The 'Lennar Machine,' A Cycle-Proof Growth Plan Proves Itself

(From left): Lennar's Stuart Miller, Executive Chairman, Rick Beckwitt, Co-CEO and Co-President, and Jon Jaffe, Co-CEO and Co-President. Credit: Maggie Goldstone, TBD

More than one of every five new, ground-up single-family homes being sold in the U.S. at an extraordinary moment in homebuilding history comes from one of two companies, D.R. Horton or Lennar.

Talk of consolidation in the sector, such that it's been discussed for more than a decade, is now no longer talk. Public homebuilders – 20 or so – now account for 45% of the entirety of newly built, sold and/or rented single-family structures. And, these two, Horton and Lennar, own about half of that.

As a super-storm of economic forces plays out – mortgage interest rates stressing tolerance levels, U.S. regional and local bank troubles, and households digesting employment and income uncertainty ahead – homebuilding industry consolidation points to two critical impacts to watch in the next six months to five years.

• (1) Increased marketshare implications for sustainable profitability for midsize and smaller production homebuilding operators.
• (2) An unambiguously direct tie between increased marketshare and the ability to target "affordability" to an expanded lower-price tier homebuyer/renter.

In commentary accompanying Q2 2023 earnings late last week, Lennar strategic executives affirmed the Lennar team's stellar, better-than-guided financial and operational performance owes to a six-pillar enterprise game plan Stuart Miller, Lennar executive chairman, sums up in the following paragraph (annotated by TBD to note the six pillars).

We focus on (1) maintaining volume while we price our homes to drive a consistent pace. We (2) work with our trade base to manage cost and inefficiencies -- and efficiencies. We manage both our (3) land and our (4) production inventories to drive cash flow and returns on investment. We focus our (5) asset light model in order to drive balance sheet efficiency and drive return on investment. Finally we (6) fortify our balance sheet to have liquidity for strength and flexibility."

Underlining these six interrelated and constantly forward-motion "core" strategic focus areas, Miller and his C-suite team describe a "Lennar machine." The machine's characteristics are both set in stone as a plan and nimble, agile, and resilient by virtue of real-time, house-by-house granular on-going feedbacks into a system as close as can be described as housing cycle-proof. Right now, the machine's calling for even flow spec development, construction, and closings on a constantly managed and measured feedback loop.

Discussing the "Lennar Machine" and its effects on second quarter performance, Stuart Miller had this to say in comments with institutional investment analysts during a call last week:

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."

The Machine's central implication for Lennar as one of the leading $30-billion-plus competitors in its markets is as a pace and production-first operator that models growth and profitability around those tenets as imperatives.

Co-CEO and co-President Jon Jaffe notes the business model as a self-reinforcing feedback loop here:

Our core strategy of being a production-first builder, we have consciously chosen not to limit production and drive pricing to maximize margins. We think we are a better company by being production first and managing sales pace to start pace that drives better returns, better cash flow that drives better returns."

It's this self-reinforcing loop that Miller and his strategic team address three key areas of Lennar's forward pitch into a time acknowledged to be both volatile and tricky to predict. Or as Miller puts it better, the market "still has some proving to do... there's a lot of wait and see in terms of where interest rates go and where the market goes and talks of recession and jobs."

Market Consolidation/M&A Due To Bank Stress?

Stuart Miller

These are focal points that are well right in the middle of our radar screen. I think that we're a bit early stage in some of the questions and considerations. I think that some of these questions are more applicable immediately in the land development side of the business, where land developers who are not part of Lennar are definitely feeling some stress.

I think that the capital accumulation that we have in cash on our books is a strategic opportunity for us to participate and make sure -- and making sure that there is even flow by some of the participants, either through partnership or other structures.

In terms of some of the homebuilders, I think that there is still capital available for those that are operating in the production world. Whether that changes over time, we certainly have a front seat at the table in terms of being able to act where the right opportunities fit. We've done it before. We're not afraid to go forward.

About off-balance sheet structures, ... we've spent an awful lot of time and are spending a lot of time on creating systemic solutions for what I think of as kind of an opco-propco type configuration. There is no question that the structures that we have worked on can be constructive relative to some of the dysfunction that is in the market right now, and we're working in those directions as well.

On the "Lennar Machine" And A.I.'s Eventual Role

Stuart Miller

The machine that we described that we are engaging is really a data-driven approach to so many components of our business. And I think that we have -- we've done a tremendous amount of work. If you look at our digital marketing program, you look at our dynamic pricing model, both of them, we've talked about for many, many quarters for years. And these are data-driven approaches to the way that we're engaging the customer acquisition componentry of our business.

It's a very integrated set of systems that is dependent on feedback loops. And any time that you find a process that becomes data-driven and the data improves to the point that it's actually relevant, at some point, there are large learning models that can be helpful in enhancing productivity.

These are the areas where we are leaning in. I mentioned that we brought on a strategic Chief Technology Officer in Scott Spradley. And all of this is a coordinated program of taking steps at a time to improve the ingestion of data, to use the data more constructively and then to bring it to its next level where we're actually driving productivity gains within our business. We'll have more to report."

On Share, A.I., Expanding Housing Affordability

Stuart Miller

We view the fact that at the affordable level, as you properly point out, there is a housing shortage. You hear it when you speak to mayors and governors across the country. You don't hear it as a national expression as much. But at the local levels, the need for workforce housing is a dominant need, and it's become a social imperative.

So thinking about where we fit into the equation, and I don't want to make too much of this, but we have focused on saying, look, there's a void that needs to be filled. There's a needed an appetite. And what we're going to do is instead of driving price, we are going to drive pace and hold price. And that relationship between price and pace is something that we talk about it all the time.

It's the focus -- it's the whole focal point of the machine that we talk about. And at the core, we're recognizing that from the national landscape and the local landscapes, they need the volume, the supply is constrained, and therefore, we're focusing more on pace than we are on price. And we're focusing on consistency and predictability of pace so that we can rationalize costs at the same time.