Prepared remarks
Welcome to Lennar's First 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 of 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.
Good morning, everyone, and thank you for being here today. We're in Miami, and I'm joined by our Chief Financial Officer Diane Bessette, Controller and Vice President David Collins, Chief Legal Officer Katherine Martin, CEO of Lennar Financial Services Bruce Gross, President of Lennox Eric Faders, and our new Area Presidents Jim Parker and David Grove, who are now overseeing operations across the company. As you're aware, Jon Jaffe retired earlier this year. While we miss him, our team’s experience and leadership ensure that we are continuing smoothly. Jon, if you're listening, everything is fine, and we hope you're enjoying the beach. We're working hard, and I assure you that Jim and David are adjusting well to their new roles, despite the challenges of today’s conference call. I will start with a brief overview of the macroeconomic and strategic landscape of our company. After my remarks, Jim and David will provide an operational overview, and then Diane will present a detailed financial overview along with guidance for the second quarter of 2026. Following that, we'll have a question-and-answer session. As mentioned in our press release last night, we are pleased to share our first-quarter 2026 results amid a persistently challenging housing market, which has intensified due to the volatility surrounding current events in the Middle East and a retreat by institutional buyers. Nevertheless, we believe we are closer to a turning point for Lennar than we have been in the past three years. In the first quarter, we maintained our focus on a clear strategy, consistently managing production and sales, and improving our asset-light manufacturing platform. We have not waited for the market to improve; instead, we focused on maintaining our volume while developing business programs to reduce costs and ensure profitability while meeting housing demand. Although our margins and bottom line reflect the current affordability-driven pressures in the housing market, we observed ongoing improvements in our cost structure, positioning us to stabilize and enhance margins as we continue to serve the market's needs. Despite market challenges, we are optimistic about our standing in key markets and the advancements made in adjusting our business practices to current conditions. Now, let's take a macro view of the overall housing market. The economy presents a complex environment for housing, with high home prices outpacing wage growth and mortgage rates remaining over 6%. This creates a significant affordability challenge for buyers, alongside a consumer confidence that is under strain from various uncertainties both domestically and internationally. Furthermore, the conflict in the Middle East adds unpredictability, potentially leading to increased gas prices and inflation. Job security has come into question for many consumers, particularly as the rapid advancement of artificial intelligence raises concerns about the future workforce. This uncertainty affects household budgets and leads to hesitance regarding large purchases, especially homes. While traffic remains steady in our communities, urgency in transactions has moderated. Furthermore, issues like tariffs and immigration continue to inflate material and labor costs. We are actively addressing these pressures through our partnerships and operational efficiencies, but overall costs in the industry remain challenging to manage. Recently, the federal government's actions regarding housing have been limited. Institutional buyers, who historically make up 5% to 7% of new home purchases, have decreased due to political pressures and public sentiment. This shift could result in reduced demand and signal the need for less supply construction. On a positive note, the federal government is increasingly engaging in discussions surrounding housing affordability, which is a notable development. Although proposed legislation like the 21st Century Housing Act may not have immediate impacts on the housing market, longer-term effects seem more plausible. In summary, the housing market faces tensions between demand and affordability, with supply remaining critically short due to years of underproduction. While current conditions keep the market soft, we anticipate a gradual recovery. Turning to Lennar's operational strategy, our focus remains on three key areas: driving consistent volume for operational efficiency, refining our asset-light balance sheet for strong returns, and utilizing technology to enhance both operations and customer experience. We are committed to reducing costs this year by leveraging these focus areas. Recognizing the current state of the market, we are actively adapting rather than awaiting a reset. Progress is evident in our cost efficiencies, technology initiatives, and marketing enhancements. Our relationships with land banks continue to strengthen, providing timely home site deliveries that support our manufacturing model. Financially, we ended the quarter with a strong balance sheet, maintaining flexibility for growth and capital returns. Although the housing market remains challenging, our numbers show promise. Costs are decreasing and volumes are steady, positioning us well for future improvements. We believe that once mortgage rates normalize, pent-up demand will surge, driving rapid margin recovery. We are not only focused on current market challenges but are also building a better future for the company. Our strong team, dedication to quality, and mission to provide affordable homes remain steadfast. Now, I'll hand it over to Jim Parker for his update.
Thanks, Stuart, and good morning, everyone. I am Jim Parker, Lennar's Area President for the Eastern half of the country. I joined Lennar about eight years ago through the CalAtlantic transaction and have over 30 years of experience in homebuilding. David and I have collaborated to enhance performance across the Lennar platform, and you will hear from David shortly. I want to express my enthusiasm about where we are as a company and the remarkable progress we've made in the past 3.5 years. Although the market has faced challenges since interest rates increased in 2022, we have implemented a clear and well-communicated plan at Lennar and have executed it in a coordinated manner. The housing market has been adjusting due to high prices following COVID and rising interest rates, which have impacted affordability and homebuyer confidence in our regions. Rather than waiting for the market to stabilize, we view this as a new normal and have adapted our business strategies to meet the volume the market requires at competitive prices and incentives. We are focused on improving our products, optimizing our everything's included packages, rebuilding margins, and using mortgage rate buy-downs to maintain or regain momentum. In our first quarter, we are seeing early indications of a more consistent demand environment. We will continue to monitor how this develops amidst the new geopolitical challenges. Over the next three weeks, David and I will visit each of our divisions for our quarterly operations reviews, which occur at the start of each quarter. This is an exciting time as we assess the market locally; we gain insight into how our leaders think, react to changes, and represent Lennar. These sessions help us align macro perspectives with field realities, ensuring our decisions reflect the actual situation. The reviews also allow us to discuss effective strategies in real time. The ongoing discussions are collaborative and rewarding, enabling us to continuously refine our approach and stay aligned with the changing conditions and needs of each market. These conversations focus not only on metrics but on people. We observe our talent in action and gain insight into how each operator engages with landowners, developers, trade partners, and customers. These relationships are crucial for securing land, maintaining cost control, and expanding market share. Following our people, land is our most essential asset, and we remain actively involved in developing a disciplined land strategy in every submarket to grow our community count, reduce absorption pressures, and improve margins. We also examine how we are connecting with customers via our marketing and sales efforts, utilizing tools like RILA to gather real-time buyer feedback, and applying our dynamic pricing system with everything's included platform. This collaborative method helps us align product offerings, monthly payments, and value to meet today’s buyer needs while strategically reducing incentives and rebuilding our margins. This business strategy and local focus have enabled Lennar to maintain a strong market position. We are the number one builder by market share in 22 of the top 50 homebuilding markets and among the top three in 42 of those markets. This leadership showcases our volume-first, value-driven approach and the robustness of Lennar's operations. We concluded Q1 with 1,678 active communities, reflecting a 6% increase from the previous year. With this growth, we continue to adjust our pricing and decrease our incentives. Ultimately, we manage this business hands-on as one unified Lennar. By staying close to our operators, customers, and aligning around land, product, and execution, we achieve consistency throughout the company. I take pride in the discipline and momentum our teams are establishing and look forward to carrying this into the remainder of the year. Now, I’ll turn it over to David.
Thanks, Jim. Good morning, everyone. I'm David Grove, and 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 operations. So 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 in 12 of the last 13 quarters sequentially, and we are down 12% over the last two years. Our direct costs 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 have 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 the 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 $3.60 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 leads, which represent the highest intent buyers in our funnel, increased 10% year-over-year. Once the 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 the prior quarter and a 71% improvement year-over-year. This response time 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 to drive improvement. As a result of refined targeting, faster response time, and higher quality engagement, our digitally driven sales appointments increased 11% from our prior quarter and 17% from Q1 '25, which helped 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 price 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 a reminder, we ended our first quarter with three completed unsold homes per community. In conclusion, our team is focused on executing our strategies that drive improving customer acquisition results, reduce direct costs, and enhance operational efficiencies. These efforts, among others, are delivering measurable results and position us for future success.
Before we go forward, Diane, great job guys. But David, how many years have you been with the company?
27.
I want to ensure everyone is aware that Jim has 30 years in the industry and 8 years with Lennar through the CalAtlantic program, while David has been with Lennar for 27 years.
Homegrown.
Carry on.
Okay. Good morning, everyone. So Stuart, Jim, and David have provided a great deal of color regarding our operating performance. 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. 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 divisions, 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 supply of owned homesites was at 0.1 year, and our homesites controlled percentage was 98%. This configuration significantly lowered 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 option 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 a 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 three 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 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 approximately $20 million in earnings from our Financial Services business and for our multifamily business, we expect earnings around $10 million. Turning to another category, we expect a loss of approximately $25 million, 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. 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.
Questions and answers
And our first question comes from Alan Ratner from Zelman & Associates.
Thanks for the detail, and David and Jim did a 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 in 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 had right now today is that immediately after this call, both Jim and David, as Jim carefully described, will be 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 if a long-term program, what they're 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, this week we're observing a similar demand pattern to what we experienced in the past couple of weeks. There hasn't been any significant negative impact, which is encouraging given the current macroeconomic conditions.
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've known 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 on 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 exchanges and maybe some of the headcount changes, I guess, that have gone on in the last several quarters. I 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 are working on. And even the things where we missed that and went down bed adds 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 that. We've known this for a month. 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 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 and 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.
Appreciate it. Thanks, as usual, for all the info. 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, given all the technology initiatives as well. I'm curious, is it based on a certain market share? Or is it more of a bottoms-up 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 get the efficiencies that you needed because industry starts were down high single digits segment. You happen to gain a lot of share. 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 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 where you would willingly relinquish some market share, 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. When you look at the 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, and they're all very market specific. We don't have a specific mandate to grow market share, but we do recognize that with advantaged market share, we can work with trade partners and landholders to do a better job of negotiating. So I'm going to turn it 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, certainly. I would say that market share, as we define it, is based on our positioning in the market and our targets. However, that's not the main factor driving what you're inquiring about. Our consistent volume comes from how we carefully assemble each of our land positions and communities, and we have early expectations of achieving a certain pace. Our current strategy is to sustain that pace, with increased market share being a result of maintaining that pace on a community-by-community level alongside our underwriting, while competitors tend to slow down a bit.
Yes. I believe our trade partners play a crucial role in our approach, which is fundamentally built from the ground up. It all begins with planning the community and determining the ideal absorption rate, from which we develop our strategies. The more effectively we collaborate with trade partners and land sellers, the more growth naturally follows. This leads to increased interest in various communities in the future. It all connects, but I want to emphasize that it's not about adhering to a specific target; rather, it’s about nurturing the communities as we expand. That’s what truly propels our market share. We are focused on smart growth while working towards achieving an absorption rate that aligns with market conditions.
And I just have to say that the volatility embedded in putting our foot on the accelerator, taking it off, putting on the brake, back and forth, only creates inefficiencies in the development process, construction process, and all the processes. If we can build the tangibility for our trade partners, and even for land partners, we can get the best pricing, and we're using that to our advantage. In 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, focusing not on answering competitive information or contextualizing it in terms of how can we rationalize affordability with the 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 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 in 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 build affordability for the future.
Got you. That's very helpful. I appreciate that. I guess my second question has to do with volume through the year. So you've 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. 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 or 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 to what the market is allowing us to do. We don't want to break the market until it's a balancing act. And that's why I say it's not a science.
Yes. This is a top priority for the divisions. We begin this process even before the year starts with our early forecasting. We examine the different quarters and try to balance them as much as possible. It ultimately focuses on land and timely community openings without delays. I believe we're improving in that area. It involves looking ahead 18 months to evaluate the quarters, which helps us determine our community count, what needs to be prioritized, and how to address Northeast markets in terms of accelerating home site development using various methods to manage weather challenges. It truly begins with planning. You can see divisions that excel in this; they have an incredibly effective branding machine.
To 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 now.
And our pricing mechanism, our pricing tool is primarily focused on getting a tactile sense of where the customer is and where affordability lies. This is our primary driver in our day-to-day hands-on pricing across 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 new areas of focus that you're really looking to achieve as we move through the next several quarters?
Well, not only that's a good question, it'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 we've gone through, separating land from homebuilding balance sheets, is really interesting. It's getting more interesting by the day. If you think about risk-adjusted pricing for capital when you look at risk profiles and separate risk profiles, there's a field of opportunity to rationalize the costs 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, trying to find the right bucket for the right land to maximize or minimize the capital costs and option costs associated. But additionally, we think that over time by taking a capital market 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've 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.
I want to highlight the significance of our core product in this discussion. As we focus on developing fewer products repeatedly, we will enhance our efficiency. Our cycle times have decreased year-over-year from 137 days to 122 days, and quarter-over-quarter from 126 to 122. We are concentrating on improving our field operations by leveraging core products. What would you suggest discussing in relation to this?
I believe that our core product is not only leading to reductions in cycle time, but it will continue to improve over time. It also assists us in streamlining our cost structure with a couple of core products that are designed efficiently within our all-inclusive packages. This allows us to leverage our purchasing structure and take advantage of our scale. Together, the combination of volume, core product efficiency, and production is resulting in lower costs and quicker cycle times, which will enhance our inventory turnover. 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; they say, well, that's great, but why is Greenville at 96? They come back the next quarter and even hit it harder. So it's become a very badge of honor. And the core plans just make us more efficient for our trades to build. They know they get repetition, and inspections go smoother. 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 coordinating dance of building homes; some of our divisions are really paving the new ground to improve that cycle time in a very constructive way.
Yes. And the best thing is quality is improved with cycle time. It becomes so much more efficient.
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 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 will merge the company using technology towards greater and greater use of core plans. Now you can imagine if we're talking about the 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 we monitor technologies across 50 divisions coast-to-coast and get that entire enterprise to push towards core plan; it is going to be technology that really drives us forward. Is there anything that you guys would say about where core plans are percentage-wise and how we are migrating through your views 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%, 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 usage in the first quarter. It seems like it was largely attributable to inventory, which was a bit surprising given that you started and 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 a pretty strong conversion in 2026?
It probably relates most to average sales price coming down.
Yes, I think so, John. We are very focused on pricing to market. Our incentives are at a higher level. While we are experiencing cost savings that are increasing cash, it’s challenging to outpace the lower revenue on a per home basis. We need to continue purchasing homesites to maintain production. You will notice some improvement in matching against the progress of the quarters, but the first quarter will still show lower revenue due to fewer deliveries. This is somewhat unusual for the year.
I understand. Given the dynamic nature of the current market, I wanted to follow up on Steve's question. The target of 85,000 deliveries suggests that you intend to initiate more home builds than you have orders for in the second quarter, and then work through that inventory in the latter half of the year. If that's accurate, what factors are contributing to the significantly higher delivery projections for the second half compared to what’s indicated for the second quarter?
So first of all, let me say, we clearly have question marks around the two things that I detailed as things that have happened in the short term that have kind of changed the landscape. Of course, turmoil in the Middle East has everybody's attention, and we have a question mark: what that going to do? How is it going to ripple through? And number two, the sidelining of the institutional investor is another component of that. There are a lot of people thinking about it. If the institutional investors are 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. 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, base optimism that I've been getting from both David and Jim about the configuration of our business.
I think it comes down to the steadiness we see in many markets. More importantly, we notice the enthusiasm among our associates as they begin to recognize the benefits of our various programs. A quick example is virtual customer care. In recent operations meetings across three divisions, everyone mentioned how, although they initially faced challenges, they are now experiencing improvements in efficiency, customer experience, and response times. Our teams are increasingly embracing the initiatives we've been working on for years, and the resulting optimism is energizing many people. This positive momentum is what is driving our progress.
I just said that we have the privilege right now of having the time to read what the market gives us over the next few months within this environment. 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.
Well, I think that generally speaking, the unified view right now is it is definitely within our scope and within the opportunity set. 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. Of course, that very careful dance that we dance of having corporate time to the individuals and the divisions that are actually seeing what's happening on the ground. I think there's a general sense of optimism about our ability to do as good as the market allows. 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 make it through their first traumatic conference call. 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 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.