管理層發言
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.
Very good. Good morning, everybody, and thanks 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; and Fred Rothman, our Chief Operating Officer. As usual, today, I'm going to give a brief 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 operating positions. As usual, Diane is going to give a detailed financial highlight, along with some limited guidance for the second quarter of 2025. And then, of course, we'll have our question-and-answer period. And as usual, I'd like to ask you to please limit to one question and one follow-up so we can accommodate as many as possible. So let me begin. As we noted in our press release last night, we're very pleased to review our 2025 first quarter results against the backdrop of a challenging economic environment for the housing market.
We adhere to our strategy and focus on driving consistent volume and growth by matching sales and production base and using our margin as a circuit breaker. We completed our Moro spin-off, distributing shares to our shareholders and supporting our transition to an asset-light land-light model, and we completed our Rausch Coleman acquisition using our asset-light model as we expand into new markets. While margin and earnings have been adjusting to movements in the overall housing market, we are confident that our focus on volume and even flow will position us very well for resilience, durability, and growth in the future. Let me briefly discuss the overall housing market. Consistent with last quarter's earnings call, the macro economy remains challenging as mortgage interest rates have remained higher for longer, which has left the overall housing market weaker for longer. Across the housing landscape, actionable demand has slowed materially.
On a bad news is good news basis, all of this has led to the long-awaited environment where the costs of both homes, new and existing, and apartments start to come down. As we noted in our press release, our average sales price this quarter net of incentives declined to $408,000, 1% lower than last year. Evidence suggests that the time is now and the sticky and large housing component of inflation might soon contribute to curtail the last mile to the 2% target. While underlying demand for homes remains strong, actionable demand is limited by affordability and credit, which remained challenged by limited funds for down payments as well as income qualification for mortgage. Most recently, even where household income indicates an approvable mortgage qualification, elevated personal debt levels have often presented as an additional impediment to already strained mortgage access. Additionally, until recently, consumers have been generally confident that they will remain employed and that their compensation is safe.
But more recently, even that safety has been called into question. A somewhat confused consumer and wavering consumer confidence have challenged the consumer's desire and ability to transact. While there continues to be considerable traffic of customers looking for homes, the urgency to actually transact remains tested. The overall supply of homes has also remained constrained by years of underproduction. Additional shortfall in production will likely be triggered by now music demand together with already existing restrictive land permitting and higher impact fees at local levels and higher construction costs across the housing landscape. Additionally, new approaches to both immigration and tariffs have potential limiting impact, and John will discuss this further in just a few minutes. In summary, the housing market has softened as affordability and consumer confidence have limited actionable demand.
Incentives have been increasing and net housing prices seem to be moderating. At very least, housing will not be contributing to inflationary pressures and while demand is constrained, supply is equally limited. Against this backdrop, let me turn to Lennar's operating strategy. Our strategy is and has remained very clear. That is simplify our business by focusing on the two core tenets of our operating strategy. Operationally, build and deliver consistent volume to maximize efficiencies. And financially drive asset-light land-light focus to build cash flow. Now that we have completed our Millrose spin-off, we have intensified our focus on each. First, we focus on consistent volume by matching our production pace with our sales pace. This means that as market conditions change to the positive or negative, we focus on driving and delivering consistent volume at the division level and at the community level in order to maximize efficiencies in construction costs and cycle times in SG&A and in all elements of marketing and sales.
We also strive to deliver consistent and even flow volume to our trade partners so they can be more efficient and deliver cost savings to us. While we are not there yet, we are getting better each quarter and will accelerate progress now that the spin is behind us. Our execution in the first quarter was materially better than in the fourth quarter last year when we missed our expectation on sales volume. This quarter, we did adjust and adapt to market conditions in real-time as we adjusted incentives and pricing. We achieved expected sales volume and we did not allow our inventory levels to spike. We are laser-focused on keeping sales volume up in order to catch up pace and find even flow in each division and each community. By maintaining this discipline, we will not build up inventory in either built homes or in developed home sites, and we will efficiently convert production to cash. As I noted last quarter, the catching up comes at a cost, and that cost is additional pressure on margins.
Accordingly, we have looked ahead to the second quarter of 2025 and as we look ahead to the second quarter of 2025, we expect to sell between 22,500 and 23,500 homes and deliver between 19,500 and 20,500 homes. We expect our margin to be approximately 18%, depending on market conditions, as we expect to continue to see margin pressure on deliveries 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 while maintaining properly sized inventory levels so that as market conditions stabilize or improve, we will benefit from normalized margins across our growing volume. On a side note, our margins are actually quite strong, except for the approximately 13% incentive we are using to enable affordability. These are outsized for the moment and normalized incentives should be around 5% to 6% and that would track to a normalized margin for a normalized margin to be in the mid-20s percent margin.
We remain focused on consistent volume in current market conditions, and we will be very well-positioned as the market normalizes. The second focus of our operating strategy is to refine our asset-light configuration. We are much closer to the completion of the strategic rework of our operating platform from being a traditional homebuilder with sizable land assets to becoming a pure-play land-light asset-light manufacturing model homebuilder that benefits from just-in-time delivery of fully developed homesites. The Millrose spin completed the backbone structure of that rework now we are and have the time to focus on refinement of that platform. With Millrose operational, we now have a strong complement of land bank partners that enable the land and land development activity that enables the just-in-time delivery of fully developed homesites as a manufacturer. Of course, each of these valued partners operate a little differently and has a different cost structure.
But with the diverse land trade partners, we will refine cost and execution over time. As with all of our trade partners, our land partners will benefit from our consistent and predictable volume and our cost structure will benefit as a direct result. As we've noted before, once refined, we have conviction that our structured asset-light land-light model enables far more predictable volume and growth with a much lower asset base and lower risk profile. We are confident that our operating strategies of consistent volume and an asset-light land-light just-in-time delivery system of developed homesites will continue to enable our company to be best positioned to rationalize our cost structure and be best positioned with strong volume as margins normalize. Let me turn back briefly to our first quarter 2025 results. As I noted earlier, we are quite pleased with the successes embedded in our first quarter results and accomplishments.
In our first quarter, we started 17,651 homes, delivered 17,834 homes, and sold 18,355 homes. As mortgage interest rates remained higher for longer and consumer confidence searched for footing, we drove volume with starts while we incentivized sales to enable affordability. As a result, during the first quarter, sales incentives rose to approximately 13%, reducing our gross margin to 18.7%. Our SG&A came in at 8.5%, which produced a net margin of 10.2%, although we were able to maintain construction costs and reduce cycle time, as Jon will detail shortly. We exceeded our sales and delivery expectations while we were able to grow our community count from 1,447 last quarter to 1,584 communities this quarter, including our Rausch Coleman acquisition, and we're better prepared for the remainder of the year. We continue to expect to deliver between 86,000 and 88,000 homes in 2025. Our results represent a consistent and strategic quarter of operating results in the context of a very difficult economic environment, all while completing a time-intensive Millrose spin and growing into new markets with the Rausch Coleman acquisition.
We clearly were able to walk into government at the same time. Additionally, on the positive side, we have driven our operating strategy to enable consistent cash flow, which has enabled us to strategically allocate capital. Our strategy has enabled us to repurchase another 5.2 million shares of stock for $703 million in the first quarter, while we continue to deliver a strong dividend. Additionally, we distributed as a dividend to Lennar shareholders, 80% of the shares of Millrose Property Corporation and through that Millrose ownership, they will receive a regular dividend while providing permanent capital, which will drive the future success of Lennar. As for the remaining 20% of the Millrose shares, Lennar will shortly dispose of that remaining 20% in either a further distribution of Millrose shares or at Lennar's option may execute a potential exchange for Lennar's shares which would basically effectuate a cashless buyback of Lennar shares.
Just to say this again, the additional 20% interest will be retained for a relatively brief period of time and will either be distributed or exchanged for Lennar shares to effectuate the cashless stock buyback. After our stock repurchases and dividends, we ended the quarter with $2.3 billion of cash on hand and an 8.9% debt-to-total capital ratio. We are well positioned after the Millrose spin to be able to continue to return capital to shareholders as we continue to grow our business. We are very well positioned from a balance sheet to an operating strategy to be able to adjust and address as the market unfolds as we execute through the year. So let me conclude and say that while this has been a constructive quarter for Lennar and while the short-term road ahead might still seem a little choppy, we're very optimistic about the longer-term road ahead. This has been a very exciting quarter for Lennar, and we couldn't be prouder of the work and dedication of our extraordinary associates who worked together to make it all happen.
Let me also take a minute to welcome to the team, the talented new members of Lennar who have joined from our Rausch Coleman combination. We couldn't be prouder to now have us all working together as one. Together, we've expanded our platform as we have upgraded the financial and operating platforms of Lennar and as we will continue to drive production and sales. We've continued to drive production to meet the housing shortage that we know persists across the market. And as interest rates normalize, we believe that pent-up demand will be activated and our margin will quickly recover. As a company, we are well prepared with a strong and growing national footprint, growing community count, and growing volume. Perhaps most importantly, our strong balance sheet and even stronger land banking relations afford us flexibility and opportunity to consider and execute thoughtful growth for our future.
In that regard, we will focus on our manufacturing model and continue to use our land partnerships to grow with a focus on high return on capital and on equity. We will also continue to focus our pure-play business model and reduce exposure to non-core assets. We will continue to drive to just-in-time home site delivery and an asset-light balance sheet. And as we complete our asset-light transformation, we will continue to refine our platform and generate strong cash flow and return capital to shareholders through dividends and stock buybacks while we also pursue strategic growth. With that, let me turn it over to Jon.
Thank you, and good morning, everyone. Stuart has highlighted for you our strategy of being a consistent high-volume homebuilding manufacturer. I'll further review this as I discuss our performance on sales pace, cost reduction and cycle time reduction, along with the execution of our asset-light demand strategy for the first quarter. As noted, our overall first quarter sales pace of 4.1 homes per community per month was right in line with our stock case of 4.0. This was accomplished with consistent starts and accurate cycle time, which determine the sales pace leaders at each community. Knowing the output of this production, our marketing and sales teams engaged Lennar's machine to turn digital needs into appointments and they convert appointments into sales. Throughout each week, we evaluate leads, appointments and sales activity to measure if we are on track to achieve the needed pace.
We continuously adjust to ensure we end the week not only with a targeted number of sales but the sales of the right home. If the community falls short on pace in any given week, there's a clear focus on taking action to course-correct and get back on pace. To drive the needed level of quality appointments, we focus on improving the experience for our customers to achieve higher conversion rates versus the alternative of chasing more top of funnel needs, which increases marketing spend. We believe our approach produces more qualified and motivated customer appointments, which we can convert into sales at higher conversion rates. During the quarter, as we moved past the beginning of February, we did not see the seasonal pickup typically associated with the beginning of the spring selling season. So we continued to lean into our machine, focusing on converting leads and appointments and adjusting incentives as needed to maintain sales pace.
These adjustments came in the form of mortgage rate buydowns, price reductions and closing cost assistance. In general, homebuyers in Florida and Texas, the two highest-volume states, needed more help than most other markets around the country. We needed more incentives in Florida and Texas markets to assist buyers achieve mortgage payments they can afford, as well as to offset both a slowing in-migration environment and increased inventory. All markets around the country require incentives to assist buyers in the current home buying environment. In this challenging macro environment, we utilized our machine, along with our dynamic pricing model, to identify unsold homes nearing completion. Appointments are set for those homes, and prices are established to achieve sales preventing the buildup of inventory. Accordingly, we ended the quarter with an average of about 2 unsold completed homes per community.
Our production team continued its stride of being an ever more efficient homebuilder, the disciplines of planning for and delivering consistent construction starts, designing efficient to build floor plans, deploying digitally enabled scheduling and quality control processes, and a well-trained construction management team, all allow for the development of meaningful strategic partnerships with our entire supply chain. The continuous improvement of these strategic relationships with our trade partners is the core of how we drive down both construction costs and cycle time quarter after quarter. In the first quarter, our construction costs were lower by 1% from Q4 and decreased on a year-over-year basis by 2.5%, to our lowest direct construction costs since Q3 of 2021. We expect this trend to continue for our second quarter and into the year. Also in our first quarter, cycle time decreased on average by 1 day sequentially from Q4 down to 137 calendar days on average for single-family detached homes.
This is a 17-day or 11% decrease year-over-year. We also expect continued improvement in cycle time reduction for our second quarter. As Stuart discussed, the execution of our strategy of matching our sales pace to our production pace required sales incentives of 13% in the quarter, about 700 basis points above normal. Our trade partners know that we are doing this to maintain production levels, which they benefit from greatly. Our trade partners work with us to reduce their operating costs and when needed to lower their margins. This is critical to our execution of reducing construction costs in each quarter. Let me address tariffs. We've been in discussions regarding the potential impacts of tariffs with our supply chain. These discussions all start with a review of margin reductions we have already taken. This leads to a constructive effort to identify alternative sourcing and material strategies.
Additionally, we prepare our trade partners to absorb potential increases to their supply chain costs in the event of tariffs. To date, we have had no impact to our costs from tariffs and we'll work closely with all our trade partners to address cost impacts should tariffs present themselves. Similarly, with respect to potential labor disruptions that could arise from immigration policy enforcement, our consistent high volume makes our construction a priority for our trade partners. Today, there's been no shortage of labor or impact to cycle time. Again, our strategic trade partners appreciate the financial impact on margins and maintaining our consistent high volume, and we expect to be as well-positioned as possible should any disruptions present themselves. As Stuart addressed and as Diane will provide further details, we have further executed on our asset-light strategy with the Millrose spin.
Post Millrose, we ended the quarter with our supply of owned homesites improving to 0.2 years, down from 1.3 years, and controlled homesites increasing to 98% from 77% a year ago. During the quarter, land bank acquired on behalf of about 29,000 home sites for about $1.8 billion and a commitment of about $1.1 billion in land development. We purchased during the quarter from our various land banks almost 15,000 homesites for about $1.6 billion. Operationally, our production-first discipline of even-flow starts allows for the planning and consistency of takedowns from land banks, providing for efficiencies in the operations of land management by both our land bank partners and ourselves. As we move forward, we are focusing on refining the efficiencies in and around the coordination of just-in-time land acquisitions by our land partners and us with the commencement of land development and/or home construction.
These improvements in the execution of all of our operating strategies enable capital and production efficiencies, leading to an improving inventory turn, which now stands at 1.7x versus 1.5x last year, a 13% increase. In our second quarter, we will continue to refine the execution of Lennar's marketing and sales machine, our even flow, high-volume production, and all land acquisition and development activities to be even more operationally and capital efficient. I also want to extend a welcome to our Rausch Coleman associates to the Lennar family and thank all of our Lennar associates for their hard work, focus, and dedication.
Thank you, Jon, and good morning, everyone. So Stuart and John have provided a great deal of color regarding our operating performance. Therefore, I am going to spend a few minutes summarizing balance sheet highlights and then provide estimates for the second quarter. So starting with the balance sheet. This quarter, once again, we were highly focused on turning our inventory and generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $2.3 billion of cash and no borrowings on our $3 billion revolving credit facility. This provided total liquidity of approximately $5.3 billion. As noted during our first quarter, we completed the distribution of shares of Millrose properties to our shareholders. As a result, we spun off from our balance sheet, $5.6 billion of land, representing 87,000 homesites and $1 billion of cash. With this strategic transaction, we completed the next milestone in our journey of becoming a land-light just-in-time manufacturer of homes and established a provider of recyclable cash for the future.
In addition, we also completed the acquisition of the homebuilding operations of Rausch Coleman homes, which extended our footprint into both new and existing markets. As a result of the Millrose and Rausch transaction, we ended the quarter owning 13,000 homesites and controlling 533,000 homesites for a total of 546,000 homesites. As Jon noted, this translated into our years owned supply improving to 0.2 years and our homesites controlled increasing to 98%, our lowest years owned and highest controlled percentage in our history. 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. As we look at ratios, our inventory churn was 1.7x, and our return on inventory was almost 30%. During the quarter, we started approximately 17,700 homes and ended the quarter with approximately 38,300 homes in inventory; this inventory number includes approximately 3,100 homes that were completed unsold, which is about 2 homes per community, well within our target historic range.
Turning to our debt position. We had no redemptions or repurchases of senior notes this quarter. Our net debt maturity of $500 million is not until May 2025. Our homebuilding debt to total capital was 8.9%, including the impact of the Millrose spinoff. Consistent with our commitment to increasing total shareholder returns, we repurchased 5.2 million of our outstanding shares for $703 million and we paid dividends totaling $132 million. This was, of course, in the distribution of the Millrose shares. Our stockholders' equity was just under $23 billion, and our book value per share was about $86. In summary, the strength of our balance sheet provides us with significant confidence and financial flexibility as we progress through 2025. So with that brief overview, I'd like to turn to Q2 and provide some guidance estimates. Starting with new orders. We expect Q2 new orders to be in the range of 22,500 to 23,500 homes as we match sales and production paces.
We anticipate our Q2 deliveries to be in the range of 19,500 to 20,500 with a continued focus on turning inventory into cash. Our Q2 average sales price on those deliveries should be about $390,000 to $400,000 as we continue to price to market to meet affordability. We expect our gross margin to be approximately 18%, which excludes purchase accounting, depending on market conditions. Margin is impacted by our use of incentives as a bridge to customers for affordably priced homes. Our SG&A percentage should be in the range of 8% to 8.2% to maintain sales activity, so for the combined homebuilding joint venture land sales and other categories, we expect a loss of about $15 million. We anticipate our financial services earnings to be in the range of $135 million to $145 million. For our multifamily segment, we expect to be about breakeven for the quarter. Then turning to other, we expect a loss of between $25 million to $30 million, excluding the impact of any potential mark-to-market adjustments for our public technology investments.
Our Q2 corporate G&A should be about 2% of total revenue, and our foundation contribution will be based on $1,000 per home delivery. We expect our Q2 tax rate to be approximately 25.3% and the weighted average share count should be approximately 261 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $1.80 to $2 per share for the quarter.
分析師問答
I appreciate the insights provided. My first question pertains to the long-term normalized margin you mentioned. Stuart, you referred to a gross margin in the mid-20s, and I was curious about what the operating margin might look like after accounting for corporate expenses. I assume you're considering a long-term corporate expense of around 1.5% or something similar, but it would be helpful to know what you envision for the normalized operating margin. Additionally, what does your plan look like for reducing SG&A and corporate expenses from their current elevated levels?
I think that across the board, Steve, you're really looking at efficiencies that are being brought to all elements of the business. especially in the wake of having spun Millrose, and some of the activity that just had to take place as we went through what was a time-intensive program. I think that all parts of our business are being relooked at and rerationalized. The simple math that I did was basically around the abnormally high level of incentives that are out there in the market right now to get to the volumes that enable us to realize on the efficiencies that we think we'll ultimately get. So I figured out what I think that normalized bottom line operating margin is going to be, but it's significantly higher than where we are right now, where we're basically having to incentivize affordability at a very elevated level.
Yes, Stephen, I guess I would just say, if you go back to kind of, no, our SG&A was probably around 7% versus 8% now. So I think that gives you a little bit of a framework. And our corporate G&A was about 1.5% versus 2%. The only thing I'd say there is that we do continue to invest in technology. We see that being a very important component. So that one is a little tougher to call, but agree with Stuart. I think that we're in a more elevated mode now than we will be in the future.
That’s an interesting question. We live in a dynamic housing market, and we'll need to reassess what normalized demand looks like as we go forward. Currently, our focus is very much on a community level. For the communities we operate in, we believe we are experiencing an absorption rate that aligns with what we consider normalized over time. Whether that changes is something we will have to observe. When examining the housing market, we note that we have been underproducing compared to what would be considered normalized production for the past decade and a half. This has contributed to a supply shortage, so with the current interest rates and the impact of inflation on affordability, we believe the market is undersupplied and that actual demand levels are significantly higher than what is currently actionable. This is what we are addressing. As the market evolves and factors like immigration come into play, our perspective may change, but we will have to see how that unfolds.
I would just add to Stuart's comments that as each new normal presents itself in the future, our machine is very clear, and we have the ability to focus on adjusting it rather quickly throughout the platform.
Okay. If you change your mind, you're saying you could make that adjustment fairly quickly, Jon. That's encouraging. Would you say that could happen within a few quarters, or is it something you could do even faster?
I think how quickly we'll move will depend on how what's happening relative to a new normal and how severe it might be. In most cycles, it's a much more gradual process and the adjustment is over several quarters. If we find ourselves in a place where we need to move faster, I feel comfortable we can do so.
I think the bottom line answer to the question is we can adjust our production levels and therefore, our sales pace pretty quickly. That would probably take a quarter or two. So we can make those adjustments pretty nimbly. And I think that we're getting better and better at being able to tweak up or tweak down.
Thanks for all the details so far. And congrats on all the exciting moves during the quarter. I know it was a busy time for you guys. So nice job getting all of it to the finish line. So Stuart, I think you walked through the normalized margin conversation well. I'd like to drill in a little bit more there. So obviously, if incentives go back to normal tomorrow, yes, your margins are going back to the mid-20s. But I think one of the advantages of your strategy and your model today is you are turning through your inventory a lot quicker than other builders and a lot of that inventory was underwritten in a different environment when incentives were much lower. So I guess my question is, you guys are out there buying land every day, you're buying a lot of land or tying up a lot of land. The land you're tying up today, is it being underwritten to an incentive level closer to today's level? And if so, can you get back to a gross margin north of 20%, even if incentives don't necessarily get back down to that 5%, 6% level over the next few years? Or is it really going to require that type of return to normal to get that margin lift back up?
Alan, we probably haven't told that part of the story well enough yet. The way we've looked at our land reconfiguration is we're focused on turning that land inventory for exactly that reason. As we run through production levels, where they are, we are basically selling the land that was underwritten at a different level, and we are redeploying at current levels. So just a second, I'm going to ask Fred to weigh in on this because Fred is kind of front and center in a lot of it. But the whole focus is let's run through the land and the inventory that was bought yesterday and constantly, it is a constantly refreshing group of assets. both the home inventory and the land inventory. And particularly in the difficult market as we're in, yesterday's land acquisition isn't going to get better with time. So let's replace it with the next one. Fred, why don't you weigh in?
Sure. So we're very strategic right now in how we're approaching land acquisition. We're being patient, but we're also underwriting the current information and incentives and gearing to higher margins. But we're going to watch to see land tends to be trailing some of the other aspects of our business and moving down. And we're now finally starting to see land sellers and site development contractors realize what's happening in the market, and we can take advantage of that over time.
That's good to hear because refreshing the cost basis is a significant part of our strategy. I appreciate your insights. For my second question, which is also about margin but focuses on the near term, I know you’re not providing guidance for the rest of the year. However, it seems your closing guidance indicates a solid revenue increase in the second half of the year. Typically, we see some seasonal patterns in your gross margin, with about a 150 basis point improvement in margins during the latter half due to higher revenues. I understand there are many factors at play, including purchase accounting and costs associated with Millrose, which may impact us more in 2026 and beyond, in addition to the mix issue with Rausch Coleman. Should we anticipate a similar seasonal trend in margins this year, assuming all else remains equal, or will these headwinds counteract the usual seasonality?
Well, that is definitely a backdoor to asking for some guidance on margin; we're decidedly staying away from that. I think that the market is still defining itself as we look ahead. There are all kinds of movements in the market that are political and social and economic. I think that we're going to just lead things where they are. We're going to wait and see how the market evolves. I think that going back to your first question, though, Alan, is this is a time where turning assets to cash and then redeploying with a new view of market conditions is a real strategic advantage. It's what we're doing every day. Right now, we're going through our ops reviews. We've been in a number of our divisions, we're midway through. And the focus is on exactly that; spending of land continuing to keep the sales pace up, and we might take a lower margin, but we're generating cash, and we're redeploying with a new understanding of where the market is and potentially where it's going. I think it's going to work to our benefit.
Maybe just to parse out the second quarter gross margin or the walk from the 18.7% to the 18%. It sounds like that's excluding the purchase accounting. So Diane, I guess I'm curious what is the expected purchase accounting agreement? And then maybe to Alan's question, I mean, Millrose's impact from that seems like it might be more longer dated, but there's probably some impact, maybe 10 to 30 basis points from that. And then along the same lines, are you currently selling homes at sub-18% margins right now?
To the purchase accounting, yes, it was about 10 basis points in Q1. And I think it will probably be in the range of about 20 basis points in Q2 as we have a full quarter of activity from Rausch. Second part, what was that again, what are we selling at?
The second part was Millrose and sorry, then what are you currently selling at now?
Yes, the margin guidance we provided for Q2 is partly due to an increase in sell and close activities, and we are likely in that phase with our current sales and closings for this quarter.
I'm not entirely sure I understand the question. However, we've experienced similar situations in the past. While we are constructing homes, we realize that both the land and the homes themselves do not increase in value in a declining market. We've focused on keeping our land assets short-term, allowing us to efficiently manage those assets and ultimately develop the homes. The pricing outlook for tomorrow is unlikely to be much better than today. That’s our perspective, and it reflects our strategic execution. If we need to adjust production levels, we will make that decision based on market conditions.
Thanks. Good morning, everyone. Thanks for all the details, always. First, I wanted to zero in a little bit on some of the mechanics and how to think about the interactivity with Millrose going forward from two aspects. One, obviously, you've already had a significant portion of your land under option to begin with, but now you're taking it up by about another 20 points or so. So I was just wondering, relative to perhaps let's say, fiscal '24, what the full or annualized gross margin impact might be from pushing that additional 20% of your land base through options where theoretically it might be a little bit of a lower gross margin all else equal. And secondly, on the Millrose side, with a tougher sales backdrop, I was wondering if there's any element of walkaways from some options that I'm sure with the 18% average, there's something at one of the tail ends of that curve. And if there would be any kind of option walkaways or things that we should anticipate over the next couple of quarters?
Regarding the margin and the impact of Millrose alongside our land banking strategy, the shift we've made to an asset-light program has generally seen an impact of approximately 100 basis points over time. While the current circumstances make it challenging to pinpoint the exact impact, it is significant as it constitutes about 20% of our business. In terms of deposit walkaways, we anticipate very few, if any, as the cost of abandoning these deposits likely outweighs the benefits of working through assets at lower margins. We prefer to manage these assets even if it means lower margins. Historically, we've observed that during downturns, including the Great Recession, the most effective strategy is to work through assets and convert land into cash, rather than risking deposit money and failing to cover overhead costs. Therefore, we believe our program incentivizes the most economically sound decision: taking lower margins, working through the assets, and redeploying the cash.
Great. Secondly, I'd love to just shift the second to the balance sheet and cash flows and now with obviously the Millrose transaction still pretty close in the rearview mirror, but nonetheless, if you have any updated thoughts around leverage free cash flow. And I believe earlier, there had been talk perhaps of trying to use just net income being more or less equivalent to free cash flow, and presumably a significant, if not large portion of that would be towards share repurchase. So any updated thoughts around there? And maybe even what any guardrails around share repurchase for 2025?
Well, look, we've daylighted this repeatedly on prior earnings calls where we expressed and explained that the cash flow reconciliation over the next year or so is going to be a complicated business. There are a lot of inflows and outflows; Millrose was anomalous in that we were actually spending a large number of assets that ultimately would kind of flip back around into a cash flow negative kind of configuration as we're taking assets off book and then bringing them back on book over time. That rotation, we're going to have to let that work through a little bit. But we do have as kind of a north star and where we're headed a distinct focus on the fact that as this cash flow not only kind of works its way through, we think that we will be generating cash approximately equal to earnings. And we do expect to reignite the stock buyback, cash stock buyback program that will be rather robust as that cycling kind of works its way through over the next year.
As I said, the way I think about it is 2025 is a little bit of a year in transition. There's a lot that changed with Millrose, just the whole reconfiguration of our balance sheet. But I think as you know, we're always long-term focused, and we strongly believe that the asset-light capital-light model that we've developed is going to be really advantageous in the future, and we'll meet all of the goals that we've established, which is generate cash and really make sure that we're increasing total shareholder returns.
My first question is just sticking with thoughts on the cash generation of the business. One of the things that you mentioned is that now that the Millrose is done, you can accelerate the progress in terms of the even flow production side and standardizing your product and those efforts in there. Can you talk about where you are within that? And how we should think about the progress that can come through over the next quarters and what that will mean to your ability to sustain cash generation even in a more volatile or weaker demand environment?
I would say we're still in the early stages of implementing cost rationalization and efficiencies from our current structure. The past few quarters have involved managing several tasks to finalize the Millrose spin-off and the merger with Rausch, which is proceeding as anticipated. Our asset-light strategy has proven successful as well. Now that we can concentrate on a simplified business model, we're beginning to see advantages in our current operational meetings. By focusing on the essential elements of this streamlined approach, I believe we will reap significant benefits moving forward. Regarding cash generation, we have established and are continually developing strong relationships in the land business. Our operations are akin to a well-choreographed process, similar to appliances and other materials we integrate into homes. Our just-in-time delivery system is becoming increasingly efficient. This method of acquiring land, developing it, and delivering homesites as scheduled will resemble the production cycle in home building, and the efficiencies embedded within this process will be considerable.
I would just add, just really enthusiastic, as Stuart said, as early-tuning land into more of a production commodity to allow us, we think, to achieve the kind of efficiencies that we've achieved on the production vertical side of our business with land and land development. And we think that there's a lot of opportunity to become more efficient, which will translate into our cash flow and into our bottom line.
Yes. But just on the land side, we're being pretty religious right now about making sure that we're not pulling land back on our books. We're not accumulating developed homesites as additional inventory. And those efficiencies are going to define your question on cash flow. How do we get cash flow to equal actual earnings? We think that's going to be kind of exactly where we end up.
Okay. That's helpful color. And then thinking about the forward growth of the business, post the spin, does that change how you consider acquisitions? And can you talk about the kinds of deals that you might be interested in? And what you're seeing in terms of the M&A pipeline and perhaps the health of some of these smaller private builders, given what's going on in the market?
We have experienced a part of our growth over the past years through collaborations with smaller builders, mainly enhancing our presence in existing communities rather than expanding into new markets. The Rausch Coleman transaction is a larger deal with a strategic operational team that is eager to integrate with our systems. Our land programming will support the Rausch Coleman program effectively, allowing us to rethink our growth strategy. Historically, our mergers and acquisitions have focused more on acquiring land assets and increasing community counts. Now, we plan to enter new markets in a more strategic manner, using an asset-light approach that enables us to do this in a capital-efficient way. Fred, would you like to add anything?
Yes, I believe the use of Millrose in acquiring Rausch Coleman exemplifies how mergers and acquisitions can be advantageous. We are being very selective and actively seeking opportunities, but we plan to approach this strategically. We will continue to utilize our mills and possibly others to fund land purchases while we identify operational aspects. It's a good match, and we are also exploring additional opportunities.
Okay. Thank you, Susan. And why don't we take one more question?
Could you elaborate on your decision to start a home on an incremental cash flow basis, considering that land is increasingly, if not a variable cost? What do you think this means for your cash flow per unit? I believe this is where the disconnect lies between your model and the industry's traditional focus on a more margin-centric approach.
Yes. I believe we have mentioned this before, but there are significant efficiencies from maintaining production that offset what you might be considering. As you hear John discuss the cost reductions in an inflationary environment, the reductions we've achieved on the direct construction side are quite remarkable. Additionally, having access to third-party capital is crucial, especially concerning land and overhead costs. You are correct that land prices are rising, but when viewed from a broader perspective, the efficiencies we are achieving outweigh those increases.
I'm not sure we understand.
I want to clarify...
Are you asking about the decision to build each home?
Yes. People often think that if you have a 10% EBIT margin, it could translate to a 10% cash flow. However, that's not the case because in the traditional model, for every unit sold, you need to acquire and develop a raw lot, which turns into a variable cost. Essentially, cash flow is tied to your earnings, and I believe many are overlooking this aspect. It appears that your decisions are being made without considering the land acquisition, which historically has been a drag on your cash flow.
Well, listen, I don't think it's quite that linear. The fact is that we're going out and we're looking for a piece of land, and the reality is that land might have to be developed. And it might take 1 year, 1.5 years for the land to actually mature to a developed home site. And while it isn't situated on our books, we have been a participant in making the decision on that piece of land, which we basically assign and absorption rate to. It might be three homes per month or homes per month, but we are making that decision. The real benefit of where we are is that we're constantly refreshing. We're keeping those land obligations as much shorter. And as they mature to develop home sites, we're taking them down. We're committing to an absorption rate and that commitment is limited in its scope or in its risk by the amount of deposits and commitment that we have but we are looking at building a model that says where we make a commitment to a takedown schedule, we're going to do our very best to execute on that in order to work through that land.
And that's how the land bank becomes a lot more efficient over time; the dependability of that absorption rate will enable them to bring the cost of capital down and rerationalize the actual cost of our inputs relative to the home. So I wouldn't think of it as a home site by homesite optionality that just flows through. But on the other hand, you are running through land on a more cash flow basis and redeploying that cash into better land over a shorter period of time.
I completely agree with your point, Stuart. Ken, as Stuart explained, when we underwrite land and assess an absorption rate of around four homes per month, we establish a timeline for development to reach the finished homesite, along with a schedule for starting construction that aligns with that four-month pace. Essentially, at the underwriting stage, we are making decisions about when to begin home construction and the sequence we will follow.
Right, very good. I guess my second question would simply be, if you guys can quantify the spread between what you saw in backlog and what became intra-quarter order closings in 1Q comment on the 2Q spread, if it exists or not. And if your share count guidance, Diane for 2Q, what that effect would be if your exchange was fully executed.
Looking at the second quarter from a high-level perspective, the backlog is quite close to 18%, and we anticipate sales will align with this as well based on our current experiences. As Stuart mentioned, the margin will depend significantly on our sales performance moving forward. We currently have limited data, just a few weeks’ worth, which could affect whether our margins increase or decrease, as there tends to be a lot of sales activity within the same quarter. At this moment, all indicators are aligning with the margin guidance we previously provided.
Okay. Thanks, Ken. And let's end it there. I want to thank everyone for joining us. These are tricky times as we look at the housing industry. You can always count on getting a straight shot from Lennar; we're going to tell you where the market is and how we're addressing it and look forward to keeping you updated as we go forward through 2025. Thank you, everyone.
That concludes Lennar's first quarter earnings conference call. Thank you all for participating. You may disconnect at this time, and please enjoy the rest of your day.