Lennar 3Q16 Earnings Call Notes

Lennar’s (LEN) CEO Stuart Miller on Q3 2016 Results

Slow but steady housing market recovery

“We have consistently believed that we are in a slow steady though sometimes choppy housing market recovery and we have crafted our operating strategies specifically to position us well to grow steadily and consistently and to act opportunistically in these market condition”

Production levels are still too low to meet the needs of household growth

“we continue to believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of the American household growth that is now normalizing. Additional questions have been raised as the effect of an increase in interest rates relative to the recovery for first time homebuyers segment. We believe that there continues to be a growing pent-up demand for dwellings of all types across the country, though stronger in some markets than others”

First time home buyers have come back to the market more slowly

“First-time home purchasers have come back to the market more slowly than they have historically and more slowly than expected. While the growing percentage of our for-sale homebuilding business continues to be geared towards first-time purchasers, our broader new household strategy has targeted the rental market as well”

Margins impacted as move to shorter duration land

“Okay. So we have been pretty consistent Bob, in saying that we expect our gross margins to be drifting down. We highlighted that at the beginning of this year and as we move through last year as well. But we also focused attention on net operating margin primarily recognizing that as land that was bought at very low prices flow through our system, margins would be higher. As that land dissipated and we ended up with more shorter term land, our margins would – our gross margins would drift down. But we felt that as the recovery matured, we would continue to focus on bringing down our growth rate, focusing on efficiencies in our SG&A, as we have been articulating and really driving increased earnings through more efficient net operating margin.”

Industry average gross margin is at 21, 22%

“. Our view has been that our gross margins will continue to drift downwards. I think if you look at the average of the industry, if you look at what’s normalized gross margin in the industry, you are probably looking at 21%, 22%. And over time, we will probably drift in that direction. The industry average might even be lower than that. ”

Land and labor is expensive and hard to come by in this environment

” We are not focusing on stretching growth in an environment that just isn’t giving it easily. Land is expensive. Land is hard to come by. People are expensive and hard to come by. It’s hard to grow operations efficiently and effectively at an accelerated rate in a market where land and labor is really constrained. And so we have chosen to focus on operational efficiencies as a mechanism for driving profitability going forward.”

Rick Beckwitt

Starting to take less risk in land impacts margins, more wholesale

Yes. This is Rick. The natural evolution of a soft pivot is that you are starting to take less risk in land. Associated with that risk profile is a margin presence. You are looking for near-term opportunities, quicker turns. So gross margin will naturally come down and IRRs will come up. And so when we are going less long on some of these positions, it means that you are paying a little bit closer to retail than you were in buying wholesale.