Lennar Corporation (NYSE:LEN) Q2 2023 Earnings Call Transcript

Lennar Corporation (NYSE:LEN) Q2 2023 Earnings Call Transcript June 15, 2023

Operator: 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 question-and-answer 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 statements.

David Collins: Thank you, and good morning, everyone. Today’s conference call may include forward-looking statements, including statements regarding Lennar’s business, financial condition, results of operations, cash flows, strategies and prospects. Forward-looking statements represent only Lennar’s estimates on the date of this conference call and are not intended to give any assurance as to actual future results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could affect future results and may cause Lennar’s actual activities or results to differ materially from the activities and results anticipated in forward-looking statements.

These factors include those described in our earnings release and our SEC filings including those under the caption Risk Factors contained in Lennar’s annual report on Form 10-K most recently filed with the SEC. Please note that Lennar assumes no obligation to update any forward-looking statements.

Operator: I would now like to introduce your host, Mr. Stuart Miller, Executive Chairman. Sir, you may begin.

Stuart Miller: Very good. Thank you, and good morning, everyone. Sorry about the delay. We had a lot of people joining. Wanted to make sure if people had an opportunity to get in. I’m in Dallas today together with Jon Jaffe, our Co-CEO and President, and we’re joined remotely from Miami by Rick Beckwitt, our Co-CEO and Co-President, Diane Bessette, our Chief Financial Officer, David Collins, our Controller and Vice President, and Bruce Gross, our CEO of Lennar Financial Services. As I said, they are all in Miami, so there will be a bit of coordination here. As usual, I’m going to go ahead and give a macro and strategic overview of the company. After my introductory remarks, Rick’s going to walk through our markets around the country, comment on our land position.

Then John’s going to update supply chain, cycle time, and construction costs. And as usual, Diane will give a detailed financial highlight, along with some limited guidance for the third quarter to assist in forward thinking and some guidance for the year. And then we’ll answer questions, as many as we can. As usual, please limit yourself to one question and one follow-up so we can get as many in as possible. So let me go ahead and begin by saying that we are quite pleased to report that the Lennar team has remained focused on production and pace, cash flow, inventory turns, and return on capital, and we have again produced strong and consistent results for the quarter. Our second quarter results are consistent with the stabilization we have seen in the current economic environment, as well as consistent adherence to our core operating strategies that we’ve discussed on prior quarterly conference calls.

As it relates to home building, the economic environment has stabilized as customers have adjusted to and accepted higher-for-longer interest rates, the supply chain chaos has normalized, inventories have remained low, and the supply of housing across the country is in very limited supply. This environment seems to represent a new normal that has formed in the wake of the Federal Reserve’s aggressive interest rate hikes starting last year. While persistent inflation remains in the system, aggressive rate hikes have given way to moderated and measured rate movements, allowing the market to adjust in orderly fashion. The strong demand for housing that had been curtailed by sticker shock and affordability challenges has returned, while the housing market adjusted prices, incentives, including rate buy-downs, and production costs in order to enable customers to afford needed shelter.

And even while interest rates and affordability were primary headwinds to demand, the well-documented chronic housing supply shortage has kept inventory levels very low, which has continued to propel customers to stretch their finances for needed housing, as incentives and price reductions combined to spark sales activity. The net price of homes has moderated through price reductions together with the use of interest rate buy-downs and other incentives, and the net average sales price has stabilized and not gone higher nor lower for that matter, even as demand has returned. We have seen in our numbers that net average sales prices on home closings have dropped approximately 10% or 11% on home sales from the peak of approximately $500,000 in 2022 to approximately $450,000 now, and we expect that that pricing is going to remain constant throughout the year.

I would note additionally that through our multifamily apartment division, we are also seeing that rental rates have moderated. Given our extensive experience in the multifamily apartment market, along with our for-sale and for-rent housing business, we see that there is general downward pressure on rents, as many markets have become somewhat overbuilt and there is additional inventory being completed and coming online. This inventory will complete over the next year and a half. While rents won’t likely drop significantly, they are not likely to grow very much either. Remember that rentals and rent equivalents make up a significant part of the CPI calculation. Overall, we believe that the housing market has leveled and while net average sales prices are lower, cancellations have been normalizing and margins have bottomed and are recovering as cost reductions and value engineering provide an offset to the price reductions.

Looking ahead, we continue to believe that the market and the economy will remain constructive for home builders as pent-up demand continues to come to market and consume affordable offerings. Additionally, we believe that the supply constraint will continue to limit available inventory and maintain supply-demand balance. The core elements of the supply shortage will not resolve in the near term as the almost 15-year production deficit will take years to resolve. And note that even when existing homes with low-interest mortgages — even when existing homes with low-interest mortgages that are not currently trading, do come to the market and add to supply, the sellers will also need a place to move and that creates a net zero to overall dwellings, in addition to supply and in addition to demand and therefore still a housing shortage.

Bottom line, supply is short, demand is returning to affordable offerings and builders will need to produce more homes to fill the void. Against this backdrop, the Lennar team has remained consistent in our commitment to strategies that we articulated as rates began to climb over a year ago. Let me do a quick review as these strategies explain both what we have accomplished as well as what we expect to accomplish throughout the remainder of the year. First, we said then, as we say now, that we maintain volume and production as our constant and margin as our shock absorber and we manage our business with certainty through volatility staying focused on production, inventory turn, cash flow and return on assets. Accordingly, we maintain volume keeping our production machine working efficiently while rationalizing costs.

In the second quarter, our sales team engaged our digital marketing platform in conjunction with our dynamic pricing model to continue to drive sales volume at market pricing in order to maintain consistent production levels and improve our inventory turn. We affectionately call this configuration the Lennar machine and it is designed to produce consistent sales pace at pricing that enables consistency as the market adjusts. Although it is not perfect yet, the Lennar machine drove new order volume to 17,885 new orders exceeding last year’s volume by 1% and this enabled our production group to operate with predictability and consistency. Additionally, we efficiently backfilled cancellations in the quarter, which have now dropped to some 13.5% enabling our deliveries to exceed expectation at 17,074 deliveries and that was up 3% over last year.

If by chance, by the way, any of you happen to be in Miami, come on by and ask to see the Lennar machine in action. I think you’ll get a better sense of our strategy and you just might start to imagine where the often talked about AI might find its way into the sometimes stodgy home building industry and improve productivity. And to this end, we have a new and exciting Chief Technology Officer at Lennar named Scott Spradley. Welcome aboard, Scott. Let’s get to work. We’ve continued to focus on selling homes at market clearing prices, reducing margin when conditions weaken, and improving margin as conditions level and improve. Accordingly, our margins bottomed in the first quarter at 21.2%, then as the market levelled this past quarter, we saw margin improvement to 22.5%, and we’re expecting further improvement next quarter to 23.5% to 24%, and further improvement beyond that, of course, depending on market conditions.

Through all phases of the market cycle, we are consistently producing strong cash flows. The elements of execution are working extremely well and improving with the Lennar machine, and we’ve gained confidence in our ability to now guide to increased volume for the year of 68,000 deliveries to 70,000 deliveries with strong margins and strong cash flow. Our second strategy has been to work with our trade partners to right-size our cost structure to the current sales price environment, while we continue to drive our cycle time to pre-supply chain crisis levels. John will cover this strategy in more detail shortly, but John and Rick have been focused across our platform with our production and our purchasing teams, as well as our trade partners.

Considerable results are reflected both on the margin improvement and in the number of homes that were construction-ready and available for delivery. On the margin front, since Lennar led the way with a reduction in margin while maintaining volume and increasing market share, as the market corrected, in the wake of an industry-wide reduction in starts, we engaged our trade partners to work side-by-side with us to help find efficiencies in production, to right-size their margins as well, and to work side-by-side in driving efficiencies on the site. As margin expanded in the best of times, they benefited. As margins have now contracted in the more difficult times, we all understand the benefits of predictability and consistency that derives from consistent volume and scale.

Cycle time continues to be a work in progress. While we continue to make improvement, we improved from 219 days last quarter to 215 days this quarter, this is truly like fixing a plane that is in flight, as progress is slow and difficult to measure as products change. Nevertheless, we’re making slow but steady progress as improvement will help reduce inventory turn, which now stands at 1.2 versus 1.1 last year. Our third strategy is to sharpen our attention on land and land acquisitions, as well as on land and land bank strategy. While Rick will give additional detail on land, this has been a specific concentrated focus by all three of us, myself, Rick, and John, across the platform, working connected and together to refine our approach to reducing land exposure and becoming increasingly asset light.

We’ve made significant progress in reducing land held on our balance sheet, with now 70% of our land controlled and only 30% owned. As with our trade partners, our land partners or sellers have become strategic partners in maintaining volume and increasing market share, while helping to rationalize cost. Our fourth playbook strategy was to manage our operating costs, or our SG&A, so that even at lower gross margin, we will drive a strong net margin. While we’ve been driving our SG&A down over the past years, quarter by quarter, to new record lows, and many of those changes, although not all, are hardwired into permanent inefficiencies in operations, there are some components that have grown as we’ve had to address more difficult market conditions.

Examples, of course, are realtor costs and marketing expenses, which have had to expand as customer acquisition has become more challenging. Nevertheless, we were able to achieve a respectable 6.7% SG&A this quarter, which resulted in a strong net margin of 15.8% after net. We know that in more difficult times, there is and should be upward pressure on sales and marketing costs in order to drive and find purchasers and drive new sales. We believe, however, if we continue to drive volume, we’ll be able to constrain increases and manage to a very attractive cost level and net margin. Our fifth playbook strategy was to maintain tight inventory control and the Lennar machine of digital marketing, sales management, and dynamic pricing has materially improved inventory control by enabling a focus on selling homes in inventory, focusing on — focusing maximum attention on underperforming communities, and bringing attention to product plans that are simply just not selling.

Clearing the homes that are complete and closable rather than selling homes that are many quarters in the future is exactly what drives cash flow and we’re focused on this part of our business every day. Both land and home inventory control is mission central for our overall business and in our second quarter numbers, you can see in our continuing quarterly improvement in our now 13.3% debt to total capital — capitalization ratio down from 14.2 last quarter and our $4 billion cash position that our inventory and our balance sheet is being carefully managed to provide excellent liquidity and flexibility for our future. These elements of business continue to be managed through every other day management meetings where numbers are reviewed at the regional and divisional levels by the entire management team.

Starts, sales and closings are maintained in a controlled balance with the end result of volume with defined expectations. The sixth playbook strategy was to continue to focus on cash flow and bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our second quarter results, we not only accomplished excellent cash flow and bottom line results, but we repurchased $208 million of stock and we also repurchased approximately a $158 million of senior debt due in fiscal 2024. We expect to continue to generate considerable earnings and cash flow and accordingly, will continue to retire debt and purchase stock opportunistically. Let me say in conclusion that our second quarter of 2023 has been an excellent quarter for Lennar.

We saw market conditions level and stabilize at least for now and we executed on our core strategies. We are extremely well positioned to navigate the uncertainties of the current market. We engaged the difficulties of the past year with a consistent strategy that promoted certainty of execution throughout the company. When market conditions were difficult and uncertain, Lennar associates knew their mission. Similarly, as the market has leveled, Lennar associates know mission and exactly how to execute. Our strategy is well known and understood through our division offices and we have a plan that — we have a plan as the inevitable cycles of our industry even and flow. We focus on maintaining volume while we price our homes to drive a consistent pace.

We work with our trade base to manage cost and inefficiencies — and efficiencies. We manage both our land and our production inventories to drive cash flow and returns on investment. We focus our asset light model in order to drive balance sheet efficiency and drive return on investment. Finally we fortify our balance sheet to have liquidity for strength and flexibility. Knowing what to do and executing per plan has driven this quarter’s success and continues to guide us into the next quarter and beyond. We are confident that we will continue to perform and drive Lennar to new levels of performance. Thank you and now let me turn over to Rick.

Rick Beckwitt: Thanks Stuart. As you can tell from Stuart’s opening comments, the housing market has continued to normalize and recover as buyers have become more comfortable with higher mortgage rates. Tight inventory levels in the resale and new home market propels demand for available new homes and we offered a combination of attractive pricing and compelling mortgage rate programs to capture that demand. While many of our markets are performing well, in all of our markets we are regularly adjusting base prices and incentives to maintain our targeted sales pace. Our strategy has been to maintain our targeted start phase, continue to sell homes, and adjust our pricing to reflect market conditions. In that sales with starts, we have used dynamic pricing model and the Lennar machine Stuart just previewed to continuously find the market clearing price of each of our homes on a community by community basis as quickly as possible.

We fundamentally believe that our price to market strategy reflects our balance sheet first focus where we can maximize starts and sales, increase market share, generate cash flow, and keep our home building machine going. With this end, John will discuss the operational and cost benefits of maintaining our start phase. Our second quarter results reflect the successful execution of our price to market strategy. During the quarter, our new sales orders increased 1% from the prior year and 26% from the first quarter with the first and second quarter seasonal change exceeding our historical average over the last three years. New orders increased sequentially in each month during the quarter. Our sales pace for community averaged 4.8% in the second quarter, down 4% from the prior year, but up 23% from the first quarter.

Our second quarter new sales price decreased 11% from the prior year and was up a slight 1% from the first quarter. Our cancellation rate during the quarter totalled 13.5%, which was a significant improvement from our first quarter. All of these operating comparisons reflected stabilization and normalization across our markets and Lennar’s continued focus on using price and incentives to achieve our targeted sales pace per community. These results compare very favorably to nationally reported results and highlight the increase in our market share across our footprint, driven by a carefully crafted starts and sales program. Our sales activity and cancellation rates in the first few weeks of June have been consistent with our second quarter results.

And now I’d like to give you an update on our markets across the country. In prior quarters, I described three categories, one, markets that are performing well, two, markets that are performing but require slightly higher pricing adjustments and incentives to maintain our targeted sales, and three, markets that require more aggressive pricing adjustments, incentives, and repositioning to regain momentum. In the second quarter, we did not have any of the category in three markets. During the second quarter and so far in June, we’ve had 14 markets that are performing well. These include Southwest Florida, Southeast Florida, Tampa, Palm Atlantic, New Jersey, the Philly metro area, Charlie, Raleigh, Charlotte, Raleigh, and Coastal Carolinas, Indianapolis, Dallas and Houston, Phoenix, and San Diego.

These markets are benefiting from low inventory and many are benefiting from a strong local economy, employment growth, or in migration. New sales in these markets reflect more normalized incentives, which may include closing costs, assistance, minor mortgage rate buy-downs in order to maintain sales momentum. In the second quarter, we had 26 category in two markets. While many of these markets have improved relative to the first quarter and are meeting our sales targets, they still require higher pricing adjustments and incentives than our category one markets. Our category two markets include Jacksonville, Ocala, Orlando, Gulf Coast, Northern Alabama, Atlanta, Virginia and Maryland, Chicago and Minneapolis, Nashville, Austin, San Antonio, Colorado, Tucson, Las Vegas, Cal Coastal, the Inland Empire, the Bay Area, Central Valley, Sacramento, Portland, Seattle, Utah, Reno, and Boise.

While inventory is limited in each of these markets, we’ve had to offer mortgage rate buy-downs, base price reductions, closing costs, and other incentives to maintain momentum. The size of the adjustment can vary on a community-by-community basis and it’s often been limited to specific homes each week. We’ve been very proactive and work closely with Lennar Mortgage to create highly attractive, cost-efficient, and timely financing packages that have enabled us to offer attractive purchase prices for our customers. This hands-on coordination between our sales and mortgage teams has enabled us to sell our homes quickly and avoid building up finished inventory. Before I turn it over to John, I’d like to discuss our landline strategy and community count.

Much of our balance sheet and inventory management progress is driven by the execution of our land strategy while simultaneously driving sales, delivery and managing production. Quarter after quarter, we have worked with our strategic land partners and land banks to develop relationships for them to purchase land on our behalf and deliver just-in-time finished home sites to our home building machine on a monthly and quarterly basis. In the second quarter, about 90% of our 1.2 billion land acquisition was finished home sites purchased from various land structures. We continue to make significant progress on our land life strategy. This was evidenced by our second quarter ending year’s own supply of home sites improving to 1.7 years from 2.4 years prior year and our controlled home site percentage increasing to 70% from 60% for the same time period.

I would like to conclude by discussing community count. Our community count at the end of the second quarter was 1,263 communities, which was up 3% from the prior year period and we expect to increase our community count in the highest single digits by the end of fiscal 2023 from the end of fiscal 2022. As I mentioned last quarter, the bulk of these communities will come online in the fourth quarter. I’d now like to turn it over to Jon.

Jon Jaffe: Thank you, Rick. As Stuart and Rick discussed, Lennar’s operations have continued the steady execution of maintaining our starts and sales pace. Our strategy is to price homes to market so our construction machine can operate smoothly without the disruptions of stopping and restarting. This strategy enabled us to reduce our direct construction cost as expected, delivering gross margin improvement in the quarter. While we achieved some gross margin benefit in Q2 from cost reductions, a greater amount of cost reductions will impact margins equally in Q3 and Q4 based on the timing of when homes were started. As noted, our quarterly starts and sales pace were 5.3 homes and 4.8 homes per community respectively. Utilizing the Lennar machine, we focused on the orderly selling of homes at the right pace, so homes are sold prior to their completion.

This process allowed us to not build up excess finished inventory as we ended the second quarter with approximately one inventory home per community, consistent with our Q1 ending inventory level. Our strategy of maintaining starts also plays a major role in gaining access to the labor we need and is the foundation for our previously stated objectives of lowering construction costs, reducing cycle time, and achieving even and flow production. While Lennar starts were down year-over-year for the first half of 2023, industry-wide start levels were down 100% more than Lennar’s. We’ve heard from our trade partners how important it is to them that we have maintained starts in all of our communities and all markets. Our production-first strategy has had a dramatic effect on Lennar being the builder of choice for trades.

At many of our trade partners, Lennar represents over 70% of their business. These trade partners saw little to no decrease in their work while at the same time the industry start levels were contracting by 30%. Looking forward, we will continue to increase our starts and expect Q3 and Q4 starts to both be above 2022 levels. Looking at our second quarter, as expected, our construction costs fell sequentially from Q1 by about 3%. While our Q2 costs were up about 8% on a year-over-year basis, this was down significantly from the 13% year-over-year increase we had in Q1. Again, this is the trajectory of cost reductions we guided to last quarter. In addition to our trade partners stepping up with cost reductions, we also took our value engineering focus to a new level.

While we have always value engineered our plans, we created a dedicated team as part of our national supply chain group to focus on this area. This team works hand-in-hand with our divisions both in the field and the office to drive cost and constructability efficiencies. Going forward, this team will focus on our core plan strategy. Rick and I were in Houston last week attending our Internal Annual National Supply Chain Meeting led by Kemp Gillis. There, we saw firsthand how this team has shifted from fighting the battle of supply chain disruptions to achieving the needed cost reductions to offset our sales price reductions. Now, this team is looking ahead and is fully engaged in initiatives that will impact our results in 2024 and beyond.

This includes programs to structurally offset future cost increase pressures and to implement new technologies to both make the field process more efficient than ever and transform the way we manage information for the bidding process. We can report that there is a great intensity in this team and more focus on innovation than ever before. With respect to the supply chain, the second quarter had the least supply chain disruption since 2020. This was due to the combination of a steep decline in industry-wide starts along with manufacturers operating in much higher capacities for an extended period, augmented by Lennar supply chain strategies and communication. The lack of supply chain disruptions helped our continued reduction in cycle time.

We saw modest improvement in our second quarter and expect to see a more meaningful improvement in the back half of the year. For the quarter, cycle time decreased by four days sequentially from Q1. As we move into our third and fourth quarters, we will benefit from greater cycle time reductions that of a primary driver for our increased guidance and deliveries for 2023. Additionally, we will start about 3,500 homes in Q3 that will reduce cycle time, will allow us to have the appropriate inventory levels to achieve our delivery guidance. The reduction of cycle time in the back half of the year will also free up cash that is otherwise tied in our inventory, further strengthening our balance sheet. In the second quarter, we made meaningful progress in evolving from the production challenges of the supply chain disruptions for even flow production.

While there is still meaningful progress to be made in obtaining even flow production from start to finish, I want to take this opportunity to recognize and thank all of our construction and purchasing associates for delivering one of the smoothest quarters of closings. All of us at Lennar are focused every single day on lowering costs, reducing cycle time, achieving even flow production, enabling improved margins as G&A efficiencies, a stronger balance sheet, and the delivery of high quality affordable homes. I would now like to turn it over to Diane.

Diane Bessette: Thank you, Jon and good morning, everyone. Stuart, Rick and Jon have provided a great deal of color regarding our home delivery performance. So therefore, our usual, I am going to spend a few minutes on the results of financial services and reemphasize some of our balance sheet accomplishments. And then provides some high level thoughts for Q3. So starting with financial services, for the second quarter, our financial services teams had operating earnings of $112 million. Looking at the details of the mortgage and federal operations, mortgage operating earnings were $82 million compared to $74 million in the prior year. The increase in earnings was driven by a higher profit per loss to loan due to higher secondary margins, which was partially by lower loss volume.

Title operating earnings were $33 million compared to $30 million in the prior year. Title earnings increased primarily as a result of higher volume and a decrease in cost per transaction as the team continues to focus on gaining efficiency through technology. These valid results were accomplished as the result of great synergies between our home building and financial services team, as they successfully executed together through the developing market. They truly operate under the banner of one-Lennar. So now turning to the balance sheet. There’s a constant drum beat at Lennar to be laser focused on returns on invested capital and cash flow. This quarter, we were unwavering in our determination to turn our inventory and generate cash by increasing production as we’ve priced homes to market to deliver as many homes as possible.

The drum beat continued with our determination to preserve cash and increase asset efficiency with a judicious eye towards land spend. As we noted, we spent approximately $1.2 billion on land purchases this quarter of which approximately 90% of the initial sites where vertical construction will soon begin. The results of these strategies was that we ended the quarter with $4 billion of cash and no borrowing on our $2.6 billion revolving credit facility. This provided a total of $6.6 billion of home building liquidity. Given our continued focus on balance sheet efficiency, we enhanced our goal of becoming land lighter. As we noted, our years’ homes improved to 1.7 years from 2.4 years in the prior year, and our home sites controlled increased to 70% from 68% in the prior year.

At quarter end, we owned 117,000 home sites and controlled 207,000 homes sites for a total of 387,000 homes sites. We believe, this portfolio of home sites provides us with a strong competitive position to continue to grow market share in the capital efficient way. During the quarter, we started about 19,700 homes and ended the quarter with approximately 37,300 total homes in inventory of which about 1300 were completed unsold as we successfully managed our finished inventory levels. Consistent with our commitment to strategic capital allocation, we repurchased two million shares, totalling $208 million, and we paid dividends totalling $110 million. In our continued effort to further strengthen our balance sheet by reducing our debt balances, as we noted, we repurchased $158 million aggregate principal amount of senior notes due in fiscal 2024 at prices below par.

We’ve repaid about $5.6 billion of senior notes over the last several years, which equates to approximately $300 million of interest savings. Combined with strong earnings, our holding debt to total capital ratio was 13.3% at quarter end, our lowest ever, which is an improvement from 17.7% in the prior year. And then just a few final points on our balance sheet. We remain committed to increasing returns. Our shareholders’ equity increased to $25 billion. Our book value per share increased to $87. Our return on inventory was 28%, and our return on equity was 18%. So in summary, the strength of our balance sheet, strong liquidity, and low leverage provides us with significant confidence and financial flexibility as we move through 2023. So with that brief overview, I’d like to turn to our thoughts for the third quarter and provide some ranges of each of the components of earnings, as well as a few data points for fiscal 2023.

Starting with new orders, we expect Q3 new orders to be in the range of 18,000 to 19,000 homes as we remain focused on achieving our production goals. We expect our Q3 ending community count to be flat with Q2 ending count, though, as Rick indicated, we expect to see high single-digit growth year over year by the end of our fiscal year on November 30. We anticipate our Q3 deliveries to be in the range of 17,750 to 18,250, and we’re raising our delivery expectations for the full year to 68,000 to 70,000 homes, which is an increase from the previous guidance of 62,000 to 66,000. Our Q3 average sales price should be consistent with Q2 as we continue to be focused on delivering affordable homes. We expect Q3 gross margin to be in the range of 23.5% to 24% as we see continued impact of our cost savings initiatives, with some offset for higher land costs as we continue to purchase a greater number of finished onsets.

I’ll note that, as is historically the case, we expect our Q4 gross margin to be sequentially higher than Q3, though it is difficult to provide more direction at this time. We expect our Q3 SG&A to be in the range of 6.7% to 6.8%, and for the combined home building, joint venture, land sales, and other categories, we expect to have earnings of about $25 million. We anticipate our financial services earnings for Q3 will be in the range of $100 million to $105 million. We expect a loss of about $10 million from our multifamily business and a loss of approximately $20 million for the Lennar Other category. Remember that the Lennar Other estimate does not include any potential mark-to-market adjustments on our technology investments — that adjustment will be determined by the stock prices at the end of our quarter.

We expect our Q3 corporate G&A to be about 1.4% to 1.5% of total revenue and our charitable foundation contribution will be based on $1,000 per home delivered. We expect our tax rate to be about 24.7%, and the weighted average share count should be approximately 284 million shares. When you pull all that together, these estimates should produce an EPS range of approximately $3.35 to $3.50 per share for the third quarter. And with that, let’s turn it over to the operator for questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session of today’s conference. [Operator instructions] Our first question comes from Kenneth Zener from Seaport Research Partners. Please go ahead.

Kenneth Zener: As I understand the benefit of your even flow process, you’re able to decapitalize your balance sheet, lifting inventory turns, which is consistent with our inventory turns equal alpha thesis. So my first question is, what do you consider to be the most efficient or targeted start pace long-term, giving starts equal orders, relative to 2Q’s 5.3 pace that you set your margin shock absorber to, in your words?

Stuart Miller: Let me start by saying, Ken, that it’s a combination of — even flow is a combination of going asset light, but it’s also a very focused program on our building partner relationships, enabling consistency and predictability relative to our trade partners to enable us and them to become the most efficient versions of ourselves. So your question is what is that start pace? And the start pace is a program that we think about putting in place as we evolve our understanding of performing and underperforming communities, their relationship to sales and closings. And a lot of this is data-driven and evolving. So there isn’t a number that we can give you. It’s more a concept that we are solving to and iterating to and using a lot of data feedback loops to come to numbers that make sense across a broad spectrum of 40 divisions, 40 geographies all working in sync. Jon?

Jon Jaffe: I would also add that it’s very dependent upon community specifics and market specifics in terms of what’s the right pace. So it might be a very different pace for Dallas than it is, say, for Seattle. And we very carefully measure that balance market by market so that we can match a sales pace and start pace according to market demand, land availability, labor availability.

Kenneth Zener: I appreciate that there. It sounds like there’s several layers to peel.

Stuart Miller: Yes, there are. And by the way, let me just say, it’s handled with an every other day meeting and not just data feedback loops, but interpersonal feedback loops that are constantly in motion. But go ahead.

Kenneth Zener: Right. No, no. It sounds like you have to be actually responsive to the trade in part. So second, considering your non-WIP inventory, owned lots fell about 20% year-over-year to 1.7 years, very impressive. And Diane, I’m very glad that you report and adjust out inventory units. So my question is, to what level can owned lots go to in your even flow framework, given Rick’s 90% finished lot purchase comment, if I heard that correct. And are you willing to kind of offer a goalpost for FY ’24, perhaps implied cash flows, given you’ve been dropping almost 0.2 years’ owned. Sequentially, it’s very impressive.

Stuart Miller: Sure. Thank you. And Rick, why don’t you go ahead and take that question?

Rick Beckwitt: We have a target out for 2024, yes. All I know is, as Stuart mentioned in his comments, Jon, myself and Stuart are laser focused on our asset-light balance sheet and continuing to improve the percentage of homesites we control versus own. We’ve developed some incredible relationships with our land partners and with our land banks that really have facilitated us to improve on these metrics.

Diane Bessette: And I guess I might add, while we’re not there yet, our goal — as we continue to be asset lighter and have less years owned, our goal would be to have our net income equaling our cash flow. And we’re not there yet, but we’re working towards just replacing what we’re delivering. So that’s the longer-term goal.