality is, it is the stall that's embedded in the existing home market that is relevant because as the existing home market starts to unlock a little bit, it enables people to activate the process of going from a first-time home to a move-up home and a move-up home to a second move-up home, it just unlocks an awful lot in and around the ability of people to engage in the housing market.

So that -- yes, the homebuilders are generally providing that lower interest rate by buying down, and it is impactful to margin. But unlocking the rest of the housing market as a flywheel kind of approach or effect -- and that effect unlocks a lot of activity for the entirety of the ecosystem.

Okay. Fair enough. Yes. Secondly, the -- I guess sort of following on John's question, I think what he was alluding to around orders and deliveries into the next quarter. I'm just curious if you can update us on the cancellations environment a little bit. And I guess, whatever the trend was, kind of what you're reading into what you're seeing in cancellations today?

I'd say it's really remained pretty consistent from second quarter through third quarter in terms of order pace, cancellation pace. As we said, we really didn't see any effect in the third quarter relative to interest rates coming down at the end of the quarter. And it directly ties in on a community-by-community basis of what do we need to do to support our customers as they're challenged by affordability. So bottom line is, it's remaining pretty consistent.

Okay. Why don't we take one more?

Perfect. Our final question comes from Jade Rahmani from KBW.

Can you say what quantity or percentage of year-to-date deliveries have come from Millrose?

Diane?

Yes, I want to say it's been about -- Dave, correct me if I'm wrong, about 25%-ish, in that zone.

And so in terms of the gross margin outlook, looking beyond the fourth quarter, should we still expect the remaining 75% once you're at a steady cadence with Millrose to come through that interest cost on gross margins?

Yes, stating the obvious with the low cost that Millrose offers us, the more that we have deliveries from that vehicle, it's benefiting our margins.

But realistically, across our land banking environment, we're focused on managing the option costs of those communities. And one of the things that benefits -- and this is an interesting flywheel within the land banking world, is our ability to build certainty within the land banking structures, and that is certainty of close, certainty of execution, enables us to maintain a more moderated cost structure within those systems and to actually bring down costs.

And therefore, when we talk about does land banking drive our business? In one sense, we have the ability to walk away from deals if we need to. But the reality is, we are highly, highly incentivized to keep each of our structures, whether it's vertical construction, horizontal construction or whether it's land banking, operating in a smooth, effective way because that's how we get to the best cost structure and therefore, produce affordability. And all of this kind of ties together as to why our strategy relative to volume.

I think that's well said, Stuart. For us, it's a manufacturing approach, meaning even flow from beginning to end. So it starts with land into our land banks, as I said, just-in-time coming out predictably just-in-time from the land banks to a production team that's focused on bringing cycle time and cost down. And it's an ecosystem that's all the way through. So the more effective we are in doing that, as we've noted, we bring down our construction costs. But as Stuart is highlighting now, the more effective we are creating stability and reliability in the land bank world, the more that, that capital costs come down. So they all have our laser focus on how do we become more efficient, more durable and bring value to our partners.

So even while we might have the ability to -- as a risk mitigator to walk away or to do something else, our whole strategy is focused on building certainty and across our land banking system, bring down cost and option costs in each of our land banks to help with the affordability factor. I'm not sure if that's answered your question, but I think that's what you're getting at is when you talk about 25% for Millrose and advantage cost, the question is, can we get more advantage costs across the whole spectrum?

Okay. I was trying to understand, as the 25% grows toward 100%, shouldn't that -- I think the market is assuming that would be a negative, an incremental headwind because that $560 million of annual interest cost is not yet fully reflected in gross margin.

While I have tremendous affection for Millrose and Darren and the group there, and we want to do a lot of business with them, we think that our business is best configured with a range of participants that are providing low-cost capital to enable us to be the best version of ourselves. With that diversity of engagement, I think we get the best out of everybody, and we really have been migrating towards building, enabling, participating in an industry solution, not just a myopic one for Lennar.

All right. With that said, I want to thank everybody for joining us, and we look forward to reporting back on consistent and focused progress as we go forward. Thanks, everybody.

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

Welcome to Lennar's Second Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in the forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

I would now like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.

Good morning, everybody, and thank you for joining us today. I'm in Miami today, together with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, you just heard from our Controller and Vice President; Fred Rothman, our Chief Operating Officer; Bruce Gross, our CEO of Lennar Financial Services; Mark Sustana, our General Counsel; and a few others as well.

As usual, I'm going to give a macro and strategic overview of the company. After my introductory remarks, Jon is going to give an operational overview, updating construction costs, cycle time and some other items. And as usual, Diane is going to give a detailed financial highlights along with some guidance for our Third Quarter of 2025. And then, of course, we'll take questions in our question-and-answer period. As usual, I'd like to ask that you please limit yourself to one question and one follow-up so that we can accommodate as many as possible.

So let me begin. We're very pleased to review our 2025 Second Quarter results against the continuing backdrop of a challenging economic environment for the housing market. In the second quarter, we remained focused on our stated strategy by driving volume and growth, matching production and sales pace using margin reduction to enable affordability and sell and deliver homes to avoid building excess inventory. While our margin and earnings have been adjusting and of course, falling in order to accommodate the realities of the housing market conditions, we remain focused on volume and even flow production to enable rerationalized cost structure and overhead in order to find a floor and rebuild margin even as the overall housing market continues to soften.

We expected that the new normal of higher interest rates for longer would mean lower margins for longer as we drove affordability. We knew that we and the industry, we're initially going to have to bring down the price of homes we build through incentives and mortgage buydowns to meet affordability and normalize the supply and demand balance. We also knew that you rationalize margin from a lower average sales price would only be -- we would only be able to rebuild margin from a more efficient cost base.

We believe that we have gotten ahead of these market realities, and we are building what will become a stronger margin driving platform by using volume to enable us to drive costs down across our platform. We know this takes time, but we also know it will help build a healthier housing market and position Lennar for bottom line growth even as the market remains soft. Admittedly, we haven't gotten there yet, but we believe that we're getting very close to the bottom and the time when we will build back margin from a lower cost structure, and I'll explain that in more detail shortly.

First, I'll discuss the market environment, then review our strategy, then relate strategy to our reported numbers and expectations for the near future. Let me start with a macro view of the housing market. Consistent with last quarter's earnings call, the macro economy remains challenging as mortgage interest rates have remained higher, while consumer confidence has been challenged by a wide range of uncertainties both domestic and global. Across the housing landscape, actionable demand has been diminished by both affordability and consumer confidence and therefore, has continued to soften.

At the same time, supply remains constrained by years of underproduction. New construction has slowed as builders have pulled back on production due to mixed demand signals, exacerbating the chronic supply shortage that derived from the Great Recession and its aftermath. Additionally, restrictive land permitting, along with higher impact fees remain supply constraints, while labor and material costs, lumber is a particular [ heavy ], are generally increasing. Accordingly, given short supply, home prices remain high with median sales hovering around $400,000 in many markets.

Demand, however, is still high as people want and need homes. Millennials are hitting the prime buying age and are realizing the benefit and perhaps imperative of home ownership. But affordability and waning confidence around buying now are sending confusing signals. We certainly don't want to overstate the negative as the market is definitely not crashing, but it just continues to cool. Inventory is up slightly from last year's lower levels, but still relatively limited. It's just that the housing market right now is driven by supply and demand that can't be properly aligned. This is a difficult cycle as low supply fuels high prices and high prices lock out many of our buyers. Mayors and governors around the country continue to decline the housing shortage and point to affordability or attainability as a priority concern.

As a case in point, I and many other homebuilding leaders, last week, heard from Governor Cox of Utah, explained that there's a significant housing shortage in his state, and they simply need more supply. In fact, they are running a Need More Supply publicity campaign in the state. He noted that the American dream is homeownership and his state has a 350,000 home deficit that is maintaining prices at an unaffordably high level. He emphatically argued that they need more starter homes in the state that are affordable to those who are just beginning their careers and their families. He describes how he and his state are making noteworthy efforts to eliminate or modify restrictions in zoning and timeliness in order to attract more supply, which will help narrow the supply gap and help align supply and demand. This is a common refrain.

The post-pandemic days of strong actionable demand driven by low interest rates are behind us. Initially, many in the housing market held on to the hope that the higher interest rates were temporary, expecting inflation to subside and rates to drift back to lower levels. However, this expectation has not materialized. Looking ahead, there is little evidence to support expectations of materially lower interest rates in the near term. As a result, elevated interest rates have solidified as the new normal. The environment is about recognizing that short supply is keeping prices higher and that only lower prices enabled by lower cost structures will define affordability. This trend has started with reducing margins and using incentives to enable affordability. But looking ahead, it is much more about transitioning to lower cost structures.

Against this backdrop, let me turn to Lennar's operating strategy. Our strategy is and has remained very clear. First, operationally, we are building and delivering consistent value by meeting the market at affordability and using volume, we push efficiencies through our platform. And second, financially, we are focused on driving an efficient asset-light land life balance sheet to effectively hold and develop our land assets and to build cash flow. As I said earlier, we are not there yet, but we are certain that we are finding a floor with margin and getting close to building it back even in a softer housing market environment.

As the current market softness unfolded, we focus on consistent volume by matching our production pace with our sales pace. Although some have questioned why we have maintained volume rather than protect our margin, we are very clear and steadfast on our strategy. Historically, we protected margin as market conditions solved, and we generally led the way in protecting short-term profitability. But we learned through those times that once we step backwards and lose momentum, it becomes increasingly more difficult to restart and recapture volume. The machine slows and does not restart easily.

We have concluded that by maintaining volume, we can create new efficiencies and new solutions that are durable for the future and will result in meaningful long-term efficiencies in our cost structure. When we stop and pull back, the restart is difficult and expensive, but even worse, we end up coming back as the exact same company we were before with no significant changes for the future.

Today at Lennar, we are laser-focused on injecting technology-assisted solutions into our platform with the expectation that we become meaningfully different and decidedly better. We believe that with volume, we can design and engage real change that will produce significant recurring returns for years to come. It really comes down to using hard times to push, to force and accomplish hard things, and this is exactly what we're doing. As many know, we have spent considerable time working with, investing in, and exploring technology. And the general business community is consumed with the possibilities and opportunities enabled by modern technology.

We think about the extraordinary companies that remade their business by incorporating technology solutions into an older platform like Walmart or Home Depot. They invested heavily in their technology-enabled solutions and cemented themselves as industry leaders. We believe in the virtues of technology solutions and the value and efficiency it can bring. We clearly believe that technology properly configured can enhance productivity. Today's technologies can and will, combined with extraordinary management teams, can bring efficiencies that have never been seen before. We believe that productivity and efficiencies can be enhanced by orders of magnitude when technology assistance solutions intersect with company-wide adoption.

We have learned that modern technology is not plug and play. In order to get excellent product development and achieve adoption, it requires substantial monetary investment, management time and widespread engagement. Additionally, it needs a lot of volume to run through the system for development and for A/B testing. These solutions are very hard to create and even harder to incorporate into an organization that is accustomed to old ways and old habits. But we are certain that the returns on investment will be significant in both cost savings and efficiency in the way that we acquire and interact with our customers. This is why we are driving volume and focus on using that volume to enable unique Lennar technology-enabled solutions. I'll review some examples shortly.

But first, let me briefly reflect on our second core strategy of driving an efficient asset-light, land-light balance sheet to efficiently hold and develop our land assets and build cash flow. As I noted last quarter, the Millrose spin was a critical part of our asset-light, land-light strategy, but there is more to accomplish. The land strategy also benefits from our volume as greater predictable volume enables greater certainty for the capital market and will help build a more capital-efficient market for this very important part of our business. We are continuing to drive certainty with volume for our land bank partners, and this will help ensure stability and dependability. In turn, that dependability will translate into certainty and predictability for Lennar. Additionally, this part of our strategy also benefits from our technology-enabled solutions work as a technology-based administration system will enable efficiency at many levels, and I will further address this shortly as well.

So now let me turn to our results. As I noted earlier, we're quite pleased with the success embedded in our second quarter results and accomplishments. In very complicated market conditions, Lennar associates have been executing our strategy, while learning and developing new technologies for our future. This is hard work, and I thank them all for their amazing contribution to that future.

In our second quarter, we started over 24,000 homes making up for last quarter's shortfall. We delivered over 20,000 homes and sold 22,601 homes. As mortgage interest rates moved higher for longer and consumer confidence declined, we continue to drive volume with our starts, while we incentivize sales to enable affordability. As a result, during the second quarter, sales incentives rose again to 13.3%, reducing our gross margin to 18%, excluding purchase accounting, as expected, on a lower-than-expected average sales price. By that, I mean the partners who put in the roads, water and sewer on each attractive land that we develop. They too are dependent on consistent volume to ensure that their investment in heavy equipment is continuously working. Idle equipment costs money with no income. Our focus on volume enables us to have conversations and build relationships that were impossible when the market was heated and strong.

Given those initiatives, we look ahead to the third quarter of 2025. We expect that our margin will come in at approximately 18%, of course, depending on market conditions. We expect to sell between 22,000 and 23,000 homes and deliver between 22,000 and 23,000 homes. We expect our average sales price to be between $380,000 and $385,000 as we expect to continue to see pricing pressure on homes that will be sold during the quarter.

Nevertheless, we are focused on driving sales and closings and driving strong current cash flow even at reduced profitability. We are focused on maintaining properly-sized inventory within our 2 homes completed unsold per community level, per month, overall. So that if market conditions stabilize or improve, we will benefit. And if the market conditions soften, we are prepared. We expect our overhead in the third quarter to continue to run on the high side at between 8% and 8.2% as we continue to invest in and evolve various Lennar technology-assisted solutions that will define our future. These initiatives have been and will continue to add SG&A as well as corporate G&A for some time to come as they represent a significant investment in our differentiated future.

Let me give you some examples. You might remember the program that we once described at the Lennar machine. The machine, which is overseen by Ori Klein, Jeff Moses and Benoit, and they do an amazing job. It was and still is our primary digital marketing and customer acquisition product and it has become central to our overall marketing and sales efforts. It operates on a sales force backbone, which ingests data from across the Lennar sales landscape. The machine's components have become native to the Lennar way of selling.

We have invested heavily in the future of this high technology program, which is designed to reduce our customer acquisition cost both internal and external and manage the dynamic pricing of our homes. Perhaps most importantly, we are working closely with executives at Salesforce as well as our advisers at Mackenzie to evolve and design a Lennar agent force that we'll be able to quickly engage with customers in coordination with our sales team as well as independently in off hours.

Our development of this tool requires significant data flow, and is another reason that we maintained our volume to continue to build our digital marketing and customer acquisition program. Another example is in the land arena. We are at the front end of developing a technology-driven land management system in cooperation with the team at Palantir. Our Lennar interface with Palantir is Yen Liu, who is driving that innovation. We -- as we developed our essential housing and Millrose business engagement, we knew that asset light and land light wasn't enough. Off-balance sheet acquired land with just-in-time delivery of home sites can potentially harbor inefficiency. The day-to-day administration from purchasing land to the development of that land and to the delivery of developed homesites is being crafted with a state-of-the-art high technology-enabled program. This system will help manage every part of the land and land capital relationship and journey. Of course, in order to execute, it requires money, overhead, executive management time and attention and substantial volume running through the system that will enable this system to properly evolve.

Finally, in July, we will execute, wish us luck, the 2-year transition of our ERP system to JD Edwards E1 system. This has been a massive undertaking by the extraordinary Lennar professionals, professionals in our IT group that was led by Scott Spradley until his retirement a few weeks ago, and to be transitioned by his leadership, Thor, Lee and Jason. You guys know who you are, who are ready to complete this rather complex feat. Through the -- although this is really considered just a technical transition, it will enable our combined team of the IT leadership group and Diane Bessette, our Chief Financial Officer to begin on modernization of our entire financial platform from the main office to the field.

Many of you might have noticed that we at Lennar get prepared fairly quickly to report earnings. The reality is that we close our books within 3 days of quarter end, we have a full numbers package 3 days later, and we have a complete forecast 3 days after that. The good news is that we could report earnings on the tenth day after the quarter end. The bad news is that this extraordinary time frame is handled with limited automation that has been limited by our old school ERP. David Collins really lead this effort. Our financial team does an exceptional job but they will be truly supercharged and capable of much more as we get these processes automated, and we will.

So in conclusion, let me say that while this has been a constructive quarter for Lennar, and while the short-term road ahead might seem choppy, we are very optimistic about our future. We are well aware that our numbers this quarter aren't where we would like them to be, but neither is the market. And this is a tough time to be spending heavily on innovation, but we are. This has been an important quarter for Lennar, and we couldn't be prouder of the work and dedication of our extraordinary associates who work together to make it all happen. Together, we have upgraded the financial and operating platforms as we drove production and sales.

We are well prepared with a strong and growing national footprint, growing community count and growing volume. We have continued to drive production to meet the housing shortage that we all know persists across our markets. And we have driven growth, production and volume, we have positioned our company to evolve and create efficiencies and technology that will make us a better company and built for the future. Perhaps most importantly, our strong balance sheet and even stronger land banking relations and soon our technology-enabled solutions will afford us flexibility and advantaged opportunity to consider and execute on strategic growth for our future as well. In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high returns on capital and equity. Lennar is extremely well positioned for the future and we look forward to keeping you up to date on our progress.

And with that, let me turn it over to Jon.

Thank you, and good morning, everyone. Stuart has described in detail the why and how behind our strategy of being a consistent high-volume, technology-enabled homebuilding manufacturer and our commitment to execute that strategy. We strongly believe this strategy will produce greater efficiencies and drive down costs throughout our platform. I'll further review this as I discuss our performance on sales pace, cost and cycle type reductions and the execution of our asset-light land strategy for the second quarter.

Our sales pace for the second quarter was 4.7 homes per community per month, in line with our sales plan. The well-documented softness of the spring selling season that showed the impact of affordability challenges driven by higher interest rates and elevated home prices along with the uncertainty associated with the macro environment. As the market softened, we leaned into our people and processes, define market and maintain sales pace. This involves the rigor of a daily review of marketing and sales data to make needed adjustments. Based on a real-time analysis of traffic, sales, sales pace and inventory, we would even make no adjustments to prices, increased incentives or decrease incentives. This is powered by some of the technology that Stuart referenced as we've added new automated pricing capabilities to Lennar Machine. This particular technology analyzes all of this marketing and sales data and provides pricing recommendations. It is in its early stages, but we're encouraged thus far.

We continuously make pricing adjustments with the goal of ending the week with both the targeted number of sales and with a focus on selling our completed or suite-related inventory. If any community falls short of these goals at any given week, analysis of the data provides us, of course, correcting actions. By hearing to this discipline, we ended the quarter well positioned with an average of under 2 uncompleted -- 2 unsold completed homes per community. All of the markets we operate in experienced some level of softening. Even in our strongest performing markets, buyers needed the assistance of incentives. Incentives while vary across the different markets, were primarily in the form of assistance with mortgage rate items. The markets that experienced more challenging conditions during the quarter were the Pacific Northwest markets of Seattle and Portland, the Northern California markets of the Bay area in Sacramento, the Southwestern market of Phoenix, Las Vegas and Colorado and some Eastern markets such as Raleigh, Atlanta and Jacksonville. These markets experienced sensitivity to higher home prices and/or the macro impact on the technology workforce.

Turning to the production side of operations. As Stuart highlighted, achieving construction efficiencies with the goal of our production first strategy. Our start pace in the second quarter was 5.1 homes per community per month providing meaningful volume to the supply chain, which is critical to accomplishing our mission of lowering cost and cycle times. Achieving these goals is measured by reducing costs across our entire platform. The proper execution of this strategy will deliver savings in direct construction, land development, land acquisition, indirect cost and SG&A. Volume and importantly, consistent even flow volume along with efficient-to-build plans and digitally enabled scheduling and quality control processes all drive cost savings. Our commitment to this consists volume means our trades can drive down their own cost structure as well as work successfully on lower margins, allowing us to stabilize and ultimately grow our margins. The cost reduction discussions with our supply chain are grounded in both the recognition that our consistent volume and market conditions require a recalibration of cost.

Direct construction costs in the second quarter were lower sequentially by 1.5% from Q1 and on a year-over-year basis by 3.5% to our lowest direct construction costs since Q3 of 2021. This trend will continue into our third and fourth quarters. Another benchmark of efficiency is our cycle time. Our second quarter cycle time decreased by 5 days sequentially from Q1 down to 132 calendar days on average for single-family detached homes. This is an 18-day or 12% decrease year-over-year and is lower than pre-pandemic cycle times. We expect to see continued improvement in cycle time as well throughout our third and fourth quarters. Our operating strategy is also resulting in reductions in land development costs and in restructuring land acquisitions. As Stuart noted, our consistent volume comes into play as it provides the consistent and predictable work to the land development contractors to depend on utilization of heavy equipment. Similarly, the consistent and dependable takedown of land in a slowing macro environment allows for the proper alignment of timing of land closing and a recalibration of the purchase price of land.

With respect to the question regarding tariffs. Consistent with our commentary last quarter, we have had no impact to date to our costs from tariffs. We work closely with the supply chain to prepare for alternative sourcing if it becomes necessary as well as the expectation that our trade partners will work with us to mitigate and offset cost impacts should they present themselves. As Stuart addressed, we are able to provide further details, we continue to execute on our asset-light strategy. We ended the quarter with our supply of owned homesites improving to 0.1 years, down from 1.2 years a year ago and controlled home site percentage increasing to 98% from 79% a year ago.

During the quarter, land banks acquired a harbor half of about 17,000 home sites from about $1.4 billion and a commitment of about $2.1 billion in land development. We purchased during the quarter from our various land bank partners, almost 22,000 finished homesites for about $2.7 billion. The cost and processes in and around land banking provide another area for efficiencies, as Stuart discussed. Our focus on the coordination between land sellers and land banks of just-in-time land acquisitions with the commencement of land development. Our consistent volume provides the opportunity for processes and technologies that will lead to cost reductions.

These improvements in execution of all of our operating strategies enable capital and production efficiencies, leading to an improved inventory churn, which now stands at 1.8 versus 1.6 last year, a 13% improvement. In our third quarter, we will continue to focus on meeting our planned sales pace, while intensifying our efforts to reduce costs and maximize efficiencies across our operating platform. I want to thank all of our Lennar associates for their hard work, focus and dedication for the work accomplished in our second quarter and for the hard work that lies in front of us.

And now I'll turn it over to Diane.

Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our operating performance. So therefore, I'm going to spend a few minutes on the results of our financial services operation, summarize our balance sheet highlights and then provide estimates for the third quarter.

So starting with Financial Services. For the second quarter, our financial services team had operating earnings of $157 million. The strong earnings were primarily from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins and also due to a higher capture rate. The financial services team is intensely dedicated to providing a great customer experience for each homebuyer and has created a true partnership with our homebuilding team to best accomplish that goal. Our LSS teams together with our homebuilding divisions are truly one Lennar.

Turning to our balance sheet. This quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.2 billion of cash and $5.4 billion of total liquidity. We are now positioned as a land light, lower-risk manufacturing homebuilder. Our year supply of owned homesites was 0.1 years, as Jon noted, and our homesites control percentage was 98%. We ended the quarter owning 12,000 home sites and controlling 520,000 homesites for a total of 532,000 homesites. We believe this portfolio of home sites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way.

With our focus on returns, we are pleased that our inventory turn increased to 1.8x with a solid return on inventory of 27%. As we stated in the past, we balance margins and asset turnover as both contribute to higher returns. During the quarter, we started approximately 24,200 homes and ended the quarter with approximately 42,100 homes in inventory. This inventory number includes 2,900 homes that were completed unsold, which as noted, is under 2 homes per community and continues to be within our historical range.

Turning to our debt position. We opportunistically raised $700 million in senior notes at 5.2% due in July 2030. We primarily used the proceeds to pay off $500 million of senior notes that matured in May. As a result, our homebuilding debt to total capital was 11% at quarter end. Our net debt maturity of $400 million is not due until June of 2026. Consistent with our commitment to increasing shareholder returns, we repurchased $4.7 million of our outstanding shares for $517 million, and we paid dividends totaling $134 million. Our stockholders' equity was just under $23 billion our book value per share was about $87. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the balance of 2025.

With that brief overview, I'd like to turn to Q3 and provide some guidance estimates. Starting with new orders. We expect Q3 new orders to be in the range of 22,000 to 23,000 homes as we matched production and sales pace. We anticipate our Q3 deliveries to also be in the range of 22,000 to 23,000 homes with a continued focus on turning inventory into cash. Our Q3 average sales price on those deliveries should be about 380,000 to 385,000 and gross margin should be approximately 18% as we continue to price to market and use incentives to enable our customers to attain affordable homes.

Our SG&A percentage should be in the range of 8% to 8.2%, impacted by our continued investment in technology solutions. All of these metrics, of course, are dependent on market conditions. For the combined homebuilding joint venture land sales and other categories, we expect a loss of about $25 million. We anticipate our Financial Services earnings to be approximately $175 million to $180 million. For our multifamily business, we expect a loss of about $40 million, as we continue to strategically monetize assets to generate higher returns.

So turning to Lennar Other, we expect a loss of $35 million, excluding the impact of potential mark-to-market adjustments to our public technology investments. Our Q3 corporate G&A should be about 1.8% of total revenues, and our foundation contribution should be based on $1,000 per home delivery. We expect our Q3 tax rate to be approximately 25.3% and the weighted average share count should be approximately 257 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $2 to $2.20 per share for the quarter.

In conclusion, I, like Stuart and Jon would like to say thank you to the financial teams in our division and in our corporate office. You bring an incredible amount of dedication to the table each and every day, and it is greatly appreciated.

With that, let me turn it over to the operator.

[Operator Instructions]

And our first question will come from Alan Ratner from Zelman & Associates.

Thank you for all the details so far. Very helpful. A lot to touch on here. But I think, first, maybe if we could just chat a little bit about the consumer and what you're seeing there. I know, Stuart, you went into a lot of detail about the overall demand environment. But we've been getting a lot of questions, hearing a lot of concerns, reading headlines about just the overall quality of the consumer today and some headlines about student loan. For example, that's beginning to impact some credit scores and just overall kind of stretched kind of quality there. So have you seen any dramatic shifts year-to-date in terms of credit quality or just the overall ability for consumers to purchase homes? Or has this been kind of just a slow steady grind over the last few years given affordability constraints?

Look, I'm just going to say, generally -- and I'm going to turn it over to Bruce for a second. But just generally speaking, the market has definitely softened or continue to soften. New normal interest rates are higher, but more importantly, consumer confidence has started to wane a little bit. In our last earnings call, I did talk about the fact that we are seeing higher debt levels in some of our loan applications and that, too, is starting to weigh in on the market. Bruce, maybe you could give some more color.

Sure. From a credit perspective, if you're thinking about credit scores, it's been very consistent. What we are seeing though is a little bit of a shift to more government loans, which helps with the ratios for some people that don't qualify. So our government loans were up from 40% to last year. to about 48% in the second quarter of this year. So that's the one noticeable difference. You also brought up student loans, but people do have to qualify assuming the student debt. So we haven't really seen any shift there with any changes with student loans at this point.

Second question on the -- just overall, I guess, price elasticity in the market, Stuart, obviously, with the Machine and your ability to flex incentives to maintain a targeted sales pace impressive results there. I'm just curious across your portfolio. Do you feel like there are any markets right now that don't really have elasticity and demand, meaning incentives? It doesn't really matter how high you take them, you're struggling to achieve a certain targeted pace. And as a result, you've dialed back the production? Or would you say across the board, there is a market clearing price. It's just a matter of finding what that level is to achieve the targeted absorption?

So I'll just say quickly and then turn it over to Jon that -- as you know, Alan, we are on top of these numbers, our divisions, our regions every day. And I would say that you do see somewhat of a rotation where one week it's one market and one week, it's another where the question of elasticity is raised and challenged, and it's a real ebb and flow market out there that moves around. Jon?

I completely agree with that, Stuart. It's nothing you can point to where you say this market is behaving consistently in a different direction. As I highlighted some of the markets that are harder to find that pace. As I said, it's in part driven by perhaps where pricing is and particularly tech workers who are foreign check workers just the uncertainty around that. in combination, you tend to see a bigger impact. But that also tends to be very community-specific, and we make the adjustments.

Next, we'll go to the line of Stephen Kim from Evercore ISI.

Appreciate all the color as always. I guess last quarter, we discussed your view that long-term normalized operating margins before corporate expense were like in the mid- to high teens and that you could be nimble in adjusting your operations to a lower level of volume if you needed to. You made clear today, again, you're definitely committed to driving volume-based efficiencies. But based on the third quarter order guide, it looks like maybe you are tweaking down volume a little bit and your comments there just in response to Alan, it sounds like maybe some markets where there's an inelasticity of demand, you sort of tweaking volume down a bit.

So I'm just wondering, first of all, to make sure that I heard that correctly. I also noticed you didn't really give -- I didn't hear it at least a full year volume guide. So my question basically is could you talk a little bit about how you see the overall level of volume for -- on an annualized kind of basis? Has it changed in the last few months? And is there some sort of a metaphorical line in the sand for either volume or margins that is worth talking about in addition to the sort of the long-term normalized level? Is there like a bottom line or a bottom or floor level that's worth talking about?

So that's a number of questions in one. Let me clear up, Steve, that in my comments, I did say that we are still expecting for the full year to hit the bottom of the range that we previously articulated of 86,000 to 88,000 homes. So we did detail that. I think that we're remaining consistent, and we're focusing on driving volume, but we're not trying to break anything. This is a day-by-day kind of program of working with market conditions. And what we're doing is adjusting pricing using incentives to meet the market at affordability.

And at the same time, we were working with cost structure to say, okay, the market is going to be able to afford X. Now we've got to be able to build something that is market desirable at a cost structure that enables us to make a responsible margin. Is there a breaking point? I don't think so, Steve. I think that we're really focused on saying the market is going to be where it's going to be. And that interest rates -- the interest rate is part of the affordability program. We're going to have to find a way.

The challenge for the industry is going to be to find a way to build a cost structure and take inefficiencies out of our system build that cost structure, housing that the market can afford at the end of the day, this conundrum that you've got a supply shortage and demand challenged at the affordability level, I tried to really highlight that. It's not something that we've really seen before. And so the market needs supply, it needs supply at a cost structure where we can make a margin and where the customer can afford. And that's what we're driving towards with everything that we're doing.

I think you said it very well, Stuart. As I highlighted in those markets that have some more challenges, Steve, it's exactly as Stuart said, we are finding our way to a recalibrated cost structure to meet that demand. The demand is there, and it is just challenged as we all know. So it's up to us to do the hard work to figure out how to provide pricing with our homes that is actionable for those consumers.

Yes. And obviously, a lot of that is just good old blocking and tackling and making sure you're sharing the pain with all of your partners who are benefiting from your volume. But you also talked intriguingly, Stuart, at length about technology and the major productivity gains you anticipate from technology. And you made clear that you felt like you weren't quite there yet. And so what I wanted to clarify is, is the gap, is it one of know-how and time? Or do you think that you actually need to have a higher level of volume than you have today in order to capture and optimize those productivity gains?

It's a really important question. Let me first say, I don't think -- I think that we need volume, but I think that we have volume. So I'm not making an argument that we need more volume in order to run through. I think that we have that high level of volume that will enable us to learn. But what I did try to articulate is, I don't care if you look at the technology companies that are self-made as technology companies like Amazon, like Meta, like Google, like -- if you look at those companies, the amount of money that they invested to become what they were and before they ever saw $1 of profit was enormous.

If you then back up and look at the companies like Home Depot and Walmart that on an old chassis, they put a brand-new engine to enable than to be prepared for a digital future. The dollars that were invested by those companies was not just numbers of dollars, but it was management time, it was general overhead, it was focus and attention. I'm not sure that any of these companies did what they did in the context of a softening market.

And so the coincidence of -- we didn't start what we're doing in a softer market, but we're traversing a softer market as we are building these components that we think position our company to be very unusual within the industry. And it just takes time, it takes attention, it takes overhead to get the programs working well. But if I look back at the time that I said we are developing the Machine, and you should all come here and see what we're doing to today, the advances have been breathtaking.

And they're critically important. The problem is in a descending market. It's hard to see what we're actually doing. But our grasp on the numbers, moment by moment, day by day, of what's coming through our system and how we're set up for sale and how marketing is driving the sales component that we're looking at. If I think about the response time and the quality of engagement with our digital customers. These things are, I'm going to say, revolutionary in terms of what we're used to as a company, and we're learning every day.

So we're pretty enthusiastic about what we're doing in these spaces. And we are engaging top-flight professionals to work with us so that we are learning -- we don't know what we don't know. We're learning what we don't know. As we migrate forward, it takes time. We're not there yet. And we probably will never be there, but we're getting closer, and we're adding efficiencies to our program even as we build the systems. Sorry for the long-winded answer.

Next, we'll go to the line of John Lovallo from UBS.

The first one is, I guess, I understand that you guys are working through some older land assets, and you guys talked about the land management system today that you're developing. You've also been very clear about what you believe to be the benefits of the even flow model. But I guess what I'm curious about is what margins and returns are you putting capital to work at today?

Well, interesting question. Look, anything that we're buying today is going to come through the system maybe a year or 2 years from now. We are working through some older land assets. But even as we work through those land assets, we are reworking and focusing on the horizontal development costs associated with that. And that can be as expensive as the land asset itself. As we look to put assets to work today, just remember that in a declining market, what we might underwrite today might still move around. Jon, how would you handle this?

Well, it will vary by market, obviously. But I'd say we're trying to adhere to finding our way to -- on a 20% gross margin as we do our underwriting with the expectation as you heard from Stuart and myself of recalibrating, driving down our cost structure as a buffer against the market conditions.

But just remember that because our land assets are generally much shorter term than they ever were historically, we are running through over shorter periods of time, those land assets and reloading with newly configured land assets on a regular basis. And that rotation means that we might suffer from some lower margins for a period of time. But over time, there will be a turnaround. Home prices presumably will start to migrate up and that notion will turn on itself where margins will be improved. Fred, do you want to add to that at all?

Yes. I think we're also exhibiting quite a bit of patience as we look at deals today, and be very selective as we fine-tune our negotiating skills again and bring back the lessons that we've learned over the many years at Lennar to buy land at the right price and most importantly, right now, on the right terms. So we're not taking down large tracks we're buying just in time, and we're being very selective in what market we're pursuing.

Great point because we've spent a lot of time with this. When you go from strong market conditions and maybe even overheated market conditions, the ability to negotiate and to really make sure that the terms, conditions and pricing are right, really becomes almost impossible. When you then migrate to slower conditions that we're in right now, we have to reeducate ourselves and start incorporating some of those old skills that are critically important. And that's exactly what we've been doing.

That's why I mentioned in my comments, just at the shorter term, but also at our high-volume, we generate cash flow for land sellers in a market that the macro conditions are slowing down. And so it's a very different environment today than what we've been through for the past 3 years.

Okay. Yes, that's helpful color. And it looks like homebuilding cash flow from ops was about $1 billion outflow in the second quarter and what's typically a positive quarter. Can you provide any color around the moving pieces there?

Yes, sure. I think what you're seeing, John, is just the impact of the lower average sales price for a variety of reasons and also just some lingering remnants of the Millrose spin-off. So the cash flow is really most dependent on our ASP and the margin -- the bottom line margin. And you've seen that sales are both challenged in the second quarter.

Look, in the context of our Millrose spin-off, which is still fresh, and some of the ins and outs that derive from that. We're still going through some of those reconciliations, and you're seeing our numbers move around. It will probably be another quarter of that. But we're really migrating to a strong cash flow environment.

Yes, continued cash flow. I think that's really important. As we're turning the assets, right? It's one of the most important components of cash flow. So the nominal amount moves around a little bit, but consistent cash flow is definitely our goal.

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

My question is on the core product. Can you talk a bit about where you are in terms of integrating that into the business, how that perhaps benefited the improvement in inventory turns that you saw this quarter? And how we should think about the path to you really sort of fully integrating that into the strategy?

Susan, this is Jon, our core product continues to be rolled out across our divisions. It now represents about 1/3 of our starts. And yes, so way of example, it is more efficient from a cost and cycle time perspective. So we expect actually about almost a 20-day improvement in cycle time between noncore to core product as it is designed and engineered to maximize efficiency of both the build process and the cost to build. And so we're seeing continued improvement, and it just takes some time to roll out across all of our product portfolio. We started at a more entry-level price-sensitive products, knowing how important it is to deal with price sensitivity there. And now we are in the midst of designing product we're rolling out for move-up product and attached product like town homes.

Okay. That's helpful. And then maybe looking out further with that, do you think you can eventually get to 3x inventory turns? Or where can you get to with the turns? And what kind of an environment would you need to see that? And how does that work into the cash generation of the business over time?

It's interesting that you're bringing this up. We didn't spend a lot of time on core product today, but it is a core focus. And that's exactly where our focus becomes. Now it's going to take us a little bit of time, but we're definitely looking at a 3x kind of turn as a north star for the company and maybe beyond that. We think that there's still a lot of levers to pull our core product focus, something, again, is a drumbeat on a regular basis through our division, and it will make a meaningful impact in our ability to improve our inventory turns.

So we kind of adjusted our discussion today towards some other things. And it's a lot like the machine that we brought back up today. 2 years ago, we were talking about it pretty regularly. And then we just went kind of quiet with it. The same thing with core. It is happening every day in the company, but it's not something that we need to talk about. You'll hear more about it over time.

Why don't we take our last question.

And for the last question, we'll go to the line of Michael Rehaut from JPMorgan.

Wanted to first dive in a little bit to the SG&A. You kind of highlighted different drivers of the SG&A move year-over-year, quarter-to-quarter. And even in the press release, initially in the press release earlier on the rise in SG&A was tied to a further investment and an engagement in future efficiencies. But later on in the press release, you said the rise was primarily due to less leverage due to lower revenues and an increase in marketing and selling expenses.

So I just wanted to dive in a little bit to that line item and understand when you talk about low 8s and about up 100, 150 basis points roughly over the first half of this year versus last year. Is it more the investments that we're talking about? Or is it more due to the increase in marketing and selling and sales commissions and other marketing -- market-related -- housing market-related drivers?

So Mike, you're right on. It's really all of the above. The reduction in average sales price and in revenues, that's just math. And we're just pointing out the obvious math. But underlying our very, very strong and high SG&A levels and corporate for that matter, is the fact that we are running through those items some significant time, attention, investment, specific dollar outlays, but additionally, additional overhead people that are working on these programs that we think build lasting efficiencies.

We believe that the return on that investment is going to, in the rear view mirror, look very, very attractive. But as you're building these models and programs, it's very hard to be able to identify what that return is going to be, but the investment is nonetheless still there and running through the system. And as I said, and this is the tricky part is most companies that have rebuilt systems and spent significant dollars have done it in the context of fairly strong market conditions. And decidedly, right now, we are in an industry that is going through a bit of an industry recession. And therefore, I'd just say that it's unusually high dollar spent on technology at a time when the market is pulling back. So you do have some of that math issue as well.

Okay. I appreciate that. And I guess, secondly, just on the gross margin. I just want to understand kind of what's in that and when you give the guidance for next quarter, what is it and not in that? So what I'm referring to specifically is, first of all, the Millrose dividend payments or option deposit payments I think annualized of around $500 million. Is that full annualized impact at this point, fully reflected in the 18%? Or is that something that might be a headwind for next year?

And secondly, when you give the 18% gross margin guidance, is that also inclusive of the 20 bps of purchase accounting?

So Mike, I'll take that. The first one. So let's talk about the purchase accounting, pretty negligible for the third quarter. So I think you can kind of take that off the table. As far as the auction maintenance fees, remember, since we started our land banking program 5 -- 4, 5 years ago, that's been embedded in the cost. Now of course, with the spin-off of Millrose, there is that additional fee. But yes, it's all included in the margin guidance that we give. And as Stuart and Jon has been really pointing out all of the pressures, whether it's the market, option fees, all really just keep us incredibly focused on cost efficiencies to offset any of the negative that are in the gross margin. So it's really not just additional option fees. That's one component. But all of the headwinds are why we're so passionate about making sure that we're focused on cost efficiencies.

I think that one of the things that we've done particularly well, given our financial group and the integrity that is wrapped in that financial group. The -- looking forward and looking backwards is the same, it is consistent. The way that we look at margin is consistent. There are no moving pieces that are changing the way forward versus what we're doing right now. It's exactly consistent with what we've been doing. So you're really looking at apples for apples in the evaluation.

And if you look at the way that we're thinking about margin, again, we know the market is soft. We know the market is difficult. We are injecting some important shavings or cost alterations in the negotiating that we're bringing to whether it's horizontal costs, vertical costs or SG&A costs. We are working through how do we make an attractive for at least appropriate margin given where market affordability is the product that we have to build and building it on a more efficient basis and at a lower cost. That's what you're seeing in our margin, and that's how we're approaching the business.

So with that, Mike, thank you, and thank you, everyone, for joining. We look forward to coming back in the third quarter reporting again. Have a nice day.

That concludes Lennar's Second Quarter Earnings Conference Call. Thank you all for participating. You may disconnect your lines, and please enjoy the rest of your day.