In a recent earnings call, Lennar Corporation’s CEO, Stuart Miller, issued a stark warning about the impending challenge facing the housing market, land shortage. Miller emphasized that the limited availability of developed land, coupled with escalating development costs, will curtail the supply of new homes, further exacerbating the existing supply-demand imbalance.
Despite the vast expanse of available land in the United States, a shortage for residential development persists. Leading builders, including Lennar, have expanded operations through strategic acquisitions of companies with coveted land reserves. However, this pursuit comes at a considerable cost, ranging from thousands to tens of thousands of dollars per acre, placing substantial pressure on cash flows and financial statements.
Addressing this issue, Jonathan Jaffe, Lennar’s co-CEO, president, and director, highlighted the company’s efforts in refining its land acquisition strategy. Jaffe revealed that approximately 85% of their $1.5 billion land acquisitions involved finished homesites obtained through various land structures. Notably, the third quarter saw a substantial improvement in their year’s supply of owned homesites, decreasing to 1.5 years from 2.2 years, while the controlled homesite percentage rose to 73% from the previous year’s 79%.
As of the end of the third quarter, Lennar possessed 107,000 owned homesites and controlled an additional 284,000, totaling 391,000 homesites. During the same period, the company’s inventory increased from 18,675 to approximately 43,600 homes. Jaffe emphasized that the reduction in cycle time and owned land will bolster cash flow and enhance inventory turnover, which experienced an 18% increase, now standing at 1.3 compared to 1.1 the previous year.
In terms of community count, Lennar closed the third quarter with 1,253 communities, marking a 5% growth from the previous year, with expectations of achieving high single-digit growth by year-end.
In a separate development, Lennar disclosed that its plan to take Quarterra Multifamily public has been put on hold. CEO Stuart Miller explained that the company is refraining from discussing it on a quarterly basis to avoid potential disappointment or misalignment with expectations.
Lennar’s core strategy of selling homes after completion has been instrumental in maintaining low excess inventory levels, allowing the company to navigate the market effectively. Miller underscored the success of cost reduction initiatives, resulting in improved margins and a substantial number of construction-ready homes available for delivery this quarter.
In terms of performance, Lennar reported a slightly reduced quarterly starts pace of 4.9 homes per community, compared to the previous quarter’s 5.3 homes per community. However, they delivered 18,559 homes, marking an 8% increase from the previous year, and sold 19,666 homes, reflecting a remarkable 37% year-over-year gain.
While the resale market experienced a dip of 2.2% in July, newly built home sales saw a modest uptick, underscoring the pivotal role of builders like Lennar in meeting the surging demand for housing.
Looking ahead, Lennar is poised to finish the year with robust performance. The company anticipates delivering between 21,500 to 22,500 homes in the fourth quarter, surpassing Bloomberg analysts’ estimate of 20,446. Additionally, they project net new orders to range from 16,200 to 17,200, with a gross margin on home sales anticipated to fall between 24.48% to 24.6%.
CEO Miller concluded with a bullish outlook, expressing confidence in the company’s readiness for a formidable 2024. He affirmed, “We have the land. We have it identified. It is under contract or in our pipeline. It is under development.”
In conclusion, the housing market is grappling with a critical challenge in the form of a severe land shortage. Lennar’s CEO, Stuart Miller’s warning underscores the urgency for innovative solutions to address this scarcity and ensure sustainable growth in the industry.
Source: Yahoo Finance