Lennar Corp (LEN) 2019 Q3 法說會逐字稿

Welcome to Lennar's Third Quarter Earnings Conference Call.

(Operator Instructions) Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I will now turn the call over to David Collins for the reading of the forward-looking statement.

Thank you, and good morning, everyone.

Today's conference call may include forward-looking statements, including statements regarding Lennar's business, financial condition, results of operations, cash flows, strategies and prospects.

Forward-looking statements represent only Lennar's estimates on the date of this conference call and are not intended to give any assurance as to actual future results.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties.

Many factors could affect future results and may cause Lennar's actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described in this morning's press 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.

Sir, you may begin.

Great.

Good morning, and thank you.

This morning, I'm here with Rick Beckwitt, our Chief Executive Officer; Jon Jaffe, our President; Diane Bessette, Chief Financial Officer; and David Collins, who you just heard from.

We're out in California today with our Board.

We have our board meeting tomorrow, but we're touring our Board on some of our properties out in California, showing them what makes us the company that we are.

I'm going to start today with a brief overview.

Rick and Jon are going to give some additional operational remarks, and Diane will deliver further detail on our third quarter numbers as well as some additional guidance for the remainder of this year.

As always, when we get to Q&A, we'd like to ask that you limit your questions to just one question and one follow-up so that we can accommodate as many participants as possible.

So let me go ahead and begin by saying that we're very pleased to report a very strong third quarter performance that reflects both the continued recovery in the housing market as well as continued focus on leveraging our size and scale and delivering greater cash flow and higher returns.

Our results reflect the fact that the housing market continued to strengthen throughout the third quarter, confirming and continuing the trend that we reported in our earnings call last quarter.

The market for new homes has been improving from last year's pause as lower interest rates have stimulated demand and improved affordability, while the overall fundamentals of the economy have remained strong.

We clearly saw traffic in sales continued to strengthen in the third quarter as a combination of lower interest rates, together with slower price appreciation and positively impacted affordability.

And that together with low unemployment, wage growth, consumer confidence and economic growth drove the consumer to return to a more affordable housing market.

Current market conditions are strong and they've been continuing to improve as the production deficit driven short supply, lower interest rates and attractive pricing have motivated consumers.

In the third quarter, we achieved strong net earnings of over $513 million or $1.59 per share.

This result derived mostly from solid operating results from both homebuilding and financial services.

In homebuilding, stronger sales drove and are driving stronger-than-expected deliveries at stabilized margin levels of 20.4% by the end of our guidance as incentives have moderated.

While deliveries jumped 7% over last year and new orders improved 9% over next year -- last year, our size and scale in most of the best markets in the country enabled us to offset the impact of rising land costs with production cost savings and leverage -- and overhead leverage, which has driven our SG&A to an all-time third quarter low of 8.3%.

And we're confident that these trends are going to continue into the fourth quarter.

Our financial services performance also contributed to our earnings beat, and I want to focus on this for a couple of minutes as this performance is a proxy for many of the important initiatives driving our company today.

At the beginning of the quarter, we expected the contribution from this segment to be approximately $54 million.

By the end of the current quarter, our Financial Services segment generated a record quarterly profit of $78.8 million or an improvement of about 45% from our expectations.

It's noteworthy that having sold our retail mortgage component, our retail title component and our retail home insurance agency, we no longer drive additional volume from spikes in the mortgage refi business that has been booming as rates have gone down.

We're only producing from our core business.

While some of this beat drives from market conditions, much of the performance story from this segment is about shedding noncore assets, which enabled our management team to focus on the core homebuilding-oriented business and implement new technologies to streamline the remaining business process, all while improving our customers' experience.

This core focus drove significant operational improvement versus the prior year with fewer assets deployed as follows: First, we increased the company's combined mortgage capture rate from 71% to 77% having integrated the CalAtlantic business, which had much lower capture rates than where Lennar historically operated.

Second, and perhaps most importantly, we reduced the cost to originate a loan by 22% from $7,700 for loan to approximately $6,000 for loan, and this is the continuation of the operational improvements, which have now driven the origination costs down 33% from $9,000 per loan in 2017.

And then third, we reduced the total financial services associate headcount by over 50% from approximately 3,700 associates with the announcement of CalAtlantic to now below 1,600 associates.

The technology initiatives implemented include robotic processes to automate repetitive detail-oriented tasks that eliminate human error and manual intervention.

These initiatives are helping our journey to reduce paper flow, streamline the closing process and drive a friendly -- friendlier customer experience.

Technology, together with management focus, has enabled efficiency, a better customer experience and a much better bottom line.

Our management team has been focused on incorporating new technologies on our old operating chassis to both drive down cost and to create significantly better customer experience in mortgage with our blend partnership, in title and escrow services with our States Title partnership and home insurance with our Hippo Insurance partnership.

And although ultimately, we will improve our entire end-to-end process to get to a one-tap closing, we're really starting to see the fruits of our focus and investment at the bottom line right now.

And these improvements specifically and these types of improvements generally are sustainable and will continue to drive bottom line improvement in our financial services segment and across our company in the future.

Moving on, while strong operating results drove the bottom line, our overall focus on inventory, land spend and shedding noncore assets has driven a strong and improving cash flow picture as well.

First, we are reducing our overall inventory levels as we've had a relentless focus on our pivot to land-lighter strategy.

From the timing of land purchases to the duration of the land that we buy to the percentage of option versus owned land, we are migrating towards a significantly smaller land inventory, driving our business forward.

Second, we're also driving our asset base lower as we continue to focus on monetizing noncore assets and migrating to a core pure-play homebuilding and financial services platform.

As noted, we have shed various noncore financial services assets this year.

We continue to divest and monetize various remnant Rialto assets, and we're working on finding proper positioning for other ancillary businesses as well, and the latter will happen as quickly as is practical.

With that said, strong operating results, together with our focus on overall inventory reduction, has increased our expected cash flow for this year to $1.5 billion and projected annual cash flow expectations for 2020 are continuing to head towards the $2 billion mark.

Our strong cash flow and strong cash position enabled us to repay $500 million of debt at the beginning of the quarter, while also opportunistically repurchasing another 6 million shares of stock at an average price of about $48.5 a share through the quarter, and we will pay off another $600 million of debt for cash flow, right at year-end.

At quarter end, we had a debt-to-total-cap ratio of approximately 37%, which is 300 basis point improvement over last year.

And while we're not giving specific guidance for 2020 at this time, we're very optimistic about the prospects for next year.

Accordingly, we expect to generate strong cash flow for the remainder of 2019 and expect to continue to use excess cash flow to both pay down debt, while we continue to opportunistically repurchase stock.

We expect to see our margins improved steadily throughout the remainder for the year as prices remain stable and incentives continue to subside and ensure that we achieve our 2019 closing target of now approximately 51,000 homes.

We are confident that we'll achieve this target, which frankly would have been higher except for the hurricane activities that slowed production at the end of the quarter.

Before I turn over to Rick, Jon and Diane, let me just say that we remain encouraged by both Lennar's position and market conditions for the remainder of the year.

Our size and sale in each of our strategic market continues to facilitate the management of costs and production in a land-and-labor-constrained market.

Our focus on technology is driving efficiency that is reflected in our consistent improvement in SG&A and our bottom line.

Our strong cash flow and bottom line profitability are continuing to enable us to reduce debt and return capital to shareholders.

Our strong balance sheet continues to improve and position us for the future.

And our strategy of shedding noncore assets continues to drive an intensified focus on our core homebuilding and financial services businesses.

As the homebuilding market continues to improve in the wake of the recent pause, we're optimistic about our ability to deliver strong and consistent performance for the remainder of 2019 and into 2020.

With that, let me turn over to the rest of the team.

Rick?

Thanks, Stuart.

We had a strong quarter driven by a solid execution of our operating strategies.

Homebuilding revenues for the third quarter totaled $5.4 billion, representing a 3% increase from 2018.

This was driven by a 7% increase in deliveries to 13,522 homes and a 5% decrease in average sales price.

Deliveries for the quarter exceeded the high end of our guidance as we were able to accelerate some fourth quarter closings into the third quarter as buyers took advantage of lower mortgage rates.

Our gross margin for the quarter totaled 28.4%, which was just shy of the topside of our prior guidance and up 30 basis points sequentially from the second quarter.

This sequential improvement benefited from direct cost savings and were slightly impacted by an increase in the number of closings coming from lower-margin third-party option contracts versus the land we developed.

This is in line with our land lighter strategy that is focused on maximizing cash flow and internal rates of return.

I will discuss this in greater detail in a bit.

Our SG&A in the quarter was 8.3%.

This marks an all-time third quarter low and highlights the power of our increased local market scale and operating leverage.

Homebuilding operating earnings totaled $659 million, up 8% from the prior year.

And net earnings for the quarter totaled $513 million, up 13% for 2018.

New orders for the quarter increased 9% to 15,369 homes, exceeding the high end of our Q3 guidance.

New orders increased in each of our homebuilding segments, with August being the strongest month in the period.

From a dollar value perspective, new orders totaled 5.2 billion which was at 3% from the prior year.

Our average new order sales price declined 5% year-over-year and 2% sequentially, reflecting our continued focus on the strong entry-level market.

The entry-level market now accounts for about 40% of our business, and this will continue to increase as more first-time buyer communities come online and increase our overall community count in 2020.

During our third quarter, we saw increased demand, which benefited from lower mortgage rates and increased homebuyer sentiment.

Our sales pace per community increased 10% year-over-year.

We continued to experience solid traffic on both our website and at our Welcome Home Centers and are optimistic that sales will continue to be strong in Q4.

We ended the third quarter with a sales backlog of 18,908 homes with a dollar value of $7.6 billion.

This backlog, combined with our current housing inventory, puts us in a great position to close about 51,000 homes in fiscal 2019.

As we look forward to 2020, we are laser focused on improving our returns on capital and generating significant cash flow.

With this in mind, increasing our percentage of option homesites and reducing the amount of owned homesites are our top priorities.

At the beginning of this year, we set a 2-year goal of having 40% of our homesites controlled via auctions in similar arrangements.

We made great strides on this front in the third quarter as our percentage improved from 25% to 30%.

This increase reflects the strength of our relationship with local developers and their desire to work with us to increase our option position given our size and scale in our markets.

We expect to continue to expand on our existing relationships and enter new regional and national land platforms over the next 12 months.

Based on this, we are now increasing our goal of control homesites to between 40% to 50% of our land needs.

During the third quarter, we also made progress reducing our years owned supply of homesites from 4.5 years to 4.4 years and continue to target a goal of 3 years.

As we've reached these 2 goals, it will enable us to reduce our on-balance sheet land set and purchase homesites on a takedown basis much closer to the start of the home.

This will generate additional cash flow and drive meaningfully greater returns.

Consistent with our land light strategy and focus on increasing returns, we are continuing to develop a program to address the single-family rental market.

There is no question that there is a shortage of affordable and workforce housing and new single-family rental communities can't help solve this problem.

Given this shortage, there is intense investor interest in new single-family rental communities where the owner can leverage the overhead costs of managing the rentals because they're all in the same community, with identical features from home to home and Lennar is uniquely positioned to capitalize on this opportunity.

Last quarter, we daylighted our single-family rental program where our homebuilding operation is building and selling homes in bulk in a community on land owned by a third party with no lease-up risk to Lennar.

We love this expansion of our core business as it allows us to leverage our homebuilding machine and existing overhead, and it will generate high returns and profits, all with no accompanying land or lease-up risk.

This is a perfect expansion of our land light strategy.

And given our strong relationship with landowners and developers and our low cost and speed of construction, we're optimistic that we can increase deliveries in the next couple of years.

Additionally, this program provides an interesting and unique hedge to our wholesale business.

Now, I'd like to turn it over to Jon.

Thanks, Rick.

Today, I want to speak about our focus on cost reduction across our platform.

First, I will discuss our significant size and scale have led to Lennar becoming the Builder of Choice, resulting in reduced direct construction cost and advantageous cycle times.

With respect to direct construction costs, I mentioned on our last earnings call that we look forward at the next few quarters and saw that directionally, our direct construction costs were increasing.

This pour out in our third quarter as we saw our direct costs were down sequentially from Q2 by $0.99 per square foot, or 1.6%.

From a year-over-year perspective, our direct costs were up just 3%.

This represents the lowest rate of year-over-year increase in 11 quarters and compares favorably to a year-over-year rate of 7% just last quarter.

We have visibility into the continuation of this trend over the next few quarters as we review the direct cost for homes delivered in Q3 by the quarterly cohort that the homes were starting in.

Looking at the sequential cohort, it is very clear that our direct costs are trending down over each subsequent quarter and will contribute positively to our gross margins going forward.

Sequentially, in Q3, our material costs were down 3.5% from Q2.

Significantly, over 65% of our material cost line items were lower sequentially, with the biggest declines coming from lumber, drywall and exterior finishes.

As I have previously discussed, lumber represents the largest single-cost item at approximately 13% of direct total -- total direct cost.

Lumber reached its low in December 2018 that since remained in the range, averaging about $350 per thousand board feet.

On the labor side of costs, the severity of the labor shortage in the construction industry has not abated, but our labor cost moved up just 1% sequentially in Q3 over Q2.

We see across all of our markets that our Builder of Choice focus is playing out to allow Lennar to minimize the impacts of this labor shortage.

Some real-time examples of this is we have national and regional manufacturers struggling with critical labor shortages and supply interruptions.

In 3 separate situations, these suppliers, who are strategic partners of Lennar, are flying in crews and materials from other regions of the country to complete the work in Lennar communities.

These are a few examples demonstrating that our size and scale allow us to get above and beyond responses to rectified issues.

This is further evidence of our ability to attract trades to our job sites away from other builders, enabling Lennar to have significant cycle time advantages.

Size and scale, combined with even-flow production and everything is included platform by the consistent, predictable volume for our trades.

Let me now turn to SG&A for a moment.

Given our significant size and scale, we're leveraging our overhead with a focus on simplifying all of our operations, systems and processes to allow our associates to operate more efficiently.

We continue to gain operating leverage towards simplifying our systems, processes and procedures.

As a result, our associates have become significantly more efficient and productive, resulting in our year-over-year personnel spending flat while our volume increased by 7%.

We continue to leverage technology to reduce our customer acquisition cost spend by sourcing higher-quality online customer leads.

Our focus is on the quality of our Internet leads, not just quantity.

Through a rigorous AB testing of digital marketing strategies and tactics, we deliver higher-quality leads to our Internet sales team.

The result is our Internet leads to find us someone who requests specific information and gives us their contact information are up 50% over last year.

The resulting high volume of high-quality leads reduces realtor spend and delivers more volume across the fixed cost of our sales platform.

I will conclude by echoing what you heard from both Stuart and Rick.

We are laser-focused on improving our net operating margins, free cash flow and return on capital.

To achieve these goals, our program is simple.

Maximize efficiency due to land light, have everything is included, even flow production, with sales matched to the production pace, drive direct costs down through strategic builder choice partnerships, and use technology and leverage to reduce our SG&A.

Now, I'll turn it over to Diane.

Thank you, Jon, and good morning to everyone.

So let me summarize and reemphasize a few points from our third quarter, and starting with homebuilding.

So looking at deliveries, you've heard that our deliveries increased 7% from the prior year and exceeded the upper range of June guidance by 2% as we benefited from a favorable interest rate environment.

Our third quarter gross margin on home sales was 20.4%, which was at the higher end of our June guidance.

The prior year's gross margin was 20.3%, including CalAtlantic's purchase accounting and 21.9%, excluding purchase accounting.

Q3 2019 gross margins were impacted by lower average sales prices as we strategically repositioned our product to target more first-time homebuyers and lower-priced homes.

Gross margin was also impacted by an increase of 60 basis points in sales incentives year-over-year though incentive decreased sequentially by 30 basis points.

Additionally, while construction costs were up 3% year-over-year, there was a decrease sequentially of 1.6% as we realized the benefits of our size and scale.

Our third quarter SG&A was 8.3%, which is the lowest third quarter SG&A percent we have ever achieved and was at the lower end of our June guidance.

This compared to 8.5% in the prior year.

The improvement, as Jon mentioned, was primarily a result of continued operating leverage due to size and scale in our markets and our focus on technology initiatives.

Turning to new orders.

New orders increased 9% from the prior year and exceeded the upper range of June guidance by 4%.

Our cancellation rate for the quarter was 16%.

And then looking at absorptions, absorption for the third quarter was 3.4 versus 3.1 in the prior year, and we ended the quarter with about 1,300 active communities.

And finally, for a homebuilding joint venture land sales and the Other categories, we had a combined earnings of $18 million compared to a $3 million loss in the prior year.

The current quarter primarily benefited from $12 million of gross profit on land sales and also $12 million earnings of Other income, largely related to the sale of 2 clubhouses, both as a result of our continued focus on cash generation, and this was partially offset by about $10 million of losses from our joint ventures.

Now turning to Financial Services.

Looking at the results in total, operating earnings were a record $79 million net of noncontrolling interest compared to $61 million in the prior year, and the details as follows: Mortgage operating earnings increased to $57 million from $34 million in the prior year and as you had us mentioned, mortgage earnings improved primarily due to a higher capture rate of increased Lennar deliveries as well as reductions in loan origination costs, driven in part by technology initiatives.

These items more than offset the decrease in retail origination volume as a result of the sale of substantially all of our retail mortgage business in Q1 of '19.

Title operating earnings were $18 million compared to $22 million in the prior year.

The decrease was due to the sale of the majority of our retail agency business and Title insurance underwriter business, the States Title in Q1 of '19, which resulted in a 56% decrease in Title revenue.

This decrease in revenue was partially offset by an increase in captive closed orders and a decrease in operating expenses.

Rialto Mortgage Finance operating earnings were consistent with the prior year at about $4 million.

A decrease in securitization dollar volume was offset by an increase in securitization margins.

And then turning to Multifamily.

Our Multifamily segment had operating earnings of $11 million, net of noncontrolling interest, compared to a loss of $4 million in the prior year.

There was 1 building sale this quarter that resulted in the segment $13 million share of gains compared to 1 sale in the prior year that resulted in segment $2 million share of gains.

And then in the Lennar Other category, this is the category for the legacy Rialto assets, outside of Rialto Mortgage Finance and our strategic technology investments.

Earnings were $16 million in this quarter compared to $10 million the prior year, and this was largely driven by higher earnings related to the Rialto fund investments that we've retained.

And then finally looking at our tax rate, our tax rate for the quarter was 23.1%, which was lower than our guidance of 25.5%, primarily due to energy credits that our team was able to generate this quarter.

And then turning to the balance sheet.

We ended the quarter with $795 million of cash.

And at the end of the quarter, our homesites owned and controlled were 310,000, of which 70% are owned and 30% are controlled.

There's an improvement, as Rick mentioned, from 25% controlled in the prior quarter.

And as we've said, our year's supply owned decreased sequentially from 4.5 to 4.4.

Land acquisition spend during the quarter was $691 million and land development was $645 million.

We had borrowings on our revolving credit facility of $700 million, leaving $1.7 billion of available capacity.

During the quarter, we retired $500 million senior notes due in June.

And since the acquisition, as Stuart mentioned, in CalAtlantic, we retired $1.6 billion of senior notes.

As we mentioned, during the quarter, we repurchased 6.1 million shares of stock for a total of $295 million, and this brings our repurchase activity to 8.1 million shares or $395 million so far this year.

At the end of the quarter, our homebuilding debt-to-total cap ratio was 37.1%, which improved 300 basis points from the prior year and 120 basis points sequentially.

Stockholder's equity increased to $15.4 billion and our book value per share grew to $48.40 per share.

So now turning to guidance.

I'd like to give a little bit of guidance for the fourth quarter.

Starting with homebuilding, we expect new orders to be between 12,200 and 12,400.

We expect to deliver between [15,800] (corrected by company after the call) and 16,000 homes.

This estimate includes the impact of a hurricane that Stuart mentioned as well as the acceleration of deliveries into Q3 that Rick referenced.

We expect our Q4 average sales price to be between $385,000 and $390,000.

We expect our Q4 gross margin to be in the range of 21.25% to 21.5% and our SG&A to be in the range of 7.7% to 7.8%.

And for the combined homebuilding joint venture, land sales and other categories, we expect a loss of -- Q4 loss of approximately $20 million.

Turning to Financial Services, we believe our Financial Services earnings will be between $68 million and $70 million.

We believe our Multifamily segment will be about breakeven.

And for the Other category related to the Rialto legacy assets and our strategic investments, we expect Q4 [earnings] (corrected by company after the call) to be between $5 million and $10 million.

We expect our corporate G&A to be about 1.4% of total revenues, and we expect our tax rate to be about 25.5%.

The weighted average share count for Q4 should be about 317 million shares, and this estimate does not include any additional share repurchases that we might opportunistically pursue.

This guidance should produce an EPS range of $1.81 to $1.94.

In summary, we believe we are well positioned to continue to generate strong profitability, increased cash flow and improved returns for the balance of 2019 and continuing into 2020.

And now, let's turn it over to the operator for questions.

(Operator Instructions) First question comes from Stephen Kim from Evercore ISI.

This is actually Trey on for Steve.

So first I wanted to ask about -- on the orders front.

The West, Central and in your Texas regions, all were pretty good, up 10% or more, but the East appeared to be lagging a bit.

Is there something unique in that geography?

Or is there something a little bit more comp related that's more difficult in the quarter?

We're just wondering what's kind of going on there.

In the year ago period, we had a lot of new communities open in the quarter, and we had a pretty strong sales period in the year ago.

There is nothing going on that's abnormal or unusual.

I feel that the Eastern markets are strong across the board.

Okay.

And then you highlighted this quarter that your closings benefited from a pull-forward deliveries due to the lower rate, and it's also something you talked about last quarter as well.

I'm just wondering, is that something that is included or that dynamic, is that included in your fourth quarter guide?

Or is that something that could, again ultimately be a little bit of upside to your numbers?

Yes.

I think with regard to the acceleration of people's desire to close, when rates move, people lock, and they don't want to lose the opportunity, and we just saw some people do that in the third quarter.

And if there is similar phenomenon in Q4 then we'd expect something like that as well, but we haven't put that in our guidance.

Next question comes from Ivy Zelman from Zelman & Associates.

Congrats on a great quarter.

So it's been almost 2 years -- roughly 2 years since you initially announced the acquisition of CalAtlantic.

And I thought it might be helpful, maybe you can share with us with respect to the aspects of the integration, where you've been most pleasantly surprised?

And where there are other areas that you still think there's untapped opportunity that you can capitalize on with the dominant scale that you have?

And then I have a follow-up.

Ivy, this is Jon.

I'd say, most pleasantly surprised with how quickly and smoothly the integration went across the entire platform.

So to me, it's not one particular area that stands out, but everyone very quickly was on the same page.

There is no confusion about you turn left or right.

And a very quick transition to everything's included out in the communities to have our consumer-facing front all on the same page.

Same thing as you look across our Internet, digital marketing platform.

Same thing as you look across our land acquisition discipline.

Everybody really is in lockstep pulling in the same direction and that's what we're most intrigued about.

I guess I'd add to that Ivy, we always assume and expected that given the increase in scale and size in our markets that that would be a significant advantage.

And if anything, we underestimated the benefit of that.

And it really -- it comes from all aspects of the business, access to labor, our cost structure and really on the landside.

I think that -- look, I think that the most remarkable part of 2 years -- just 2 years passing since that announcement and no disrespect intended, we don't even talk about the acquisition anymore.

We are one Lennar.

We are one company.

And vestiges of integration, things like that, are far behind that.

I think that as one company, we're focused on using our size and scale to really leverage every aspect of our business.

You hear about it a lot relative to land, you hear about it a lot relative to production costs, and you see a lot of leverage in SG&A, and all of those components are being driven by the fact that we've got size and scale and a fully integrated program as one company-unified program.

That's very helpful and sounds awesome.

And hopefully, there's a lot more to come from the scale and your dominant position.

And moving to one aspect of it with land, Rick, maybe this is for you, just -- with respect to the regional lead developers that you've partnered with, I think you've talked probably about 3. Some of the clients I was chatting with at our housing summit, we're talking about, why is it any different than another builder who's optioning lot from land developer.

And I thought it would be helpful one, if you can talk about it.

If you've expanded upon this rate?

And why is it advantage, the relationship you have, because I think you own a portion of those companies, maybe elaborate on that, Rick if you would?

Yes.

I think the key differential is the people that we're working with, our experts in going through the entitlements and really finding great pieces of properties that are a game-changer.

And if you think about our core business, as a builder, we don't want to really play in the entitlement states.

So these are regional folks that this is what they do.

They find opportunities before anybody else can, and we've worked with them to expand our land platform.

And we have expanded them into other geographies and it's working excessively.

This is Jon.

I'd interject that the strategic relationships differential between what you hear from other builders.

I believe that these are long-term ongoing relationships that will continue to produce opportunities for us over time as compared to one-off auction transactions with the developer doing a single course.

Next question comes from Truman Patterson from Wells Fargo.

First, just wanted to touch on the order incentives, could you just discuss how they tended through the quarter, possibly the magnitude of the improvement from 2Q to 3Q?

And I realize it might be difficult to parse out numerically, but could you just discuss qualitatively, how incentives trended by segment, entry-level and move up?

Yes.

We didn't have too much variability amongst the months in the quarter.

And as we've always said, we're really focused on net pricing and focused on maximizing the value of our inventory and turning inventory.

Our key focus, as Stuart, Jon and Diane and I have said, is we're very focused on return on investment.

And so net margin is really what we're focused on.

Okay.

When I'm looking out a year or so, I'm really trying to hope to understand where your growth will likely come from community count absorptions.

You're starting to replace you move-up communities with higher absorbing entry-level communities.

Will that just lead to very modest community count improvement?

I believe you alluded to it on the call previously, and growth will primarily come through increased absorptions.

Or do you think you have enough owned land that you can really liquidated and grow communities regardless kind of a decent rate in 2020, call it, like a mid-single-digit clip.

We're expecting to see community count growth going into 2020, progressing through the year.

And with our focus on the entry-level and lower-price market, absorptions are going to be stronger given the fact that there is higher velocity in the entry-level market.

Next question comes from John Lovallo from Bank of America.

First one, I believe last year, you provided delivery, margin and SG&A outlook for 2019 during the third quarter.

Is there any reason why you guys decided not to do that today?

There is no specific reason.

We just have traditionally given guidance for the following year in the fourth quarter.

Last year, we made a decision strategically to accelerate that, and we've just gone back to our normal practice.

As I said in my comments, we're optimistic about 2020.

It's just a little premature for us to do -- to give specific guidance.

And I think that as we have traditionally done in the first quarter, we will give the guidance that we normally give.

Okay.

That sounds good.

And then in terms of orders, if there are any comments, maybe at least directionally you can give us in terms of September and how that may have trended?

Yes.

So historically, we've not given additional guidance past the quarter's end.

But as we said in our remarks, the market has been very strong, and it has continued to be improving, and I think will go above that far.

Don't want to set a new standard, but it's clear that the trend through the quarter was positive with August being our most robust month.

And continuing into the fourth quarter, we're seeing additional strength.

Next question comes from Mike Dahl from RBC Capital Markets.

Sir, maybe just a pickup on that last comment.

I think, clearly, your business has seen the strength in the numbers and it's great to hear the positive commentary.

One of the pushbacks we still get to the overall group is just the broader macro concerns and whether or not these are really seeping into consumer behavior at this point.

So can you give us a little more color on what you're hearing from the field as buyers are balancing affordability being restored versus maybe or maybe not being impacted at all by some of the headlines out there?

I think that -- and we talk about this a lot.

It's easy to get a little confused in today's market.

There was a lot of noise in the political scene, and it certainly feels like it's creating cross currents.

But as we look to the feedback that we're getting real-time from the customers coming to our Welcome Home Centers and talking to us about their thought process, their future, we're still seeing that underpinning the fundamentals of the economy are driving consumer sentiment.

And perhaps, we are more sensitive to the noise than the actual consumers.

Low unemployment, generally positive job growth, a fairly strong economy, all of these things seem to be driving consumer sentiment more than some of the new stories that we see that seem to be politicized.

And so we're -- as we've noted, we've seen growing strength as we went through our third quarter and that seems to be the dominant direction.

I know that there's is a lot of questions about upcoming potential recession and things like that, our customers don't seem to be viewing it that way.

And I think that the housing market, in general, seems solid and strong and continuing to improve.

Okay.

That's helpful and good to hear.

My second question then just specifically with respect to the fourth quarter, orders guidance.

If we heard it correctly, it sounds fairly robust in terms of the growth there, and there is an easier comp.

But just on the question of absorption versus community count, maybe a little more detail?

The comment was made, growth and community count into 2020, how should we think about the balance of community count versus absorption in -- within that fourth quarter, orders guide specifically?

Community count is a very complicated number.

It's got a lot of moving parts.

So into the fourth quarter, we're kind of suspecting that our community count is going to be about where we are and we'll see a little bit more absorption.

As I noted in my comments, our guidance for the fourth quarter has been moderated by the production slowdown that we saw relative to all the preparation work, all the way up to eastern seaboard that had to take place relative to the hurricane coming through and that really shut down a few weeks of production.

So our guidance might have been higher had we not had that kind of blip along the way.

In terms of community count as we look into 2020, I think that what we've probably understated is the really strong relationships that are driving our land strategy overall, all the way from the way that we're migrating from owned to auction programs to the access to new communities to the kind of regional and sometimes national relationships that will define the way that we own and hold land and are prepared for growth in the future.

These are evolving stories that really come down to very, very strong long-term relationships that have been enhanced by our additional size and scales and the 2, relationship and size and scale are working hand in hand to give us a great deal of confidence that as we think about community count going into 2020, we are on an upward trajectory and that's going to define our growth prospects as we go forward.

Next question comes from Michael Rehaut from JPMorgan.

Congrats on the quarter.

First question, Stuart, I just wanted to expand a little bit on what you just said before regarding the land relationships, the shift towards lot optioning, the ability and sourcing of land and communities going forward and kind of how that's allowing you to at least directionally say you expect to grow community count next year.

With the increase of the lot-optioning target from 40% to 45%, I guess, maybe just asking it perhaps a little bit more bluntly, but number one, I was hoping to get a little bit of a timeframe of when you hoped to achieve that 40% to 45% range?

I think in the past, the 40% number was a little bit more.

Perhaps over the next couple of years, let's say, or maybe the next 18 months even, if we're still talking about that same time frame, let's say, now through the end of next year or even 2021.

And secondly, as part of this question, just on your community count comments and access to land, I believe you'd also talked about with the overall soft pivot with that you've been doing over the last 2 or 3 years, most recently, kind of a unit volume growth objective of perhaps low to mid-single digits, I was curious if the enhanced access to land changes that type of growth dynamic that perhaps, if you're opening yourselves up to a broader enhanced set of land developers and stronger relationships, if that changes that growth calculus at all?

Okay.

So that's a lot of questions embedded in one there, Mike.

So let me see how I can do.

Let me start at the end and say that we're really not attending our growth trajectory.

We're refining the way that we get there, and we're really using the expanded relationships that we've got and size and scale to moderate our growth, but the access to land that we are -- that we're working on and working with right now really enables us to grow as much as we perhaps want to, but we're constraining their growth in order to do it in the most effective way possible.

And by constraining growth, what we're enabling of ourselves is the ability to make that migration from a land heavier to a land lighter strategy, which is going to generate very strong cash flows that enable us to manage our balance sheet, our debt levels and our return of capital strategically.

So we're really pretty enthusiastic about that.

Again, the relationships that we have that are long-term relationships, together with the size and scale that we've amassed, gives us a lot of optionality.

And we know that we've highlighted a fairly aggressive target in terms of migrating from what was 20% to 25% to 30% option versus owned land relationship to a 40% to 50% level over the next couple of years, and that's an aggressive standard.

But when we look at what's in our hopper and the things that we're working on and understand that when this management team focuses on something, we have a lot of tools in our toolbox.

We have people who have deep, rich relationships and that we can activate that stuff and make these things happen and that's what's happening behind the scenes.

What we have in the hopper right now gives us a pretty good sense and confidence about being able to set high standards and expectations and then deliver on them.

That's what you've seen from us in the past.

That's what you going to see from us now.

Great.

I appreciate that.

I guess if I can just -- I know this first question multifaceted, but I'll see if I can sneak another one and if you allow.

On the gross margin side, obviously, it's an encouraging guide for the fourth quarter, and you're kind of continuing to see that recovery throughout this year, as many builders have coming off of the first half of the year when the industry kind of processed some of the higher incentive levels of the back half of '18.

Should we be thinking of kind of the '21 -- low '21 as kind of a new reset baseline at this point, given how the housing market has normalized and incentives have kind of receded off of those higher levels 6 to 12 month ago as we go into 2020?

So look, there are some moving parts in this, and I'm going to let Rick kind of directly answer the question.

But I want to highlight one thing, first and that is, look, land prices generally are and have been moving up.

And then the migration towards a land lighter strategy generally means you're buying more of a retail priced land asset underneath each and every home.

What is exciting to us and remarkable is as Jon properly highlighted, our size and scale is helping us offset some of those natural increases in price with some reductions in our production cost, reductions in our SG&A to get to a net margin that is really consistent and strong going forward.

So Rick, maybe you'd like to weigh in on the direct margin question?

Yes.

So Stuart is exactly right.

There are a lot of moving pieces with regard to margin as we look at 2020 and '21.

Our focus on increasing returns has an impact on the gross margin.

We will be taking land very much closer to the start of construction.

And as a result, there is a tradeoff between gross margins.

And I've said in the past, it could be 100, 150 basis points, but returns go up exponentially.

And we believe that, that's an important thing for us to focus on.

In addition, as we move down the price curve, the entry-level homes generally have lower margins but much, much higher IRRs associated with them.

So when we come to fourth quarter, we'll give you guidance on where we think we'll be for 2020.

But all in all, it will be a really strong profitable year.

And Mike, this is Diane.

Let me just take a minute while we're talking about the fourth quarter.

My apologies, deliveries for the fourth quarter should be 15,800 to 16,000 homes.

I just wanted to clarify that.

The next question comes from Buck Horne from Raymond James.

I wanted to see if you could just go in a little bit more detail on the single-family rental community platform that you're developing.

And is it something that you'd envision -- and it sounds like you're going to do it without land investment or lease-up risk, but would you actually consider expanding it to buy some land, specifically targeted for that type of project?

And I guess I'm also curious what kind of addressable -- total addressable market you think is out there for the build-for-rent products?

(technical difficulty)

Operator, are you still there.

I'm not hearing anything on the line.

Buck.

Okay, good.

Do you want to go through your question again?

Somehow, we had an audio problem.

Yes.

No worries, no worries.

Sorry about that.

The question was on the single-family rental community platform.

And just curious, you sound like you're doing this without land investment and without lease-up risk.

But would you consider expanding to actually invest in land, specifically geared to that type of community?

And really just -- the other question is what kind of total addressable market you think is out there for the built-for-rent product?

I don't know.

It's a little spotty.

But listen, I'd say this.

I want to make clear that our single-family-for-rent program is an extension of our core business, and it really isn't asset-sensitive extension of that business that enables us to expand our core business without the risk.

We're not becoming -- it's not a version of our multifamily business.

We're not building a new ancillary business.

It's a production-oriented business.

It's an extension of our core.

And additionally, and I think, Rick highlighted it very well, that is, one of the biggest problems that we have in the country right now is affordable and workforce housing.

And the single-family-for-rent business is becoming one of the big solutions, and we are part of that solution.

We have had intense inquiry from participants who want to build entire communities of single-family for rent where we can do it effectively, efficiently and with high returns, and we can participate though we're not taking either the land risk or the lease-up risk.

And this is a really positive program for us.

Rick, why don't you...

Yes.

Directly, to answer your question, our primary focus in -- is doing it in communities that are owned by a third party.

That's our highest return on investment.

It allows us to leverage our overhead.

It allows us to build a very efficient program and build that scale fast.

In addition to that, we are looking at doing single-family rental as an additional product offering in some of our existing communities, having the affection of the community to increase the taste and return on investment in those communities.

So it's going to a combination of things, but as Stuart said, this is our core business.

We're building, selling and closing the homes and doing it fast.

Look, this is Jon.

I just would add one other point to this is we have complete optionality since this is the same product as we're building for sale to go in whatever direction makes the most sense in terms of meeting the market demand and producing the highest returns for us.

Why don't we take one more?

Last question comes from Matt Bouley from Barclays.

Just back on the entry-level mix and the sales pace implications.

I think Rick, you mentioned that you're in about 40% of the business today in terms of entry-level, which kind of looks like where legacy Lennar was pre-CalAtlantic.

So I just -- and I'll leave it here, this is my only question.

As we look at 2020, just one kind of any sense of where that entry-level mix will be next year based on the communities you've got coming on?

And two, you mentioned the sales pace should improve as a result, but are you actually thinking that you can reach sales pace levels that are accordingly consistent with where legacy Lennar was?

Well, with regard to the mix in 2020, I did say that it will be a higher percentage of entry-level.

Probably moves up 2% to 3%, 4%-ish, depending on when those communities come online.

We really targeted across the board a lower price point.

You can see it in our sales orders in every geographic segment of the company.

And it's primarily being led by Texas and some of the Florida markets.

But there's a -- we've really worked on a highly engineered, efficient, core plans that we're just rolling out everywhere.

In our single-family-for-rent program and strategy we'll add to the change and the migration in that mix.

Look, as we come to a conclusion here today, let me just say that there are a lot of moving parts in our business that are reflected in the third quarter as all moving in the right direction.

And I think the best what you're hearing from the management team right now is we're enthusiastic about the business.

We're enthusiastic about the market and how it stepping up as we look towards 2020.

And we think that the business is on a really good track.

To make the changes, to make the programs and position the pieces to really have an exciting year ahead.

So thank you for joining us.

We look forward to reporting our fourth quarter.

That concludes today's conference.

You may disconnect at this time.

Thank you, and have a great day.