Lennar Guides To 10% 2024 Growth As Other Builders Fret

A year-ago, builders braced for the impacts of steeply-rising interest rates and stick-high inflation as they readied their outfits for bad, worse, and worst-case business scenarios that looked like rough times lay ahead.

Then in November 2022, mortgage rates retraced below 6% and it was off to the races. Buyers remained undeterred. Builders made concessions. Standing inventory cleared, and most of the gap between new production and closings and locked-in new orders vanished. And, of course, existing home market scarcity has added impetus to new-home demand.

Now however, once again, more builders have a negative take on the outlook of business conditions than positive, as sustainedly high interest rates appear to be grinding away, not at buyers' intent but at their wherewithal amid a slew of new pressures on their wallets.

Add to those pressures the as yet unknown economic and consumer household spending impacts of:

• 27 million borrowers back "on the hook" for college loan repayments of $300, $400, or even more per month
• the UAW strikes against major U.S. auto makers could jolt the broader economy – perhaps either exerting influence on the Fed to lower interest rates, or adding inflationary pressure, which could have the opposite effects
• a potential government shut-down, whose effect on Q4 GDP is estimated at .05% if a shut-down were to last two to three weeks.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) is a proxy for builder confidence across a national sample of operators. While more than half of operators in the sample report that conditions have deteriorated, a large chunk says that conditions – demand and their ability to meet it profitably – are good enough.

Lennar is one of them. Its C-suite executives – referring to their current enterprise's operational system as a "drumbeat" – pointed to full-year guidance on 2023 deliveries in the range of 70,800 to 71,800, a 7% to 8% beat on 2022 totals, and an "initial growth expectation" of 10% in 2024.

That's not one of the homebuilding operations viewing near- to mid-term conditions as anything but an opportunity to expect itself to grow.

The drumbeat Lennar is marching to is a six-point strategic "playbook" the enterprise adopted long before conditions began to get rougher as the Fed set its fiscal and monetary policy in motion to tighten money supply and raise borrowing costs. By now, the playbook boils down to this, as Lennar executive chairman and co-CEO Stuart Miller sums it up:

We focus on maintaining volume, while we price our homes to drive match pace. We work with our trade base to manage costs and efficiencies and adjust our product offering to meet the market. We manage both land and our production inventories to drive efficiency, cash flow and returns on our asset base. We focus on land-light model in order to drive balance sheet efficiency. Finally, we fortify our balance sheet to have liquidity for strength and flexibility."

Easier said than done, and it's really the execution of the Lennar team across the enterprise that has put it in position to prosper and continue to engage around a plan as other operators may find they're forced to react.

Here are a few of the highlights, not just accounting for Lennar's strong performance to date, but recognizing what the organization needs to continue to improve as it adapts to volatile, turbulent, choppy, spotty, and iffy business conditions in the next three to 12 months.

Growth Capacity In The Next 12 Months

We are positioned for a very strong 2024 right now. We have the land. We have it identified. It is under contract or in our pipeline. It is under development. 2024 at this point, except for the overall sales environment, is pretty much embedded in our system. So, we have pretty good visibility at this point.

We keep talking about selling and building and programming by process. And by process, we just have great visibility into what we're able to produce for 2024. And in fact, if you look at our kind of five-year land planning and overall production schedules, we have pretty good visibility even beyond.

Now, the question is, what's the market going to do and how is the market going to react? We are going to continue to price to market conditions. We are an operating -- manufacturing platform that is going to price-to-market. And if the market moves a little bit, you're going to see our margins be, as I said before, the shock absorber.

So, when we talk about a projection of growth for 2024, we have pretty good certainty that we can accomplish that. And how the market unfolds in these kinds of uncertain times where interest rates are moving, the Fed is clearly trying to take liquidity out of the system, we're going to wait and see how it actually evolves. But our target right now is in that low-double digit level of growth for 2024. And we think it's achieve -- we know it's achievable. We'll see how the market performs.

Is Entry-Level At Greater Risk?

As rates move around, [and] as demand moves around, we are tapping incentives up or down, we're maintaining pace. But the fact is that we haven't had to move dramatically in either direction as rates have moved currently. You asked whether it's the entry-level buyer or the move-up buyer that is doing better, frankly, there's strong demand across the platform. And in all segments, we are seeing strong demand out there."

Affordability is kind of a question, and meeting the buyer where the affordability exists is kind of the trick of the market and getting it just right. These are tweaks up and down. And of course, depending on where interest rates go, that is going to be the determinant of how much of an incentive has to be given or doesn't have to be given. And that's what we're kind of working our way through right now as you go through pricing."

The Pivot To Digital

We've talked an awful lot about our digital sales funnel together with our dynamic pricing level and sales engagement. We are really striving to drive more and more of our customer engagement through our digital world where we access customers, meet them, where they want to find us, and engage them very directly. That's where we think we can have the very best engagement with our customers. We've talked about our digital sales machine. It's an important part of the way that we're creating a process around our sales program for the future, and it is evolving."

Going Asset Lighter

Our land owned and controlled relationship is an area of focus. The year supply is very much an area of focus. You've seen these numbers migrate from much higher to the point that they're at now and we're not finished. We recognize that there will be an additional level of cash that comes into the company. We don't think it puts us in a bad position to end up with negative net to total cap -- negative net debt to total cap. And we recognize that we will continue to be cash generative. We fully expect that. We think that at year-end, we'll probably be in a better position than we are right now."