Lennar Corporation (NYSE:LEN) Q4 2022 Earnings Call Transcript

Lennar Corporation (NYSE:LEN) Q4 2022 Earnings Call Transcript December 15, 2022

Lennar Corporation misses on earnings expectations. Reported EPS is $4.55 EPS, expectations were $4.89.

Alexandra Lumpkin: Thank you, and good morning. 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 yesterday’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.

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

Stuart Miller: Very good. Thank you and good morning, everyone. Thanks for joining us this morning. I’m here in Miami and joined 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 is here, our CEO of Lennar Financial Services. Happy to have Bruce back in the seat. And of course, Alex, who you just heard from. Jon Jaffe, our co-CEO and President is on — is out in California and on the line and will participate remotely. As usual, I’m going to give a macro overview and strategic overview of the Company. I’ll be a little longer than usual. We’ve got some strategic matters that we want to cover. After my introductory remarks, Rick is going to walk through our markets as he did last time around.

Jon’s going to update supply chain, cycle time and construction costs, and give a little overview on land as well. I think that Rick and Jon will both talk a little bit about land. As usual, Diane will give a detailed financial highlight and we’ll give some rough boundaries for the first quarter to assist in looking forward, thinking and modeling.  And then we’ll answer as many questions as we can. And as usual, please limit yourselves to one question and one follow up. So, let me go ahead and begin by saying that once again, the Lennar team has turned in excellent results for the fourth quarter and year end 2022, which continue to enhance our positioning for evolving market conditions. Market conditions continue to deteriorate in the fourth quarter as the now well-documented interest rate driven sales slowdown and pricing correction intersected with the still stressed supply chain, high labor and material costs and elongated cycle times to make for a very complicated landscape to bring the year 2022 to a close.

The very sudden movement in interest rates experienced over the past six months has very quickly affected both, affordability and consumer confidence, resulting in a very rapid change in market conditions and demand. Sales and sales prices are down materially across both, the new and existing home markets and given commercial underwriting and lending criteria, new for rent properties are being curtailed as well. Our current view is that production of single family and multifamily dwellings nationally will be down between quarter to a third in 2023, exacerbating the national housing supply shortage. Numerically that means that approximately 1.5 million homes produced over the past couple of years per year will drop to around 1 million homes produced.

Now, Rick’s going to go through market review and market conditions across our platform in a few minutes. So, stay tuned for that. But even as demand has cooled very quickly, the overhang of a now correcting, although disrupted supply chain, stubbornly high labor and materials costs and production or cycle times that have grown by over two months, have created an unusual wedge that the home builders have been left to navigate. Jon will give a lot more detail on that. On a positive note, very limited new home inventory exists. Limited existing home supply exists as existing homeowners hold on to extremely low mortgage rates and very limited multifamily production combines with the chronic housing production shortfall over the past decade and leaves the industry in the middle of what we believe will be a fairly short duration correction without an inventory overhang to resolve.

Against this backdrop, in addition to the two hurricanes that swept through Florida, the home building and financial services team at Lennar have focused and have executed on the strategies that we’ve detailed over the past quarters as we have very quickly and efficiently adjusted our business and business model. We laid out that — the Lennar strategy playbook over the past quarters and those strategies, the successes and the misses are reflected in our first quarter and year-end results. And I’d like to give a brief overview. So, first, as the first playbook strategy, we detailed that we are going to continue to sell homes and adjust pricing to market conditions and maintain reasonable volume. In fact, we relied on our proprietary dynamic pricing model developed by our inimitable Jeff Moses to guide to volume-based pricing in order to drive sales at market pricing so that we maintain the volume that maintains our starts and sales base, so they remain in sync and drive steady production.

The result of this program is that margin as opposed to volume becomes the so-called shock absorber, and fluctuates up and down like an accordion as market conditions especially interest rates change. Accordingly, interest rate changes, especially downward, potentially improve lagging margins. In the fourth quarter, we saw our margins adjust rather quickly, down some 270 basis points to 25.3% before impairments as we used price reductions plus incentives in the form of both, closing cost payments and interest rate buy downs to offset volatile interest rate and market shifts. We did this both to sell homes as well as to protect our backlog by adjusting pricing and incentives to ensure closings. While our cancellation rate of 26% is decidedly higher than the 12% last year, it has been falling from the peak of 28% reached in October, and we expect it to normalize below 20% in the near future.

Also in the fourth quarter, we used our pricing strategy to in orderly fashion maintain our volume. While our sales were still down some 15% year-over-year, that result has compared favorably to reported market conditions and enabled us to start over 68,000 homes in 2022, which is only a 1% reduction year-over-year and gives us visibility to potentially flat 2023 deliveries. While this is not intended to be a projection, it is within the broad boundaries of our outlook ahead. We derive confidence in our ability to achieve sales base at the best possible prices from our significant investment in digital marketing, which is more relevant than ever before. Our proprietary digits platform, which we built on a Microsoft backbone, provides digital marketing insights and analytics that guide us to better execution with appropriate pricing from our dynamic pricing model.

Our digital marketing team under the guidance of Ori Klein, is doing some very interesting, innovative, and very credible work. Our second playbook strategy was to work with our trade partners to right size our cost structure to current market conditions. On this item, let me say that Jon will cover this in great detail shortly, but Jon, together with Rick is giving a master class on cost reconciliation across our platform to our production and our purchasing teams, as well as to our trade partners. Make no mistake, Lennar led the way with reduction in margin, while maintaining volume and increasing market share as the market has corrected. We expect our trade partners to work side by side with us and follow suit. As margins expand — expanded in the best of times, they benefited; and as margins have now contracted in the more difficult times, we are driving costs down as prices are reduced and we expect participation as well.

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While there is no doubt a lag in those reductions coming through our — there is no doubt, a lag in those reductions coming through our reported numbers; there will also be no doubt a significant reduction coming, period. Cost reductions will improve lagging margins. Our third playbook articulated strategy was to sharpen our attention on land and land acquisitions. While Rick and Jon will give additional detail on our land reviews, this has been a specific concentrated focus by all three of us, myself, Rick, and Jon, across the platform, working, connected and together to reconsider every land deal in our pipeline and minimize exposure to falling land values. In that regard, I dare say we have stopped the bleeding early. We have reconsidered every land deal in our pipeline; we have reconsidered land development dollars being spent; we have walked from deposits or renegotiated terms and price; and we have been relentless in focusing on protecting cash and only purchasing the next strong margin at today’s pricing.

Newland purchases will improve lagging margins. Fortunately, we are well-positioned with well-structured contracts and shorter-term deal structures that enable our capital allocation to be micromanaged constructively. We started the quarter with $2.5 billion of expected land closings. We ended the quarter with three quarters of that spend, either walked from, renegotiated to produce a responsible margin or pushed for reconsideration at a later time. As with our trade partners, our land partners or sellers understand that we are maintaining volume and increasing market share while taking the first hit to our margin. They will need to work together and participate or we’ll need to move on. Our fourth playbook strategy was to manage our operating costs for our SG&A so that even at lower gross margins, we will drive a strong net margin, and as much as we have 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 efficiencies in operations. Nevertheless, as average sales prices come down, the percentages won’t hold without corresponding additional cuts. We also know that in more difficult times, there will be an upward pressure on some of our sales and marketing costs in order to drive and find purchasers, and drive new sales. In our fourth quarter, we were able to maintain our 5.8% SG&A at the operating level. And we believe if we continue to drive volume, we’ll be able to contend increases and manage to a very attractive cost level. Each of our operating teams, as well as our corporate teams are looking for additional efficiencies, especially now that COVID is behind us, and teams are reconvening in person in our offices and finding those inefficiencies face-to-face and together.

Our fifth playbook strategy was to maintain tight inventory control. This is exactly what drives the cash flow machine, and we’re focused on this part of our business every day. Both land and home inventory control is the mission control of our overall business. And in our fourth quarter numbers, you can see in our 14.4% debt to total capitalization and our $4.6 billion cash position that our inventory is being carefully managed. Now, we know that the questions have been raised by the press and others about a mysterious 5,000 homes being sold to single family for rent purchasers at deep discount because of dire market conditions. The fact is that we, like other builders, provide a tape of homes available for sale to the single family for rent buyers, so they are aware of what is available in the ordinary course of our business, and we’ve been doing that over the past many quarters.

That tape might have had completed homes and homes that are one to four months out from completion. Over the course of the past year — and these are the facts, over the course of the past year, we have sold approximately 7% of our homes to single family for rent purchasers, including Quarterra. That percentage is approximately the same range quarter by quarter. And as we look ahead to 2023, we think the percentage will be roughly the same or less. Net margins on those homes are approximately the same as homes sold to primary buyers, and there is no unusual discounting or advantage. In our operating world, our focus is not on fire sales to manage inventory. Instead, it all starts with the starts, sales and closings management of our business.

These elements of the business are managed through an every other day management meeting 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 that defines expectations. This is the most carefully reviewed and managed part of our business and enables us to maintain an extremely low inventory of completed not sold homes, which has consistently been at or under one home per community for the past years. And right now, we have approximately 900 unsold completed homes. Currently, land inventory is managed equally carefully. From the corporate office, tight oversight is maintained on the land and land development spend.

Diane oversees every dollar spent on land acquisitions and development dollars and maintains accountability relative to years of land owned versus controlled and years of land owned overall. If we aren’t hitting targets, we aren’t spending money. Like with home, there are no fire sales, just careful day-to-day management. We’re aware that inventory has grown through the year because of expanded cycle time due to the supply chain disruption. We also know that this inefficiency will correct over the next few quarters and will turn approximately $150 billion of inventory into additional cash and will provide the cash to pay down debt due in 2024. That is on the radar. Additionally, a pause on growth this year will reduce inventory and generate additional cash over the next year as well.

Because of the tight control of land and completed home inventory, our cash flow has grown, pushing our balance sheet to the point where our net debt to total capital is actually negative at this point. That makes Diane happy. The sixth playbook strategy was to continue to focus on cash flow bottom line in order to protect and enhance our already extraordinary balance sheet. If we reflect on our fourth quarter results, it is mission accomplished and we are still just getting started. If we continue to execute our playbook strategies, we will continue to drive strong cash flow and even through bottom line profitability — and even though bottom line profitability will be compressed year-over-year, as prices and margins are impacted in a correcting market, our balance sheet and cash position will continue to improve.

This improvement enables the flexibility to be opportunistic as market conditions stabilize as well as opportunistic in repurchasing both stock and debt. We have tremendous optionality. Now, the final playbook strategy is the one where we must report a miss. That of course, being the spin of Quarterra by year-end. In spite of our best efforts, in spite of my best efforts, the current market conditions are simply not favorable to our commercial asset manager spin on the year end timeline. Not to be cliché, you just can’t and don’t want to fight the tape. We believe that we have a very high end public company waiting and almost ready to enter the public arena, but we’re going to postpone for the time being and wait for the right timing, Quarterra deserves exactly that launch.

While I remain confident, enthusiastic, that Quarterra will be spun and Lennar will become a pure play home builder as promised, it will not happen by year-end, and I’m not prepared to posit another date, given current market uncertainties. So, please be patient. So, at the end of the day, if you’re keeping score and are considering success in the difficult market conditions, I believe that we from the Lennar homebuilding team to the Lennar Financial Services team, to the Quarterra team, have had a truly remarkable fourth quarter and year-end 2022. In extraordinarily difficult market conditions, we focused on strategy and we executed with precision. We ended the year with the highest revenues, the highest profit, the highest cash flow, the best balance sheet, and the highest liquidity in Lennar’s history.

We have a plan of execution to move into the uncertainties of 2023 with a focus on maintaining volume, maximizing margin, managing inventories, driving cash flow, managing land and land spend, and further enhancing our balance sheet, in spite of challenging market conditions. Accordingly, we are guarding our first quarter closings to between 12,000 and13,500 homes with the gross margin of approximately 21%, which we believe will be the lowest gross margin for the year. Additionally, we’re targeting delivery volume to be flattish for the full year as we drive volume and pickup market share, and build margins through reconciliation of construction costs and land costs and adjustment to product efficiency, while carefully managing SG&A. We are prepared once again to look adversity square in the eye and stick to our strategies and pull out a big win.

Simply put, that’s what we expect of ourselves. As a conclusion or an epilogue, let me add that we’ve come to an end of another year, and we have a truly wonderful leader who will be retiring after 27 years of service. Jeff Roos is one of our Regional Presidents who has overseen many of our western divisions. Jeff has been an absolute warrior of Lennar over these past decades, but as with all great leaders, he leaves us with ample, handpicked talent to fill the void. In fact, his people will be even better than he has been. He wants it that way. While I have a somewhat heavy heart, I feel a great sense of pride to have worked so many years with such a talented partner. Many of you on this call don’t know Jeff Roos, and he liked it that way.

Jeff is the very essence of Lennar. He is a quiet engine under the hood, never the shiny paint job, extraordinary on the field, always a leader in execution and always willing to learn something new. They say that you can’t teach an old dog new tricks. Well, Jeff was always the old dog that taught us all new tricks. Off the field, Jeff is even better. He has been ever focused on making the world a better place through HomeAid or diaper drives or anything that works for community. He never stops caring, never stops driving, and you can’t help but love everything that he stands for. So, with that said, Jeff is a shining example of all that drives us here at Lennar to be better and to reach higher. And it is Jeff and people just like him that make it a certainty that Lennar will continue to succeed.

So, with that, let me turn over to Rick.

Rick Beckwitt: Thanks Stuart. As you can tell from Stuart’s opening comments, the overall housing market has been reacting to a significant increase in mortgage rates, which has impacted affordability and home buyer confidence. While we continue to have many strong markets, in our more challenging areas, we’ve had to adjust base sales prices, increase incentives, and provide mortgage rate buydowns to maintain or regain sales momentum. As sales strategy — our sales strategy has been to find the market clearing price for each of our homes on a community by community basis as quickly as possible, and price our homes accordingly. In many cases, we’re solving to a monthly payment and not to a sales price. This requires a detailed understanding of community and product specific pricing, financing programs, traffic trends, inventory levels, and buyer sentiments.

During the fourth quarter, our new sales orders declined 15% from the prior year on a 4% lower year over year community count. Our year-end community count was lower than we projected at the beginning of the year as we walked away and renegotiated on many communities. Jon will walk you through this as he discusses our land strategy. While our cancellation rate and sales incentives increased sequentially from the third quarter, our sales orders and sales pace per community was relatively flat throughout the fourth quarter, as we successfully executed our pricing strategy in most of our markets. To maintain and regain sales momentum, our fourth quarter new sales order price declined 9.5% sequentially from our third quarter with mix accounting for 250 basis points of the decline, and base price reductions and incentives, accounting for 200 basis points and 500 basis points, respectively.

The combination of adjusted pricing and rate buydowns have created a more stabilized environment. As we cleared out or closed many of our older contracts in our backlog, our backlog has reset to these new prices, admittedly at lower margins, and we’re seeing more stability and a trend toward lower cancellation rates. To this point, our cancellation rate peaked in October, declined significantly in November, and we’ve seen a continued reduction thus far in December. We fundamentally believe that this price to market strategy reflects our balance sheet for its focus, where we can maintain starts and sales, generate cash flow, and keep our home building machine going. To this end, as Jon will discuss, by maintaining our starts pace, we’ve been able to get cost reductions from our trade partners, and significantly increase our market share as many of our competitors that either stopped or slowed starts altogether.

I’d like to now give you an update on our markets across the country. They really fall into three categories: One, markets that are performing well; two, markets where we’ve adjusted pricing and incentives, found the market price and have successfully regained sales momentum; and three, markets that may require some additional pricing adjustments to regain our targeted absorption pace. During the fourth quarter, and so far in December, we had eight markets that are performing well. These include Southwest Florida, Southeast Florida, Tampa, Palm Atlantic, New Jersey, Charlotte, Indianapolis, and San Diego. These markets are benefiting from extremely low inventory and many are benefiting from strong employment and strong local economies. While these markets continue to be strong, we’ve had to offer mortgage vote, buydown programs, and normalized incentives.

Our category two markets, which reflect markets where we’ve made more significant adjustments and have successfully regained sales momentum, include 23 markets. These include Jacksonville, Ocala, Atlanta, Coastal Carolinas, Raleigh, Virginia, Maryland, the Philadelphia Metro Area, Chicago, Minnesota, Nashville, Dallas, Houston, San Antonio, Colorado, Tucson, Las Vegas, California Coastal, the Inland Empire, The Bay Area, Central Valley, Sacramento, Seattle, and Boise. While inventory is limited in each of these markets, we’ve had to offer more aggressive financing, base price reductions, and/or increased incentives to regain sales momentum. The size and adjustments — the size of the adjustments is varied on a community by community basis and has often been limited to specific homes each week.

In some cases, to avoid cancellations, we’ve had to adjust pricing on our homes in backlog. We’re being very proactive with our pricing and not reactive. This has allowed us to sell homes and avoid building up finished inventory. We’re outselling the competition, and as I said, increasing our market share. Our category three markets which reflect the more significant softening and correction include eight markets. These include Orlando, Pensacola, Northern Alabama, Austin, Phoenix, Utah, Reno, and Portland. While the driver of the individual dynamics of these markets vary somewhat, traffic is slowed, buyers are taking more time to purchase and many need to be convinced that now’s the time to buy. There is fear that prices haven’t hit bottom, which has led to elevated cancellations.

In these markets, we’re focusing on establishing pricing that generates new growth sales to offset the cancellations, and we have achieved that. This is required to work with our backlog to prevent cancellations. It’s also required a mix of base price adjustments, sales incentives, and mortgage buydown programs. While we’ve made progress in each of these areas, we still need to make some adjustments going forward. There’s not a one size fits — one size fits all solution. I’m confident however that we’re making progress in each of these areas and we’re very fortunate to have limited completed unsold inventory, so we should be able to get these markets back on track in the first quarter. I hope this gives you a better picture of our markets across the country and what we’re doing to keep our sales activity going.

The markets are very fluid and we’re making proactive strategic decisions and adjustments every day. We are committed as a management team to address any future market changes. And as we’ve said in the past, we’re going to keep our homebuilding machine going to maintain our starts and price our homes to market. This is our balance sheet first focus. I’d now like to turn it over to Jon.

Jon Jaffe: Thank you, Rick. Our well executed strategy of pricing to market to maintain sales volume as Stuart and Rick have detail, set us up for the next part of our game plan, our construction strategies. Simply put, by continuing to sell homes and generate cash flow, we’ll keep starting homes. Our construction playbook has three primary areas of focus, lowering construction costs, reducing cycle time, and achieving even flow production. Properly executed, these strategies improve both, gross and net margins, allowing us to profitably continue the cycle of finding the market to sell homes. Let me address each area. Reductions in construction costs have historically lagged the change in market conditions. While that is true this time, what is different is the speed of change in the market conditions has caused a sharp reduction in industry wide starts, thus speeding up the availability of labor and materials for Lennar.

This is very quickly turning the shortages of the last two years into excesses. Taking a look back at our fourth quarter, construction costs continue to increase as we guided on our last earnings call. Increases in both materials and labor resulted in a total direct construction cost increase of 6% and 16% sequentially and year-over-year, respectively. Moving forward, our process is a three-pronged approach of first, working with our trade partners to reduce the cost of labor materials; second, evaluating all specifications in the home; and third, an intense value engineering review. We have very strong relationships with our trade partners. We have demonstrated to them that we have taken the first step by lowering sales prices to drive sales, and they understand this and understand the dynamic of labor availability as overall starts slow and they’re working closely with us to lower their prices.

Since the beginning of our third quarter, we have reduced contracted costs by approximately $14,000 per home, or $6.22 per square foot. And this amount will grow throughout our first and second quarters as reduced demand for labor and materials accelerates. These savings will start to flow through our results in the back half of the second quarter, and will primarily be seen in closings for the second half of the year. What has been a steady increase in construction costs over the last few years will reverse course in our first quarter with a small reduction in cost per square foot compared to our fourth quarter. This is primarily driven by lower lumber costs from earlier in the year. This improvement is already baked into our backlog as these homes started in the last four to six months.

Cycle time is the second area of focus for our construction strategy. We see meaningful improvement in this area as cycle time was flat sequentially for the quarter, despite the cumulative effect of supply chain disruptions experiencing the two hurricanes that impacted production in Florida and parts of the Carolinas. Importantly, we saw cycle time improvement during the quarter for the front end of construction, which measures the duration of time from trenching to insulation. This first part of construction process is the first to see labor free-up and came down an average of eight days during the last four weeks of our quarter as compared to the prior four weeks. As Stuart noted, bringing down our cycle time throughout the next few quarters will free up significant amount of cash that is tied up in inventory, further strengthening our balance sheet.

The third area of focus is even flow production. Prior to the pandemic and its related supply chain disruptions, even flow production was a core focus for us. It is a key pillar for being the builder of choice for the trades as it maximizes efficiencies for them. The steady pace and rhythm of starts through completions is absolutely critical and is only achieved with real time communication between all parties. From Lennar’s offices and fields to manufacturers, to distributors, to trades, and then back to us, information such as projected start dates and day by day scheduling in the field is enabled with rigorously adhered to technology driven tools and processes. Level construction flow of our homes drives field and G&A efficiencies for both the trades and Lennar open improved margins for both.

As Stuart noted, this is an intense focus of both Rick and myself, along with our national, regional and divisional purchasing and construction teams. All of us are focused every single day on lowering cost, reducing cycle time and achieving even flow of production. Turning next to our land light strategy, this focus has been the primary driver of cash flow generation over the past several years, leading to the strongest balance sheet in our company’s history. And we have taken it up a notch in the current environment. Quarter-after-quarter, we have worked with our strategic land banks and land partners where we have established relationships to purchase land on our behalf and deliver just in time finish home sites to our homebuilding machine on a quarterly basis.

During the fourth quarter, we reassessed every land deal in our pipeline, utilizing updated underwriting, we either restructured the price, the terms, and/or the timing, or we did not proceed with the transaction. The result of this focus was that 75% or approximately $680 million of land purchase in the quarter were just in time deliveries from our land banks or land partners. The remaining $220 million of land purchases were made up of option payments and small short duration land purchases. In fact, about 88% of the land purchased in the first quarter were for transactions under $2 million each. During the quarter, we also terminated contracts totaling about 27,800 home sites. There was approximately $37 million in forfeited land deposits associated with some of these terminations.

The ongoing focus on our land light strategy resulted in ending fiscal 2022 with a controlled home site percentage of 63%, up from 59% last year. Additionally, we reduced the years of owned home sites to 2.5 years at the end of the fourth quarter down from three years last year. Thank you. And I’ll now 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 homebuilding performance, so I don’t need to provide any additional details. Therefore, I’ll spend a few minutes on the results of our other business segments and our balance sheet, some points already noted, and then provide high level thoughts for Q1 €˜23. So starting with Financial Services, for the fourth quarter, our Financial Services team produced operating earnings of $125 million. Mortgage operating earnings were $80 million compared to $77 million in the prior year. We benefited from a higher level of lock volume than expected as buyers locked in the attractive rates offered with our interest rate buydown programs.

These discounted interest rates provided certainty to our buyers to avoid potential future rate increases. Title operating earnings were $44 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 efficiencies through technology. These solid results were accomplished as a result of great connectivity between our homebuilding and Financial Services teams as they successfully executed together through this choppy environment. Then turning to our Lennar Other segment. For the fourth quarter, the Lennar Other segment had an operating loss of $106 million. This loss was primarily the result of non-cash mark to market losses on our publicly traded technology investments, which totaled $96 million.

Although, it’s been a very tough environment for technology stocks, we have found and continue to believe that there are incremental operating efficiencies through these technology partnerships for both, our homebuilding and Financial Services platforms, as well as greatly improving our home buyer’s experience. Then turning to the balance sheet. As we’ve all noted, this quarter, we were laser-focused on our balance sheet. We focused on pricing to market, turning inventory and thus generating cash as we — and we also focused on preserving cash by matching our starts pace with our sales pace, and as Jon mentioned, reevaluating every land deal in our pipeline to ensure the underwriting aligned with today’s market conditions. The results of these actions is that we ended the quarter with $4.6 billion of cash and no borrowings on our revolving credit facility.

This provided a total of $7.2 billion of homebuilding liquidity. During the quarter, we continued our progress of becoming land lighter. At quarter-end, we owned 166,000 home sites and controlled 281,000 home sites, for a total of 447,000 home sites. This translates into 2.5 years owned, which exceeded our year-end goal of 2.75 years owned and was an improvement from three years in the prior year. We controlled 63% of our home sites, which was slightly lower than our goal of 85% since we walked away from approximately 28,000 home sites related to option contracts that we terminated this quarter. Last year’s control percentage was 59%. When we calculate our years owned and home sites controlled, we include home sites with vertical construction that is homes in inventory.

Since the goal of these calculations is to assess future balance sheet risk and homes in inventory present lower risk since they turn into cash in a short period of time, we plan to exclude inventory homes from the calculations on a go forward basis. It’s just a better way to look at our business and will provide greater comparability to others in our industry. So, for reference, we had approximately 40,000 homes in inventory, mostly under construction at November 30th. If we exclude those homes from the calculations, our years owned was 1.9 years and home sites controlled was 69%. We also remained committed to our focus on increasing shareholder returns. During the fiscal year we repurchased 11 million shares totaling 967 million or about 4% of our outstanding shares at the beginning of the year.

Additionally, during the year, we returned cash to our shareholders by paying dividends of $438 million. From a leverage perspective as we mentioned, we continue to benefit from our paydown of senior notes and strong generation of earnings, which brought our homebuilding debt to total capital down to 14.4 at quarter-end, our lowest ever, which was an improvement from 18.3 in the prior year. And as we mentioned, our net debt to total capital at quarter-end was a negative 2.4%. As we look forward, we do not have any senior note maturities in fiscal €˜23. Our next maturity is $400 million due in December of €˜23, which is our fiscal €˜24. And just a few finer points on our balance sheet. Our stockholders’ equity increased to $24 billion.

Our book value per share increased to $83.16. Our return on inventory was 32.8% and our return on equity was 20.9%. In summary, the strength of our balance sheet, strong liquidity and low leverage provides us with significant financial flexibility for the upcoming year. And with that brief overview, let me turn now to the first quarter of €˜23. It continues to be difficult to provide the targeted guidance that we have historically provided, given the uncertainty of market conditions. So, as we did last quarter, we’re providing very broad ranges to give some boundaries for each of the components of our first quarter. So, starting with new orders, we expect Q1 new orders to be in the range of 12,000 to 13,500 homes and expect our Q1 ending community count to be about flattish with the prior year as we walked away from deals that would have produced new active communities.

We anticipate Q1 deliveries to also be in the range of 12,000 to 13,500 homes. Our Q1 average sales price should be in the range of 440,000 to 450,000 as we continue to price to market. We expect gross margins to be about 21%. This number will adjust somewhat based on the number of deliveries, primarily as a result of our policy to expense field costs. As Stuart mentioned, as we see things today, we expect our Q1 gross margin will be the low point for gross margins for the year. And we expect SG&A to be about 8%. This too will adjust based on deliveries and homebuilding revenue. For the combined homebuilding joint venture and land sale and other categories, we expect to have a loss of about $10 million. And looking at our other business segments, we anticipate our Financial Services — earnings for Q1 will be in the range of $50 million to $55 million.

We expect a loss of about $25 million for our multifamily business and for the Lennar Other category also a loss of about $25 million. This guidance does not include any potential mark-to-market adjustments to our technology investments, since that adjustment will be determined by the stock prices at the end of our quarter. We expect our Q1 corporate G&A percentage to be about 2.0% to 2.2%, as a result of lower total revenues and our continuing investment in internal technology initiatives to produce efficiencies. Our charitable foundation contribution will be based on $1,000 per home delivered, and we expect our tax rate to be approximately 24.5%. The weighted average share count for the quarter should be approximately 287 million shares. So, when you pull this together, this guidance should produce an EPS range of approximately a $1.40 to a $1.70 per share for the first quarter.

Finally, given the market uncertainty, we’re providing boundaries for deliveries only for the full year of 60,000 to 65,000, but are not providing further details at the time. However, we do look forward to giving another update on our next earnings call. So, with that, let me turn it over to the operator.

Q&A Session

Operator: Our first question comes from Stephen Kim from Evercore ISI. Please go ahead.

Stephen Kim: Thanks very much, guys. I appreciate all the information, very exciting times here. I thought that the most interesting thing you commented on today was your outlook for gross margins in 1Q to be the low point for the year. And so I wanted to explore that a little bit. I think you — there were a few components. I think you talked about lower costs that would start flowing through — I think you said in the back half of 2Q and mostly into the back half of the year. You also mentioned, I think, Jon, that lumber benefit is already in the numbers for 1Q. So, that’s probably not the reason. So, there’s two other potential reasons I could see why margins might improve. One of them is that maybe you’re benefiting from having lower the level of specifications or finishes, finish level of the homes, and so its cost in U.S. Maybe — and those would be delivered in Q2?

Or that maybe you’ve seen an improvement in buyer demand over the past several weeks. And so, I was wanting to see if you could comment on either of those. And also tell us what range of mortgage rate are you assuming in your outlook?

Jon Jaffe: So, that’s a lot of questions, Steve. So, let me start by saying we do expect that our first quarter margin, we think, is going to be a low point. I think it derives in large part from a very general notion, and that is we’ve gotten out ahead of the migration downward in pricing. We’ve done it by price reduction and by incentive structure, as noted. And we took a very strong first move in that regard in order to keep the machine, the volume moving in the right direction. With that in mind, we started the reconciliation process with land. Remember, our land position is much shorter term than it’s been in past. And therefore, we have flexibility. And so, we think that we’ll be able to reconcile some land pricing. And as far as our trade partners are concerned, I think I was clear, we’ve been working with trade partners, both on labor and material.

Some of those materials like lumber are already filtering through, just at the very early stages filtering through some of the price reductions that will build as we go through the year. But we are working hand in hand with our partners. And given our volume and pickup in market share, there’s a lot of labor, a lot of other people out there that are looking to do business with us. We think we’ll be able to bring our pricing down. And additionally, we’ve been hard at work, reconciling efficiencies in the homes that we built, changing product where appropriate and making sure that we are best positioned at sales prices, at interest rates that are higher to be able to access the market and refine our margin as we go through the year. You asked a question as what our assumption is relative to interest rates.

We’ve kept a flexibility in our numbers. We recognize that the Fed is focused on unemployment numbers and wage numbers and are likely to continue raising interest rates. But the tenure has had a mind of its own, and mortgage rates have been trending down. I noted the flexibility, the shock absorber nature of our program, our dynamic pricing program that we have in place. All of it is almost agnostic to interest rates. We’re going to keep moving through the year, adjusting our pricing and the affordability for our customers in order to do what we can to maintain volume. So, we don’t have a forward view on interest rates that defines how our program is working, we’re going to be adaptable to the interest rate as it evolves through the year. All indications though are that we’re probably not going to see much more spiking and more moderating relative to interest rates.

But that’s a toss-up question.

Rick Beckwitt: I guess the only thing I think I would add to that is very thorough — is that — our gross margin is impacted by the volume of closings that we have at every quarter. And Q1 is most likely going to be the lower volume quarter. And as we close more homes, as Diane said in her description, the level field overhead that gets absorbed is spread over more closing, so that has a positive impact on margins.

Stuart Miller: And I know Jon wants to add something. Go ahead, J.