Prepared remarks
Welcome to Lennar's Fourth Quarter Earnings Conference Call. 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, our new Chief Legal Officer; 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. Before we begin, however, let me note 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, and his leadership will certainly be missed. Jon has been known as our company's plow horse, driving 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 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. We are very pleased to present Lennar's fourth quarter and year-end 2025 results against the backdrop of 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, grown market share, and reengineered our operating platform for a better and more efficient future when the market bottoms and normalizes. We are extremely well positioned with very strong market share in strategic markets, and our margin is leveraged to the upside. 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.
The coinciding 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 hesitant and limited by what they could afford to purchase. 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 sold in line with the low end of guidance, 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.
We are 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 keep an affordable cost structure, and we will find our floor and rebuild our margins as the overall housing market continues to remain short on supply.
Let me now turn to a quick macro view of the housing market. Consistent with our third quarter, the macro economy remained challenging through the fourth quarter. While mortgage rates drifted marginally lower, consumer confidence became even more challenged by economic uncertainties and 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. 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 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 present tangible, practical strategies that effectively confront these realities and restore affordability and access to homeownership for the broader population. Mayors and governors across the country both Republican and Democrat understand this and continue to view the housing shortage as a priority concern, pointing 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. Newly constructed homes have slowed recently, exacerbating the chronic supply shortage as builders have pulled back on production due to slow sales and affordability concerns. Short supply cannot 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, as 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 cannot 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.
Federal officials have initiated discussions with builders and industry associations among others to gain a comprehensive understanding of 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. 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. 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. I am confident that housing will emerge as a central element in addressing the affordability crisis and providing meaningful solutions for the future. Now let me turn to our results.
In our fourth quarter, we started 18,443 homes, 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 at a slower pace while incentivizing 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 to be lower, as is expected in the first quarter, between 15% and 16%, 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. 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. In my view, our results in the fourth quarter, two 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, and our overall inventory has been reduced from just under $20 billion one year ago to just under $12 billion today. We have also consistently reduced our vertical construction costs over the past two 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. We have positioned Lennar for the time when market conditions normalize and our margins 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, and 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 one-time paper loss, this paper result was simply a function of the book value of the shares on Lennar's books 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.
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 many of our leaders have worked together with Jon and are very prepared to pick up where he leaves off. Specifically, Jim Parker and David Grove, both tenured Regional Presidents, will each oversee operations for about half 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 three of these leaders, Jim, David, and Greg, are very enthusiastic about their new opportunities and anxious to get started. We will not be hiring a replacement for Jon because the experienced leadership from within the company is part of the Lennar culture and all three are capable and qualified to carry the company forward without missing a step.
Let me 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, 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 very well positioned with a strong national footprint, growing community count, and increasing volumes. We have continued to drive production to meet the housing shortage that persists across our markets. 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. We have materially reduced our inventory, construction costs, and 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 strategic growth for our future. 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 the 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. 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. We ended the quarter with an average of just under three 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.
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, 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. The 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 by 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. Our Financial Services team contributed significant profitability, and most importantly, worked in partnership with our homebuilding teams to provide a great customer experience for each homebuyer. Now, let's turn to our balance sheet. The result of our 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 is just under 3 per community. Our inventory turn increased to 2.2x, and our return on inventory was approximately 20%. 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. 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. During the year, we used $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. 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. 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. The first quarter is historically the lightest delivery quarter of the year and therefore light on revenues. We typically see Q4 gross margins to Q1 gross margins in the following year decrease by 100 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 metrics, of course, are dependent on market conditions.
For the combined homebuilding, joint ventures, 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. 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. On a combined basis, these estimates should produce an EPS range of approximately $0.80 to $1.10 per share for the first quarter.
Questions and answers
Our first question comes from Alan Ratner from Zelman & Associates.
Thanks for all the details so far. I think gross margin is on the top of everybody's minds, and you walked through a lot of the moving pieces there. It's encouraging to hear that incentives actually ticked lower in the quarter. 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 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 reduction in incentives.
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. That definitely challenged our ability, particularly in some markets, to stabilize pricing. So we saw some impact in terms of what we accomplished versus what we expected because of what was happening in real-time in the marketplace. It varies across the country. The government shutdown had a material effect on the consumer psychology. Our feeling is that the government shutdown had a meaningful impact on the consumer sentiment going through the quarter.
As we started the quarter, the expectation was that with interest rates moving down a little, even with negative consumer confidence, the belief was that the incentive structures would come down through the quarter. We think that as we look through our numbers for next year, both incentives will be coming down, and the federal government is very focused on developing programming that activates affordability. What it'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 essential part of the economy. So we think incentives will come down through the year.
I appreciate the detail there. And Stuart, you spoke a lot about the administration's efforts recognizing there might be 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? Or is this something that is more of a multiyear view in your mind?
The crystal ball around government activity is complicated. A number of homebuilders have gone in to see critical officials within the government. We have received a lot of attention from them. You've seen trial balloons put around various types of programs. The government has been very tuned in to the industry to ensure they are not walking into unintended consequences. Do I think that something will come out in 2026? I'd be surprised if something isn't done. I believe affordability is very much on the table, and politically, it’s important that someone do something about it.
Given your strategy of maintaining volume and focusing on cost and efficiency, how do you envision the upside in your ability to recapture margin as the market improves, particularly considering the changes made over the past few years?
If you buy into the notion that there is a supply shortage, we believe that there is a significant supply shortage. If you believe that there is pent-up demand that is not able to activate itself because of affordability, as we maintain volume over time, we're going to figure out and push our large enterprise to rationalize its cost structure. We're focused on using modern technologies and building efficiencies in everything we do. We think there is a clear path to margin improvement. There will be a reconciliation of incentives, and we expect that gap to provide us margin growth.
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. This allows us to leverage volume and technologies to be the most efficient manufacturer possible.
How should we think about community count growth versus absorption, and your performance versus the market?
We're continuing to focus on community count growth. If you look at our volume growth, at 82,500 homes delivered last year, it's about a 3% growth rate, and we expect similar growth this year. Much of that will come from additional community count in strategic markets. It's about building the volume the consumers need while maintaining affordability and finding ways to improve operational efficiencies.
Are you anticipating government actions to improve affordability? With your focus on volume while peers have dialed back, can you harness margin improvement from lower incentives without needing to increase your volume?
That is what we're laying out. The reality is we don't have to restart the machine; it's running efficiently. We need to accept a lower incentive structure for margin to grow. We are levered to the upside in terms of margin growth.
Your approach to the market has been prioritizing supply. Where are you in that journey of trying to establish a floor on margin? If demand remains weak, would you consider easing back on some of your delivery aspirations?
We are committed to maintaining volume. We had an expectation of finding a stronger floor on margin, but market conditions are fluid. The government shutdown affected consumer stability, and it affects our expectations of what our margins would be. We're focused on volume as it enables us to build efficiencies for the future.
Depending on market conditions, you see us have a little more cash when there's uncertainty and less cash when that uncertainty ebbs. We will look at our maturities and adjust. Generally, as conditions stabilize, we'll hold less cash on our balance sheet. Cash flow is likely to be very solid as we improve our efficiencies.
Congratulations, Jon, you made it through your last earnings call. Thank you all for joining us today. We're enthusiastic about our business model and supplying homes to a difficult market. We believe we are levered to the upside for margin improvement and look forward to seeing where the market takes us.
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.