Lennar Corporation Class B 2026 Q3 Earnings Call

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.

Thank you. Good morning, everyone, and thanks for joining us today. I am in Miami today together with Diane Bessette, our Chief Financial Officer, David Collins, our Controller and Vice President, who you just heard from, Katherine Lee Martin, our Chief Legal Officer, Jim Parker, our Chief Operating Officer, and David Grove, our Executive Vice President for Homebuilding. Similar to last quarter, Jim and David, who jointly oversee our operations across the country, are here with me and will participate in our question and answer period. As usual, I am going to give a macro and strategic overview of the company, and Diane is going to give a detailed financial overview and guidance for the fourth quarter 2026. Then we will open it up for questions, and as always, please limit to one question and one follow-up.

Let me begin by saying that we believe our third quarter 2026 results represent continued and consistent operational execution in a market that has, if anything, gotten more difficult since we last spoke in June. I think that our press release pretty much covers the summary of the quarter, but I am going to try to give some additional color. As noted in the release, we delivered 20,840 homes within our guidance range of 20,500 to 21,500. We generated 20,879 new orders, just below our range of 21,000 to 22,000. Our gross margin improved sequentially to 15.8%, as our sales incentives rate on deliveries came down to 12%. Our net margin improved to 6.6%, and our earnings per share came in at $1.19 on a GAAP basis and $1.23 excluding one-time items. Nevertheless, interest rates and consumer confidence constrained the improvement that we anticipated going into the quarter.

Let me briefly discuss the overall housing market. Generally speaking, the housing market remains constructive as the housing shortage that has persisted for the past decade plus continues to limit availability and drive the need for more supply. While market conditions are certainly not terrible, as can be seen from our rather strong volume, the market becomes more difficult as interest rates test affordability, particularly within our price ranges. During our third quarter, interest rates moved in the wrong direction. At our last call, the 30-year fixed rate was sitting between 6.4% and 6.5%. Today, it is at approximately 7%, with the 10-year Treasury hovering right around 5%. The modest relief we saw earlier in the year has reversed, and the buyer at median family income is stretching well past 30% of gross income to carry a home.

Fewer families can afford to both produce a down payment and qualify for a mortgage. As in many of our markets, almost 50% of our visitors cannot immediately qualify. Buyers are clearly stretching to try to afford the stability of a home, and of course, we are adjusting our price and incentives in order to enable them. Second, the driver of rate moves is inflation, and the current driver of inflation is energy. Of course, everyone knows that the conflict in Iran has kept oil supply disrupted, and it doesn't look like there's an imminent end in sight. As we heard from the Fed yesterday, the data suggests that inflation is not subsiding. Inflation, of course, is a double-edged sword in that it both increases the basic cost of living while also driving up interest rates.

When families are paying more at the pump and more for electricity, their willingness to make the largest financial commitment of their lives moderates, even when their underlying desire to own has not changed at all. Accordingly, consumer confidence has been moderating as both interest rates test the boundary of affordability while inflation increases the cost of living. Third, the Federal Reserve's assistance is clearly off the table for practical purposes and not a near-term source of relief. While this was clearly the hope of some, yesterday's rate hike clearly demonstrates that the Fed will continue to be data-driven. Rate cuts, when they eventually come, will be a meaningful tailwind for our business. But we are not holding our breath or waiting for them, and we are not building our business plan around those rate cuts.

Fourth, the resale seller has become a more aggressive competitor for our customer, especially at our price range. Resale supply has continued to rebuild and is now very competitive in price. Active listings nationally are back above historic levels. In Texas and in Florida, they are particularly high. Those are our two largest markets and states. When a resale seller cuts price, they are competing directly for our customer and we respond, which is a meaningful part of the incentive and pricing dynamic you see in our South Central and Southeast markets. On the cost side of our world, while we continue to perform extremely well, labor availability has started to become more of an issue. Immigration enforcement and enthusiastic data center construction continue to create tightness in certain geographies. While we've been able to offset labor cost increases with efficiencies from scale, the pressure on cost is certainly building.

On the policy front, the federal government's engagement with housing affordability continues. I will repeat what I said in June. The level of attention being paid at the highest levels of government to this issue is unprecedented in my experience. Affordability has become a critical political issue. I continue to believe that meaningful federal and/or state action is likely, although I would also say that it has taken longer than I would have liked. We are pleased to see that the state and federal efforts to constrain institutional and investor purchases of single-family homes, both as single-family for rent and build-to-rent communities, seems to have been resolved in recent legislation. We continue to view those avenues of supply as long-term positives for housing and for the buying public, because they accommodate demand in local markets in ways that ultimately produce the very supply that this country is short of.

In summary, interest rates moved up. Inflation is driving rates up and consumer confidence down. The Fed is focused on data. The resale supply is competing harder. Additionally, even while our incentives are down and our margin is up, our cost structure is beginning to see pressure from short labor supply. While this is a difficult landscape, we are doing what we said we would do in a market that is just not helping. Against that backdrop, let me turn to our operating strategy. Our strategy has not changed. We remain focused on two priorities. First, driving consistent, even flow production and volume in order to effectively manage our cost structure, and in order to monetize land that was underwritten in different market conditions. Second, continuously refining our asset-light, land-light balance sheet model to ultimately generate strong and growing cash flows and returns.

As to the first, across the Lennar platform, we have clarity that we price to market and maintain volume in order to meet demand at affordability. We offer the incentives our customers need to achieve the value they can afford, and we hold our production pace through the adjustment. That means we are compromising margin in order to maintain volume. Of course, we understand that this is a choice. It is deliberate, and it is not something the market is doing to us. It is not the choice that we made only to add needed supply to the supply-constrained market. It is also a strategic choice that has enabled us to drive construction costs down and to financially transform our business model and our balance sheet. Here is why we believe and continue to believe it is the right choice.

If you go back to 2023 as a baseline, our revenue per square foot is down 13%. Our construction cost per square foot in the same timeframe is down 14%. On the vertical side of this business, labor, materials, product design, cycle time, and overhead per unit, we have fully offset price with cost. That work is done, and it will continue to benefit the future of our business. Construction costs per foot have continued to improve and improved again this quarter to approximately $80 per square foot. That is down 6% from a year ago and down 14%, as I said before, from our fourth quarter of 2023. Our record cycle time of 116 days is down from 121 days last quarter and 126 days a year ago. That is evident that we are managing those dynamics very well.

Our carefully managed inventory level of 1.8 homes per active community reflects a well-balanced program with our starts pace and sales pace both at 4.1 homes per community per month. Over the same period, our land cost per homesite is up approximately 6%. Option maintenance fees have grown to reflect a true cost of capital across our asset base and for the duration that that capital is deployed. That is the entire margin gap. It is not labor, it is not material, it is not overhead. It is land. Land that was identified, underwritten, and committed to in very different market conditions. Land is the one input that we cannot re-engineer. We can only deliver through it.

Every home we close retires a homesite that was priced for a market that no longer exists and frees us up to replace it with a homesite priced for the market that we actually have. When we accept a 15.8% margin rather than holding out for something better, we are buying two things. We are buying volume, and volume is what converts expensive land into cash while we still produce positive margin, and we are buying time, because every quarter we move through that land at a lower margin is a quarter closer to normalized land basis. The alternative, holding price and selling fewer homes, leaves us carrying the same expensive land for longer and generating less cash, or perhaps writing off deposits with the same problem and less runway. We made the decision deliberately. We have been consistent about it every quarter.