管理層發言
Welcome to Lennar's second quarter earnings conference call. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a Q&A session. 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 flow, 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 uncertainty. Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those described in our earnings release and our SEC filings, including those under the caption "Risk Factors" contained in Lennar's Annual Report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.
I would now like to introduce your host, Mr. Stuart A. Miller, Executive Chairman and CEO. Sir, you may begin.
Very good. Good morning, everybody, and thanks for joining today. In this interesting day with the SpaceX IPO at the same time, I am in Miami today together with Diane J. Bessette, our Chief Financial Officer, David Collins, who you just heard from, Katherine Lee Martin, our Chief Legal Officer, and Jim Parker, our newly promoted and appointed Chief Operating Officer. Congratulations, Jim. And David Grove, our newly promoted and appointed Executive Vice President for Own Building. Congratulations, David. Jim and David jointly oversee our operations across the country. While they will not be giving opening remarks today, they will participate in our Q&A period. As usual, I am going to give a macro and strategic overview of the company, although abbreviated, and Diane will give a detailed financial overview and guidance for the third quarter of 2026. Then we will open it up for questions. As always, please limit yourself to one question and one follow-up. Before we begin, I would also like to reiterate that we have now posted our new investor deck on our website today at investors.lennar.com in conjunction with this earnings release. This deck was created to give investors, analysts, and interested parties a clear view of the Lennar transformation and strategy that we have described consistently on these calls over the past years. From our volume-based operating strategy to our asset-light manufacturing model, and from our technology platform and initiatives to our path to margin recovery and long-term value creation, we have tried to tie it all together for your review and comment. We believe it provides important context for understanding where we are, where we are going, and why. With that said, let me begin by saying that we are pleased to report Lennar's second quarter 2026 results that we believe represent strong operational execution even as the macro backdrop has grown more complicated and sometimes erratic since our last earnings report. In the second quarter, we delivered 20.5 thousand homes around the midpoint of our guidance and we generated 21.7 thousand homes or new orders near the high end of our guidance. Our gross margin improved sequentially to 15.6%. Our net margin increased to 6.4%. And our earnings per share came in at $1.31 excluding mark-to-market items. Notably, our sales incentive rate on deliveries was 12.9% this quarter, down from 14.1% in Q1 and down from 14.5% in Q4 2025. After three years of incentive levels that were generally elevated, we are starting to see the first real and potentially sustainable decline. While this decline may be a leading indicator of margin recovery, the overall market remains choppy as economic and geopolitical crosscurrents mark the way forward. Against this backdrop, let me briefly discuss the overall housing market. The macro economy has grown more complex since the first quarter earnings call. I want to spend a few minutes reviewing the specific dynamics shaping the market right now. First, mortgage interest rates have remained stubbornly elevated in the mid-to-upper 6% range throughout our second quarter. The 30-year fixed rate sits between 6.4% and 6.5% today, modestly better than a year ago when rates were closer to 7%, but still at a level that keeps affordability challenged. At 6.5%, a buyer at the median family income is spending above 30% of gross income on their housing needs. Buyers are stretching, and our incentives are enabling purchase. The fact that incentives are declining, although slowly, is an encouraging signal even though the math has not yet changed meaningfully for the buyer. The inflation picture has also become more complicated. The May CPI report released recently showed headline inflation at 4.2% year-over-year, up from 3.8% in April and the highest reading since early 2023. The primary driver was energy, as gasoline prices increased 7% in May and are up over 40% year-over-year, driven by disruptions to oil supply tied to the Iran conflict. While this is possibly just an energy-driven spike, as core CPI came in at 2.9% and actually decelerated on a monthly basis, higher energy prices touch every part of the American household budget and tend to depress consumer confidence. When families see gasoline at the pump or electricity bills climb, their willingness to make major financial commitments, including purchasing a home, moderates, even when their underlying desire to own has not changed. This inflation backdrop most likely has taken the Federal Reserve off the table as a near-term source of relief. The federal funds rate remains at 3.5% to 3.75%, and there is little probability of a cut in the immediate future. Rate cuts, when they eventually do come, can be meaningful tailwinds for our business, but we are not waiting for them. We are building and executing to the market as it currently exists. On the employment side, the economy remains solid on the surface, but consumer psychology is being affected by anxieties about the long-term security of jobs at a time of rapid technology change. The advance of artificial intelligence is raising questions about the future of employment across a wide range of the workforce. We see this in buyer behavior: traffic is inconsistent, intent is high, but urgency to close is still measured and deliberate rather than confident and energized. We continue to make homeownership achievable and attractive through value-oriented pricing, compelling financing, and the speed and quality of our customer engagement. While currently urgency is lacking, we continue to build the platform to serve buyers even better in a normalized market. On the cost side, a broad range of commodities and building products continue to create headwinds across the industry. We have managed these pressures effectively as construction cost per square foot improved to $81 this quarter, down 7% from a year ago, but the cost environment remains fluid and bears close attention. Additionally, labor costs require oversight as well. Labor availability has improved modestly in some markets as multifamily construction has slowed, providing some relief, although immigration policy and enthusiastic data center construction continue to create tightness in other geographies. Our record cycle time of 121 days shows we are managing these dynamics effectively. On a positive note, the federal government's engagement with the national housing crisis continues to deepen. While the legislative vehicles moving through Congress are likely to have little impact on supply and demand components, housing affordability is still a focal point of both the administration and the legislature. The level of attention being paid at the highest levels of government to housing affordability is genuinely unprecedented in my experience, and I remain confident that meaningful federal action is closer than the market currently believes. If and when government action does come, and depending on its content, it can be a significant tailwind for the industry. One component of our attention on this matter that we continue to watch closely is the legislative and regulatory effort at both state and federal levels to contain or constrain institutional and investor purchases of single-family homes. Several states have passed or are advancing restrictions on large-scale investor acquisitions, and federal attention is growing to this issue as well. We view this initiative as a concerning long-term development for housing as it is recalibrating demand dynamics in a number of local markets and might have the effect of reducing production of housing and reducing much-needed supply. So in summary: rates remain elevated, a fresh inflation spike is complicating the consumer picture, and the Fed is on hold. But underlying demand is real and growing, supply is structurally short, our own incentives are slowly declining for the first time in three years, and the government is focused on affordability. Crosscurrents, yes, but on balance optimistic. Against this backdrop, let me briefly turn to our operating strategy. Our strategy has not changed, and consistency of strategy, especially through a difficult cycle, is what builds confidence through our company and we believe an enduring competitive edge in the market. We remain focused on two strategic priorities: first, driving consistent, even-flow production and volume; and second, continuously refining our asset-light, land-light balance sheet model to generate strong and growing cash flow and returns. As to the first, across the Lennar platform, we have clarity that we price to market and maintain volume to meet demand at affordability. We offer the incentives that our customers need to achieve the value they can afford and we maintain consistent volume even as the market adjusts. We have remained steadfast in our execution and our results reflect that conviction. We continue to believe our focused strategy has built consistency through the Lennar platform which is creating a real competitive edge in the market. This focus has enabled us to drive down construction costs per square foot to $81, as I said, down 13% from two years ago. Cycle time is down to 121 days, which is a record low, a direct driver of inventory turn improvement to 2.5x from 1.8x a year ago. On the asset-light side, we continue to make excellent progress on an ever more seamless and sustainable asset-light model. Less than 5% of our land is on balance sheet. Total homebuilding inventory has declined to $10.9 billion this quarter from $11.4 billion a year ago. Our land-banking partnerships continued to function extremely well and are getting increasingly more efficient while providing just-in-time home site delivery at an 86% delivery rate. In addition, we are injecting modern technology in every aspect of our land-light execution. We expect that by year-end we will have an extremely efficient land operating system and process that will reduce cost structure while enhancing our land acquisition diligence and review. Simply put, our land-light model will enable us to be significantly more efficient and effective as a land buyer, land developer, and land administrator at a significantly lower overall cost of capital. By strategically focusing on volume and asset light, we are becoming a materially better and singularly focused homebuilder/manufacturer. This enables us to spend more time and attention to drive quality and value in our homebuilding operation. Quality always comes first at Lennar. We remain continuously focused on improving the quality of every home we build with a world-class customer experience for our customers and with safety first for our building partners. Lennar's excellent but always improving customer experience program starts at the time we first meet our customers through our digital marketing funnel and never stops through the signing and closing of the contract and through engagements with our customers after they close. We are focused on embracing and engaging our technology platform to enrich and expand Lennar's customer experience as we build a customer for life. Additionally, we continuously improve the Lennar value proposition. We are using our market share, land access, and cost advantages to enhance the value proposition embedded in each home offering to our customers. Our everything's-included platform and program continues to serve as an important competitive differentiator and affordability lever. By standardizing features at scale and offering more for less, we capture purchasing efficiencies, offset cost pressures, protect margin, and deliver meaningful value to buyers, all while keeping the buying process simple and transparent. Additionally, our targeted financing programs, rate buydowns, and closing cost assistance allow us to solve for an affordable monthly payment for buyers who are qualifying on payment rather than price, which describes a large share of our buying population in the current rate environment. Now let me turn briefly to our Q2 2026 results. In the second quarter, we delivered 20.5 thousand homes and generated 21.7 thousand new orders. Both reflect continued underlying demand for new homes and the effectiveness of our pricing strategy. Our average sales price came in at $372 thousand and our sales incentive rate on delivery trended down to 12.9%, as I said, compared to 14.1% in Q1 and 14.5% in the fourth quarter of 2025. I would reiterate that this is starting to look like a trend. Our gross margin was 15.6% while SG&A was 9.2%, reflecting continued investment in our digital marketing and technology platforms. Net margin was 6.4% producing net income of $305 million and earnings per share of $1.24 on a GAAP basis, or $1.31 excluding mark-to-market losses on technology. We are currently expecting to continue the trend of margin improvement. Relative to our balance sheet, we ended the quarter with $1.8 billion in cash, and our homebuilding debt to total capital ratio was 15.8%. Our inventory turn of 2.5 times and return on inventory of 15.3% reflect efficiency gains in our manufacturing model. We continue to focus on cash generation and improving returns. I will leave it here for now as Diane will cover our guidance and our third quarter expectations. So let me conclude by returning to where I started at the opening of the call. The new investor deck that we have now posted at investors.lennar.com — we have spent time putting together a presentation that we believe gives investors a clear view of our consistently articulated strategy, the mechanics of our asset-light model, the technology investments we are making, and the path to margin recovery. We expect to continue to add to and refresh this presentation as we continue to advance our program. Overall, we have made the hard decisions, built the right platform, and we believe that we will continue to see that work mature into real bottom-line results. After over three years of navigating a rather difficult and complicated housing market, we believe that we are well positioned for conditions as they unfold. In the current market incentives are declining, margins are starting to improve, and our sales and marketing machine is generating stronger leads, engagement, and better conversion. Our operational platform — cost, cycle time, inventory turn — continues to improve on every dimension. Our market position is very strong in the vast majority of our markets, which gives us the scale and influence to drive that recovery intentionally rather than waiting for it. We are building towards that with clarity, discipline, and confidence. We simply could not be prouder of the extraordinary work driven by Lennar Associates across the company. They are all aligned in mission and strategy as they have executed through this extended period of difficulty, building new capabilities, driving down costs, shortening cycle times, and never losing sight of our mission: provide affordable, high-quality homes to families across America. With that, let me turn it over to Diane.
Thank you, Stuart, and good morning, everyone. Stuart's comments combined with our earnings release provide a comprehensive overview of our second quarter operating results. Therefore, I am going to focus on balance sheet highlights and then provide estimates for the third quarter. For this quarter, once again, we were highly focused on generating cash by pricing homes to meet affordability. As Stuart noted, we ended the quarter with $1.8 billion of cash and total liquidity of $4.9 billion. During the quarter, we started approximately 20.6 thousand homes and ended the quarter with approximately 38.6 thousand homes in inventory, which included about 3.5 thousand completed unsold homes or just above two homes per community. This is a meaningful reduction from three homes per community, or 5.1 thousand homes in Q1. Our construction cycle time improved to 121 days, our lowest cycle time in history, reflecting the impact of our production efficiencies. With respect to land, we own 2% on our balance sheet and control 98% through third parties. This configuration significantly lowers our balance sheet risk, especially in challenging markets. We ended the quarter owning 11 thousand homesites and controlling 484 thousand homesites. We believe our land portfolio of primarily optioned homesites provides us with a strong competitive position to continue to grow market share in a capital-efficient way. The total balance of deposits in ACRE and ACRE's pre-acquisition cost on real estate was $7.1 billion at quarter end, an increase of $237 million sequentially. The deposit component of this balance remained flat with Q1, which is consistent with a relatively flat number of homesites controlled. The ACRE balance increase was primarily driven by a net increase in capitalized option maintenance fees. We pay current-pay option maintenance fees to land banks based on the capital deployed on a multi-year pipeline of communities. Those fees are capitalized into ACRE. ACRE is then reduced as we purchase homesites from land banks and the cost becomes part of our land basis. So in summary, ACRE increases by fees paid on multi-year land and ACRE decreases by homesites purchased one at a time. Our inventory turn was 2.5x and our return on inventory was just over 15%. We maintain our focus on increasing asset return that will enable us to capture more return upside as margins normalize. Turning to our debt position, homebuilding debt to total capital was 15.8% at quarter end. We ended the quarter with no outstanding borrowings under our revolving credit facility and $1.7 billion outstanding under our term loan. Note that $400 million of 5.25% senior notes matured on June 1. We used cash to redeem the notes. Our next maturity is June 2027. Consistent with our commitment to increasing total shareholder returns, we repurchased 5 million shares for $447 million and we paid dividends totaling $123 million. Our stockholders' equity was approximately $22 billion and our book value per share was approximately $90. In summary, the strength of our balance sheet provides us with confidence and financial flexibility as we progress through the second half of the year. So with that brief overview, I would like to provide guidance estimates for Q3. Starting with new orders, we expect Q3 new orders to be in the range of 21 thousand to 22 thousand homes with continued focus on matching start and sales pace. We anticipate our Q3 deliveries to be in the range of 20.5 thousand to 21.5 thousand as we maintain even-flow production and turn inventory into cash. Our Q3 average sales price on those deliveries should be between $375 thousand and $380 thousand. Gross margin should be approximately 16%. As we noted last quarter, we expect sequential margin improvement quarter-to-quarter as the year progresses. Our SG&A percentage should be in the range of 8.8% to 9%. And all of these metrics, of course, are dependent on market conditions. We anticipate our financial services earnings to be between $95 million and $100 million. For our multifamily business, we expect a loss of approximately $15 million. For our Lennar Other segment, we expect a loss of approximately $20 million, excluding the impact of any potential mark-to-market adjustments. For the combined homebuilding joint venture, land sales, and other categories, we expect a loss of approximately $15 million. We expect our Q3 tax rate to be approximately 28%, and the weighted average share count should be approximately 238 million. On a combined basis, these estimates should produce an EPS range of approximately $1.20 to $1.40 for the quarter. Finally, as Stuart indicated, we are adjusting our annual delivery guidance to 82 thousand to 83 thousand homes, given current pressures on interest rates and continued macro uncertainty. With that, let me turn it over to the operator.
分析師問答
Thank you. We will now begin the Q&A session of today's conference call. We ask that you limit your questions to one question and one follow-up question until all questions have been answered. If you would like to ask a question, please unmute your phone, press 1, and say your name clearly when prompted. If you need to withdraw your question, you may use 2. Again, that is 1 to ask a question. Our first question comes from Susan Maklari from Goldman Sachs. Please go ahead.
Thank you. Good morning, everyone. Thanks for taking the questions. I wanted to talk about the cash flows of the business and how you are thinking of the ability to generate cash as you continue to leverage the standard product and any inventory turn improvement that we have seen?
Core products. You wanted to talk about core products? Susan, is that what you meant? Give the impact of the core product?
The core, yeah.
Yeah. Yeah. I think let me turn it to David and Jim, but I think there is an increasing percentage of our homes that are trending towards core product. It is very efficient. I think the real impact is the returns that we get on that because they are smaller product, easier to build, lower cost. So, while I think there is a cash benefit, I think the real benefit is on the return side, but Jim?
Yeah. I would say we are continuing to optimize product across the whole company.
We are taking different divisions in different geographies, seeing what works best, what cost structure is the best, and really using those across more communities, which I think is really going to have a long-term effect on costs and on selling.
At the end of the day, as we migrate towards more of our core product, we are going to continue to see reductions in both cycle time and our cost per square foot. We think this is a real strategic advantage as we go forward. As we reduce cycle time and cost per square foot, we are going to see increases in inventory turn. We think there is still room for improvement there, and this directly impacts cash flows.
Okay. That is helpful. And then thinking about a lot of these cost savings that you have been focused on — generating returns from those tech investments, those kinds of benefits — can you give us an update on how some of that is evolving and how we should think about the ultimate savings that you can realize and what that will mean for profitability and cash generation over time?
So let me start with that and say that our savings are going to come from a number of items. As I just noted, cycle time is one, and cost per square foot is another. But as we continue to improve our foundational technologies, they are basically the engine for efficiency. We are going to start to see our SG&A start to go down together with corporate G&A. The efficiencies are coming through a system that required an awful lot of updating. Our technology systems at the foundation level required a lot of work and we have had some missteps along the way in that regard. As we really get our new systems entrenched, it is going to enable us to bring costs down. The efficiencies that we will see through our operating systems can be very strong. I do not know that we can quantify either the amount or the timing, but we know that the cost reductions are going to be quite substantial as we go forward, particularly in some of our corporate and SG&A costs.
Okay. Thank you for the color.
Next, we will go to Alan Ratner from Zelman and Associates. Please go ahead.
Hey, guys. Good morning. Thanks for all the color and the presentation. Appreciate it. First question, we wanted to drill in a little bit on the incentive and volume interplay. It is encouraging to see the trend moving lower on incentives. At the same time, you did slightly reduce the volume expectations. I am curious: as you in the field are out there trying to dial back some of those incentives, are you seeing an immediate negative impact on your sales pace and absorptions that is translating to that reduced guidance? Or should we think about it more the other way, that you are expecting to see maybe volume pull back a little bit as you try to reduce incentives, and therefore you are reducing your start pace commensurate with that? How are you seeing that in the field?
I think we have done a good job through the quarter — a really excellent job actually — of both maintaining a sales pace, a very respectable sales pace of 4.3 sales per community per week,
While reducing our incentives. I think that is a combination of core product execution, our presentation, the way we engage with our customer, and the result of our improving sales and marketing funnel, leading to more appointments kept that we can then convert at a higher rate.
I think that is right. We measure sales not just weekly but almost daily and that takes away from the pressure on the weekends. Keeping that cadence allows us to lower incentives. Layered on top of that is a disciplined approach to both sales pace and production pace to alleviate some of the pressure so that we can allow some of the incentive reductions and pricing to catch up with pace. The market has been under stress and somewhat erratic, so we have taken some pressure off pushing into the market in order to let some of those incentive reductions mature.
Great. That makes a lot of sense. I appreciate that. Second, I was hoping to get a little bit of clarification on some of the numbers in your investor presentation. You have a number in here, $18.5 billion of inventory control. I am assuming that is kind of like the cost basis of all the land that you control either through options or land banking. I am guessing that is not a finished lot value because if it was, that would seem pretty low per unit. Can you confirm that this is the current cost basis of all of your 400-plus-thousand optioned lots?
Let me say it differently, Alan. It is the total amount outstanding. So it is the total amount of capital deployed by our land bank at that point in time. That includes acquisition dollars that they paid as well as development dollars that they have incurred. So you are right — it is not the finished lot price and it relates just to the land bank population.
Okay. So that is just land bank. So of the 400 and I think it's 484 thousand lots that are controlled through third parties, only a portion relates to that number. The majority relates to that number?
Yes. The majority are in the land banks, though we do have some with land developers.
So of that $18.5 billion, should we think of all of that being relevant to your ACRE? Meaning, are you assuming a 10% cost of capital on $18.5 billion such that we should think about $1.8 billion being the check you are writing every year to maintain those land bank arrangements, or are some of those structured more as picks on the back end? I'm trying to figure out the cash flow impact of that cost of capital.
That is exactly right. There are some — most of the land banks have a current-pay structure, but we do have some that are deferred payments. The structure varies. When you look at a static point in time, what you see is an accumulation of capital deployed by land banks and then reductions as we purchase homesites from them. The majority are current-pay.
Got it. Okay. That is really helpful. I appreciate it. We do not have a precise number right now, but that is useful color. Thank you, guys.
Next, we will go to Michael Rehaut from JPMorgan. Please go ahead.
Thanks for taking my question. Good morning, everyone. First, I have a question on the direction of third-quarter gross margins, but I wanted to start with a broader volume versus price question. In the last couple of years you have put a stake in the ground saying you are a volume-driven company and you use price or margin as the lever to maintain volume. This year is a challenging environment, but I am curious about the thought process behind lowering the closings guidance this quarter by 2.5 thousand homes at the midpoint, instead of lowering margin or price further to maintain the prior 85 thousand. It would seem you are saying you do not want gross margin to go below this level. Correct me if I am wrong and provide any insight into that shift for this year.
So the answer, Mike, is that we are dealing with a constantly changing macro environment. This past quarter has been particularly awkward: you have geopolitical uncertainty that is driving elements of interest rate expectations and inflation expectations. We felt that as we manage sales and starts pace and inventory levels, we did not want to go headlong into a clearly uncertain environment with too much conviction while the market was moving around. The prudent thing to do was focus on an absorption rate we felt comfortable with so we can manage inventory levels. You have seen the critical part of our narrative: inventory has come down from three homes per community to 2.1 homes per community, which is kind of our comfort zone. We had built up inventory looking forward to a more robust selling season that did not materialize as expected. At the same time, geopolitical uncertainties suggested we should err on the side of prudence. That is the calculus behind the guidance.
Okay. I appreciate that. Second, circling back to third-quarter gross margin guidance: you are looking at about a 40 basis point sequential improvement. How much of that is from incentives coming down a little bit? I believe incentives were 12.9% on homes closed in the second quarter. What are you expecting that to be for the third quarter, and what other drivers might be behind the sequential improvement, such as more volume or lower construction costs?
We are not guiding to or projecting a specific incentive percentage for the third quarter. The margin increase is more an expectation driven by inclusion of more core product, continuous improvement in our cost structure, and some of the operational improvements across the business. We do not have a specific projection for incentives. Their migration down is slow and gradual; that is a positive because they are not increasing. That slower decline is starting to present itself as a trend, and while it could be additional upside, our guided improvement is driven by operational execution we expect going forward.
Great. Thank you.
Next, we will go to John Lovallo from UBS. Please go ahead.
Thanks, guys, for taking my questions. I wanted to go back to the ACRE comments. It seems the implied option maintenance expense was maybe $270 million greater than what was expensed in the quarter. A: is that correct? And B: does that imply that 2Q EBIT is overstated by $270 million? Along the same lines, what is the expectation in the third quarter for this option maintenance expense?
Say the question one more time — I want to make sure I am answering the right question.
Sure. It seems the implied option maintenance expense was $270 million greater than what you expensed in the quarter. Are earnings actually overstated in the second quarter because of this? And what do you expect this expense to be in the third quarter?
That is a good question. As we have stood up our asset-light strategy, remember that you are recovering one year's worth of homesites and you are starting an ACRE accumulation or capitalization of the option maintenance fees for a broader range of land assets that are covering two, three, four years, maybe five years in some instances, of land accumulating on the platform. For a period of time there will be that imbalance and that is a natural ebb and flow of capital. It is why we have been more conservative on share buybacks over time because we knew there would be this imbalance for an extended period. It will ultimately equalize, so this is not an overstatement of earnings. It is a natural migration from an on-book balance sheet with land embedded to an off-balance-sheet asset-light approach and that migration will have that imbalance for some period.
John, I would add on a positive note that most of our land banks are getting closer to that equilibrium because many of our land banks have matured. Millrose, for example, was formed about a year and a half ago, so that is one that has a little bit longer to go to reach the point where the two sides match. But the trajectory is toward equilibrium for most of our partnerships.
That is helpful. Thanks. Second question — perhaps overthinking this — it seems the wording of how you describe incentives in the press release changed a bit over the past two quarters. The incentive load of 12.9% versus 14.1%: does that include base price adjustments in that number, or is that just buy-downs?
It is all in. It does include base price adjustments and buy-downs.
Okay. If that is an all-in number and there was a 120 basis point reduction sequentially, why did we not see a bigger impact sequentially in gross margin?
It is a function of a few other items. Sometimes you change your base price for an entire community, which is different from an individual home price reduction. That makes comparisons a bit convoluted when looking at base price versus net price. Additionally, you are opening new communities with different pricing, so mix effects matter.
Yes. You are opening different communities, community A versus community B, and you might open up at a lower price. You have seen our average sales price come down at the same time, so mixing and matching across communities affects the overall margin outcome.
Understood. I appreciate the color, guys.
Next, we will go to Jay McCanless from Citizens Bank. Please go ahead.
First question: at the end of 2Q, roughly 16 thousand homes should be about 80% of the closings that you are projecting for the third quarter. Could you talk about what the backlog incentive looks like right now, maybe just directional for what gross margins and incentives might look like in the third quarter?
No, I do not know. David, why don't you take that?
Backlog incentives?
Yeah. Right now we are sitting at about that same 12.9% on sales from Q2 that will feed into Q3 closings. Is that directional?
They are flat to down a little bit right now.
I think they are on a slight downward trend versus the 12.9% you referenced, but 40 basis points is almost flat in our operations, though every 10 basis points matters to some. As you go through the quarter, backlog gets delivered across quarters and mixes with homes sold during the quarter, so it is not a precise indicator.
Okay. Thank you for answering it. Second question: is there opportunity over time to improve that weighted average cost of capital (WAC) further to something lower than 11%? Or do you think you've maxed out for now? Also, you mentioned Millrose has more time to develop. Could that help the WAC move lower over time?
Great question. Absolutely. There is continual work with regard to the land bank structures that we have, and every day we are refining them and making them better. We tried to give an illustrative example of how that cost has decreased, but I think there is a great amount of opportunity as we continue to partner with our land banks.
This is one of the big opportunities for the company going forward. It is a laser focus of ours right now making the migration from an on-book to an asset-light model. That transformation is a lot of work and required bringing capital to a market that really did not exist a few years ago. Now that we are established, every day within the company we are looking at cost of capital and cost of execution and refining the model so that costs come down. It is another area of sizable opportunity and I think you will see movement here over the next two quarters.
From there, we will take one more question. Next, we will go to Buck Horne from Raymond James. Please go ahead.
I was wondering if you could elaborate on the conversations you've been having in Washington, D.C., and the comment that you believe some meaningful federal action is closer than the market may believe. Does that relate to something beyond what is in the current housing bill being negotiated? To the extent you're willing to elaborate, what levers could be pulled that would be beneficial for builders?
I think all builders have seen and been engaged in various discussions in Washington. While it would be inappropriate and probably not meaningful to talk about those conversations with specificity because you do not know where they will end up, the focus and attention has been something I have not seen in my career. That is meaningful. It indicates the affordability question in and around housing is significant and has the administration's attention. Over the past quarter they might have been distracted by other matters, so things that might be on the agenda could be overshadowed temporarily. But the attention has been consistent and I think affordability will come back to the front and center. Where discussions end up and what programs might be pursued is something we all have to wait to see, but I bring it up because many think interest was a flash in the pan; I believe it will return to being a central consideration. Thank you very much.
That concludes Lennar's second quarter earnings conference call. Thank you all for participating. You may disconnect your line and please enjoy the rest of your day.