“Add to cart.” Those three words together set an almost mystical bar of expectations today for billions of people who exchange value for value online and in the real world of commerce. Action, reaction, transaction. What if consumers could click on “add to cart” to buy their next home—the most expensive consumer durable most of us ever buy and the most valuable asset most of us ever own?
“We’re not there yet,” says Stuart Miller, executive chairman at Miami-based Lennar Corp., who spent the past 21 years as CEO of the company before moving into this newly created leadership position in April. A pathway there, as seen in Miller’s own hand-sketched diagram, includes a step-by-step breakdown of key moments in a customer’s chain of home-buying decisions and explorations—from shopping for a wedding dress, for example, or for baby furniture. It starts with a milestone in the consumer’s life, and progresses from there.
“If we can identify that moment of engagement and start a dialogue that’s based on our educating a customer on what she needs, and grow that into an exchange where we learn more and more about our customer so that we can personalize an offering to her, we’ll soon get to the point where we’re there,” Miller says. “We’ll be able to send them a digital envelope that allows them to look at an Everything’s Included version of their own house, and that eliminates every part of the buying process that’s of no value to them, or a pain point for them.”
This experience—seemingly light years from today’s actual home-buying experience—excites Miller as he and the Lennar leadership team (including Rick Beckwitt as CEO and Jon Jaffe as president) place today’s operational performance and tomorrow’s innovation imperatives on a priority par, one as equally critical as the other.
When—not if—Lennar’s brain trust succeeds in remapping its business model backward from the simplicity of a digital point-of-purchase moment where a buyer clicks “add to cart,” the model can start to resemble the logic and elegance of, say, an Amazon. It’s there that logistics, complexity, physical movement, workflows, and time itself disappear, leaving only the who—a ready, willing, and able buyer—and the what—the home he or she wants.
“We become a pure-play builder when we separate out our land and real estate businesses, everything that’s ancillary to our core home building operations, and remove every part of the expense in our process that doesn’t offer value to our consumer,” Miller says. “That’s what we mean when we talk about building a better mousetrap. Our business at that point becomes more fully about the value we create that we can control and stay in control of, and less about areas we don’t impact.”
The pursuit of getting there on a fast track—to that shopping cart instant, an iconic shift that places the consumer at the top of a buyer-seller value chain—speaks to why Lennar’s Miami headquarters pulses like a technological central nervous system. One floor of the space would be hard to tell apart from any Silicon Valley web product development center or a Wall Street trading floor. Flat-screen monitors crawl color-coded, key performance indicator measures that river real-time data feeds in from the enterprise’s 38 home building divisions nationwide.
What Comes Next
This business-model-altering moment of truth, the “aha” for a home buyer, speaks as much about what Lennar is and what it intends to be as any of its leadership team’s accomplishments. That includes the $9.3 billion shock wave Lennar sent through the industry Oct. 30, as it announced its plan to merge No. 5 home builder CalAtlantic into Lennar. The deal, which closed Feb. 12, makes Lennar the No. 1 builder in the U.S. according to gross revenue.
BUILDER honors Lennar’s strategic and operational team of associates as the 2018 Builder of the Year, for so much more than just what they’ve achieved over the past 12 to 18 months, assembling the resources, talent, and land as one of America’s biggest builders. It’s more now about why Lennar’s dramatic CalAtlantic coup matters for what comes next—not only for the newly combined organization, but also for home building itself. Lennar’s pivot from a past outperformer on the land game to focus on future primacy as a vertical value generator able to put a buyer’s experience above and beyond where it has ever been is an important threshold for a home building organization to cross.
“One of the skills that has set Lennar apart up to now from many other big builders is the company’s ability to be a consummate ‘cycle-timer,’” says Carl E. Reichardt Jr., managing director for equity research, covering home building and building products at investment strategist BTIG. “Lennar’s longstanding ability to find and acquire assets in difficult times and monetize them in good times has been a critical capability. The CalAtlantic deal signals both a nod to the vital importance of local market scale, and Lennar’s ability to be great at more than cycle-timing, but at manufacturing itself. It’s not just about buying land well, but about building a house well.”
The combined firms’ 2017 revenues roll up to $19 billion-plus, and puts Lennar into top-three positions in more than 20 of the 30 largest new-home markets in the U.S., with local market shares ranging from 20% to 40% in many of them.
Reichardt looks at the levers Lennar gets as it amps up its volume and market share clout in most of the submarkets it serves. “Local market share has become highly correlated with return on equity since the last cycle peak,” Reichardt writes in an analysis for BTIG. “We attribute the relatively new importance of local market share to significant supply-side constraints. With labor tight and land in scarce supply (both potentially secular trends), home builders in general are struggling to control costs on the input side of their value chains as land, labor, and materials suppliers have gained more pricing power… We believe local market share helps offset the pricing power of local input suppliers. This is because land and labor markets are local in nature, and a high level of local share allows builders to regain some control over input supply and cost, and therefore better protect margins and potentially grow returns. Moreover, divisional overhead is better levered. Taking out a sizable peer may also free up the competitive landscape for LEN in markets where overlap was high.”
Market Share
All local market scale is not created equal. It means different things to builders, to Wall Street analysts, to local trade contractors and subcontractors, to local land sellers, and to local home buying customers. What’s more, local market scale for D.R. Horton or Pulte or NVR, for instance, may work similarly in some respects, but nuances create distinctions from one builder to the next. The important thing to note—particularly with respect to the opportunity gained in the combination of two builders both as different and as alike as Lennar and CalAtlantic—is the way the subtleties of local market scale can both save money and make more money at the same time, which is why, in its latest earnings call, Lennar raised guidance on its free cash flow from ongoing operations from $1 billion to $2.5 billion in 2018.
“Management indicated that their dominant positions in 20-plus markets is allowing them to get more aggressive in creating land deals that are more advantageous to them, while potentially tying up important developers in this rapidly evolving sub-segment of new housing,” writes Wells Fargo senior analyst Stephen East in a recent post–second quarter earnings summary. “The obvious opportunity is around just-in-time delivery of a finished lot to LEN, a la NVR and potentially DHI [D.R. Horton]. Further, we believe they are tying up important developers by assuring them their pipelines have an outlet. We believe this type of partnering is important as it acts as a counterbalance to FOR’s [Forestar Group, a subsidiary of D.R. Horton] potential roll-up strategy.”
This means that local market scale in this sense can make Lennar both a better customer—of lots, of trade contractors, and of building products and materials—and a better seller of homes to people whom it’s getting to know more intimately through the use of data and technological marketing platforms. (Click here to see how the Lennar/CalAtlantic merger will affect the country's top local markets.)
For Miller and the Lennar brain trust, it boils down to the nuance that comes of the company’s learned expertise and its habit of execution. To them, there’s local market scale, and then there’s Lennar local market scale. Miller described it this way in his commentary to Wall Street analysts—taken from a Seeking Alpha transcript—following the company’s April 4 earnings disclosure, taking aim both at reducing debt-to-capitalization levels to improve operations today, and, at the same time, increasing the company’s fiercely directed investment in the “add to cart” endgame of the moment.
“It’s about market share in strategic markets, markets that we know, products that we know well, and an Everything’s Included platform that we have worked with for years and that we’re getting better and better with,” Miller told analysts. “It’s about new technologies that can help build a better mousetrap. All of these elements drive bottom line and drive better cash flows. We think we’re going to be able to very quickly take a step up in debt-to-total cap, bring it back down to the levels where we started by paying down debt, increasing our equity component, and building a really strong balance sheet. Then we think we’ll have excess cash flow to employ, to continue to grow the company, but also to be able to return capital to shareholders.”
Many of the synergy costs Lennar intends to capture as part of $365 million it intends to save in 2018 and 2019 will come as the Lennar-CalAtlantic integration shifts more than 200 communities with houses originally programmed as CalAtlantic legacy “design center” home plans to Lennar product offerings. (Click here for more about how Lennar encourages collaboration among its partners.) There, where Lennar’s Everything’s Included floor plan and elevations reign supreme, cycle time savings of 15 to 20 days per home and other direct cost savings add up and multiply fast. Here’s how Lennar’s Jaffe—former chief operating officer, now president—arrives at some of the math behind how Lennar will both integrate CalAtlantic and put the combination to work toward its own fundamental transformation into a vertical merchant builder whose business may soon show more kinship with a manufacturing and marketing organization than it does with the opaque, high-risk-questionable-reward land investment and real estate game:
“The majority of these synergies, $265 million in 2019, will come from lower direct construction costs. Given that the combined volume represents approximately 125 million square feet of homes per year, this equates to $2.12 per square foot, just a 3.7% savings from Lennar’s current direct construction costs. Contributing to this 3.7% savings per foot will be the cost savings associated with Lennar’s stand-alone volume as we would expect greater leverage as we increase our production from 75 million to 125 million square feet.”
This all adds up to the evolution of Lennar into a pure-play home builder. At less than $3 per square foot of savings—much of it gained on conversion of time, cost, and opportunity cost on more than 200 CalAtlantic neighborhoods over to Lennar’s Everything’s Included product and community lineup, one plus one starts to add up to more than two, the true definition of synergy beyond cost cuts. The discipline and rigor of the process come through in Jaffe’s description of the process minutia the Lennar leadership team is carrying out among its various tiers of management.
“We’ve developed a very thorough process at the division level to identify potential savings, and how to execute on them,” Jaffe says. “We’re conducting cost synergy workshops at seven divisions per month. The workshops identify, validate, and collect cost synergies across all labor and material categories, as well as the improved building practices and value engineering processes to achieve them. We also evaluate every opportunity to improve utilization of our national supplier programs to enhance the rebid opportunity. It is a joint effort of our national and regional purchasing teams, construction and value engineering experts, and the division management teams. The process is very detailed and organized. It starts with planning sessions four weeks before the workshop begins, all the way through to a fully developed and agreed-upon plan that clearly articulates accountable resources, timing, and synergy amounts.”
The Road Ahead
As keen as miller is about the progress of the huge integration this year and next, he’s positively vibrating over what comes after that. What comes next—intentions, ambitions, and expectations—can happen because the CalAtlantic deal happened, but it’s different and much more than a megadeal.
In fact, what comes next relates to a cultural capability Miller nurtured and mined for the better part of two decades as he ran Lennar, but which emerged in a new form of potential in the past three years. It has nothing to do with mastery at acquiring land assets when they can be bought for a low price, and selling them later at a high price; it has everything to do with profitably building homes, repeatedly, predictably, and with a high rate of customer satisfaction.
“As the housing recovery began to take hold and technology really started to change how people related to commerce, I got all of the regional and division presidents together and told them we needed to get with the program and start using data and technology to market and sell our homes,” he recalls. “Every single one ... said, ‘Yes, we’re on it,’ and every one of them went back to their offices and did things exactly the way they always had. Everybody, except one.”
The exception was Las Vegas division president Joy Broddle, who teamed up with marketing manager Ashley Max to develop a data-driven marketing model to use social media and content marketing to generate leads, nurture them, and convert them to sales. Broddle, who graduated as a marketing major from Florida State University and started at Lennar as a receptionist in 2002, got her shot as Las Vegas division president in June 2015, just as Miller issued his challenge to the division leadership.
“What happened was that migrating away from newspaper ads to the data model generated a decline in traffic to our models,” Miller says. “But the traffic the data model generated were much higher quality leads, and the leads converted at a higher rate.”
That result was enough of a positive outcome to turn heads at corporate, but the clincher was another piece of data. Further analysis showed that, compared with what would have been typical advertising and marketing spending—roughly about 1.2% of sales revenue—actual spending on the data-driven content marketing and social network model came in at less than half that cost.
Think about how that might roll up, across 38 divisions, 1,350 or so communities, and 46,000 deliveries with an average selling price of just over $400,000. That’s upward of almost $20 billion, 1.2% of which is in the neighborhood of $240 million, and half of that amount—more than $100 million—is about how much that data and technology, applied to finding a customer who wants to find a new home, can take out of the SG&A of the company.
“Our South Florida division, right here, told me, ‘That’s Las Vegas, this is here. It can’t be done here,’” Miller says. “So I set up daily video conference calls between the Las Vegas division leadership and the South Florida division, and we worked on it every single day until the South Florida team got it and could implement it.”
Now, a little over a year since the data- and content-driven marketing model has rolled out as an enterprise practice, it’s not uncommon for the South Florida division to win monthly or quarterly recognition as the best performer in the entire portfolio, says Miller, going on to compare the company to the NFL.
“Each week, 32 teams—playing by the same rules and having the same tools to work with to compete—put their own product on the field, it’s there for all the world, all their competitors, everybody to see what they’re doing, the best practices, the best disciplines, the best way to play the game,” he says of the NFL. “We have 38 divisions, and each of them operates essentially as a separate business. What we’re doing is having them compete, and the game makes us all better, it makes the overall product better.”
