Lennar reported “stronger-than-expected” revenues and home closings in the first quarter, despite forecasting a “complicated and volatile 2023.”

“While the consumer remains challenged by affordability concerns, they are adjusting to the new normal of interest rates and opting to purchase their home. In these extraordinarily volatile and difficult market conditions, the Lennar team has focused on strategy, and we have executed with precision,” executive chairman Stuart Miller said on the home builder’s first quarter earnings call.

The home builder’s $597 million profit was 18% higher than the same quarter a year ago.

With volume, incentives, and sales prices as “constants” and margins as “shock absorbers,” Miller said Lennar was able to successfully navigate volatility in the first quarter while remaining focused on its core strategies. Since the Federal Reserve began implementing its tightening program, Miller said Lennar has remained focused on selling homes at market-clearing prices while building at a consistent pace.

The home builder recorded a quarterly starts and sales pace of 3.7 homes and 3.9 homes per community, respectively, and ended the first quarter with approximately 1,300 completed, unsold homes—about one home per community—according to co-CEO and co-president Jon Jaffe.

“If market rates deteriorate, we comprise margin through prices and/or incentives, but we generate strong cash flow. If conditions improve, we improve margins and bottom line while also generating strong cash flow,” Miller explained during the earnings call. “Our primary focus is on cash flow. We maintain our volume to move through the limited legacy land that we have, which is at legacy prices, while keeping our production machine working efficiently and rationalizing costs.”

In the first quarter, Lennar’s gross margin decreased 360 basis points from the fourth quarter to 21.2% and 570 basis points on a year-over-year basis. The decline reflects the use of price reductions and incentives to “offset volatile interest rates and market shifts,” according to Miller.

New orders declined 10% on a year-over-year basis in the first quarter, a decrease that Lennar said compares “favorably to reported market conditions.” The builder's home deliveries in the first quarter increased 9% on a year-over-year basis to 13,659. Its cancellation rate improved from 26% in the fourth quarter to 21.5% in the first quarter. While the cancellation rate remains significantly higher than the 10.2% rate from the first quarter of 2022, it improved sequentially each month during the first quarter, reaching a 14% level in February.

“Our strategy has been to maintain our targeted sales pace, continue to sell homes, and adjust our prices to reflect market conditions. With this strategy, we have sacrificed gross margins to generate sales,” co-CEO and co-president Rick Beckwitt said. “To match sales with starts, we’ve used our dynamic pricing model to continuously find the market-clearing price for each of our homes on a community-by-community basis as quickly as possible.”

Beckwitt said all of Lennar’s markets are either “performing well” or responding favorably to pricing adjustments and incentives to regain sales momentum.

“While our strategy has resulted in lower gross margins across the platform, the good news is that for now we have no markets [that require additional price adjustments or incentives to regain our targeted absorption pace],” Beckwitt said.

Updates on Core Playbook Strategies
Miller said to help achieve market-clearing pricing, Lennar is continuing to invest heavily in its digital marketing program. The digital marketing platform provides the home builder with insights and analytics that help guide better execution while maximizing pricing. Additionally, Lennar is continuing to engage with trade partners to “rightsize” its cost structure to help keep costs down while maintaining its targeted starts pace.

“While there continues to be a lag in [cost] reductions coming through our reported numbers, in the back half of the year, cost reductions will improve lagging margins,” Miller said. “Cycle time reductions will also come through in the back half of the year. Improved cycle time will improve our inventory turn and will help reduce inventory as we will be able to carry less inventory to hit our deliveries.”

In regard to land and land acquisitions, Miller said Lennar purchased “very little land” during the first quarter as the company awaits better pricing that is more in line with current home sale prices. The builder continues to reevaluate every land deal in its pipeline and has walked from deposits or renegotiated terms and price for some deals.

Beckwitt added Lennar’s supply of owned home sites improved to 1.9 years from 2.7 years in the first quarter, and its controlled home site percentage increased 500 basis points to 68% on a year-over-year basis.