管理層發言
Welcome to Lennar's Third 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 statements.
Thank you, and good morning, everyone. Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption Risk Factors contained in Lennar's annual report on Form 10-K, most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.
I would like to introduce your host, Mr. Stuart Miller, Executive Chairman and Co-CEO. Sir, you may begin.
Good morning, everyone, and thank you for joining us today. I’m currently in Miami with Jon Jaffe, our Co-CEO and President; Diane Bessette, our Chief Financial Officer; David Collins, our Controller and Vice President; Katherine Martin, our new Chief Legal Officer; and Bruce Gross, CEO of Lennar Financial Services, along with several others. I want to acknowledge that Mark Sustana, our General Counsel for 20 years, is not with us today and will be missed. He has been a remarkable part of this company, and though he recently retired, he will continue to provide strategic advice as a consultant. I believe he’s listening in today. As usual, I’ll start with a macro and strategic overview of the company. After my comments, Jon will discuss operations, including updates on construction costs and our land strategies. Diane will provide a detailed financial highlight and guidance for the fourth quarter, followed by our question-and-answer session.
As always, please limit yourselves to one follow-up question to allow time for everyone. Let’s review Lennar’s third quarter results, set against what may be the start of improving economic conditions in the housing market. Our results demonstrate ongoing softening in market conditions and affordability during this quarter. Maintaining sales volume proved challenging, necessitating additional incentives to meet our expected pace and prevent excess inventory. While our deliveries were just shy of our target for the quarter and we sold more homes than anticipated, these achievements came at the cost of further margin decline, which fell to 17.5%. Consequently, we will adjust our delivery expectations for the fourth quarter and the full year to alleviate sales pressure and stabilize margins. We anticipate delivering between 22,000 and 23,000 homes in the fourth quarter, and our full-year expectation has been adjusted to 81,500 to 82,500 homes.
This is a strategic moment for Lennar to pause and let the market catch up. Although mortgage rates began to decrease toward the end of the quarter, stronger sales have yet to emerge. Nevertheless, we are observing early signs of increased customer interest and improved traffic in the market. With lower mortgage rates, buyers are displaying more enthusiasm in considering home purchases, which typically precedes stronger sales activity, assuming rates remain low. Should interest rates continue to decline, we are optimistic about the market's potential to stabilize soon. The protracted period of elevated interest rates has compelled us to adjust our construction costs to facilitate sales under challenging market conditions. Our streamlined construction cost structure, coupled with reduced margins, has enabled us to maintain affordability and support the balance of supply and demand. We have aligned our sales pace with our production pace and strengthened our market position in each of our strategic areas.
We are now well-positioned with lower costs, efficient product offerings, and a strong market presence to handle any pent-up demand as rates normalize and confidence returns. We recognize this moment as the right time to shift back slightly. We have acted proactively in response to current market conditions and believe we have developed a more robust margin-driving platform for the long term. While this adjustment has required time due to prolonged weaker market conditions, we are confident our strategy is fostering a healthier housing market and positioning Lennar for future cash flow and growth. If mortgage rates stabilize around the 6% mark or lower, we expect to see firming in the market and increased demand driven by improved affordability. We will continue to focus on managing volume and production flow, albeit at a somewhat slower pace, while maintaining a sensible volume to support our affordable cost structure and restoring our margins as the market works through its supply challenges.
Looking at the macro environment of the housing market, it remains tough as we head into the fourth quarter. High mortgage interest rates and persistent consumer confidence issues have kept demand subdued. Actionable demand has been dampened by factors such as affordability challenges and uncertainty, resulting in continued market softness as we progressed through the quarter. However, as we entered the latter half of the quarter, interest rates began to decline, and we are now nearing the 6% mortgage rate, sparking a slight consumer return to the market. Despite this, supply remains limited in most markets due to past underproduction. Builders have reduced output in response to slow sales and affordability issues, intensifying the long-standing supply shortage. Demand is strong as people still need homes, but affordability concerns and diminishing confidence present constraints. This cycle repeats itself as low supply drives high prices, which in turn makes it difficult for many buyers to enter the market.
Mayors and governors across the country emphasize the housing shortage as a primary issue, linking it consistently to affordability and attainability. For a deeper understanding of the housing market complexities, consider reading "Abundance" by Ezra Klein, which discusses the long-term challenges of structural short supply and the increasing need for housing. The current environment underscores that high prices driven by limited supply necessitate lower cost structures to achieve affordability. In our third quarter, we commenced around 21,500 homes, delivered approximately the same amount, and sold just over 23,000 homes. While our deliveries fell slightly short of expectations, our sales exceeded projections, allowing us to increase our community count and better position ourselves for the remainder of the year. As mortgage rates stayed high and consumer confidence took a hit, we managed our starts while providing incentives to drive affordability and control inventory growth.
We maintained our inventory levels at a historically reflective rate of two completed unsold homes per community. As a result, sales incentives increased to 14.3%, resulting in a gross margin of 17.5%, below expectations due to an average sales price of $383,000. Our SG&A came in at 8.2%, yielding a net margin of 9.2%. Looking forward to the fourth quarter, we anticipate margins to remain around 17.5%, depending on market conditions. We expect to sell between 20,000 and 21,000 homes and deliver between 22,000 and 23,000 homes, with an average sales price expected to range between $380,000 and $390,000, alleviating pressure on home prices sold this quarter. For the full year, we see deliveries between 81,500 and 82,500 homes. Our overhead for the fourth quarter is expected to range between 7.8% and 8% as we continue to invest in evolving various Lennar technology solutions that will shape our future.
These investments will impact SG&A and corporate G&A for the foreseeable future as they are significant investments for our differentiated future. In closing, while this has been another tough quarter in the housing market, it has been a constructive quarter for Lennar. Though the immediate path forward may seem uneven, we hold a positive outlook for our future. We acknowledge that our numbers aren’t where we want them to be, just as the market conditions also present challenges. We are well positioned with a strong national presence, increasing community count, and rising volume, and we remain focused on addressing the housing shortage that persists across our markets. Additionally, as we pursue growth, production, and volume, we are committed to enhancing our efficiency and embracing technologies that remain relevant and beneficial for our future. Our strong balance sheet and advantageous land banking relations provide us with flexibility and opportunities for strategic growth ahead.
I would also like to highlight my excitement about a technology company we have supported for years. We are confident that Opendoor, under its new CEO Kaz, will be a vital partner in Lennar’s tech evolution. Kaz, coming from Shopify, is committed to transforming homeownership through modern technology. His vision emphasizes the importance of leveraging energy and tools to simplify the home buying and selling process, ultimately benefiting families and communities. Kaz’s message encapsulates an opportunity to redefine what's achievable in real estate, emphasizing our shared mission to improve homeownership accessibility. Lennar is aligned with this mission, and we are positioned well for the future. We are eager to keep you updated on our progress, and with that, I’ll turn it over to Jon.
Good morning, everyone. As Stuart described, we are highly focused on executing our core strategy, which involves maintaining high-volume production by utilizing advanced technology in our homebuilding operations. Our goal is to drive efficiencies that establish us as the leading technology-enabled, low-cost homebuilding manufacturer. Our strategy has yielded greater efficiencies, as demonstrated by improvements in our cycle time, inventory turnover, and overall costs. In this update, I will review our third quarter performance regarding sales pace, cost reduction, cycle time enhancements, and the execution of our asset-light plan strategy. For the third quarter, we achieved a sales pace of 4.7 homes per community per month, consistent with our sales plan. To accomplish this, we leverage the Lennar machine, starting with attracting qualified leads through our digital funnel. We prioritize a quick response to each customer along with quality engagement.
Importantly, our average response time to leads improved by 53% from the second quarter, now at just 46 seconds. This means that when a lead requests information, they typically receive a call or text within 46 seconds. To support our sales efforts, our Internet sales consultants benefit from real-time analytics for immediate coaching after each interaction, enabled by proprietary software. This technology-based approach resulted in an 8% quarter-over-quarter increase in appointments. Additionally, we employ a dynamic pricing tool that aligns home prices with real-time supply and demand, aiding us in achieving our sales targets. Our pricing technology continues to advance with feedback and data from our results. The effective execution of the Lennar machine has allowed us to sell the right homes at current market prices while keeping our inventory positioned well, averaging under two unsold homes per community.
Affordability remained a challenge for customers across all markets during the quarter, and incentives rose by about 100 basis points to meet our sales objectives. This ongoing affordability issue fuels our focus on a production-first strategy. At the heart of this strategy, we maintained a consistent start pace of 4.4 homes per community per month for the quarter. This sustained volume benefits the supply chain, enabling us to leverage it to lower both costs and cycle times. Steady volume supports ongoing negotiations with our trade partners, leading to reduced costs. Over the past 11 quarters, we have achieved cost reductions in 10 of them, with an average decrease of $1.50 per square foot during this period. Direct construction costs for the third quarter decreased approximately 1% from the second quarter and about 3% year-over-year, marking the lowest construction costs for our company since the third quarter of 2021.
We expect this trend of decreasing direct construction costs to continue into the fourth quarter. We have now accomplished cycle time reductions for 11 consecutive quarters, with a 6-day decrease from Q2, bringing the average cycle time for single-family detached homes down to 126 calendar days. This indicates a 14-day or 10% year-over-year reduction and is the lowest cycle time in our company’s history. Technology is a crucial factor in driving these improvements by equipping our construction teams with real-time information presented in user-friendly dashboards, enabling better scheduling and field problem-solving. Enhanced cycle times and technology-driven quality assurance processes have also contributed to improved home quality, illustrated by fewer work orders and a reduced warranty spend, which is down about 35% year-over-year. Our emphasis on efficiency and cost reduction also extends to land development, where we apply similar volume-based strategies to negotiate lower costs with trade partners in a slowing land market.
In the third quarter, we began to see significant progress in these initiatives and anticipate further enhancements in the upcoming quarters. Land acquisitions are strategically structured to be just in time, utilizing our land bank relationships and phased takedowns to minimize carrying costs. Concerning our asset-light strategy, we finished the quarter with improved metrics. Our supply of owned homesites dropped to 0.1 years from 1.1 years last year, while the percentage of controlled homesites rose to 98% from 81% last year. These operational improvements have led to increased inventory turnover in the third quarter, now at 1.9 compared to 1.6 last year, reflecting a 19% improvement. In the fourth quarter, our team will focus on executing the strategy of maximizing efficiencies to further reduce costs across our operating platform.
Thank you, Jon, and good morning, everyone. Stuart and Jon have provided a great deal of color regarding our homebuilding operations, so therefore, I'm going to provide a quick summary of our financial services operations, summarize our balance sheet highlights, and then provide guidance for the fourth quarter. So starting with Financial Services. For the third quarter, our Financial Services team had operating earnings of $177 million. The strong earnings were primarily driven from our mortgage business and were driven by a higher profit per loan as a result of higher secondary margins. Once again, our financial services team worked in partnership with our homebuilding teams with the goal of providing a great customer experience for each homebuyer. Turning to our balance sheet, this quarter, once again, we were highly focused on generating cash by pricing homes to market conditions. The result of these actions was that we ended the quarter with $1.4 billion of cash and total liquidity of $5.1 billion.
As Jon noted, consistent with our land-light lower-risk manufacturing model, our year supply of owned homesites was 0.1 years and our homesites controlled percentage was 98%. We ended the quarter owning 11,000 homesites and controlling 512,000 homesites for a total of 523,000 homesites. We believe this portfolio of homesites provides us with a strong competitive position to continue to grow market share and scale in a capital-efficient way. With our focus on turning inventory, our inventory turn increased to 1.9x, and our return on inventory was 24%. During the quarter, we started about 21,500 homes and ended the quarter with approximately 42,500 homes in inventory. As Stuart mentioned, we carefully manage our inventory levels, ending the quarter with fewer than two completed unsold homes per community, which is within our historical range. And then turning to our debt position, we ended the quarter with $1.1 billion outstanding on our revolving credit facility, and our homebuilding debt to total cap was 13.5%.
We had no redemption or repurchases of senior notes this quarter. Our next debt maturity of $400 million is not due until June of 2026. Consistent with our commitment to increasing total shareholder returns, we repurchased 4.1 million of our outstanding shares for $507 million, and we paid dividends totaling $129 million. Our stockholders' equity was just under $23 billion, and our book value per share was about $89. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the remainder of 2025. So, with that brief overview, I'd like to turn to Q4 and provide some guidance estimates, starting with new orders. We expect Q4 new orders to be in the range of 20,000 to 21,000 homes as we match production and sales paces. We anticipate our Q4 deliveries to be in the range of 22,000 to 23,000 homes with a continued focus on turning inventory into cash.
Our Q4 average sales price on those deliveries should be about $380,000 to $390,000 and gross margin should be approximately 17.5%, consistent with the prior year. And our SG&A percentage should be in the range of 7.8% to 8%. All these metrics, of course, are dependent on market conditions. For the combined homebuilding joint venture, land sales and other categories, we expect earnings of approximately $50 million. We anticipate our Financial Services earnings to be approximately $130 million to $135 million. For our multifamily business, we expect a loss of about $30 million as we continue to strategically monetize assets to generate higher returns. Turning to Lennar Other, we expect a loss of $35 million, excluding the impact of any potential mark-to-market adjustments to our public technology investments. Our Q4 corporate G&A should be about 1.9% of total revenues, and our foundation contribution will be based on $1,000 per home delivered.
We expect our Q4 tax rate to be approximately 23.5%, and the weighted average share count should be approximately 253 million shares. And so on a combined basis, these estimates should produce an EPS range of approximately $2.10 to $2.30 per share for the quarter.
分析師問答
Our first question comes from Alan Ratner from Zelman & Associates.
Stuart, obviously, I think a lot of people want to dig into the pivot here on strategy a little bit and understand whether this is a little bit more short-term in nature or just a change in the way maybe you're thinking about the longer term. I guess from an incentive standpoint, I'm just curious, have you already started to dial back some of the incentives? And if so, what has the response been in terms of order pace or margin or any color you can give there?
So I wouldn't really look at it as a change in strategy. I would look at it more that we are making adjustments as we go forward. We're still very focused on volume. We're maintaining a very, very strong volume. I think we're taking the edge off as the market has continued to become a little bit more stressed. I think that as we went through our third quarter and interest rates were trending more towards the 7% range than what ultimately took place at the end of the quarter and into the fourth. We just felt that it was an opportune time to take a step back, particularly as perhaps interest rates are starting to moderate a little bit. They're a little up and down still. We thought it was a good time to let the market catch up a little bit. In terms of have we already started, the answer is no. That is something that Jon will be directing and focusing on over the next few weeks. But we're just recalibrating to make sure that we're not pushing too hard on a market that really doesn't want to be pushed.
Got it. That's helpful color. Second question relates to the land strategy in relation to this. This isn't my view, but it's one I hear from investors that given the spin to Millrose and given the fact that now you're 100% off balance sheet with option contracts that are tied to some certain takedown schedule. I know there's been some concern that maybe you don't have the flexibility to meaningfully change the start pace or the takedown pace. So I'm curious, I know this is a fairly modest pullback in start activity, so it probably doesn't affect things too much. But is there any adjustment that's also going on on the land side to account for this slower start pace, meaning have you adjusted the takedown schedules or paused in any cases? Or on the flip side, would land begin to then accumulate on the balance sheet potentially if you don't accelerate those starts in '26?
Thanks, Alan. I've heard that question a number of times. The answer is we are not constrained in any way by our land relationships or the reconfiguration of land. To the contrary, we were very deliberate about injecting the ability to pause as market conditions change and adjust. Additionally, we have the ability, although it is expensive, to walk away from programs that we have in place. So it is not the constraint of our land relationships that define our strategy at all. To the contrary, it is much more about the recognition that we're going to have to find, frankly, as an industry, a way to build and deliver homes at a more affordable level, and that is all going to derive from cost structure, all the way from land to land finance costs, all the way through to vertical construction, horizontal restructuring and SG&A. It's why we are so focused on a differentiated way forward relative to modern technologies.
We have to get more efficient and effective. And unfortunately, the road to get there is one of volume; the system and working with our trade partners to deal with logistics and cost structures and also building new technologies that are expensive to do. The SG&A goes up before it goes down. But to bring this back to land, it would be a mistake to think that land was carefully crafted to not be a factor in strategy, but instead to be a steppingstone of the strategy going forward.
Next, we'll go to the line of Stephen Kim from Evercore ISI.
Thank you for your insights, Stuart. I would like to follow up on Alan's question regarding the duration of this pause. Can you provide some clarity on whether you expect this planned slowdown in sales production to last around one to two quarters, or do you view it as a more extended adjustment to a lower volume for Lennar? Additionally, please address this in terms of both housing production and land.
Our strategy continues to focus on volume and supplying markets that need it. We are dedicated to reducing our cost structure so that we can maintain margins even in a slowing market. Achieving this is challenging and not straightforward. To answer your question about whether this represents a change in strategy or a more permanent slowdown, we don’t view it that way. Our primary focus is to sustain volume, which allows us and our partners to find ways to operate more efficiently as we address the increasing demand for affordable housing in our communities.
Okay. But you have indicated that you are looking to slow your volume versus, let's say, maybe what you had thought or thought about three months ago. And I guess the nature of my question is, is this slowdown, however you characterize it or this adjustment, is it something that you see as a measured in a few months? And then you're on the other side of that, there's going to be sort of a reacceleration. Are you sort of like pushing things off? Or is this something where you are sort of just lowering your overall or recalibrating to an overall lower level of volume than what you may have thought three to four months ago, let's say?
So look, I think we're living in a fluid world right now. We're going to have to see how the market evolves. But the way that I would think about what we're doing is we're running a marathon and partway through, we're just taking a moment to take a breath, let our body catch up to where we are, and we're on a mission to move forward and to keep pursuing the strategy that we have in place.
Got it.
I don't certainly want to beat a dead horse here, but I just wanted to try and put maybe perhaps a finer point on this kind of short-term adjustment in approach given the challenging market. And I'm wondering on kind of a bottom-line basis, if you guys just felt like you didn't want to go below 17.5% margin and the cost was too high to drive that volume where you hoped it was where you wanted it three months ago? Or is there also, in your view, sort of an elasticity of demand issue where part of the problem here is that even if you were to drop margins or raise incentives to keep that, you really wouldn't ultimately even be successful in what you needed from a volume perspective. And so with that, maybe demand becoming more inelastic, just a lack of demand in the marketplace, it just didn't make sense to drop that gross margin below where you're looking in the back half of this year currently.
I'm not sure we've gotten that philosophical, but we are responding in real-time to market conditions. I believe it was the right time to ease some pressure. We have outstanding athletes working on our marketing and sales initiatives across the company, and they have done an excellent job helping us navigate through tough times. We thought this was a good moment to reduce pressure on that aspect of our program and reassess our next steps. However, our fundamental strategy remains unchanged. We're committed to increasing volume and providing the market with an affordable, accessible product. Jon, would you like to add to that?
Yes, I would agree, Stuart. And it's really hard to answer your question, Michael, because it's market by market and even community by community. So it is just, as Stuart said, it's taking some of that hedge off so we can better fine-tune exactly how we price in that market-by-market analysis and community-by-community analysis.
I appreciate that. I understand it might require a detailed analysis to fully answer your question. However, the concept of elasticity is crucial. As a follow-up, we observed mortgage rates decrease by about 20 to 30 basis points in August and another 20 to 30 basis points in September. I'm interested in whether this change, which totals around 50 basis points, has influenced demand trends in your markets, and if so, which ones. Additionally, would this potentially ease pressure on gross margins or incentives, or are you at a stage where you anticipate the incentives you established during the quarter to stay in effect through the fourth quarter?
I think, Michael, as Steve laid out, it does help reduce the cost of those mortgage rate buydowns. But as Stuart responded, it's not exactly linear. It's each market, it's each community, how they're used and what the buyer demand is and the affordability stresses that exist.
I believe that when considering elasticity, it's more of a retrospective analysis. Our strategy, as you've highlighted, is a bottoms-up approach. Jon has mentioned it involves looking at each community and our company is making adjustments based on what our top performers are achieving in various markets across the nation. Reflecting on our third quarter, as I mentioned earlier, we didn't notice any significant sales impact, but there was a slight increase in consumer engagement. As we enter the fourth quarter, while we typically refrain from commenting on our observations so far, I can share that we've noticed a bit more interest. If interest rates decrease and stabilize around 6%, we anticipate a sense of optimism in the market and an activation from those who have the need and the capacity to engage.
Next, we'll go to the line of Susan Maklari from Goldman Sachs.
My first question is on the inventory turns. Can you talk through how some of these company-specific efforts are continuing to come through even as you moderate or adjust the strategy? And how we should think about the upside to those inventory turns in this kind of an environment and long term, the ability to get to 3x as you do think about the setup on the ground?
At the end of each quarter, Jon and I conduct operations reviews with our division management teams to analyze their operations and strategies. I've found it fascinating to see our divisions focusing on their inventory turn, which, in my view, indicates whether we are prioritizing effectiveness and efficiency, working on utilizing our resources to become more efficient, and reducing costs to enhance affordability. I attended one of those reviews this week with a team that is approaching a 3x inventory turn. When we aggregate all the divisions, you will see averages. However, at the local level, aiming for that goal is a significant part of our discussions as we work on reducing cycle times. Jon mentioned that we are currently experiencing the lowest average cycle times as a company. That's the direction we're heading, but don't hold us to the 3x target, as it is a challenging benchmark to reach. Go ahead, Jon.
I would just add, Stuart, is as we've discussed and discussed in prior quarters as well, this ongoing focus on efficiency. So just in time into our land banks, just in time out of our land banks where we're ready to start production, all of this is a constant tweaking and refinement of processes to do just that is to continue to drive that metric, which, as you've seen, is making good progress.
Every one of these programs, thinking processes, now Jon talks about land into the land bank, land out of the land bank and those efficiencies, all of these tie to modern technologies that are partners of what we're trying to do. As we get those technologies working, those efficiencies are going to amp up.
Yes. Okay. That's very helpful color. And then maybe taking that one step further, as we do think about the inventory turns and these efforts coming through, can you talk about the cash generation of the business? And how you're thinking about the uses of that cash, especially in this sort of environment that we're in? And any updates on the M&A environment, those kinds of strategic efforts?
Well, as far as we're concerned, everything is on the table. We are certainly focused on total shareholder return. That is sometimes defined by how we grow and what kind of M&A strategy we might inject into our business as we go forward. We are looking at everything. As I've said, the use of our land banking program is something that enables more of that focus. At the same time, we're focused on returning capital to shareholders. You've seen that we've had a pretty steady program of doing exactly that. We are very, very focused on driving cash flow. Now there's been an adjustment period in the wake of Millrose and getting the pieces working exactly together takes a little bit of time, but our program is laser-focused on how do we get to that total shareholder return, how do we use cash effectively? How do we drive growth effectively? At the end of the day, the focus of this company is how do we become something different in the future from what we've been in the past and a big part of that is capital allocation.
Next, we'll go to the line of John Lovallo from UBS.
The first question is orders were obviously very solid and a little bit ahead of expectations. You guys are working at the lowest cycle times in a very long time, if not in history. What caused sort of the slight miss in the third quarter deliveries given those factors?
It really is just timing and relative to when sales occur getting through the mortgage approval process, nothing more than that.
Okay. Understood. And I guess we've heard from several of your peers and from some other companies through the value chain that Florida inventory levels are beginning to stabilize, maybe even improve a bit. Obviously, there's a lot of markets in Florida. But in some of the key markets, maybe the I-4 Corridor, if you could talk about, I mean, is this consistent with what you're seeing on the ground?
Tampa, Orlando markets along I-4 as I commented, we have always remained very laser-focused on inventory levels. It's part of our strategy, even flow production, sales pace with respect to other builders, we did see some buildup, but I would agree with that in general, starting to see some stabilization.
Yes. And remember that the size of inventories across the competitive landscape, meaning existing homes and new homes, is a big part of what defines the stress on the sales process. In Florida, that has been a factor. Inventories have been high, both across existing and the new home market. They have been moderating, and that has started to build a more stable environment, which we sell.
Next, we'll go to the line of Matthew Bouley from Barclays.
Regarding incentives, this is somewhat of a philosophical question. Looking ahead, based on the potential direction of interest rates, do you expect to keep some level of buydowns as a competitive advantage compared to the resale market? Or if rates drop to 6% or lower, do you foresee a significant reduction in those incentives?
That's an interesting question. Many have wondered why we focus on the decline of interest rates when we are already buying them down. The key factor is the stagnation in the current home market, as its gradual reopening allows individuals to transition from first-time homes to larger ones and then to even bigger homes. This creates a chain reaction that enhances activity throughout the entire housing ecosystem. While homebuilders are indeed lowering interest rates through buy downs, which does impact margins, unlocking the broader housing market acts as a catalyst, driving significant activity across the market.
Okay. Fair enough. Yes. Secondly, I would like to follow up on John's question regarding orders and deliveries for the next quarter. I'm curious if you can provide an update on the cancellations environment and what trends you're observing in cancellations today.
I'd say it's really remained pretty consistent from second quarter through third quarter in terms of order pace and cancellation pace. As we said, we really didn't see any effect in the third quarter relative to interest rates coming down at the end of the quarter. And it directly ties in on a community-by-community basis of what do we need to do to support our customer as they're challenged by affordability. So bottom line is it's remaining pretty consistent.
Okay. Why don't we take one more?
Can you say what quantity or percentage of year-to-date deliveries have come from Millrose?
Yes, I want to say it's been about 25% in that zone.
And so in terms of the gross margin outlook, looking beyond the fourth quarter, should we still expect the remaining 75% once you're at a steady cadence with Millrose to come through that interest cost on gross margins?
Yes, staying the obvious with the low cost that Millrose offers us, the more that we have deliveries from that vehicle, it benefits our margins.
Realistically, in our land banking environment, we are focused on managing the option costs of those communities. One of the advantages is our ability to create certainty within the land banking structures. This certainty in closing and execution allows us to maintain a more moderated cost structure, leading to reduced costs. When we consider whether land banking drives our business, we have the option to walk away from deals if necessary. However, we are strongly motivated to keep all our structures—whether vertical construction, horizontal construction, or land banking—operating smoothly and effectively. This approach helps us achieve the best cost structure, ultimately contributing to affordability. Everything ties together to support our strategy regarding volume.
I think that's well said, Stuart. For us, it's a manufacturing approach, meaning even flow from beginning to end. It starts with land into our land banks, as I said, just in time coming out predictably just in time from the land banks to a production team that's focused on bringing cycle time and cost down. It’s an ecosystem that's all the way through. The more effective we are in doing that, as we've noted, we bring down our construction costs. But as Stuart is highlighting now, the more effective we are creating stability and reliability in the land bank world, the more that capital costs come down. They all have our laser focus on how do we become more efficient, more durable and bring value to our partners.
So even while we might have the ability to as a risk mitigator to walk away or to do something else, our whole strategy is focused on building certainty across our land banking system, bringing down cost and option costs in each of our land banks to help with the affordability factor. I'm not sure if that's answered your question, but I think that's what you're getting at when you talk about 25% for Millrose and advantage cost. The question is, can we get more advantage costs across the whole spectrum?
Thank you. With that said, I want to thank everybody for joining us, and we look forward to reporting back on consistent and focused progress as we go forward. Thanks, everybody. That concludes Lennar's third-quarter earnings conference call. Thank you all for participating. You may disconnect your line, and please enjoy the rest of your day.