For Lennar, Results And Outlook Cast A Bigger Role For Its Data
Like many of us have and will, New York Times economics and business writer Binyamin Appelbaum asks why homebuilding in the U.S. doesn't adopt modern manufacturing methods to address its housing affordability crisis.
Last year, only 2 percent of new single-family homes in the United States were built in factories. Two decades into the 21st century, nearly all U.S. homes are still built the old-fashioned way: one at a time, by hand. Completing a house took an average of 8.3 months in 2022, a month longer than it took to build a house of the same size back in 1971."
Of course, Appelbaum evidences a false equivalency – construction start-to-completion cycle times during the supply-chain meltdown year of 2022 – to illustrate his point about comparisons with construction cycles a half-century ago. Still, his points are well-taken if vertical construction were all that's involved in bending the cost of residential development in the direction of more U.S. households in more economic brackets and household earnings levels.
It's not, of course.
Without looking at the fully-stacked, end-to-end value cycle that includes land and development, land entitlement, financing and capital access, access to frontline labor resources, product manufacturer relationships, and sales and marketing capabilities, etc., there will never be any such bending.
What comes clearer, after all, is that the gains homebuilding and residential development will ever make to deliver more affordable, attainable, and sustainable quality homes for people will come not just through greater efficiencies in vertical construction. Rather, they'll only come from pulling the entire development value cycle – from well before construction through the residents' livability experience – through a modern manufacturing-style system.
A best-of-class example among currently operating models for the productization of homebuilding's entire value cycle – from capital and land development, through design and engineering, to assembly, marketing, sales, and customer value creation – is a holistic system its stewards call the Lennar Machine.
During this past Friday's earnings call with Wall Street analysts on Q4 and 2023 fiscal year results, two words came up repeatedly in both Lennar's C-suite prepared remarks and Q&A with the analysts: Execution and Consistency.
Together, the two terms headlined explanations for all that could be said positively, both about this past year and quarter's performance results, and about the confidence the organization has in sustaining and improving on those metrics in 2024 and beyond.
The term "execution" – used in varying contexts by Lennar Executive Chairman Stuart Miller, by Co-CEO and President Jon Jaffee, and by CFO Dianne Bessette – surface 17 times in the hour-long conversation with equity research analysts. Variants of the word "consistent" and "consistency" come up 37 times during the call.
The reason for homing in on these two terms goes back to two essential upsides of modern manufacturing and industrialization – ones that bend cost curves toward consumer households' means, allow private sector organizations to produce profitably and generate value for shareholders and stakeholders, and work efficiently within the growing constraints on frontline worker availability and costs – are execution and consistency.
The "factory-ization" or "productization" of Lennar's value-cycle model, Miller explains, has been memorialized in Lennar's organization and operations now for several years leading into the COVID-era turbulence now heading into another chapter. A prolonged backdrop of strong structural demand, diminished affordability, and supply scarcity set Lennar's strategic and operational dial on producing homes at a rate that would expand market share, and at price-points would-be homebuyers could make work within their means.
Against this backdrop, Lennar's consistent strategy throughout the past year has been to continue to drive volume, find affordability, meet demand by using our dynamic pricing model, use appropriate incentives, and provide supply to the market. Over the past year, we have consistently detailed our operating strategy with the expectation that we would do as follows. Number one, reduce our land assets while growing our business. Number two, drive strong and consistent bottom-line earnings, while concurrently generating consistent net cash flow. Number three, reduce our construction cycle times while increasing our inventory turns. And number four, ultimately enhance the quality of our returns on equity and return on assets by focusing on the allocation of liquid assets, i.e., cash.
Now, each of these strategic action items is enormously easier said than done, and all of them amount to mere words without one constant, which Miller goes into detail illustrating: Execution.
By executing consistently on all four parts of the operating strategy Miller maps out above, benefits piled up to produce financial, operational, and strategic results. They also positioned Lennar both to be prepared for continued turbulence or to ignite outsized share and margin gains should the market behave more benignly in the coming 12 to 18 months.
Gains from Executing the Strategy to Drive Volume
- Market share
- Builder-of-choice positions due to visibility in volume and time horizons
- Ability to pressure suppliers to work on cost and price efficiency
- Gained land-buying market share, and earned land buyer-of-choice positioning
- Generated consistent cash flow
- Gained discovery and insight into land bank capital positioning and durability
- Scalable real-time insights to sales, marketing, and dynamic pricing machine
We focused on what was required to drive volume while market conditions challenged affordability," says Miller. "We pushed data and engagement through the component parts of this digital tool and stressed it often to its limits. We reviewed 40 points of feedback from our 40 operating divisions and made adjustments and refinements as we learned. Today the result is that Lennar's machine is becoming an invaluable partner as we drive volume by finding our market at affordable pricing and driving sales at the same pace as production."
Lennar co-CEO and President Jon Jaffee adds color to how the Lennar Machine functions – by design – as near as possible to a factory-like precision system, but with granular, community-level settings and calibrations that allow that system to adapt and remain consistent and predictable.
The execution of our pricing strategy is based on the strength of each individual market matched against the level of production by community in that market," Jaffee says.
The holistic operating model Miller and Jaffee refer to – allowing them to hold pace up as both the pull of demand and the push of supply as the operational driver of the entire value cycle – has at its heart, soul, and brains shared, common data through which all the separate parts of Lennar's operations connect, derive insight, and act on.
The team continues to embrace technology to run a more efficient business," says CFO Diane Bessette. "These solid results were accomplished as a result of great synergies between our Homebuilding and Financial Services team. They truly operate under the banner of One Lennar."
One Lennar. One model. One system. One single source of truth through which every part of the operation becomes accountable. This is perhaps, why Evercore analyst Steven Kim notes:
I'm hearing a lot of steady state. I'm hearing a lot of predictability in what you're laying out. And obviously, that's something that we think is critically important to an eventual revaluation."
Building of the future will someday mean more than a low single-digit share of homes will be assembled in factories.
But companies like Lennar operate in as industrialized system as any sustainably profitable organization out there today, largely by virtue of their team's ability to bring an entire ecosystem of relationships – land, trades, policymakers, financial stakeholders, and customers – into a virtuous cycle of value.